Modular and offsite construction have moved from curiosities to mainstream delivery methods on schools, healthcare facilities, multifamily housing, and data centers. Factory-built components shorten schedules and tame weather risk, but they also stretch traditional risk allocation. Owners still ask a simple question: if my contractor cannot finish, who will step in and at what cost? That is the space a performance bond is designed to occupy. It is familiar on conventional projects, yet it functions differently when the project’s value lives partly in a factory, on wheels, or swiftbonds benefits at a port.
This piece unpacks how performance bonds operate on modular and offsite jobs, where they work well, when they create friction, and how to structure them so they actually protect the project. The perspective comes from sitting through surety claims calls, negotiating completion terms with modular manufacturers, and standing in muddy laydown yards waiting for the first set of boxes to arrive.
What a performance bond actually covers
At its core, a performance bond is a three-party agreement. The contractor, known as the principal, promises to perform the contract. The owner, the obligee, expects the work to be delivered as agreed. The surety, usually an insurer’s surety arm, guarantees the principal’s performance up to a penal sum, often 100 percent of the contract price.
If the contractor defaults and the owner declares a default in accordance with the bond and contract terms, the surety has options. It may finance the original contractor to finish under supervision, tender a replacement contractor, take over and manage completion, or pay the owner the cost of completion up to the bond limit. The purpose is not to insure against all headaches, only the risk of non-performance tied to the contractor’s obligations. Latent design defects, shifting codes, and owner-initiated changes sit outside the bond, unless specifically drawn in by contract.
That straightforward concept becomes nuanced when 60 to 85 percent of the value is fabricated offsite and arrives as volumetric modules or panelized assemblies. Key questions arise. When does performance occur, in the factory or on the site? What if a manufacturer that holds 70 percent of the scope is not the named bonded principal? If the plant goes silent mid-run, can the surety step in and access molds, jigs, proprietary shop drawings, and production slots? On traditional builds those questions barely exist.
The modular twist: performance risk migrates into the factory
A conventional performance bond aligns with field installation. Most value is created on site, and defaults show up where everyone can see them. Modular shifts value creation upstream into factories with their own schedules, quality systems, and supply chains. That shift does not break a performance bond, but it changes how it should be written.
Several real-world wrinkles drive outcomes.
- Title and risk of loss often transfer earlier. In modular, the owner may pay for completed modules at the factory long before they reach the site. If the contractor collapses between progress payments and delivery, the owner needs both a right to the modules and the means to retrieve them. Standard bonds rarely address custody of partially completed goods. Factory production queues can be contractual choke points. A missed slot because of financing hiccups or design churn can push delivery by months. That delay might not meet the threshold for a formal default. If it stretches, the bond becomes the only lever, yet sureties expect crystal-clear default triggers and cure periods. Multiple parties may split design, fabrication, and installation. On several modular schools I have worked on, an architect and engineer complete a 30 percent concept, the modular manufacturer finishes shop-level drawings, and a local GC handles foundations, craning, and final fit-out. A bond that names only the GC leaves the owner exposed to a plant shutdown. A bond that tries to wrap the manufacturer without its consent will not be enforceable. Performance standards differ between plant and field. Tolerances and inspection regimes in the factory can be far stricter than field norms. If the contract keeps acceptance criteria vague, sureties will resist paying for disputes that are really scope interpretation fights.
The net effect, if not addressed up front, is a bond that looks solid on paper but stumbles the moment the project relies on factory performance.
Structuring bonds that work for offsite delivery
The key is aligning the bond with how value is created and where failure could occur. The following practices have proven durable across affordable housing, health clinics, and hazard-resistant classrooms.
Define scope and acceptance in both environments. The performance obligation should reference factory completion milestones with objective acceptance tests, plus site installation and commissioning. In one California clinic program, we used percent complete by module type, passed plant inspections, and verifiable factory mock-ups as acceptance gates. When a dispute arose over interior finishes, the bond language steered us to the factory inspection records rather than field punchlists.
