Off site materials

It can sometimes be appropriate for the client to pay for items even though they remain ‘off-site’, for example, where a contractor has themselves made a large payment for plant or materials that have yet to be delivered to site, or if the client wishes to ‘reserve’ key items in order to protect the programme. Such items should be agreed in advance and listed in an annex to the contract bills.

Paying for off-site goods or materials can be useful, however, it does put the client at risk, for example if the contractor becomes insolvent and the items are then not delivered, even though payment has been made.

Several mechanisms are available to protect the client:

The client should check the financial status of the contractor to assess the likelihood of insolvency.
The client should require proof that the property in the items is vested in the contractor before payment is made. This may include a vesting certificate (certifying that property has passed to the contractor and that the materials will be properly identified, stored and insured), and checking that the suppliers terms and conditions do not include a retention of title clause.
The items should be set aside, and clearly marked with the client’s details.
The materials should be 'ready for incorporation'.
The client should require proof that the materials are insured against specified perils for the period they remain off site.
If the contractor is part of a larger group, then a guarantee might be required from the holding company.
An on-demand bond might be required up to the value of the off-site items, with the value of the bond reducing as deliveries to site are made.
The client might enter into a contract direct with the supplier.

However, none of these methods is fool proof. For example, a vesting certificate may be of limited value in practice, as it is difficult to sue an insolvent contractor. Furthermore, despite best endeavours, items may simply be removed or disappear in the event of insolvency, or if there is a rumour that insolvency might occur. This is particularly true for items that have yet to be fabricated, items that have still to be worked on, or items that are abroad.

In a perfect world, items would be delivered to the site and affixed to the property before payment is made, but where this is not possible, a judgement is necessary to assess the risk to the project, or the potential loss to the client versus the cost of ensuring absolute certainty in relation to off-site goods.