By Stanley P. Sklar
The American Institute of Architects (AIA) publishes the most widely used set of construction contract documents in the industry. Even lawyers who do not use the contracts will invariably select favorable provisions to incorporate in their own construction contract documents. The AIA's cycle for reviewing and updating the documents has now accelerated from a 10 year cycle to a five year cycle, perhaps reflecting the dynamic nature of the construction industry. In 1997, the AIA issued revisions to owner/contractor agreements, in addition to the B141 and B151 owner/architect agreements. This article reviews only the owner/contractor agreements, with an emphasis on changes in the 1997 editions.
The AIA A101 is the "Owner/ Contractor Agreement where the basis of payment is a Stipulated Sum." In Article 2 of the A101, the AIA has eliminated the space where exceptions to the contractor's scope of work used to be inserted. Parties must be sure that exceptions are listed elsewhere to avoid future disputes.
Article 3 emphasizes the need for coordination between commencement and substantial completion dates. As an inducement to a contractor, however, an owner and its counsel should consider bonus payments for early completion and liquidated damages for failure to complete on time.
Article 5 now covers progress payments and final payments. It also clarifies that an owner must pay the contractor amounts that are not in dispute under construction change directives, with a release of retainage on completed work at substantial completion.
Article 6 provides a space for the designation of the owner and contractor's representatives. This new provision should assist in clarifying the lines of authority between the parties. In addition, to avoid the "revolving door" of changing representatives, 10 days' notice is required before a party can change its representative.
The A107 is the "Owner/Contractor Agreement for Construction Projects of a Limited Scope where the basis of payment is a Stipulated Sum." It is geared toward smaller projects. When an owner and contractor use this form, they do not use the A201 General Conditions. Instead, the A107 incorporates its own more limited general conditions.
In Article 1 of the A107, the AIA has eliminated the space where exceptions to the contractor's scope of work used to be inserted. The parties must be sure that exceptions are listed elsewhere to avoid future disputes.
Article 2 follows the format of the A101, emphasizing the need for coordination between commencement and substantial completion dates. When using the A107, an owner and its counsel should similarly consider bonus payments for early completion. In addition, if the parties agree to liquidated damages, those damages would customarily appear in this section.
Article 4 now details the timing of a contractor's applications for payment and the process for progress payments and final payments. Unlike the prior edition, new Article 4 also specifies when the contractor is to be paid.
Article 6 continues to protect the architect's documents by specifically including documents in electronic form. In addition, new Article 6 re-quires the contractor to be generally familiar with local conditions and correlate its personal observations with the contract document requirements.
Article 7 contains provisions to which owners are sure to object. Specifically, the contractor is entitled to rely on the accuracy of information that the owner provides. This provision appears to resurrect the Spearin doctrine, which courts have significantly eroded over the years. The Spearin case held that an owner warrants the accuracy and adequacy of its detailed plans and specifications. United States. v. Spearin, 39 S. Ct. 59 (1918).
In an effort to be consistent with the changes in the A201, in Article 8, the AIA has eliminated the architect's right to rely on professional certifications that the contractor supplies. It now establishes procedures, very similar to Subparagraph 3.2.1 of the A201, for the contractor's review of site conditions. In addition, the indemnity provision closely matches Paragraph 3.18 of the A201.
Consistent with the trend toward alternative dispute resolution, Article 9 now requires mediation as a condition precedent to arbitration. The dispute resolution mechanism is a simplified version of Paragraph 4.4 of the A201. As in the A201, an owner and contractor mutually waive consequential damages.
Article 14 now describes in greater detail the payment procedures and expands the definition of substantial completion. It does not provide the protection found in Subparagraph 9.7.1 of the A201, which allows a contractor to stop work under the contract if the owner does not make payments in accordance with the agreement. It does afford the contractor the rather drastic remedy of termination. There is, however, no provision similar to Subparagraph 4.3.3 of the A201, which requires the contractor to continue performance pending final resolution of any claim. Nor does it contain a clause like Subparagraph 9.6.7 of the A201, which is important to subcontractors and requires a contractor to hold payments received for the benefit of subcontractors.
Article 15 expands the definition of hazardous materials beyond asbestos and polychlorinated biphenyls (PCBs) and establishes procedures for dealing with hazardous materials.
Article 16 refers to project management protective liability insurance, a new form of insurance, the effectiveness of which is yet to be determined.
Article 17 clarifies a contractor's rights and obligations during the correction period.
Article 19 provides for termination by an owner. As in the A201, Article 19 requires an owner to provide a detailed accounting of the costs that the owner incurs after termination
of the contract, if the contractor requests that information. Absent is the owner's right to terminate for convenience found in the A201.
