Surety Bonds Offer Versatile Solutions to Contractual Default Risks of Modular Building

As the use of modular building in U.S. and international construction projects continues to grow, owners, construction managers, general contractors, subs and trades all are looking for ways to assess and manage the unique, diverse and at times complex contractual exposures they represent.

From prefab manufacturing to transportation, installation and construction, the ultimate success of project participants at all points in the modular supply chain and construction process is subject to a complex set of interdependencies.

Traditional laws and regulations that apply to construction projects eventually may require adjustments to address circumstances that are otherwise unique to modular construction projects and their participants. For instance, prefabricated sections may be manufactured in one state and transported to another. Additionally,  projects differ in their contractual determination of whether entities involved in production of modules are in fact subcontractors or manufacturers, which could subject them to different regulations. While many states have set regulatory regimes, they are fluid and amended periodically based on new case law, changes in consumer trends, and the emergence of new watchdogs who bring different perspectives.

There are also potential legal controversies over at what point the project owner is responsible for modules shipped to the construction site, and lack of clarity over whether and how protections, such as statutes of repose and statutes of liability, apply to various entities involved in modular construction projects.(1)

Sound contracts key to effective modular construction surety solutions

While these controversies are being sorted out, owners, project managers, general contractors and all project participants – both onsite and offsite – need clarity with respect to their project-specific responsibilities and deliverables.

Accordingly, individual roles, responsibilities and specifications must be spelled out in detailed contracts with participant. Surety bonding, insurance and other financial requirements should be stipulated in each contract and flow down consistently from general contractor to subs, trades, pre-fab manufacturers and transportation providers.

Sound contracts are key for each participant to obtain appropriate surety bonds that provide protection against the financial consequences of contractual defaults of the other participants. Among the various types of surety bonds that can apply to modular construction projects are:

– Bid bonds, which provide assurance that contractors, manufacturers, suppliers, trades and other participants bidding on a project will deliver the services as stipulated in their bid and, if given a contract, will purchase a performance bond.

– Performance bonds, which provide assurance of the completion of any work by a project participant according to timing, specifications and quality stipulated in the contract.

– Supply bonds, which can be obtained by manufacturers/subcontractors and their suppliers to guarantee the delivery of their materials and finished product, such as the pre-fab materials, according to the specs and timing stipulated in their contractors.

– Payment bonds, which provide protection should a contractor or sub fail to pay its subs, trades or workers according to its contractual requirements.

– Maintenance bonds (also known as warranty bonds), which protect the owner for a set period of time against defective workmanship, materials or design that could arise subsequently if the project was not done correctly. These bonds typically are not issued without first purchasing a performance and/or payment bond.

As modular construction gains momentum in all parts of the U.S., Unique Surety and Insurance Services, LLC, can work with project owners, construction managers and general contractors to show how surety bonds can address risks of contractual default and protect the interests of the various participants in these projects. For assistance with your modular construction bonding needs, telephone 1-833-266-3765 or email aliciawalter@bondwithunique.com. You can also visit www.suretybondsbyunique.com.

Notes:

1. Beeton, Joe (Jan. 29, 2019) The Bottom Line: Putting together pieces of a modular project contract. Construction Dive. Retrieved from: https://www.constructiondive.com/news/the-dotted-line-putting-together-the-pieces-of-a-modular-project-contract/546923/