Not Just Another Construction Contract: Specific Considerations for Modular Construction Agreements

Types of Modular Construction
In 2020, some in the Construction Industry predicted that the COVID-19 pandemic may finally be the spark that thrust modular construction into common practice in the United States. A type of prefabricated construction, modular construction can mean:
 

1. “permanent modular construction,” which is a “construction delivery method utilizing off-site, lean manufacturing techniques to prefabricate single or multi-story whole building solutions in deliverable module sections” which are transported to a permanent building site; or
2. “relocatable modular construction,” which is “[a] partially or completely assembled building” constructed in a building manufacturing facility that can be “reused or repurposed multiple times and transported to different building sites.”[1] 

Either components or entire repetitive individual modules—offices, hospital rooms, hotel rooms, apartments—can be wholly constructed off-site, in a warehouse or factory, under safe, controlled, higher quality, more frequently monitored conditions, with fewer people/trades on site at any given time. The cost, quality, and time/schedule factors alone made this construction delivery method attractive to many, let alone the added safety and security benefits.

This hybrid manufacturing, shipping, construction, and erection methodology, however, can cause significant legal confusion and questions including:

• Is it considered construction or the shipping of manufactured “goods”? 
• Who bears the risk of loss at the manufacturing facility, in transport, upon delivery?  
• Is the project properly insured? 
• Are the components properly insured?
• Does the Uniform Commercial Code Article 2 (sale of goods) or common law control? 

Goods manufactured and shipped across territories, states, or countries can lead to additional questions and concerns regarding licensing, codes, and trade policies.

Not Just A Normal Construction Contract
General construction form contracts may not fully or adequately address the roles, scopes, liabilities, and obligations of all parties. Any contract should specify who is performing construction work and who is performing manufacturing or prefabrication work. Definitions for “fabrication site,” “worksite,” “components,” and “subcontract work” should be clearly developed for the particular project and roles of each participant.

UCC Article 2 or Common Law?
While caselaw is still limited in this area, courts have determined that that Article 2 of the Uniform Commercial Code (sale of goods) sometimes applies to the entire project, part of the project, or none of the project. Most courts have treated prefabricated components as goods under Article 2 until installation or incorporation into the site. This is important for a variety of reasons, not the least of which is the express and implied warranties of goods contained in Article 2, which includes the implied warranty of merchantability and fitness for a particular purpose. Some jurisdictions may permit these warranties to be waived or disclaimed through contracts, while others may not.

Local, State, and Federal law
It is imperative that the project participants research and understand the licensing, registration, code, building code, and federal, state, and local laws and ordinances that may control the worksite, the fabrication site, the shipment of goods and components, the manufacture or construction of building components, and any tax implications thereof. Statutes of limitations may vary by state and may limit potential claims or recovery against certain parties but not others depending on their native jurisdictions.

Varying jurisdictions and controlling laws may also affect trade and licensing requirements or the rights and duties of contracting parties as interpreted by courts in a given jurisdiction. Different states may also have different and varied OSHA regulations, which may or may not be preempted by federal law.

Contractual provisions related to liens or lien waivers, liquidated or delay damages, indemnification and contribution obligations, and payment times may also vary and be constrained by varying laws from various states.

Other Considerations
In addition, parties undertaking modular construction projects should also consider the following issues:

• What level of customization in manufactured components is permitted or can be tolerated by the manufacturer or the project?
• What is included in the price of the project?
• What is included in the price of each module?
• How will prefabricated parts or modules be transported to the site? 
• How will the modules be lifted and handled with they arrive on the site?
• How will Site lay-down and staging areas and logistics be handled?
• Is there insurance coverage for completed units stored off-site?
• Is bonding necessary and possible?

Form Contracts
Of the three commonly used form contracts in the United States, only Consensus Docs seems to have a contract that it has attempted to tailor to the Modular Construction context.  That form will still likely need to be modified to conform to each unique project.

While prefabricated and modular construction methods have existed in various forms for over a century, the industry has not fully considered the unique legal, statutory, regulatory, and project considerations implicated by such hybrid processes.  To treat these projects “like any other project” can leave huge gaps in scope and coverage and cause major problems and delays on a project. 

It is best to carefully consider these issues and tailor all of the contract documents to the project from the outset (and likely involve consultants and professionals including legal counsel, insurance brokers, and sureties early in the process).