The word ‘prefab’, short for prefabricated, already reveals a lot: building components will be manufactured in a factory in advance. Subsequently, the building components will be quickly and easily assembled on the construction site. For a principal, prefab/modular construction offers great advantages.
One of these advantages is the shorter construction time: machines in the factory could replace much of the work and weather conditions are significantly less important. The construction process can be streamlined and robotized more easily. The latter leads, amongst others, to a reduced risk of construction errors and less failure costs.
Modular construction also offers sustainability benefits. As most of the work is manufactured in a factory, typically using standard sizes, less waste is produced and it is easier to reuse materials. In addition, nitrogen emissions will be significantly reduced through, among other things, a reduction in work on the construction site itself and a decrease in transport movements.
Usually, the principal pays the contractor during the execution of the work in accordance with an agreed instalment schedule and in line with the progress of the work. This refers to the stage of the work on the construction site. How to deal with, for example, the façade elements for a building that are 'prefabricated' earlier?
A contractor would like to be paid for that production, in the form of 'pre-financing' by the principal. The principal may be willing to do so, for example, to ensure the availability of the façade elements.
However, in case of prefab and modular construction, a great part of the work is not carried out on the principal's site, but elsewhere in a factory. As a result, it is more difficult to determine whether the instalment schedule matches the progress of the work.
A more significant consideration is that some time elapses between the production at the factory and its installation in the building, during which time the building components are usually stored on the manufacturer's or contractor's premises.
With pre-financing, the principal is already paying for certain (movable) goods, but does not yet have immediate access to them. The next question is how to incorporate sufficient security in case the manufacturer and/or the contractor goes bankrupt?
Bankruptcy of manufacturer or contractor
In traditional construction methods, the principal who owns the construction site immediately becomes - by accession of the façade elements into the work itself - the owner thereof. With prefab and modular construction, this works slightly different. After all, the building components will only be installed into the project at a later stage. The principal will only become the owner of the building components when they are fitted into the project (by accession).
Until then, the contractor or his manufacturer is the owner. If that party-owner then becomes bankrupt, those building components will fall into the assets of the bankrupt company. The principal may then have an unsecured claim against the assets - such claims are rarely satisfied (in full). This is a thorny situation for the principal, especially when he has pre-financed the project.
To avoid leaving the principal empty-handed if he already pays installments to the contractor relating to prefabricated parts in storage, the form of delivery ‘Constitutum Possessorium’ (CP-delivery) can be chosen. In brief, a CP-delivery means that a written declaration is made by which the building components are transferred (by the manufacturer to the contractor and) by the contractor to the principal and placed in his possession without any actual action being required. The building components in question simply remain in place; the transferor who held the building components (the manufacturer or contractor) will henceforth ‘hold’ the building components for the transferee (the principal). From that point on, the building components become part of the principal's assets. The declaration is usually framed in such a way that at the time the principal pays the invoices, he acquires ownership of the parts. In other word, it is 'equal crossing'.
Considerations for CP-delivery
In view of the desired consequences, it is important to make contractual arrangements that include, amongst others, the following:
- ownership of the relevant building components is transferred to the principal upon payment of the relevant installment(s);
- the manufacturer or the contractor holds the building components for the principal;
- the building components are stored (i) separately, (ii) individualizable and (iii) identified for the respective project and principal;
- the risk of the building components in the principal-contractor legal relationship remains with the contractor, for which adequate insurance must be taken out; and
- the principal will have access to storage and construction components at all times.
Moreover, in order to keep the building components sufficiently separate and individualizable, it is recommended that the components will be stored in a place separated from any similar items. The principal may require evidence in the form of photographs for confirmation.
Keep in mind however that the contractor may have previously raised external financing and this financier has most likely negotiated security in the form of a (‘undisclosed’) pledge. The ( undisclosed) pledge will be established on the building components, which means that the financier has an older right to the building components than the principal and his right takes precedence over that of the principal. A separate arrangement will have to be made in this regard.