PREFABRICATION CONTRACT CONSIDERATIONS

Prefabrication (also referred to as modular construction in instances), is a form of offsite construction where certain construction activities occur at an offsite manufacturing facility or location.  Construction components or units are preassembled (prefabricated) at this offsite location prior to being delivered to the project site and then integrated into the project.

When preparing a prefabrication contract (including a prefabrication subcontract), there are a number of complex considerations that need to be weighed, and these considerations are bullet-pointed below.  The purpose of these bullet-points is to give you considerations to discuss and vet when preparing, negotiating, and agreeing to a prefabrication contract or subcontract.

  • UCC or Common Law. Article II of the Uniform Commercial Code applies to the sale of goods where common law applies to the sale of services.   As mentioned here, hybrid contracts involving both the sale of goods and services deal with the predominant test to see if the Uniform Commercial Code or common law applies. Oftentimes, prefabricators are considered subcontractors, particularly if they are installing the prefabricated units, where the common law would apply because of the predominant services component involved in their subcontracts.
  • Responsibility for Integration of Prefabricated Units into Project. There needs to be consideration for how prefabricated units get installed or integrated to work-in-place at the project.
  • Insurance. There needs to be strong consideration as to what insurance applies to the prefabricated units during the offsite fabrication process, transport, storage, integration into the project, and for defects.  (This involves an understanding of builder’s risk property insurance coverage, commercial general liability coverage, professional liability coverage, the master’s policy that covers property and liability at the manufacturing facility/location, inland marine insurance, etc., in order to maximize insurance coverage in the event of a loss.)
  • Risk of Transportation. There needs to be consideration how the prefabricated units get transported from the offsite manufacturing location to the project.  Transportation is significant risk from a cost standpoint, loss standpoint, and logistics standpoint when transporting loads, particularly if they are being transported from out of the state where the project is located.
  • Risk of Loss Post-Delivery to Project. There should be a protocol or plan for inspection or survey procedures when prefabricated components arrive to the project site and get signed-off, or otherwise accepted, prior to installation.  This includes consideration for damage that may occur post-delivery at the project site and may depend on whether the prefabricator is also serving as the contractor that installs the prefabricated units at the project.
  • Storage. There needs to be consideration as to storage of prefabricated units if they cannot be stored at the project site or the manufacturing location needs offsite storage to store prefabricated units to achieve a production schedule.
  • Quality Control and Quality Assurance. There needs be a protocol that discusses quality control and assurance, particularly during the offsite fabrication process.  This includes the consideration of access to the offsite manufacturing location so units can be inspected during the fabrication process.  This also includes the consideration of preservation of certain trade secrets that may be involved in the offsite fabrication process.  And, there should be a system that labels or marks the prefabricated units to allow for efficient storage and installation/integration of these units into the project.  Further, the protocol should establish the quality control and assurance procedure before prefabricated units are provided to a transporter for delivery to the project site (i.e., a pre-transportation sign-off).
  • Warranties. There needs to be consideration for warranties provided by the prefabricator and when those warranties commence.
  • Scope Issues. There needs to be consideration for any scope of work issues and gaps to ensure the full scope of work of the prefabricator is clearly delineated in the contract. This also involves scope issues involving the integration of the prefabricated units into the project to ensure that scope is appropriately detailed.
  • Legal Issues. There needs to be consideration if there are any licensing issues, OSHA issues, or state law issues that may come into play (such as a state law issue that impacts any statute of limitations or statute of repose associated with construction defects).
  • Flow Down Provisions. There needs to be a contractual responsibility that the prefabricated units comport with the contract documents (plans and specifications) so appropriate language, whether flow down provisions in the prime contract or otherwise (such as specific warranty language), needs to be incorporated.
  • Liquidated Damages and Consequential Damages. Exposure to damage needs to be considered in the event there are delays in delivery or production.  Exposure to damage needs to be considered if there are defects or quality control issues with the prefabricated units.  In this manner, consideration should involve whether the contract includes a waiver of consequential damages which may depend on whether the prime contractor is exposed to consequential damages with the owner and the type of insurance available to cover consequential damages (i.e., a party may want to limit recovery of such damages to the extent covered by insurance so as not to deprive itself of otherwise available insurance).
  • Bonding Requirements.  There needs to be consideration as to whether the prefabricator will be required to be bonded with a payment and performance bond.  If not, is there subcontractor default insurance the prefabricator will be enrolled in to cover more catastrophic losses.
  • Crane Operations. Oftentimes, prefabricated units are incorporated through the utilization of a crane so there should be consideration for any complex crane operations that may be utilized for purposes of offloading or integration in the project.
  • Technology. There needs to be consideration for using building information modeling (BIM) and any protocols associated with using BIM.

