Unlike traditional onsite construction, modular (or prefabricated) construction takes advantage of assembling building components in factories or other manufacturing facilities, as opposed to onsite. This requires transporting large, completed building segments to the project site and putting them together there, usually by the prefabricator or other trades. Although in use for decades, modular construction has recently gained popularity because it affords greater efficiency and reduced costs. For example, workers gain proficiency from performing specialized tasks repeatedly, and the indoor assembly work rarely faces weather-related delays. Opponents of the trend, however, point to its limits on customization and the high shipping costs for out-of-reach locations.

Although such benefits and drawbacks may vary project to project, certain contractual issues pervade most, if not all, modular projects:

• Integration: Because modular construction involves offsite construction, small discrepancies in design, materials, and fabrication could create difficulties adding the modular component to the onsite structure. Contractual language that outlines who bears the risk for such integration problems should appear in all relevant contracts—whether between the owner and GC, the GC and the fabricator, or the GC and installer. The actual distribution of such risk remains at the parties’ discretion, but parties should know to price their work according to who pays when integration problems occur. Further, parties should ensure the agreement’s language correctly allocates risk.
• Delay: Installing prefabricated components can occupy large spaces at a worksite. Only careful coordination can prevent the installer from facing interference from other trades. Accordingly, relevant agreements need to provide for whether and how an installer may recover losses incurred from interference.
• Insurance: Because bringing prefabricated components to a jobsite can, and often does, involve interstate transport, prefabricators should have insurance coverage that applies in all applicable states. Otherwise, coverage may not be available. All involved parties should make sure that the relevant agreements contain the necessary insurance requirements to ensure proper coverage.
• Lien: Most lien laws allow a GC, subcontractor or supplier to file a lien on unpaid furnished and completed construction work. Prefabricated components challenge traditional legal understandings of furnished and completed work. On the one hand, the components themselves are completed and, as unique work, furnished to the project in that the manufacturer cannot resell them to another buyer, so lien rights should exist. On the other hand, component parts involve no more labor and materials than a supply of building products, both of which could be returned to the supplier making a lien inapplicable.
• Risk of Loss – If prefabricated components are damaged or destroyed during transportation, responsibility for such loss varies across jurisdictions and depends on which laws apply. If prefabricated components qualify as goods, then UCC rules govern, and the risk of loss passes to the buyer based on whether the prefabricator is required to deliver the components to a carrier or a particular destination. If prefabrication, however, constitutes a service, then the UCC would not apply, and the party who bears the risk of loss is often dependent upon traditional negligence concepts related to the duty of care. Because modular construction is a relatively new construction method and negligence concepts frequently require a fact-intensive analysis, courts have not had many opportunities to delineate clear standards about which laws apply. To address such uncertainty, parties can use carefully crafted contract language to clarify the responsibility for damage during shipment in advance.

To help address these and other issues unique to modular construction, all project stakeholders, including prefabricators, installers, GCs, and owners, should ensure their contracts contain appropriate language. The attorneys at Cohen Seglias are available to assist with contracting and other construction-related needs when they arise.