Free issue materials are goods that a project owner buys directly and hands over to the contractor to incorporate into the work, with no procurement cost passing through the contractor’s price. The owner keeps legal title. The contractor takes physical possession and, once delivery is accepted, becomes responsible for handling, storing, and installing the goods correctly. That split between who owns and who holds is what makes these arrangements distinct, and it is where most of the legal and practical questions come from.
The arrangement is common on large construction and industrial jobs where the owner has a reason to control procurement directly: locking in a price on a volatile commodity, keeping equipment consistent across multiple sites, or working with a preferred vendor the contractor could not otherwise reach.
What Gets Supplied This Way
Almost anything the owner procures and delivers to site can qualify. In practice, three categories dominate.
Bulk commodities such as structural steel, aggregate, and piping are typical when the owner wants to hedge against price movement by buying early. High-value specialty equipment like HVAC systems, medical imaging units, or turbine components shows up when the owner has an existing vendor relationship or needs matched equipment across sites. Custom-fabricated items, including pre-assembled circuit boards, proprietary control modules, and bespoke architectural fixtures, get bought by the owner because the long lead times would otherwise disrupt the contractor’s schedule. The thread running through all three is that the owner is better placed to manage the procurement risk, whether that risk is financial, logistical, or quality-related.
How Ownership and Risk Split at Delivery
The handoff is the critical moment. Before delivery, the owner carries all risk of loss, damage, or delay. Once the contractor accepts the materials on site, responsibility for their physical condition shifts to the contractor, even though the owner still holds title.
The FIDIC Conditions of Contract for Construction put it plainly: the employer supplies free issue materials at the employer’s risk and cost, but after the contractor’s visual inspection the materials “come under the care, custody and control of the Contractor.”1FIDIC. FIDIC Conditions of Contract for Construction MDB Harmonised Edition
That gap between ownership and possession drives most disputes. Because the owner still owns the goods, the contractor cannot use them for any other purpose, sell them, or substitute them without authorization. Because the contractor holds them, the contractor eats the consequences if something goes wrong on site. Everything that follows in a well-run free issue arrangement, from the inspection at the gate to the insurance stack, exists to manage that asymmetry.
The Contractor’s Duty of Care
When a contractor takes possession of someone else’s property, the legal relationship is a bailment. The contractor becomes the bailee: a party holding property belonging to another for a specific purpose.2Legal Information Institute. Bailee The baseline duty is ordinary diligence, meaning the precautions a reasonable person would take with property of similar value and fragility.
What that looks like depends on the goods. Climate-sensitive electronics need conditioned storage. Steel needs protection from corrosion. Fragile custom fixtures need secure, cushioned racking. Falling short is not just poor project management; it is a breach of the bailment duty, and the measure of liability is typically the property’s value at the time of loss. For custom-fabricated equipment, that figure can far exceed what the contractor is earning on the installation itself.
Contracts usually add specifics on top of the baseline. Segregated storage that keeps the owner’s property physically separated from the contractor’s own inventory is close to universal, along with environmental controls matching the manufacturer’s specifications. Commingling creates accounting problems and makes it much harder to prove what was damaged and when.
Receiving and Documenting the Goods
The inspection at delivery is the contractor’s main chance to push back on materials that arrive damaged, short, or off-spec. Under FIDIC’s standard terms, the contractor must visually inspect free issue materials promptly and give notice of any shortage, defect, or default. The employer remains liable for problems that were not apparent on a visual inspection, so the contractor’s obligation is to catch what is visible, not to run destructive testing.1FIDIC. FIDIC Conditions of Contract for Construction MDB Harmonised Edition
A sound receiving process captures several things at once. Count every item against the packing slip and cross-reference part numbers to the project’s bill of materials; discrepancies caught at the gate are easy to resolve, while discrepancies discovered weeks later during installation become disputes. Photograph any visible damage, torn crating, broken seals, dents, or moisture intrusion, with time stamps. Sign the carrier’s delivery note only after inspection; many contracts explicitly prohibit unloading before verification is complete. Record the date, time, and personnel involved, along with the intended installation location for each item.
