Specially Fabricated Materials Can Affect the Construction Supply Chain

Construction projects sometimes require materials that are not stocked by suppliers and that require special fabrication to make them suitable for certain fixtures. Specialized materials can be both expensive and difficult to obtain, said Sam Smith, regional finance manager at Crescent Electric Supply Company (East Dubuque, IL). In addition, these items tend to have longer lead times and typically cannot be returned. "Many times, these orders require a heavy deposit up front or even 100% prepayment," Smith added.

The unique nature of these products can put the supplier of these specialized materials at additional risk. If fabricated materials end up not being used on site, they cannot be resold and the supplier would be at a loss for what it spent on acquiring or manufacturing the items, said Connie Baker, CBA, director of operations for NACM Secured Transaction Services.

Although manufacturers of specially fabricated materials are much like any other vendor within your supply chain, it can be difficult to determine their quality, ability to deliver on time or financial stability if you do not work with them on a regular basis, Smith said.

And it is not always clear where a supplier of specially fabricated materials falls within the construction hierarchy. "When involved in a construction project, it's always important to know what tier you are in to determine whether or not you have lien rights," Smith said. For example, if you are a supplier working on a job with a subcontractor, general contractor and the owner, you will find yourself in the third tier. In order to have lien rights, in certain states, you must remain within the three tiers from the owner, Baker said.

Manufacturers of specially fabricated materials could be considered fourth tier because they are supplying materials used on a job by other suppliers—which makes them ineligible to file liens. A supplier of specially fabricated materials may still lack lien rights if it is viewed as a second-tier supplier if it is recognized as a supplier to supplier.

However, lien rights are state driven and specific state statutes must be reviewed to understand any potential requirements relating to lien rights for parties providing specially fabricated materials, Smith said. "Every state will have different laws that govern who would have rights and what needs to be done," Baker said.

Specially fabricated materials are items that many suppliers do not normally sell, so their knowledge of the product may be limited, Smith said. Therefore, suppliers should refrain from aiding with installation or operation of the material and should attempt to sell items they have experience with.

Also, suppliers should be aware of the risks when vendors require them to make a large deposit for the custom order, or make them pay in full ahead of time, Smith said. It gives you "little recourse if something goes wrong. Negotiate these terms," Smith said. "On special order material, a deposit seems to be reasonable, but a portion should be held until inspection of the product has taken place. An example of such terms could be 25% deposit at the time of the order, 25% at the time of shipment and a net 30 balance. With terms like this, both parties assume some of the risk."

-Bryan Mason, editorial associate

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Sunday, 26 June 2022

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