Address title transfer, storage, and retrieval rights. If the owner pays for modules at the plant, the contract should grant title upon payment, require clear labeling, keep swiftbonds modules segregated, and give the surety and owner a right of access to retrieve, store, and insure them if default looms. Without this, modules can become entangled in a manufacturer’s general assets during a bankruptcy. We once avoided months of litigation because the contract included a right to remove completed units from the plant yard to a bonded storage facility within a set mileage radius.
Require a bond from the party that holds the manufacturing risk, or construct a pass-through remedy. Many owners are comfortable bonding only the prime GC, but on modular projects, the manufacturer’s failure is the primary completion risk. There are three workable models. First, the manufacturer is a subcontractor required to post its own performance bond naming the GC as obligee and the owner as dual obligee. Second, the prime contract includes a direct agreement with the manufacturer that grants step-in rights to the owner and the surety. Third, a supply bond is obtained on the factory output with terms that mirror performance triggers tied to delivery schedules and quality.
Create a clear default protocol suited to factory cadence. Traditional cure periods of 7 to 30 days might be impractical if missing a production slot creates a two-month delay. Default language should tie cure opportunities to realistic production windows, and it should define constructive default events such as failure to maintain raw material procurement, chronic quality failures beyond defined thresholds, or loss of required certifications.
Specify access to IP and tooling upon default. Factories guard jigs, design details, and manufacturing instructions. If a surety is expected to tender completion, it needs a right to those tools and data. We had a school project where the tendered replacement manufacturer could not replicate a proprietary seam detail because the IP issue was overlooked. The result was a redesign and four months lost.
Spell out the completion path the surety is likely to choose. In modular, the surety rarely takes over a plant. More often, it finances the existing team under a monitored agreement, or it tenders a competing manufacturer if designs are portable. A clause that recognizes likely paths reduces argument time when every day matters.
The surety’s view of modular risk
Sureties look through a credit and technical lens. They price the likelihood that the principal will default and the severity of loss if that happens. Modular adds different contours to those two variables.
On likelihood, sureties scrutinize working capital, cash conversion cycles, and backlog composition. A manufacturer with a single line and three overlapping jobs can be healthy on a typical balance sheet but brittle when a crane breakdown or supplier delay pinches cash. On severity, the concern is stranded value, partially complete modules that no one else will finish, or long delays associated with retooling a new factory to pick up midstream work.
Because of these risks, underwriters will ask for items that a field-centric contractor may never have been asked to provide. These include factory throughput data, historical defect rates by module type, changeover time between projects, and a breakdown of commodity exposure for critical inputs like steel studs, MDF, or MEP racks. They also look hard at transportation risk, since a module that passes factory QA can still suffer damage at a port or on a mountain pass.
None of this means modular is “unbondable.” It does mean the underwriting package must tell a coherent story about factory capacity, quality management, and logistics discipline, not just site safety and superintendent resumes.
Payment bonds and supply chains intersect with performance
Performance bonds live alongside payment bonds, which protect against nonpayment to subcontractors and suppliers. In modular, the supply chain is concentrated inside the plant. If a manufacturer does not pay its window supplier or MEP skids vendor, liens and stoppages can occur even when the prime contractor is performing well on site.
On a multifamily project in the Midwest, the GC held a robust performance bond, but production paused for six weeks because a supplier placed a lien threat on in-plant inventory. The owner discovered the performance bond could not compel the supplier to resume shipments. What solved it was a combination of a payment bond down one tier and a direct materials escrow that released funds to critical suppliers upon proof of delivery, not just to the manufacturer at progress milestones. The performance bond, while still critical, was not a cure-all for supply chain cash stress.
Logistics risk is performance risk
Delivery and craning are where schedule risk spikes. A module that is weather-tight in the yard may cross three jurisdictions with different oversize load rules, face a port labor slowdown, or sit through a wind hold before craning. Bonds that key performance solely to “delivery to site” invite finger pointing when risk migrates between carriers, riggers, and the GC.
