The heart of a construction project is the contract. Everything flows from it. Recently, the American Institute of Architects (AIA) released the latest version of their set of standard contract documents, covering a wide range of agreements necessary to construction. It includes the General Conditions of the Contract for Construction (AIA A201), which governs the relationship between owner and contractor, and is incorporated into its architect agreement. AGC did not endorse this contract.
Instead, AGC does endorse ConsensusDocs 200, a contract document covering a very similar scope as the AIA document, but with some significant differences in how it treats the relationships, rights and responsibilities of the three main parties.
Since member GCs are very likely to encounter this new AIA contract (if they haven’t already), it is valuable to know the differences and which aspects may be problematic for contractors. Constructor talked to experts from AGC and ConsensusDocs to find out.
HOW WE GOT HERE
Once upon a time, there was a profession called master builder, an august personage who designed buildings (and other structures) and then constructed them. He contracted with the owner to produce the entire project from thought to finish. One responsible party, one point of contact.
This profession eventually split into an architect who designed and a contractor who constructed. Then, engineers split off. The complex relationships between the three professions and the owner created a need for clearly defined responsibilities.
In 1911, AIA “consulted with builders and attorneys to publish our first set of integrated standardized contract documents, which defined the relationship and terms in construction projects,” states AIA’s website. These documents are updated every 10 years, with recent revisions in 1997, 2007 and 2017.
According to Brian Perlberg, AGC senior counsel for construction law and contracts, the 1997 version was controversial at AGC, with about one third of the board voting against endorsing it. AGC had a much more unified response to AIA’s 2007 revision: It was rejected unanimously. AGC felt the revisions had significantly diminished the contractor’s substantive rights.
“They made this shift,” recalls Perlberg, “From it being an industry-standard document to more of an advocate’s document. The AIA documents are perceived to be protective of the architectural professional.”
The AIA’s 2017 version marked the first time AIA did not consult with AGC while drafting the revision, nor did it send an advance copy to AGC for comment. AGC did not endorse the 2017 revision, either. The problems are similar to 2007, and some of them have gotten more egregious.
The AIA documents perpetuate a longstanding relationship between the parties. “AIA places the architect as the fulcrum for all decision-making,” observes Perlberg, as well as all communication between contractor and owner. “The industry has changed, and I would say the AIA docs haven’t moved fast enough to reflect the changes. Contractors and owners have all realized that a true win/win solution is to collaborate and communicate to get better project results.”
Ron Ciotti, a private practice attorney in New England and partner at Hinckley Allen, is the immediate past president of AGC of New Hampshire and the current vice chair of the AGC Contract Documents Forum. Ciotti sums up the AIA problem succinctly: “They’re excellent documents if you’re a design professional. They are not owner-friendly and not contractor-friendly. I do not believe they serve the project.”
By 2007, AGC had already joined ConsensusDocs, a coalition of 20 organizations and companies representing a broad range of industry interests, dedicated to producing a more equitable and forward-looking set of contract documents. The coalition has since grown to 40 members. ConsensusDocs issued its first set of contract documents in 2007, and updates them every five years, or more often if necessary.
“In ConsensusDocs, the parties are encouraged to communicate directly in order to solve problems, not necessarily going through the architect,” comments Perlberg. “That’s a pivot point: Do you want to have a passive owner who relies on the architect to protect them from the big, bad contractor? That’s the old way to build things.”
From AGC’s point of view, many of the problem-areas in the AIA documents are handled much better in ConsensusDocs.
One of AGC’s biggest objections to the AIA A201 is the concept of the Initial Decision Maker (IDM), introduced in 2007. A201 designates an IDM who, in the event of a claim or other dispute between owner and GC, is the first recourse for resolution. Each party submits their side and the IDM decides who wins. Either party has 60 days to object the IDM’s ruling or it becomes final. If there’s objection, it goes to mediation and, if that fails, either to arbitration or to court, depending on the terms of the contract.
