This article was written for ConsensusDocs and first appeared here.

Volumetric Modular Construction (VMC) is a building method where a structure is divided into large components or modules, fabricated in an offsite factory and then transported to a construction site for assembly.[1] Proponents of VMC hail it as a cost-efficient alternative to traditional building methods that leads to more consistent quality and shorter construction duration.[2] Due to a growing labor shortage, high demand for compressed project schedules, and stagnant construction productivity rates, the construction industry is embracing VMC.[3] A recent report on the market size of prefabricated construction estimates that from 2026 to 2031, VMC will grow at a compound annual growth rate of 7.16% and become a 413.11-billion-dollar industry.[4]

As VMC becomes more prevalent, owners, general contractors, and subcontractors must consider how to effectively contract for modular construction. One important consideration, which this article focuses on, is navigating termination of a modular subcontractor.

After terminating a subcontractor, a replacement contractor steps in to finish the remaining work. When construction takes place on-site, the partially completed work assumed by the replacement contractor is already at the jobsite. A replacement framing contractor, for example, may attach drywall to studs installed by a recently terminated framing contractor. However, under the VMC building method, where construction takes place at a prefabrication facility, project stakeholders need to consider how to protect their interests in the terminated modular subcontractor’s materials and partially fabricated modules.

Owner or Contractor Owned Prefabrication Site

One potential solution for the owner or general contractor is to lease or purchase the off-site prefabrication site. Control of the prefabrication site avoids the challenge of transferring partially prefabricated units and materials from the terminated contractor’s facility to the replacement contractor’s facility. Instead, like the replacement drywall subcontractor mentioned above, a replacement contractor arrives at the prefabrication facility and picks up where the terminated subcontractor left off.

Many standard construction contracts already contain a clause granting general contractors’ control over materials and supplies purchased from a terminated subcontractor. Parties may modify these types of contract clauses to ensure that prefabrication materials and components remain under the control of the owner or general contractor, post-termination. For example, in ConsensusDocs 753, which is the ConsensusDocs’ standard agreement between constructor and prefabricator, Section 10.1.2 states in relevant part:

If Constructor performs work at the Project Site under this article, either directly or through other subcontractors, Constructor or other subcontractors shall have the right to take and use any Components, materials, or supplies for which Constructor or other subcontractors have paid and located at the Worksite for the purpose of completing any remaining Subcontract Work. Constructor and others performing work under this article shall also have the right to use construction tools and equipment located on the Worksite and belonging to the Prefabricator and its subcontractors for the purpose of completing the remaining Work, but only after Prefabricator’s written consent, which shall not be unreasonably withheld . . .[5]

Replacing the term “Project Site” with “Prefabrication Site” or whatever contract term defines the owner or general contractor owned prefabrication facility, protects a party concerned that terminating a modular subcontractor will result in forfeiting the materials, tools, and partially fabricated modular components.

Owning or leasing a prefabrication facility, however, is not always a practical option. If modular components make up a small portion of the project’s overall scope of work, investing in a prefabrication site is not cost effective. The complexity of the modular design may also necessitate a prefabrication site that is too expensive relative to the project’s budget. Furthermore, the efficiency, cost savings, and quality that make VMC appealing, often depends on a modular subcontractor’s ability to utilize its own prefabrication site.[6] As with all risk mitigation strategies, a careful balance must be struck between commercial objectives and the added expense that owning or leasing a prefabrication facility may cause a contractor to incur.

Advance Payment Clause

The AIA Family of VMC specific standard form contracts (A181, A281, A481 and B181) include an advance payment clause that protects an owner’s rights in materials used or intended to be used for modular construction.[7] Under this clause, the owner agrees to pay the construction manager, acting as constructor, in advance for materials, equipment, and labor used in building the modules.[8] The construction manager passes this payment to the modular subcontractor and then tracks cost and expenses the modular subcontractor charges against the advance payment.[9] In return, the construction manager “warrants that title to the Modular Work covered by the Advance Payment will pass to the Owner at the time the Advance Payment funds are expended for the construction portion of the Modular Work.”[10] As a result, if the owner terminates the construction manager or the construction manager terminates the modular subcontractor, the owner maintains control over the modular subcontractor’s work materials.[11]

The downside to an advance payment clause is that the owner may view it as an attempt to “front-load” the contract.[12] Furthermore, if most of the project’s construction is modular, an owner may prefer to use progress payments to ensure contract compliance and monitor the project’s schedule.[13]

Security Interest Clause

A carefully tailored security interest clause offers another solution. As part of securing a modular subcontractor’s performance obligations, a VMC specific security interest clause requires that the modular subcontractor grant the general contractor a first priority security interest in all of its subcontract work, inclusive of all materials supplied and any prefabricated components.[14] Consequently, if the modular subcontractor defaults on its obligations, the general contractor can enforce its security interest and seize the secured materials and components.

Compared to an advance payment clause, a security interest clause provides rights in the modular subcontractor’s work without a substantial initial expenditure. As a result, it avoids any concerns related to contract “front-loading” and allows for a traditional progress payment scheme.

Concluding Thoughts

While VMC offers several benefits in the appropriate scenario, as with any other project delivery method, stakeholders must carefully weigh their internal business objectives and align those with a right sized risk mitigation. Doing so in advance of negotiations and entry into a contract is a vital step for each stakeholder to take when considering using VMC on a project.

[1] Mohammed Zohourian et al., Modular Construction: A Comprehensive Review, Buildings, Jun. 12, 2025 at 1.

[2] Prefabricated Construction Market Size & Share Analysis – Growth Trends and Forecast, Mordor Intelligence, https://www.mordorintelligence.com/industry-reports/prefabricated-buildings-industry-study?utm_source=globenewswire (last visited April 5, 2026).

[3] Id.

[4] Id.

[5] ConsensusDocs 753, § 10.1.2.

[6] See Tharaka Gunawardena & Priyan Mendis, Prefabricated Building Systems—Design and Construction, 2 Encyclopedia, no. 1, 2022, at 70, 93.

[7] Robin G. Banks, Welcome to the Family: New AIA Contract Documents for Progressive Design-Build and Volumetric Modular Construction, 19 Am. Coll. Constr. Laws., no. 2, 2025, at 11.

[8] AIA 281-2025 § 9.3.1.

[9] Id. §§ 9.3.3 – 3.5.

[10] Id. § 9.3.6.

[11] Banks, supra note 7, at 11.

[12] See Paramita Bhattacharya, Front Loading a Schedule of Values & The Risks of Gambling with Cash Flow, Surety CFO: Blog (Nov. 10, 2025), https://www.suretycfo.com/post/front-loading-a-schedule-of-values-risks-of-gambling-with-cash-flow.

[13] Construction Law 367 (Patterson et al. eds., 2d ed. 2019).

[14] The concept and parameters of a VMC specific security interest clause came from Nathan Johnson, General Counsel for the Boldt Company.