After inspection and storage, the contractor sends a formal notification to the owner confirming that the materials are on site and under the contractor’s control. That notice marks the official transfer of care and starts the clock on custodial obligations.
If loss or damage happens after acceptance, most contracts require a written incident report within 24 to 48 hours. The tight window preserves insurance claim rights for both parties. Waiting longer can void coverage entirely under policies that require prompt notice.
The Insurance Gap Contractors Miss
This is where contractors get burned. A standard commercial general liability policy contains the care, custody, or control exclusion, which cuts off coverage for damage to personal property in the insured’s possession. Free issue materials are, by definition, someone else’s personal property sitting in the contractor’s custody, so a CGL policy will not respond if they are damaged or destroyed on site.
The exclusion applies to personal property rather than real property, so a building under construction may still be covered. The expensive specialty equipment in the staging area is not. It is the single most common insurance blind spot in these arrangements.
The usual fix is an installation floater, a type of inland marine policy that covers materials from the point of origin through transit, storage, and installation. These policies typically respond to fire, theft, explosion, water damage, vandalism, and transit incidents, and some also pick up labor to reinstall damaged materials. Most installation floaters exclude damage while goods are airborne, waterborne, or being worked on underground, so contractors operating in those environments need broader terms or additional coverage.
The contract should say who carries the installation floater and what minimum limits apply. When the owner furnishes the materials, it is common for the owner to maintain builders risk coverage while the contractor carries the installation floater. Gaps between the two policies are where claims fall through, and both brokers should review the overlap before anything ships.
When the Owner Delivers Late or Defective Goods
Responsibility runs in both directions. The contractor gives up control of procurement timing, and if the owner misses a delivery date, the work can stall.
When owner-furnished materials arrive late and the delay sits on the critical path, the contractor is generally entitled to a time extension and an equitable adjustment for losses caused by the disruption. If the contract sets a delivery date, any slippage past that date can support a claim for lost time and time-related costs, even where the owner made a good-faith effort. If no date appears, the owner must deliver within a reasonable time for use in the ordinary course of the work.
Defective materials trigger a separate set of rights. When free issue goods fail to meet specifications, the contractor should give prompt written notice and not install them. Installing known-defective materials creates its own liability. Under FIDIC’s standard terms, the employer must “immediately rectify the notified shortage, defect or default” once the contractor raises the issue.1FIDIC. FIDIC Conditions of Contract for Construction MDB Harmonised Edition If the owner drags on corrections, or the delay cascades into other trades, the contractor may have a breach of contract claim based on the implied obligation not to interfere with performance.
Documentation carries these claims. Every late delivery, every defective item, every schedule impact should be recorded in writing and communicated to the owner while the facts are fresh. Claims that rest on memory and after-the-fact reconstruction rarely land.
Cost, Tax, and Accounting Notes
Because the owner buys free issue materials directly, their cost is excluded from the contract sum. The contractor’s price reflects only labor, overhead, and any contractor-supplied materials.
For the owner, those goods still count toward the project’s total value for purposes like progress reporting, financing draws, and insurance limits. Excluding them from the contract price does not make them invisible to lenders or insurers, and project financing and builders risk policies need to reflect the full value of owner-furnished items.
Sales and use tax treatment varies significantly by jurisdiction. In general, the owner pays sales tax on the purchase. Whether the contractor owes use tax on the same materials when installing them depends on state law, and states take different approaches. Some treat the contractor as the end consumer of all materials incorporated into real property, potentially creating a second tax event; others exempt owner-furnished materials from the contractor’s tax obligations. Contractors crossing state lines should get jurisdiction-specific advice rather than importing rules they know from home.
On the accounting side, the contractor should never record free issue materials as inventory on its own books. They belong to the owner and should sit in a separate custodial ledger. Mixing them into the contractor’s financial statements overstates assets and creates audit problems later.