Modular construction is not new. However, over the last several years, modular construction has seen significant growth with no signs of slowing down. In 2021, global modular construction represented a market of approximately $130 billion and is projected to reach upwards of $235 billion by 2031. Modular construction growth in the US is largely due to the technological advances and globalization.
In general, modular construction involves the manufacturing and fabrication of standardized components of a structure in an off-site, controlled environment. Once those components are fabricated, they are then transported to the project site and assembled by an installer or contractor. Moving these fabrication and construction activities off-site allows the fabricator to control the quality standards over the fabrication process and gain the economic advantage of an assembly line and manufacturing process. This leads to a reduction in cost. This cost savings is then passed on to the owner, thereby driving down the overall price of construction.
While modular (or off-site) construction has a broad reach touching many different industries, this article will focus on modular fabrication in the industrial industry. And modular construction has provided significant advantages in the planning and construction of these industrial facilities. This article describes and summarizes some of the issues that are unique to modular construction that are different than the more traditional, on-site approach.
Challenges of Modular Construction
Modular construction does not come without its challenges. For example, the familiar Engineering, Procurement, Construction (EPC) contract relationship where the owner engages one entity to build an entire industrial complex can now be disrupted with modular construction.
Specifically, an owner who was previously beholden to a single EPC contractor can now, instead, contract directly with an engineering company to provide its process technology and equipment (the “E” and “P” in EPC) and then further reduce the cost of construction (the “C” in EPC) by directly contracting with an off-site fabricator in a different country who specializes in the fabrication of modules. In this scenario, the traditional EPC contractor now becomes the ‘installer’ or ‘connector’ of the components that arrive at the project site. Modular construction gives the owner more flexibility in its contractual relationships.
But this also creates issues related to the required coordination efforts. The owner now has much more coordination obligations that it did not have before. But even if the owner wishes to use a traditional EPC approach, it can still require that the EPC use modular, off-site construction, thereby reducing the overall construction costs and improving the overall quality of the new facility.
There’s also the added challenge of integrating the off-site fabricated components into the balance of project (BOP). Clear delineation of these all-important contractual responsibilities is paramount to ensure the modules meet the ultimate performance criteria. For example, and irrespective of whether the owner or EPC contractor is responsible for coordination, owners would likely seek written assurances that the mechanical and substantial completion requirements are properly delegated to either the off-site fabricator or the on-site contractor. Otherwise, this can create problems for the owner if the fully-assembled facility does not meet performance goals.
Finally, there’s also the challenge of transportation logistics. All of the off-site fabricated components (modules) need to be transported to the BOP site for assembly. While the risk of transportation is not new to construction projects, the heightened implications of risk allocation for transportation is obvious in a modular construction contract when much of the new facility will be fabricated off-site and then transported to the BOP site. Therefore, it is important that modular construction clients identify and reach clear terms on addressing and allocating that transportation risk. This can be handled by incorporating standard shipping terms, such as Incoterms FCA, DAP, FAS, etc.
But perhaps the more significant shipping risk particular to modular construction is the supply chain risk. As demonstrated over the past few years, the supply chain can be subject to unexpected interferences that disturb the global supply chain. Accordingly, having a modular contract in place that now sources modules from around the world introduces more transportation risk to a construction project.
Given the recent growth of modular construction, there are not many standard, form contracts offered. However, ConcensusDocs has created a form modular construction contract—its 753 ConcensusDocs form (“Prefabricated Construction Agreement Between Constructor and Prefabricator”) along with its form 253 (General Conditions Between Owner and Prefabricator (Lump Sum)). But as always, it is important to understand what is in the contract and whether that is in a party’s best interest. Again, modular construction present unique issues for each project.
Does the UCC or common law apply?
Perhaps the most fundamental legal issue facing modular construction is this question: does the Uniform Commercial Code (UCC) apply, or does the common law apply? Or, is it some hybrid of the two?
The UCC and common law provide different rules and requirements for contracts. The UCC is a set of laws that governs commercial transactions, while common law refers to a body of law that is derived from judicial decisions and precedents. The UCC traditionally applies to the sale of goods, and/or movables. While the common law applies to service contracts. Unless called out, most EPC contracts are governed by the common law.
The answer to this fundamental question (UCC or common law) has significant legal implications. For example, both legal regimes would yield different results with respect to acceptance of the modules, payment for the modules, revocation of acceptance of the modules, and warranty issues, to name just a few. Which legal regime is better for the project, and therefore the contract, is a case-by-case analysis, but it is certainly an unsettled issue within the industry, and can be easily overlooked during contract formation. It is always best to evaluate the project and end goal of the contractual relationship so that the appropriate legal regime can be invoked during contract formation.
As the US construction market shifts more and more to off-site modular construction (particularly in the large, industrial context), it is critically important for US and international clients to fully understand the special legal and practical issues discussed in this article before they enter into a US modular construction contract
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The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.