The COVID-19 pandemic has disrupted nearly all industries, including construction. Global supply chain issues and labor shortages challenge construction projects around the country. Even pre-pandemic, owners and contractors sought ways to increase productivity and sustainability while decreasing costs. Now, more than ever, industry leaders are looking for solutions to build more efficiently. Enter prefabricated (prefab) or modular construction.

This method of construction is not novel. In fact, there is evidence of modular buildings dating to the 17^th century. Other countries, like Japan, Norway, and Sweden, have embraced prefab construction for some time. These countries adopted prefab construction to cope with environmental and economic strain. For example, in Japan, one reason for the popularity of modular construction is modular buildings withstand seismic activity more effectively than traditionally constructed buildings. In Scandinavia, cold weather and shorter daylight hours make modular construction an appealing alternative to traditional construction.

In the United States, prefab construction became popular in the early-to-mid 20^th century, when prefab homes were sold widely. The homes gained a bad reputation for being low quality and unsafe, which put a damper on production. However, since the 1990s, developers began using prefab in more complex projects. Fast food chain restaurants, such as McDonald’s and the B2 Residential Project at Atlantic Yards, are notable examples. While overall the United States has been slower than other countries to adopt this construction method, the tide is rapidly turning, particularly in multifamily housing, hospitality, and health care. Experts believe prefab construction will continue to gain popularity as the industry pursues innovation to curb the effects of widespread shortages exacerbated by the pandemic.

With rising costs of materials, developers will understandably look for ways to save. One of the primary benefits of prefab construction is economy of scale, which leads to higher productivity and a reduced cost per unit. Further, experts estimate that 30-40% of the materials used in traditional construction go to waste, as compared with 2% of material waste in prefab construction.

Besides creating cost savings, prefab construction can produce time savings. Workers can construct building components offsite while developers make on-site preparations — such as permitting and grading. Weather and other environmental factors can have less of an impact on a project’s timeline, as workers can complete the bulk of the construction indoors.

With these benefits come risks. Before turning to prefab construction as a solution for your project, it is important to evaluate these risks. A construction manager knowledgeable in prefab construction is invaluable. Prefab construction comes with its own scheduling challenges and coordination of the project is key.

Also important is ensuring that the contract documents properly address the unique legal issues associated with prefab construction. A few of the major legal issues to consider are:

1. Insurance

As prefab construction creates different risks from traditional construction, it is important to consider how this might impact insurance provisions in the contract. With prefab construction, much of the on-site risk that would be borne by contractors is instead shifted to other parties. For example, prefab construction entails more complexity at the design stage. Each of the building component modules must interconnect to create a finished structure. This may require input from several professionals in different disciplines. This complexity creates the potential for increased liability for the design professionals. There are also new types of risks introduced with prefab construction, such as those associated with complex crane operations and large load transportation. In each of these cases, the parties should carefully consider the appropriate insurance coverages to adequately protect against the unique risks associated with prefab construction.

2. Quality Control

With traditional construction, the parties regularly meet on-site so that the developer and its consultants may inspect the work and evaluate the progress of the project. Since most of the construction occurs offsite with prefab construction, the contract should incorporate similar rights to inspect the work and oversee the design and construction of the modular building components. This will help ensure that the developer and its consultants will have the opportunity to catch design problems and other quality issues before delivery.

3. Insolvency

In traditional construction, there is always the risk of losing a major subcontractor in the midst of a project. However, there are often qualified replacement subcontractors to hire to complete the project. If a prefab construction project loses the contractor building its modules, there are a very limited number of replacement prefabricators that could take on the remaining work. For this reason, it is critical that a developer and its consultants are confident in the financial security of the prefabricator for the project. The recent bankruptcy filing of the construction startup Katerra serves as a reminder of the risk of insolvency in this space. To mitigate this risk, owners should consider including specific contractual provisions for protection. For example, it may be prudent to limit the waiver of consequential damages so that the owner can recover any liquidated damages or delay damages if the prefabricator does not complete the project.

These represent only some of the major issues to consider when entering into prefab construction contracts. It is important to consult with design and construction professionals with experience in prefab construction to determine whether it is a good fit for the project. Prefab construction has many cost and time-saving benefits, particularly for projects with several similar components. If parties anticipate the risks and draft contracts accordingly, prefab construction may be a particularly useful method to maximize efficiencies on a project.