The American Institute of Architecture publishes the most popular general construction contract for guaranteed maximum price contracts used in the industry by property owners and general contractors: AIA Documents A102TM – 2017 and A201TM – 2017 (the “AIA Contract”). When entering into a construction contract, owners will reduce the possibility of claims and disputes, and increase the likelihood of a successful project, by understanding the key risks associated with the project and allocating them to the contractor and or other project participants. It is thus essential that every owner using the AIA Contract critically analyze the allocation of key risks in the form contract and revise it where necessary to ensure it is sufficiently protected.
Here are the top five provisions owners using the AIA Contract should consider revising during contract negotiations.
Standard of performance
A critical issue in nearly every construction dispute is the standard of performance that a contractor is obligated to achieve. This standard will serve as the benchmark in the event of a claim. An example of a contractor-friendly standard would be “work consistent with prudent industry practices,” and a more owner-friendly standard would be the “same or similar services on high quality building projects in the area.”
Because the AIA Contract does not contain a contractor’s standard of performance, owners should negotiate and incorporate into the contract an appropriate standard.
A risk assumed by every owner is that the contractor will fail to pay its subcontractors and expose the owner to subcontractor mechanic’s lien claims. Because the AIA Contract does not require contractors to discharge or bond off subcontractor liens, owners should incorporate a reasonable provision that will obligate the contractor to indemnify, hold harmless (including attorney’s fees and legal expenses), and defend the owner and its lenders from and against any lien claims, and bond off or otherwise discharge subcontractor liens whether or not the contractor believes the claim is valid.
Under the AIA Contract’s delay provision, the contractor is entitled to a contract time extension for any cause beyond the contractor’s control, subject to the architect’s determination, and neither party is precluded from recovery for damages for delay. In addition to shifting significant authority from the owner to the architect, the AIA Contract does not set forth a clear standard that distinguishes among excusable delays (contractor receiving time but no money), compensable delays (contractor receiving time and money), inexcusable delays (contractor receiving neither time nor money), and concurrent delays (delays for which both parties are concurrently responsible).
The majority of construction disputes involves delay claims, which means that owners should require an expanded delay provision that defines the different types of delays with precision and clarity to reduce the likelihood of claims and disputes. Owners should also consider whether their interests are being served by the AIA Contract’s bolstering of the architect’s authority in this and other provisions throughout the AIA Contract, and consider shifting such authority to the owner.
It is critical that the determination of the date of substantial completion of the project be based upon measurable factors, as this date triggers the commencement of the warranty period and sometimes triggers liquidated damages for delay against the contractor. Owners should, therefore, consider incorporating mandatory conditions precedent to the achievement of substantial completion, including for example:
- The contractor has performed all of the work, other than any uncompleted punch list items that do not affect the safe and continuous use of the project for its intended purpose;
- The owner has received a certificate of use and occupancy;
- Undisputed liquidated damages have been paid;
- The contractor has provided all necessary training for the safe and continuous use of mechanical components of the project; and
- If the owner is able to negotiate successfully, that the owner has issued to the contractor a certificate of substantial completion.
An effective disputes provision not only establishes a mechanism to resolve disputes but also creates a framework to maximize the possibility of resolving disputes without the parties having to resort to litigation or arbitration. Owners should, therefore, consider incorporating an obligation that the parties engage in a meaningful process for business executives to hold meetings to attempt to resolve claims or disputes without lawyers present, and before the dispute proceeds to mediation.
Owners should also consider incorporating necessary protections for their lender(s), providing a right to cure before the contractor is permitted to terminate the contract for convenience, and including, if in the owner’s interest for the particular project, a jury trial waiver.
These are just some examples that illustrate the need for owners using the AIA Contract to incorporate revisions as necessary to protect owners’ interests and ensure a proper allocation of risks between the owner and contractor and allocation of authority to the architect. Even when using an AIA contract, owners would be wise to seek legal counsel regarding necessary revisions that will protect their interests throughout the project.
Daniel A. Kapner, Esq., is a member of Shapiro, Lifschitz & Schram’s trial practice, construction law, and power and energy construction groups.