By J. Brewer Anderson, Cobb Law Group
Prefabrication has been taking over the way contractors work and build. It is more important than ever for subcontractors to increase their knowledge and usage of this new technology. It is cost efficient and time efficient, safer than traditional methods, and scalable; yet, many subcontractors are unable to utilize this technology, at least to their full extent.
Prefabrication is the off-site production of components to be used on a job site. While there has been a large wave of residential prefabrication, like that used in new, modular homes, prefabrication can provide benefits to most specialties of commercial and residential construction.
In plumbing fields, skids, pumps, piping stacks, and water distribution centers are often prefabricated. Meanwhile, electrical contractors can assemble panels, conduits, assemblies, etc., before delivering them to a jobsite. An advantage of producing connective piping and assemblies off-site is that all measurements, quality control, and integration are handled before the component(s) leave the factory. This reduces the likelihood of malfunctioning components or other quality control issues, lessening the possibility that the same issues occur on-site, where disruptions can put the project off schedule and cut into your profits. If an error is made during the production process, off-site manufacturing allows for repair before it leaves the factory doors, thus saving more on-site job time. Another benefit of early preparation is that on-site difficulties are further prevented by mitigating the possibility of encountering unplanned disruptions on the jobsite.
While these quality control benefits speak for themselves, prefabrication is a reliable cost-saving tool. The reduction of on-site man hours associated with the construction of manufacturable components correlates with direct labor cost savings. Prefabrication can also provide savings apart from labor costs; it provides the opportunity to standardize components across multiple similar projects, reducing unit costs and marginal costs. Outsourcing prefabrication processes can compound cost-saving effects as you do not need to finance the fixed costs that arise with in-house prefabrication.
Common Obstacles
Prefabrication does come with a unique learning curve and can be difficult to benefit from if haphazardly implemented. The fixed costs associated with prefabricating, such as factories, large material outlays, bulk transport costs, etc., can sometimes deter subcontractors from pursuing the method. Also, the on-site labor hour savings can encourage supervisors to excessively reduce the number of laborers present on the jobsite; this can lead to shortages if disruptive events occur and further delays as a result. Operational strategy must be prepared for both these and other factors. An example of a productive initial venture would be to focus initial efforts on high-volume units that are common across multiple projects. This can develop familiarity with the process, costs, logistics, and timelines of prefabrication on comparatively low-risk parts. Once a familiarity of process and working relationship is built with the manufacturers, material suppliers, and shippers, it would then be reasonable to measure the viability of prefabricating a broader set of components. Specialized parts, parts that require many on-site labor hours, or parts with multiple quality control concerns can be attractive candidates as a company’s scope of prefabricated components expands.
When using prefabricated components for a project, all parts must be ordered, completed, shipped, and ready at the jobsite by the date they need to be installed, or else the prefabricator will be liable for disruptions caused by the delay. This creates additional considerations to be heeded by the subcontractor when conducting business among the contractor and manufacturers. Details and orders must be known ahead of time, maybe even months in advance of the contracted work to reduce the possibility of delays and liabilities. As this is the case, it would be helpful to have thorough negotiations with the manufacturers and contractors to create a manageable timeline to produce these pieces in a timely fashion.
Contractual protections can also reduce subcontractors’ liability exposure when using prefabricated equipment on a project. As the timeline for specialized, prefabricated equipment is fragile, site readiness provisions, manufacturing payment plans, and Owner/GC caused delay protections, etc., are contractually important to uphold, specific examples include:
Owner/ General Contractor Caused Delay Protections
These stipulate the liabilities held when an owner or GC causes a delay. For a prefabricating subcontractor, this can result in delayed project details, which furthermore delays the ability to place accurate orders for a manufacturer. When an incident like this occurs, it is possible that the prefabricated component will not arrive on time at the job site. It is important to ensure compensation, financially or otherwise, when this is a possibility.
Site Readiness Provisions
It is important that the site is in sufficient condition to safely hold or install the equipment when it arrives on the job. Large or specialized components often require a degree of care during storage, or it risks taking damage. It is important to ensure that when the equipment arrives at the site you will not be liable for storage if the site is not prepared, and not liable for possible damage that may occur in this event.
Payment Plans
Payment protections are important in all contracts as productive relationships can be strengthened or broken in the face of financial disputes. “Pay-if-paid” is a clause that can be included that removes payment liability if there has been no payment received from the GC. “Pay-when-paid” requires that the subcontractor pays the manufacturer within a reasonable timeframe, regardless of if the General Contractor has fulfilled their payment obligations.
While pay-if-paid seems to be more beneficial to the subcontractor, the importance of prolonged working relationships with manufacturers can make a pay-when-paid an attractive clause as a show of good faith with the manufacturer. Payment plans with milestones are also an option in which the manufacturer receives a percent payment when predetermined milestones are met (e.g. delivery, installation).
Appropriate Preparations
While it can seem like a heavy ordeal when shifting to methods of prefabrication, there are concrete benefits to be had by many subcontractors who currently have no prefabrication. These benefits, however, need to be adequately weighed against the costs of the underlying subcontractors’ logistical and organizational capabilities. It is important for all subcontractors to reflect on their current scope of prefabrication and establish if it can act as a productive tool, or if the organizational difficulties restrict the viability of prefabrication.
About the author:
J. Brewer Anderson is a Construction Law Paralegal at Cobb Law Group.
