The Payment Problem with Modular Construction

{"version":"0.3.0","atoms":[],"cards":[],"markups":[["sup"],["em"],["strong"],["i"]],"sections":[[1,"p",[[0,[],0,"May 20, 2022"]]],[1,"p",[[0,[],0,"Modular\nfabricators often find themselves in a conundrum when it comes to receiving payment\nfor work they perform offsite. After all, the standard in the construction\nindustry is for contractors to receive payment only once work has been\nincorporated into the project, or when materials and equipment are delivered\nand stored at the site. The following is an excerpt from the A201"],[0,[0],1,"\u00ae"],[0,[],0,"-2017,\nGeneral Conditions of the Contract for Construction that sums up this standard: "]]],[1,"p",[[0,[1,2],1,"\u00a7 9.3.2 "],[0,[],1,"Unless otherwise provided in the Contract Documents,\npayments shall be made on account of materials and equipment delivered and suitably\nstored at the site for subsequent incorporation in the Work."]]],[1,"p",[[0,[],0,"The problem, as\nmodular fabricators are acutely aware, is that nearly all their work is done\nfar from the project site \u2013 perhaps even in a different state or country. Over\nthe years, fabricators have devised several ways to deal with this issue, yet\nthere is no consensus in the industry on how to structure payments. Some fabricators require the client to pay a\nsizeable deposit up front, while others opt to get paid in a manner that largely\ntracks with the A201 standard \u2013 i.e. receiving payment for work as it is\ncompleted (albeit completed in a factory, not on site). "]]],[1,"p",[[0,[],0,"Given this\nbackdrop, how can modular fabricators, project owners, and lenders, weigh the\ncompeting needs of (a) the fabricator who naturally does not want to wait until\nits work is delivered and installed before receiving payment, and (b) the owner\nand lender who want to make sure they are getting what they pay for? Furthermore, if an owner does make progress\npayments while modular components are being built offsite, how is the owner\nprotected in instances where the fabricator fails to properly build or deliver\nthose components to the site, or goes bankrupt before completing its work? "]]],[1,"p",[[0,[],0,"The answers to\nthese questions can partially be found in a careful reading of the A201. The\nA201 allows a contractor to receive payment for materials and equipment stored\noffsite, so long as the owner approves of such payments in advance. In such a\nscenario, the contractor is required to reach an agreement with the owner on\nkey issues pertaining to payment for offsite work. In furtherance of this, the\ncontractor must establish procedures to establish the owner\u2019s title to materials\nand equipment that the owner has paid for, and to otherwise protect the owner\u2019s\ninterest by procuring insurance and making arrangements for transportation to\nthe site. "]]],[1,"p",[[0,[1,2],1,"\u00a7 9.3.2\n"],[0,[],1,"\u2026If approved in advance by the Owner, payment may similarly be made for materials\nand equipment suitably stored off the site at a location agreed upon in\nwriting. Payment for materials and equipment stored on or off the site shall be\nconditioned upon compliance by the Contractor with procedures satisfactory to\nthe Owner to establish the Owner\u2019s title to such materials and equipment or\notherwise protect the Owner\u2019s interest, and shall include the costs of\napplicable insurance, storage, and transportation to the site, for such\nmaterials and equipment stored off the site."]]],[1,"p",[[0,[],0,"Another important\nstep in protecting the owner\u2019s interest in payments made for work performed\noffsite is to make sure that title to work vests with the owner once payment is\nmade. In the A201, the contractor warrants that title to all work covered by an\napplication for payment will pass to the owner no later than the time of\npayment."]]],[1,"p",[[0,[1,2],1,"\u00a7 9.3.3"],[0,[],1,"\nThe Contractor warrants that title to all Work covered by an Application for\nPayment will pass to the Owner no later than the time of payment. The\nContractor further warrants that upon submittal of an Application for Payment\nall Work for which Certificates for Payment have been previously issued and\npayments received from the Owner shall, to the best of the Contractor\u2019s\nknowledge, information, and belief, be free and clear of liens, claims,\nsecurity interests, or encumbrances, in favor of the Contractor,\nSubcontractors, suppliers, or other persons or entities that provided labor,\nmaterials, and equipment relating to the Work."]]],[1,"p",[[0,[],0,"In total, the A201 provides a mechanism for a modular\nfabricator to get paid for work performed offsite, and requires the fabricator\nto protect the owner\u2019s interest in such work. The A201 does not, however,\nspecify the ways in which the fabricator can provide such protection. Two items\n\u2013 vesting certificates and advance payment bonds \u2013 can help both parties\nachieve these goals and make payments for offsite work more palatable. "]]],[1,"p",[[0,[],0,"Vesting Certificates"]]],[1,"p",[[0,[],0,"A vesting certificate is a document that evidences the\ntransfer of ownership. Vesting certificates can apply to fully completed\nmodules or to components that have yet to be incorporated into a module. In\neither event, if owners want evidence that they have paid for items located\noffsite and that ownership has vested, they should make sure to get a vesting\ncertificate that clearly identifies the items and their ownership status.\nOwners can also insist on the right to inspect these items and remove them from\nthe fabricator\u2019s factory if needed. Vesting certificates that are clear about\nwhat items are owned by the project owner can help protect an owner if a\nfabricator becomes insolvent. Thus far, vesting certificates have been widely\nused in the United Kingdom on modular project, yet they are relatively untested\nin courts in U.S. jurisdictions. "]]],[1,"p",[[0,[],0,"Advance Payment Bonds"]]],[1,"p",[[0,[],0,"An advance payment bond can be used in scenarios where\na contractor or fabricator has requested an advance payment to cover the cost\nof materials or equipment required to initiate a project. In making such a\npayment, owners are exposed to the risk that the contractor will default on the\nproject without returning the amount advanced. Thus, the advance payment bond\nprovides protection to owners for sums paid prior to contracted-for materials\nbeing delivered to, or the work performed on, the project site. Ultimately, it\nis a guarantee that the advanced payment will be returned to the owner if the\ncontractor or fabricator fails to meet its contractual obligations, for any\nreason."]]],[1,"p",[[0,[3,2],2,"AIA Contract\nDocuments has provided this article for general informational purposes only.\nThe information provided is not legal opinion or legal advice and does not\ncreate an attorney-client relationship of any kind. This article is also not\nintended to provide guidance as to how project parties should interpret their\nspecific contracts or resolve contract disputes, as those decisions will need\nto be made in consultation with legal counsel, insurance counsel, and other\nprofessionals, and based upon a multitude of factors. "]]]]}