These are some of the main considerations that should be touched upon in any prefabrication contract or subcontract.  There are many positives to prefabrication but those positives also come with risk factors that need to be assessed and considered.

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.

 

HYBRID CONTRACTS FOR THE SALE OF GOODS AND SERVICES AND THE PREDOMINANT FACTOR TEST

Florida’s Uniform Commercial Code (also known as the UCC) applies to transactions for goods.  “Goods” is defined by Article II of the UCC as “all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities (chapter 678) and things in action.”   Fla. Stat. s. 672.105(1).

The UCC does NOT apply to transactions for services.  Transactions for services are governed by common law.

Oftentimes, transactions or contracts include BOTH goods and services.  In this scenario, referred to as a hybrid contract, does the UCC or common law apply?  In this scenario, courts apply the predominant factor test to determine whether the UCC or common law governs the transaction:

Whether the UCC or the common law applies to a particular hybrid contract depends on “whether the[ ] predominant factor, the [ ] thrust, the[ ] purpose [of the contract], reasonably stated, is the rendition of service, with goods incidentally involved (e.g., contract with artist for painting) or is a transaction of sale, with labor incidentally involved (e.g., installation of a water heater in a bathroom).”  In such instances, the determination whether the “predominant factor” in the contract is for goods or for services is a factual inquiry unless the court can determine that the contract is exclusively for goods or services as a matter of law. 

Allied Shelving & Equipment, Inc. v. National Deli, LLC, 154 So.3d 482, 484 (Fla. 3d DCA 2015) (citations omitted).

To illustrate, in Allied Shelving & Equipment, a vendor was hired to provide and install a pallet rack system (large shelves) in a warehouse.  Each party claimed the other materially breached the contract.  An issue on appeal was whether the trial court erred by applying the common law instead of the UCC to the hybrid contract which involved both the sale of goods  (providing the racks) and services (installing the racks).  The trial court found that the predominant factor of the transaction was services, hence the application of the common law.  The appellate court affirmed (because the parties did not have a court reporter at the trial so the appellate court was not in a position to analyze the evidence introduced into the record.)

The Eleventh Circuit Court of Appeals in BMC Industries, Inc. v. Barth Industries, Inc., 160 F.3d 1322 (11th Cir. 1998) provided some pointers to determine whether a contract is predominantly for the sale of goods or services:

First, the language of the contract itself provides insight into whether the parties believed the goods or services were the more important element of their agreement. Contractual language that refers to the transaction as a “purchase,” for example, or identifies the parties as the “buyer” and “seller,” indicates that the transaction is for goods rather than services. 

Courts also examine the manner in which the transaction was billed; when the contract price does not include the cost of services, or the charge for goods exceeds that for services, the contract is more likely to be for goods. 

BMC Industries, supra at 1330 (internal citations omitted).

In looking at these pointers, the BMC Industries’ Court found that the hybrid contract was predominantly for goods—meaning the UCC applied—based on the contract language including the fact that it was called a purchase order and over half the contract amount was allocated towards the delivery of the goods. 

Whether the UCC or common law applies is an important consideration in any transaction.  Goods are procured all the time in construction.  Services are also procured all the time in construction.  And, services and good are procured in the same transactions.  Also, important, as contracts start to cater more towards modular construction and prefabrication, whether the UCC or common law applies is a consideration that needs to be factored in when preparing the contractual language.

 

Please contact David Adelstein at dadelstein@gmail.com or (954) 361-4720 if you have questions or would like more information regarding this article. You can follow David Adelstein on Twitter @DavidAdelstein1.