Separate corners

AIA revises its construction contract documents without AGC's endorsement


In November 2007, The American Institute of Architects (AIA) issued new editions of its standard construction contract documents. AIA's construction contracts, which are the most widely used construction contracts in the U.S., historically have been well-regarded in the construction industry as being fair and comprehensive.

However, for the first time in more than 50 years, the Associated General Contractors of America's (AGC's) 600-member board of directors unanimously voted in October 2007 not to endorse the 2007 edition of A201, General Conditions of the Contract for Construction. AGC's well-publicized decision may be a residual effect of AIA's refusal to join AGC and other construction industry groups in developing a new set of construction contract documents.

Regardless of AGC's decision, AIA chose to continue to publish its own documents, which are an important revenue source for AIA. The AGC-endorsed forms, known as ConsensusDOCS, also were released in the fall. (I'll be writing about ConsensusDOCS this spring.)

The forms

Before the release of the 2007 edition, the AIA standard construction forms were revised in 1997. Included among the 2007 revised contract forms are three of the mostly commonly used forms by contractors:

  • AIA Document A101-2007, Standard Form of Agreement Between Owner and Contractor Where the Basis of Payment is a Stipulated Sum
  • AIA Document A201-2007, General Conditions of the Contract for Construction
  • AIA Document A401-2007, Standard Form of Agreement Between Contractor and Subcontractor

The AIA contracts between owners and architects also were revised.

You probably use AIA-drafted owner-contractor forms when performing reroofing projects directly for an owner. When employed as a subcontractor or retaining a subcontractor, you would use A401, which is invariably far preferable to general contractor-drafted subcontract forms.

The most important and widely used AIA document is A201. Although the contract forms directly between owners and contractors (A101) and owners and architects (B141) are relatively brief and address project-specific items such as contract price and time, the general conditions set forth in A201 comprehensively detail the rights and obligations of the parties and the procedures governing construction projects. In addition, the terms in A201 are routinely included in subcontracts and flow down to subcontractors and others involved with construction projects.

AIA states its objective when developing the contracts was to balance the potentially conflicting interests of owners, contractors, architects and subcontractors "through a reasonable apportionment of risks and responsibilities that take into account the best interest of the project."

Dissension

The 2007 forms are not the first AIA forms to result in disagreement. Following the release of the 1997 edition of AIA documents, owner groups criticized AIA for not sufficiently accounting for owners' views. At the time, AIA countered by stating owner groups did not participate as actively as others in the process that led to the promulgation of the 1997 forms. The 2007 documents appear to be more solicitous of owners' views and less contractor-friendly than the 1997 forms.

AIA has suggested AGC's current unwillingness to endorse the new A201 is fueled by financial considerations because AGC is promoting its new ConsensusDOCS as an alternative to the AIA standard construction contract forms.

However, AGC has insisted its unwillingness to endorse A201 is based on substantive disagreements. Specifically, AGC points to its disagreement with AIA regarding the authoritative role of architects in contract documents and requirement that communications with owners go through architects; AGC claims these provisions unfairly increase the risks borne by contractors. Furthermore, AGC finds troublesome a revised provision that limits the circumstances, once construction commences, when a contractor can require financial information from an owner.

Despite the differences of opinion, the AIA and ConsensusDOCS contract forms are similar in many respects. Both subcontract forms are far more reasonable and equitable to subcontractors than several previous subcontract forms issued by AGC and the one-sided, self-serving subcontract forms individual general contractors draft and routinely request subcontractors to execute.

The changes

Although there are few significant changes in the 2007 edition of the AIA documents, the changes are critically important. Be sure you are aware of these changes and that you have indicated your decision when necessary to avoid having the default provisions govern.

Arbitration

The most significant change in the 2007 edition of the AIA standard construction contract documents—and certainly the change that most requires your attention and action—is the elimination of arbitration as the contractually stipulated binding dispute-resolution procedure.

Given the complexity and nature of construction disputes, arbitration generally is considered far better-suited to resolving construction disputes than civil litigation. For nearly 100 years, AIA construction documents provided that disputes and claims between parties would be resolved through binding arbitration. However, in the 2007 forms, if parties do not expressly designate in the contract that disputes are to be resolved through arbitration, litigation will be the default dispute-resolution procedure.

In the 2007 AIA standard contracts between an owner and contractor and contractor and subcontractor, the parties are to check a box to designate the method of binding dispute resolution, indicating either arbitration in accordance with AIA General Conditions, litigation in a court of competent jurisdiction or another procedure. If the parties fail to check one of the boxes or do not subsequently agree in writing to another dispute-resolution method, claims and disputes will be resolved by litigation.

Therefore, it is critical you check the arbitration box or designate another dispute-resolution method to avoid litigating construction claims in front of juries and judges who often have little expertise, interest or patience concerning technical, complex construction disputes.