The A111 is the "Owner/Contractor Agreement where the basis of payment is the Cost of the Work plus a Fee with a negotiated Guaranteed Maximum Price." Article 4 of the A111 follows the format of the A101 in em-phasizing the need for coordination between commencement and substantial completion dates. Again, an owner should consider bonus payments for early completion. In addition, any liquidated damages would customarily appear in this section.
Article 4 details the coordination of commencement date and date of substantial completion. It establishes the preferred method of using calendar days, rather than a specific calendar date, for the substantial completion deadline. The date of commencement of the work is the date of the agreement, unless the parties provide otherwise. This new provision eliminates the confusion of determining when a notice of commencement was actually sent. As in the A101, liability for late completion is liquidated damages, and the reward for early completion is a bonus payment.
Recognizing the concept that "time is money," Article 5 requires the contractor to provide a line item contingency amount for further plan development for fast track proj-ects. This provision is intended to force contractors to recognize the potential costs associated with incomplete plans, which are customary in fast track projects.
Article 7 deals with cost reimbursement items. For example, in addition to listing off-site personnel, the agreement must include their compensation rates. The provision for reimbursement for material stored off site is a benefit to owners, because they should have title to any materials for which they have paid. In addition, legal, mediation and arbitration costs are reimbursable if the owner has approved them. Unfortunately, this provision does not extend to owner/contractor disputes.
Article 11 specifically provides an owner with the right to audit the contractor's project records.
Article 12 deals with progress payments and final payments, as well as payment to the contractor of items that are not in dispute under a construction change directive. Article 12 is similar to the A101.
Article 13 covers termination. Recognizing the owner's right to terminate for convenience that is found in the A201, Article 13 provides that a contractor's reimbursement for that termination includes all reimbursable costs incurred, plus the contractor's full fee, including the fee it would have earned on uncompleted work. If the owner suspends work, however, then the contractor is entitled to an increase in its guaranteed maximum price. Under Paragraph 13.4, the contractor is also entitled to an extension of the contract time.
Article 14 contains a space to designate the owner's and contractor's representatives, which should assist in clarifying the lines of authority between the parties. Again, 10 days' notice is required before an owner or contractor can change its representative.
Article 16 provides for the insertion of the insurance coverage limits, an often overlooked area, as well as bond information.
A201 General Conditions
In its latest revision cycle, the AIA also revised the form of A201 General Conditions. The following is a summary of significant changes to the A201, highlighted by the relevant Paragraph, Subparagraph or Clause of the A201.
1.1.5 The Drawings. In an attempt to limit the contractor's responsibility for drawings that were not in the original bid package, the AIA has eliminated the "wherever located and whenever issued" language from the earlier edition. Parties must still exercise care to provide a detailed description of the drawings on which the contractor bases its bid or negotiated price. This is as important for owners as it is for contractors. Most disputes will relate to the scope of work, which may depend on how the contract documents define the scope.
1.2.1 Correlation and Intent of the Contract Documents. A beneficial change has occurred, because the AIA has replaced "intended results" with "indicated results." Language requiring that the contractor perform anything that is reasonably inferable has always been a problem area. The new provision puts an additional burden on the architect to state expressly what is required of the contractor. With the AIA's new position that architects "do not design," it is highly unlikely that an architect will willingly assume an additional burden. Owners are often far more concerned about the scheduling and completion dates and tend to forget that incomplete plans, as found in fast track projects, may lead to disputes, despite this language.
1.5.2 Execution of Contract Documents. A change in this provision indicates that, by executing the contract, the contractor has become generally familiar with local conditions. This is a distinction without meaning. The language of site visitation is to deny the contractor a claim for changed conditions or delays caused by local conditions. Many contractors pay lip service to the site visitation and often consider a "drive-by" at 30 miles per hour adequate.
2.1.1 General. The requirement that the owner designate a representative who can bind the owner is an attempt to delineate clearly the architect's responsibility. One can only wonder just what it is that the architect does on the site. In any event, the designation of an owner's representative is important to the contractor when dealing with change orders or scope disputes.
2.2.1 Information and Services Required of the Owner. This provision requires an owner to provide reasonable evidence of its financial arrangements. Although this language is proper, every owner that reads the provision will reject the prohibition against materially varying the financial information. This change is a noble experiment doomed to fail. No knowledgeable owner will consent to this new implied tri-party arrangement among the owner, its lender and the contractor. Nor, for that matter, should any construction lender agree to it.
2.4.1 Owner's Right to Carry Out the Work. Consider with caution the reduction of the second default notice from the owner to the contractor from seven to three days. The concern is not the three day time span, but the fact that it is three calendar days. A notice on Friday afternoon at 4:30 p.m. affords an unfair method to terminate any contract. Admittedly, 10 calendar days should be sufficient to commence a cure. When termination is the issue, however, three calendar days is inadequate.