One way to calm the edges is to integrate Incoterms-like clarity into the bonded scope. Define when risk of loss passes, who carries marine cargo and inland transit insurance, who pays for laydown storage if a foundation is not ready, and what constitutes a permissible delay due to wind, escort availability, or curfew restrictions. On a courthouse annex we delivered with 42 modules, we used a simple but specific chain of custody log and required photo documentation at departure, arrival, and set. When a carrier clipped a parapet at a weigh station, we had immediate alignment on responsibility and avoided a spurious default notice.
Design responsibility and code compliance show up in claims
Design-build arrangements are common in modular. The manufacturer often resolves detailing to the shop-drawing level and may carry delegated engineering for lateral systems, connectors, and in-plant MEP. Disputes over who owns performance requirements are common soil for bond claims. If the modules meet factory specs, but the assembly fails a state modular program inspection because of a discrepancy in local amendments, is that a performance failure or a design error by the project professional?
Contracts should reconcile three layers: the architect’s basis-of-design, the manufacturer’s production standards, and the authority having jurisdiction’s rules, whether state modular programs or local building departments. Performance bonds will not pay for a redesign caused by an ambiguous basis-of-design that leaves out a seismic requirement. They will engage if the principal cannot deliver the specified result. Clarity makes the difference between a resolvable punchlist and a months-long surety investigation.
Common friction points, and how to defuse them early
After several cycles of projects, a pattern of tripwires repeats. Addressed early, they rarely mature into defaults.
- Misaligned schedules between foundations and factory output. Modules arrive to a site that is not ready, or foundations sit exposed while factory production slips. Align long-lead permits and geotech work with the factory’s freeze dates, not generic CPM milestones. Build buffer time on both sides of the set. Unclear inspection pathways. Factory modules may be inspected under a state program that preempts local review for in-plant work. Yet local officials still expect to see certain documentation. Establish a documentation package that travels with each module: stamp, serial number, QA sign-offs, and any deviations. Payment timing and retainage. Owners sometimes insist on retainage that applies equally to in-plant work. Meanwhile, factories need cash to buy materials in volume. A split retainage or escrow tied to title passage often balances risk. In practice, a 5 percent retainage at the plant with evidence of title transfer and a 5 percent site retainage tied to set and final inspection keeps everyone solvent. Interface details fall through the cracks. The joint between factory-completed finishes and field-completed elements like stairs, roofs, and envelope joints deserves obsessive attention. Small gaps become water claims that no one’s bond will love. Run a physical mock-up or, at minimum, a 3D coordination session that focuses on interfaces, not only structural and MEP. Overreliance on a single plant. A manufacturer with a single facility may look efficient, yet a regional disruption can pause the entire job. If the design allows, qualify a secondary plant early. Some sureties will give credit for a credible alternate completion path.
Claims anatomy when a modular job goes sideways
When a default is declared, the surety’s first task is to determine whether the default meets the bond terms and whether the obligee has met its own obligations. That includes proper notice, an opportunity to cure, and no prior material breach. In modular, two evidence packets matter more than in conventional work.
First, the manufacturing record. Shop travelers, QA checklists, nonconformance reports, and hold-point inspections provide an objective picture of how close the factory is to delivering modules that meet specifications. If documentation is thin, the surety will slow down, hire consultants, and reserve its rights, which prolongs the pain. Strong records speed decision making and direct the surety toward financing completion rather than starting over.
Second, the logistics and site-readiness record. The surety looks for a credible path to set and close-in. If foundations are out of tolerance, or the crane permit is still pending, the surety has cover to pause takeover while those you-control issues are resolved. That is not the surety playing games, that is it protecting its subrogation rights and limiting exposure.
In practice, when modular jobs default, the most common outcome is a forbearance agreement, financed by the surety, that keeps the existing team working under tighter oversight. Replacement is possible but rare, because transplanting midstream designs into a new factory requires retooling and reapproval of shop drawings. We managed one replacement after a plant fire, and the timeline impact was roughly 16 to 22 weeks even with cooperative inspectors.
