Modular construction has become increasingly popular. Many construction companies and project owners are opting for modular buildings that are built in pieces in assembly lines with workers performing the same tasks over and over. These pieces are manufactured away from the construction site before being shipped and installed to create apartments, dorms, schools, hotels and more.

While many projects involving modular construction are private developments, project owners are increasingly requiring payment and performance bonds of the contractors that will perform work. Some of the reasons private project owners are requiring surety bonds on modular projects include current supply-chain problems, increased construction materials costs, materials shortages and inflation. With the tight labor market, some subcontractors might not show up to perform their jobs.

All of these factors have led private project owners to require bonds to protect themselves from potential losses caused by non-performance, delays and failures of the contractors to pay their suppliers and subcontractors. Contractors that want to perform work on a modular project should review factors underwriters consider when deciding whether to issue a contractor bond for modular projects.

Personal and Business Factors

As with any type of contractor bond, a surety company will want to determine that the contractor poses a relatively low risk. The company will want to evaluate the contractor’s credit, business financials, available working capital, past experience handling similarly sized projects and work with previous suppliers and subcontractors. To help with this evaluation, the surety might ask the contractor to submit the following types of documents:

• Business organizational structure;
• Profit and loss statements;
• Information about past projects of a similar size;
• Income tax returns;
• Business tax returns;
• Bank reference letter; and
• References from past suppliers and subcontractors with whom the contractor has worked.

If the contractor has excellent credit and a strong reputation, it can anticipate receiving a quote for a low bond premium. If the contractor’s history is problematic, its rate quote might be higher. In addition to business and personal factors, the surety will want to evaluate some project-specific elements to determine the overall risk of underwriting the modular project and issuing payment and performance bonds to the contractor.

Design Phase

Modular projects require significant planning in the design phase. Contractors should be thoroughly familiar with how modular construction works. Design failures can result in delays leading to substantial losses for the contractor. The underwriters will want to see that the design of the modular project is thorough and well-documented and involves the input of engineers and architects.

Risks From the Manufacturer

In a modular project, the manufacturer of the modular components will be the contractor’s primary partner throughout the project and the most important supplier. Contractors will need to determine whether the manufacturer can meet the project's timeline and how it will handle any delay. The underwriters will want to see that the contractor has thoroughly prequalified the manufacturer and might ask for the contractor to require the modular manufacturer to supply a performance bond to protect against unforeseen delays or potential business closure.

How the Modular Buildings Will Be Transported

If the manufacturer is a distance away from the project site, how the components will be transported will be an important consideration for the surety underwriter. Contractors should consider the distance, how the components will be transported to the worksite and the risks involved with damage and delays. Damages during shipping and delays can result in other losses and liquidated damages. Contractors should carefully review the contract to look at clauses about how damages and delays will be addressed so that they can choose the best way to transport and deliver the components to minimize risk. They should avoid scheduling components to arrive just in time under the project's deadline to reduce the risk caused by delays or damage.

Knowledge of Building Codes

The surety company will want to verify that the contractor understands the different local and state building codes in the area in which the project is located and strictly adheres to them. Some locations have specific rules about how modular buildings can be delivered and whether the walls should be open or can be delivered closed. The modular buildings must meet the building codes in the area, and the contractor must understand the rules that will apply.

Potential for Construction Defects

Modular buildings are constructed quickly, which is a benefit because it can help to reduce the time needed to complete a project. However, if the equipment or employees involved in constructing a modular building make mistakes, construction defects can occur. In this type of scenario, several buildings might need extensive repairs when they arrive at the site. The risk of construction defects can increase when needed repairs are not made, and defects can impact the building's safety and quality. The surety will want to see that the contractor has a strong quality assurance program in place to ensure the work performed on the modular buildings meets all area building codes and is free of defects. The surety will want to know about the contractor’s experience working with the manufacturer and the steps it has taken to prequalify the company.

Labor Risks

With the currently low unemployment rate, the labor market is tight. Finding enough experienced workers to assemble modular buildings can be a challenge. Contractors might work with construction workers who are proficient in handling modular construction. Surety underwriters will ask questions to ensure that they have sufficiently experienced workers that can help to make sure the project will be completed within the contractual and building code requirements.

Types of Bonds

The types of bonds that contractors might need for a modular project include payment and performance bonds. The project owner might ask contractors to supply a performance bond to guarantee they will complete the project on time and according to the provisions of the contract. Contractors might also be asked to supply a payment bond guaranteeing that they will pay their suppliers and subcontractors on time

Modular projects are becoming more common as many project owners understand the value of fast construction that meets building codes. If contractors want to perform work on a modular construction project, they will likely need to secure bonds. Understanding the factors underwriters consider when evaluating the risk involved with issuing surety bonds for modular projects can help contractors reduce potential risks and secure the bonds that they need.