3.2.1, 3.2.2 and 3.2.3 Review of Contract Documents and Field Conditions by Contractor. This revision clearly indicates that the obligation of a contractor to study and compare the contract documents is performed expressly to facilitate construction. It does not make the contractor a licensed design professional. If the contractor fails to "study and compare," it may owe damages to the owner for that failure. This provision holds the contractor to a standard of what it should have known rather than what it did know and subjects the contractor to potential liability for damages to the owner for failing to perform those obligations adequately. The contractor may be burdened to perform independent analysis and even to consider a constructibility review of the contract documents.
3.3.1 Supervision and Construction Procedures. The safety responsibility is now consistent with the work that a contractor does, such as means, methods, techniques and sequencing. Under existing law, this work is a nondelegable duty and includes the duty to notify the owner and architect if the contractor determines that certain means, methods and so forth may be unsafe.
3.7.4 Permits, Fees and Notices. The change in this subparagraph is meaningless. It provides that the contractor bear "appropriate" rather than "full" responsibility for work performed contrary to building codes. This provision may seem equitable, but in fact most architects provide that the contractor build in accordance with all state, city and local building codes, ordinances and the like. The change does not address that issue.
3.10.3 Contractor's Construction Schedules. The difference between requiring the contractor to perform its work "in general accordance" with the most recent schedule "submitted to the owner and the architect" and the prior language about "conforming to the most recent schedule" is unclear.
3.12.5 Shop Drawings, Product Data and Samples. This provision has changed from requiring the contractor "to review and approve" the shop drawings for compliance with the contract documents to only requiring the contractor "to review" them. This change may on its surface seem to clarify the contractor's duty. Never-the less, what if, on review of the shop drawings, the contractor finds that they do not comply with the contract documents? Does the contractor still have a duty to notify the owner and architect? What if the contractor fails to notify either of them? Is the contractor still liable even though it does not have a duty to approve?
The AIA has included in this subparagraph a new procedure for contractors to consider. The 1987 edition obligated a contractor specifically to inform the architect of any deviation. The contractor is now permitted to approve a minor change. Any major change requires a construction change directive or change order.
3.12.10 Design Delegation. The modification to Subparagraph 3.12.10 is probably the most controversial provision. The new provision prohibits design delegation unless design services are specifically required by the contract documents or such design services are required to perform the general contractor's responsibilities for construction means and methods. The provision is often held up as evidence of the erosion of the architect's duty to design and the shifting of this design responsibility to the contractor and ultimately to the subcontractors. Some general contractors look on the shift as a way to break the stranglehold that architects have on the owner's mind-set. The shift, however, has a serious impact on the general contractor's insurance and professional licensing requirements.
3.18.1 Indemnification. By reason of the inclusion of the mutual waiver of consequential damages in Subparagraph 4.3.10, the indemnity provision excludes loss of use, and the comparative fault concept is strengthened.
4.3.2 Time Limits on Claims. In the March 1998 issue of Construction Strategist, a model letter at page 7 covers the information required of any notice under this provision. The notice must be given within 21 days after the later of the occurrence of an event that gives rise to the claim or the contractor's first recognition of the condition giving rise to the claim. Of greatest importance is that a contractor need not provide the exact time or money involved but merely that a claim is being made. From the owner's point of view, there appears to be no time limit for the contractor to furnish support for its claim.
4.3.10 Claims for Consequential Damages. Both a contractor and an owner waive consequential damages against each other. Thus the owner waives damages such as loss of use or loss of income or profit, and the contractor waives damages such as home office overhead. What, however, is the impact if the contract contains a liquidated damages clause? In addition, what are "liquidated direct damages," a previously unknown term?
4.5.1 Mediation. An excellent modification to the A201 is the requirement for mediation as a first step before arbitration may be commenced. This clause focuses on the blind refusal of many to avail themselves of the new streamlined procedures available from the American Arbitration Asso-ciation (AAA). According to AAA statistics, most claims fall within the $100,000 or less category. For those cases, mediation and arbitration are by far the most efficient methods for dispute resolution.
5.2.3 Award of Subcontracts and Other Contracts for Portions of the Work. One of the old "boilerplate" provisions of the A201 permitted an owner to object to a subcontractor and require that it be replaced with no consideration of the effect that removal of the subcontractor had on contract time and contract amount. The new provision recognizes that there is an impact on time and price. An owner is put on notice that changes in time and price may be required if that subcontractor was "reasonably capable of performing the work."
6.2.3 Mutual Responsibility. The new language expressly provides that an owner is responsible to the contractor for damage caused by the owner's separate contractors. Similarly, the contractor is responsible to the owner for damages to separate contractors attributable to the contractor.
