Should Owners Furnish Construction Items?

On a construction project, an owner may assume responsibility for the delivery of equipment, materials, data, or other items or information to a contractor.

Delivery of such “owner-furnished items” may be precedent to certain contractor activities and/or on the critical path of the project. Defective or delayed deliveries of these items are valid bases for claims as they may impact timely completion by disrupting the efficient execution of the contractor’s work. It is well established that a contractor is not only entitled to a time extension for late or defective delivery of owner-furnished items but is also entitled to an equitable adjustment for losses incurred due to resulting delay or disruption.¹

This is the second of two blog posts on owner-furnished items. The first post considers legal implications of defective or delayed deliveries of owner-furnished items, and this post includes reasons why owners may choose to furnish items, where owner-furnished equipment or materials are typically used, and considerations of the cost-benefit of the owner choosing to furnish items.

Owners may choose to furnish items because of the following perceived benefits:

• Potential significant price advantages. This is especially true if the owner is a repeat customer, providing the OFCI (Owner-Furnished, Contractor-Installed) equipment for multiple projects on a recurring basis, and has an established supplier relationship with volume discounts.
• Schedule or schedule risk reduction through early procurement of long-lead items. Owners frequently consider opportunities for schedule compression or earlier facility startup. If market demands or supply chain disruption are extending delivery times, the owner may want to procure items early.
• Limited or no market competition. A few vendors control supply.
• Preferred vendor to support standardization of operating facility equipment and coordination with existing inventories. An owner may consider existing labor force training and familiarity with particular equipment types; specialized operating and maintenance warranties or support service levels required; and carrying a component off the balance sheet by procuring a lifecycle service in lieu of the actual component. An example of this last motivation would be an owner’s decision to acquire a vertical transport service (elevators and escalators) where initial equipment and lifecycle maintenance and emergency servicing are compensated on a usage and availability basis without a capital outlay up front.
• Eliminating the need to specify and approve “or equal” products. Performance specifications provide many project benefits, but in areas where the owner decides to carry significant process performance risks, “or equal” products may be unacceptable.
• Reduced contractor markups. This is often a false economy due to risks associated with OFCI equipment, as further discussed below.
• Sales tax savings (public owners). These savings accrue when local laws limit sales tax savings on materials and equipment procured for public projects by third parties (contractors).
• Increased owner control on startup and testing.²

Owner-furnished equipment or materials are typically used in the following areas:

• Process equipment
• Large field-erected equipment
• Power transmission systems
• Long-lead electrical equipment
• Lighting systems
• Electrical controls
• Long-lead instrumentation and control (I&C) systems
• Programmable logic controls (PLC)
• Pumps
• Aeration systems
• Blowers
• Conveyors, conveyor idlers and pulleys, conveyor belting
• Ship loaders, stacker, or reclaimers
• Crushers, car dumpers
• Feeders, screens, weighing equipment
• Crushing or screening plant processing equipment
• Scrubbers
• Electrical motors
• Variable frequency drives
• Chillers
• Nuclear reactor vessels
• Steam generators
• Large power turbines
• Locomotives and rolling stock
• Scientific or experimental equipment
• Structural steel
• Stainless steel pipe and fittings
• Scaffolding
• Construction power and water
• Site security
• Select bulk materials³

To achieve a cost benefit, the owner needs to be careful of unintended consequences. If the contractor’s purchasing requirements are minimal, contractor markup is more likely to increase, as such markups become the only avenue for achieving a profit. Contractors use their purchasing power for multiple projects and can obtain lower prices based on a greater volume of purchased equipment or materials. Also, owners should consider in the cost-benefit analysis the costs of establishing and managing a purchasing department.

Owner-furnished equipment and materials have a very high potential for causing claim situations. Late deliveries, defects, and non-compliance with the contract requirements can delay and disrupt the project, which may result in claims for the costs of corrective or additional work and schedule extensions. One significant claim can negate any savings achieved.

In summary, owners should evaluate the risk to the project for problems resulting from late delivery or defective owner-furnished equipment or materials. A sensitivity analysis that contains numerous “risk” scenarios to the project schedule and cost may help the owner decide if it should provide certain equipment or materials. Owner-furnished equipment or materials may provide significant benefits if the owner recognizes the risks and has the necessary organizational infrastructure and skills in place to deliver the benefits. Understanding the cost-benefit of the owner accepting the risks of timely equipment and material delivery may be important to the long-term success of the project.

¹     Drexel Dynamics Corp., ASBCA 9502, 66-1 BCA ¶ 5472, 652 BCA ¶ 5076; L. L. Hall Construction Co. v. United States, 177 Ct. Cl. 76 (1953).

²    See Bob Prieto, “Owner Furnished/Contractor Installed (OFCI),” NAC Executive Insights, June 27, 2023, https://www.naocon.org/wp-content/uploads/Owner-Furnished-Contractor-Installed-OFCI.pdf.

³    Id.

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