Reversing a provision in the previous edition of the AIA contract documents that stated the Construction Industry Arbitration Rules of the American Arbitration Association (AAA) currently in effect at the time of the arbitration apply, the 2007 documents stipulate AAA rules in effect on the date of the contract will govern unless the parties mutually agree otherwise. In addition, for the first time, the 2007 edition of A201 stipulates that, if the parties choose arbitration, the Federal Arbitration Act, rather than state law, will govern.

Mediation still will be a condition precedent to arbitration, litigation or whatever binding dispute-resolution procedure is adopted by the parties. Mediation is to be administered by AAA according to its Construction Industry Mediation Procedures unless the parties mutually agree otherwise.

Additional insureds

Although requiring contractors and subcontractors to name other parties as additional insureds on their liability insurance policies has become commonplace, the 1997 edition of AIA contract documents did not require the practice. That edition required contractual liability and completed operations insurance as part of a contractor's commercial general liability (CGL) coverage and specifically stated an owner shall not require a contractor to include the owner, architect or other persons or entities as additional insureds on the contractor's liability insurance policies.

But the 2007 edition of A201 requires a contractor's CGL policy to include coverage for the owner, architect and architect's consultants as additional insureds for claims arising during the contractor's operations and for the owner to remain an additional insured on the contractor's liability policy for the contractor's completed operations (post-construction) coverage.

Unlike some older additional insured endorsement forms issued by the Insurance Services Office, such as the CG 20 10 11 85 and similar forms, the new AIA provision explicitly states the additional insured requirement applies only to claims caused in whole or in part by a contractor's negligent acts or omissions rather than claims arising out of the contractor's work.

However, the additional insured provision does not explicitly state the additional insured obligation applies only to the extent of a contractor's negligence. Therefore, there is some uncertainty regarding an insurance carrier's extent of liability when the contractor's negligence is a partial cause of an accident, claim or loss.

Similarly, the 2007 edition of A401 requires a subcontractor to include a contractor, owner, architect and architect's consultants as additional insureds for claims caused in whole or in part by the subcontractor's negligent acts or omissions during the subcontractor's operations and for the contractor to be an additional insured during the subcontractor's completed operations. Once again, there is no explicit provision stating the subcontractor's insurance carrier's liability is limited to the extent of the subcontractor's negligence.

Designation of decision maker

The initial decision maker is the person identified in the agreement between an owner and contactor to render initial decisions on claims and certify termination of the contractor.

Historically, AIA, clinging to its image of an architect as a neutral, objective and fair arbiter of disputes, expressly reserved the role of initial decision maker for architects when disputes arose. Although this provision often was overlooked, previous editions of AIA documents required architects to serve as initial decision makers for claims by contractors or owners against each other as a condition precedent for binding arbitration.

Faced with criticism that architects are hardly objective because they are paid by owners and a contractor's claim may well be based on the work or an act or omission of an architect, AIA finally revised this provision.

The 2007 edition of the owner-contractor agreement states an architect will serve as the initial decision maker but expressly allows the parties to select another individual—who is not party to the agreement—as the initial decision maker. There is no provision for an initial decision maker in A401. Unless the initial decision maker and all affected parties agree, the initial decision maker will only decide disputes between the contractor and owner.

Time limits on claims

Before the 2007 edition, AIA standard contract documents never sought to establish the length of a contractual statute of limitations to file suit or commence an arbitration proceeding. Rather, the documents deferred entirely to state statutes. In the 2007 edition of A201, AIA establishes a time limit of 10 years during which typical, shorter statutes of limitations and repose established by state statutes would apply.

Article 13.7 in the 2007 edition of A201 requires an owner and contractor to file all claims and causes of action, whether in contract, tort, breach of warranty or otherwise, "within the time period specified by applicable law, but in any case not more than 10 years after the date of Substantial Completion of the Work."

The provision goes on to state the owner and contractor waive all claims and causes of action not made in accordance with the provision. In states that expose contractors to lawsuits more than 10 years after completion of a construction project and allow parties to stipulate their own statutes of limitation, the 10-year limitation should preclude suits that otherwise could be brought. AIA did not include the 10-year limitation in the 2007 edition of A401.

Payment

The 2007 edition of A201 contains new provisions intended to facilitate payment of subcontractors and suppliers. Article 9.6.4 gives an owner the right to request evidence from a contractor that the contractor has properly paid subcontractors and material and equipment suppliers. If the contractor fails to furnish such evidence within seven days, the owner has the right to contact subcontractors directly.

Article 9.5.3 expressly allows an owner to issue joint checks to a contractor and any subcontractor or material or equipment supplier that has not been paid. Although an owner is not required to issue a joint check, if an architect withholds a contractor's certificate for payment because the contractor failed to properly pay subcontractors, the owner may issue joint checks for work properly performed or material or equipment suitably delivered.

AGC considers these new provisions to be "intrusive and not a favored practice."

Article 9.6.2 of A201 has been revised to require a contractor to pay subcontractors no more than seven days after receipt of payment from the owner, reflecting percentages retained from payments to the contractor for the subcontractor's work.

The 1997 edition of A201 stated a contractor was to pay a subcontractor "promptly" after receiving payment from the owner but did not specify a time period.