7.3.8 Construction Change Directives. There has always been a tendency for owners to withhold entire draws when there is a dispute, effectively strangling the contractor by refusing to pay those amounts about which there is no dispute. The new language establishes a procedure to require payments of undisputed amounts.
220.127.116.11 Applications for Payment. The new language clarifies that if a defaulted subcontractor's work is performed by a take-over subcontractor, the contractor may bill for the defaulted subcontractor's work.
9.5.1 Decisions to Withhold Certification. To avoid permitting an owner to act in a capricious or unreasonable manner, there should be specific standards under which the architect may decide to withhold certification. Usually the most abused provision involves real or imagined third-party claims.
9.6.2 Progress Payments. Despite all the commentary and discussion, the issue remains whether Subparagraph 9.6.2 is a conditional payment clause or not. The AIA commentators say it is not. Professor Justin Sweet says that the language is specifically vague and ambiguous to permit it to be interpreted by state law and custom. Justin Sweet, Sweet on Construction Law, Forum on the Construction Industry of the Am. Bar Ass'n 380-82 (1997). This clause is the one most fought over between contractors and subcontractors.
9.6.7 New Provision Assuring Payment to Subcontractor. New Subparagraph 9.6.7 is another controversial provision, at least on its face. The language establishes a very weak trust fund for the benefit of subcontractors. It states that a contractor must hold for its subcontractors payments that the contractor receives for work properly performed by those subcontractors. It does not, however, require a separate account or specifically create a fiduciary liability. Nevertheless, when one holds money for the benefit of another, some form of legal relationship is established. States such as New York, California and Illinois already have statutory constructive fund statutes. Cal. Penal Code § 4846; 770 Ill. Comp. Stat. 60/21.02; N.Y. 21 CLS Art. 3A §§ 70-79a. A benefit to the contractor, though, is that the obligations that this clause creates also apply to the subcontractor, which is then under the same obligations to its sub-subcontractors and suppliers.
Despite the new language of Subparagraph 2.2.1, situations may arise in which there are insufficient funds available to complete a project, which could place the contractor's retention in jeopardy. As an alternative, a construction lender could require the owner to reserve parts of the loan amount exclusively for payment directly to the contractor on receipt of approved applications for payment.
9.7.1 Failure of Payment. Al-though there has been a change in the interest provision for failure to pay, it merely refers to the contract documents. The problem with interest is when is payment "due"? Is it due from the invoice date? The date the invoice is submitted? Within a specific number of days after either of those dates? Drafters should revise the contract to reflect their intent.
9.10.2 Final Completion. There have always been concerns about the ability of a contractor to bond over any liens to receive final payment. Nonetheless, the AIA has made no change in this section in the 1997 revision.
10.3.1, 10.3.2, 10.4 and 10.5 Hazardous Materials. Although the AIA has modified the limitation to asbestos or PCBs to provide "including but not limited to," the provisions still do not go far enough. One merely has to look to the proposed B141 owner/architect agreement that uses the definition "hazardous materials or toxic substances in any form at the Project Site."
18.104.22.168 and 22.214.171.124 Correction of Work. The AIA has clarified the correction of the work provisions to provide that the failure of an owner to give the contractor an opportunity to correct the work can result in the owner's waiver of that protection. Another beneficial clarification is that the corrective work does not create another one year corrective period.
13.2.2 Successors and Assigns. As with Subparagraph 2.2.1, the AIA has engaged in another noble experiment doomed to fail. Most assignments to a lender of the construction contract are conditional in nature, permitting the lender to select which contracts or subcontracts it intends to accept. No lender would accept an obligation to assume the owner's rights and obligations under the contract documents without some right to object. Furthermore, the lender is not a party to the construction contract. If an owner has defaulted or the lender deems itself insecure, there is inadequate owner equity or inadequate owner perform-ance at that time. Why would a lender now assume additional liability when its loan probably is superior to any other liens?
126.96.36.199 Termination for Cause. An excellent clause is the new language requiring that, when an owner terminates for cause, it must provide on request a detailed accounting of the costs that the owner has incurred in finishing the work. This provision does not prevent creative owner accounting, but it does impose on the owner a contract obligation to provide this information.
14.4.3 Termination by the Owner for Convenience. Termination for convenience by an owner has always been anathema to contractors, which will have scheduled a project and excluded others for the sake of this project. Recognizing that an owner may have a right to terminate with-out cause and for convenience only, however, there must be some accommodation to the contractor.
Lawyers representing construction industry clients must gain a familiarity with the revised AIA documents if they are to represent their clients competently.
Stanley P. Sklar is a partner with Bell, Boyd & Lloyd in Chicago, Illinois, and is Chair of the Real Property Division's Construction Lending (I-4) Committee.Probate & Property Magazine is published six times annually and is included in section members' annual dues.