Insurance interacts with bonds in non-obvious ways
A performance bond is not insurance. Yet the insurance program will shape claims outcomes. Builders risk needs to explicitly cover offsite materials and modules at the factory and in transit, with limits sized to peak inventory exposure, not just site values. Marine cargo policies should reflect the specific routing and storage realities. If a loss event hits the plant, the bond is not a funding source for physical damage. If the insurance response is delayed or disputed, the financing agreement between the surety and principal can fray.
Professional liability also plays a role when design responsibility is distributed. On a hospital wing, we had an HVAC vibration issue that showed up at commissioning. The manufacturer argued it followed the delegated design, the engineer pointed to the manufacturer’s final detailing, and the GC held the performance bond. The claim straddled performance and professional liability. The fastest resolution came from a tri-party negotiation under a project-specific professional policy, with the surety’s participation conditioned on a release of design-related allegations. Planning these interfaces up front saves months.
Practical steps for owners and contractors
A short checklist helps align expectations before anyone signs.
- Map the value stream. For each dollar of the contract, identify where it is earned: factory, transit, site. Tie bond obligations to those points with objective measures. Decide who must post which bonds. Prime-only may be fine if the manufacturer is stable and step-in rights are robust. If not, add a manufacturer bond or supply bond and a direct agreement. Lock down title and access. Use clear title transfer language, labeling, storage rights, and IP/tooling access in the event of default. Align insurance with offsite risk. Builders risk and marine cargo must cover factory inventory and transit with correct limits and named insureds, including the surety’s interest by loss-payee endorsement if appropriate. Pre-plan completion paths. Document how a replacement factory would be onboarded, which approvals would need to be replicated, and what the realistic timeline would be.
Edge cases worth thinking through
Every project holds a quirk that can turn into a claim if ignored.
State modular program overlays. Some states, like California and Texas, maintain programmatic factory approvals that preempt local in-plant inspections. Others allow local amendments. If your modules cross state lines, ensure the design and compliance pathway accounts for both ends. A performance bond will not paper over a preventable code mismatch.
Green certifications tied to factory processes. If your project targets a rating that relies on factory practices, like waste diversion or VOC content tracking, make those into acceptance criteria in the bonded scope. Otherwise, they drift into “nice-to-have” territory during recovery plans.
Volumetric versus panelized. Panelized systems often accommodate local labor and late-stage customization better than volumetric modules. Because of that, sureties tend to view panelized completion as more replaceable midstream. If your project depends on volumetric for speed or quality, make the replaceability limits explicit in risk planning and bond language.
Owner-controlled contingency. Owners sometimes hold a separate contingency to soften shocks. If you anticipate invoking the bond, be cautious about spending contingency on work that the surety might argue falls within the principal’s obligation. Early coordination prevents double-paying for the same corrective work.
Currency and cross-border transport. If modules are fabricated in another country, currency swings and customs hold-ups can become performance risks. Some sureties will only underwrite if currency risk is hedged and customs brokers are locked in with performance expectations.
What success looks like
When the bond, contract, and delivery plan align, modular’s benefits show up cleanly. On a 120-bed student housing project delivered in 11 months from NTP, we required a dual-obligee performance bond from the manufacturer equal to its subcontract value, alongside the GC’s bond. Title passed on each batch of 10 modules after factory QA, with photo documentation and serial logs. Builders risk covered $8 to $12 million of peak factory inventory, and a marine cargo rider addressed two ocean crossings with known transshipment ports. The manufacturer shared weekly throughput data and nonconformance reports, not to satisfy curiosity but to keep the surety comfortable. We had weather holds and one cracked facade panel on arrival, yet when a shortfall in a plumbing fixture supply emerged, the surety helped backstop a workaround rather than waiting for lawyers. The result was predictable: keys delivered two weeks early, with the punchlist closed in a single sweep.
Not every project can carry that level of structure, and not every owner needs it. What every modular project does need is an honest look at where performance lives and a bond that promises help where it will be tested: in the factory, on the highway, and at the crane hook. If the documents connect those dots, a performance bond becomes what it is meant to be, a practical backstop rather than a last-resort litigation tool.