Approval of superintendent

The 2007 edition of A201 requires a contractor to furnish a superintendent's name and qualifications in writing to an owner, through an architect, as soon as practicable after award of contract. The architect must indicate whether the owner or architect has reasonable objection to the proposed superintendent within 14 days.

The contractor may not employ a proposed superintendent if the owner or architect has made reasonable and timely objection, and the contractor cannot change the superintendent without the owner's consent, which must not unreasonably be withheld or delayed.

Submittal schedule

In another new provision to which AGC objects, the consequence of a contractor's failure to prepare and maintain a submittal schedule is enlarged.

If a contractor fails to provide a submittal schedule, which is to be prepared promptly after a contract is awarded, the contractor will not be entitled to any increase in the contract sum or extension of contract time based on the time required for submittal review. AGC considers this consequence to be disproportionate to the infraction.

Consolidated arbitration

If an owner, general contractor and subcontractor have selected arbitration as the contractually stipulated dispute-resolution procedure, the 2007 editions of A201 and A401 broaden the parties' rights to combine what might otherwise be separate arbitration proceedings into one consolidated arbitration proceeding.

In previous editions of AIA documents, AIA guarded architects' right to have a separate arbitration proceeding with owners by including a provision stating no arbitration shall include, by consolidation or joinder in any manner, an architect, the architect's employees or consultant without their express written consent.

Unlike the 1997 editions, the 2007 editions of A201 and A401 allow either party, at its sole discretion, to consolidate an arbitration with any other arbitration to which it is a party as long as:

  • The other arbitration agreement allows consolidation
  • The arbitrations substantially involve common questions of law or fact
  • The arbitrations employ similar procedural rules and methods for selecting the arbitrator

The new edition of the AIA standard contract between owner and architect contains a parallel provision. Whether these new provisions will lead to consolidated arbitration proceedings so an owner could combine a claim brought by the contractor against the owner with a claim against the architect, for instance, will depend on whether the owner's contract with the architect provides for consolidated arbitration and adherence to the same rules as those that apply to the owner-contractor agreement. If an architect does not agree to consolidated arbitration in a contract, the broadened right to consolidation will have no effect.

Owner's financial capability

Previous editions of A201 included a provision, welcomed by contractors, that allowed contractors to request—before and during construction—that owners provide reasonable evidence that an owner had made financial arrangements to fulfill the owner's obligations under the contract. Furnishing such evidence by the owner was a condition precedent to commencement or continuation of the work in the 1997 edition.

This provision has been modified in the 2007 edition by limiting the circumstances during construction when a contractor can require an owner to furnish such financial information. Rather than being able to make such a request whenever desired once work has started, a contractor can only require an owner to furnish financial information and suspend construction pending receipt of the information if one of the following occurs:

  • The owner fails to pay the contractor as required by the contract
  • A change in the work materially changes the amount of the contract
  • The contractor identifies in writing a reasonable concern regarding the owner's ability to make payment when due

This change was cited by AGC as one of the reasons for its decision not to endorse the 2007 edition of A201.

HazMat indemnification

AIA has added an indemnification provision running from contractors to owners pertaining to hazardous construction materials.

A contractor is to indemnify an owner for the cost and expense the owner incurs for remediating a material or substance the contractor brings to the site and negligently handles or if the contractor does not comply with the requirements in the contract documents regarding hazardous materials. This applies except in cases where the added expense is a result of the owner's negligence.

This provision was cited by AGC as another reason it chose not to endorse the 2007 edition of A201.

Architects' inspections

Throughout the years, AIA has revised its standard contract documents to lessen architects' potential liability with regard to on-site inspections undertaken by architects as part of architects' administration of contracts.

In the 1997 edition, an architect's duty included informing an owner of defects and deficiencies observed in the work. Although Article 4.2.2 in the 2007 edition of A201 still calls for architects to visit sites to become generally familiar with work progress and quality and determine whether work is being performed according to contract documents, the language in the 1997 edition that states architects will "endeavor to guard the owner against defects and deficiencies in the work" has been eliminated.

The bottom line

Although not as friendly to contractors as the 1997 version, AIA's 2007 contract forms are fair, reasonably balanced and comprehensive contracts that provide an equitable basis for contractual relationships. AIA documents are far preferable to the self-serving contract forms drafted by owners and general contractors.

Stephen M. Phillips is a partner with the Atlanta-based law firm Hendrick, Phillips, Salzman & Flatt.



Points of contention

Breaking with its long-standing approval of The American Institute of Architects' (AIA's) contract documents, the Associated General Contractors of America (AGC) chose not to endorse the 2007 edition of the AIA A201 General Conditions of the Contract for Construction.

AGC's concerns include the following:

  • Shifting of risks to general contractors and other parties outside the design profession
  • The authoritative role bestowed on architects and the requirement that communications with owners go through architects
  • The limited prescribed circumstances that allow a contractor to require financial information from an owner during construction
  • The consequences that result if a submittal schedule is prepared late
  • Indemnification of owners in matters related to handling of hazardous materials

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