Who Owns Those Fan Motors?
Acme Sheet Metal has been hired to install a state-of-the-art HVAC system for a new computer chip manufacturing facility. The air-handling system design includes special filtration components, as well as a sophisticated air-distribution and control system. Many of the components must be special-ordered and have long lead times. To meet the project schedule, Acme has ordered equipment costing $500,000 for delivery within 12 weeks.
Some of the equipment arrives early and, due to project delays, installation of all of the equipment is delayed by an additional 30 to 45 days. Acme’s equipment vendors have invoiced the items and are awaiting payment. A small amount of the equipment is stored on the job site, but most is retained in Acme’s warehouse pending installation.
Before Acme can install the equipment, several fan motors and some expensive control equipment disappear from the job site. Acme notifies the general contractor and is told to make a claim on its own property insurance and to order replacement equipment immediately. Payment of the claim under Acme’s property insurance is delayed while its carrier attempts to determine whether coverage exists or whether the equipment should be covered by project insurance. At the same time, Acme’s draw request on the other equipment stored at the job site and off-site is refused. The general contractor informs Acme that it will not be paid until after the equipment is installed. Acme’s equipment vendors demand return of their equipment, if Acme will not pay promptly. Several of the vendors threaten not to ship equipment for other jobs if payment is not made immediately. The subcontractor finds itself in a "no win" situation. It must either advance funds to pay its vendors to preserve the supplier relationships or jeopardize those relationships while waiting for payment on the stored equipment and materials.
On most significant jobs, an HVAC subcontractor will be required to order expensive equipment and materials to be paid for under the subcontract as the job progresses. When those payments are to be made is solely governed by the subcontract. It is essential that the subcontractor negotiate to obtain timely payment for properly stored equipment and materials. It is also critical that the subcontract accurately define which party is responsible for the care, custody and control of the equipment and materials once they have arrived at the job site. That allocation of responsibility can have an effect on whether insurance coverage exists, on which insurance policy provides primary coverage, and whether the subcontractor might have a delay claim, if the project is postponed because of theft, loss, or casualty damage to the equipment or materials.
The Standard Contract
Most projects utilize a version of the AIA or AGC construction subcontract forms or some proprietary form adapted from the AIA or AGC forms. The AGC/ASA/ASC Standard Form Construction Subcontract adopted in 1994 may also be used. The general contractor will typically have a prime contract with the owner using a related AIA, AGC or proprietary form. It must be recognized that the subcontractor’s ability to negotiate successfully for payment on stored materials and equipment will be directly related to the general contractor’s ability to draw for stored equipment and materials under the prime contract. If the general contract does permit disbursements for stored material and equipment, the subcontractor is in a strong position to insist upon the right to draw for those items related to its work.
Acme was fortunate to be operating under an AIA A-401 Contractor/Subcontractor Agreement incorporating A-201 General Conditions. Those contracts provide that the subcontractor will be permitted to draw for materials and equipment stored on site, unless the contract is amended to prohibit such payments. However, as to off-site materials and equipment, a different situation exists. Acme had not requested advance approval from the general contractor for off-site storage nor obtained the agreement of the general contractor to the location where the materials and equipment will be stored. Under those circumstances, its subcontract would not permit Acme to obtain payment for the off-site materials and equipment.
Under the AIA and AGC subcontract forms, as well as the AGC/ASA/ASC Subcontract Form, had the subcontractor followed the required procedures for notice to the general contractor and approval of off-site storage, it could have requested a draw for the materials and equipment in the first payment cycle following delivery. The process would have required Acme to make a specific request for permission to store off-site, with identification of the equipment to be stored, the storage location, and the value of the equipment. The general contractor’s written approval would be requested and obtained. The general contractor would require that Acme provide evidence of its ownership of the equipment (probably a bill of sale) at or before the time of payment. The approval process would also include verification of insurance to make certain that the equipment would continue to be covered by property insurance while in storage and in transit to the construction site.
Insurance and Risk of Loss
On a typical construction project, the owner or general contractor will purchase builder’s risk insurance, covering the various components of the work until project completion. On the Acme project, the builders risk insurance covered fire or other casualty damage to the equipment stored on site. However, the policy did not cover theft of stored equipment and materials not yet incorporated in the work. A special theft endorsement was required, but not obtained by the owner or general contractor.
Acme determined that Article 11.3 of the A-201 General Conditions required the owner or general contractor to maintain property insurance for the entire work at the site. The term "work" was defined as including all materials to be used in the project. The failure of the owner or general contractor to obtain the theft coverage endorsement resulted in a claim by the subcontractor for the cost of replacement of the stolen equipment.
Theft or casualty damage in off-site storage presents a more difficult situation. The builder’s risk insurance would not cover portions of the work stored off-site without, at the very least, written approval of the owner or general contractor, with a designation of value of the stored property. Most often, the owner or general contractor will need to obtain a special endorsement to the builder’s risk policy to cover materials and equipment stored off-site or in transit. When the subcontractor seeks approval for off-site storage and identifies the value of the materials and equipment to be stored, it should also inquire about the status of the insurance. It is also good practice for the subcontractor to make certain that its property coverage extends to its stored materials and equipment, as well as any property in transit on company vehicles. Insurance coverages referred to as "equipment floaters" and "installation floaters" may be used to fill gaps in coverage.
Earlier versions of the standard contract forms were very restrictive as to payment for stored materials and equipment. The current contract forms including the AGC/ASA/ASC Subcontract typically allow for prompt payment, if the necessary procedures are followed. However, the subcontractor must keep in mind that those standard provisions can be modified by changes to the standard contract form or left out of proprietary contracts. If the subcontractor will be required to make a substantial investment in equipment or materials (particularly with long lead times), it should verify that it will get paid for those items within a reasonable period of time after delivery. The subcontractor should determine whether the subcontract requires prior approval as a prerequisite to payment for materials stored on site and it should assume that it will need approval for off-site storage. On off-site storage, notice must be given of the value of the equipment and materials as part of the request for approval. Finally, the subcontractor must verify that the equipment and materials, both on site and off-site, are fully covered by property insurance in effect.