Unless AIA A201 is modified, the default IDM is the architect.
“Selecting an architect as the IDM is voluntary,” explains Bob Majerus, general counsel and VP of Hensel Phelps, and chair of the AGC Contract Documents Committee. “You can opt out of it, but the contracts that I see almost always opt in. The parties would all have to select someone else, and that doesn’t happen very often.”
The IDM is supposedly a neutral party, but the architect has a contractual relationship with the owner, a seemingly conflict of interest. “Contractors do not believe architects should be involved in deciding disputes because they do not play a neutral role,” says Majerus. He points out that the architect may be making decisions about construction costs that have nothing to do with his expertise.
“ConsensusDocs requires the parties to get together almost immediately to see if they can resolve the dispute,” Ciotti explains. “If they are unsuccessful, the project executives are required to meet and again try to resolve it. Over $1 billion of projects have been built using ConsensusDocs contracts in the past 10 years, and there is still not one reported case.”
If the AIA contract is used, Majerus suggests getting a neutral third party appointed as IDM. Majerus uses a list of construction experts he has dealt with previously, or successfully used as arbitrators (although the IDM would be acting outside the role of an official arbitrator).
The new provision in AIA A201 on the method of giving notice for changes could severely impact contractors’ rights. For claims (essentially any change in costs or schedule), formal notice must be given in writing and delivered by certified or registered mail, or by a courier providing proof of delivery. Personal hand-delivery by the contractor will not do, because he’s not a courier who provides a receipt. For issues other than claims (a change directive as opposed to a change order), written notice may be served by regular mail, certified or registered mail or courier. Electronic transmission (for example, email) can only be used if a provision is added setting forth the method.
Most importantly, failure to serve notice in the required manner can cost a contractor his rights, and a legitimate claim can go uncompensated.
Ciotti thinks the AIA notice requirements simply don’t acknowledge the reality of current business practices. “We live by email. In ConsensusDocs, we accept regular mail and email for those processes. The only thing that requires certification is termination,” says Ciotti.
Ciotti also observes a significant inequity in the way AIA A201 treats notices: It does not require written notice for liquidated damages, which is a claim by an owner against a contractor.
Before 2007, AIA A201 had a provision that a contractor could get assurance of the owner’s financing at various times during the project. As of 2007, a contractor can ask for financial information only at the beginning of a job. “If an event takes place,” says Majerus, “Or a rumor that makes the contractor worried that the owner may not be able to pay, there is no way to ask for an update, or to ask the owner for the first time if you didn’t ask at the beginning.”
In 2017, this was improved, slightly. “In 2017, they realized they made a mistake,” explains Perlberg. “But, they also made it more technical. You still have to make a showing to get a response to requested information. But, they made it clear that if the contractor doesn’t get reasonably requested information, then a contractor may stop work, but only on the part impacted by the concern. And you can’t share information received with a contractor’s lender because the information is now deemed confidential. It’s marginally better, but it’s still not acceptable.”
“In ConsensusDocs, we look at the parties to a contract as partners to get the construction done,” continues Perlberg. “If financial information is requested, the owner provides it, and if they don’t, the contractor can stop work on the project. That’s the way it was in AIA’s 1997 contracts.”
TERMINATION FOR CONVENIENCE
Another problematic provision in AIA’s 2017 revision concerns Termination for Convenience, changing the method by which the GC is compensated if the project is terminated by the owner. Previously, a contractor could recover overhead and profit on work not yet executed. That has been changed to a termination fee, similar to ConsensusDocs’ approach. “I’m not fully against what AIA has done,” says Ciotti. “But, they have not updated their subcontractor document, A401, to be consistent with A201. The subcontractor can, under the A401, still collect from a GC for overhead and profit.”
“In ConsensusDocs, we look at the parties to a contract as partners to get the construction done. If financial information is requested, the owner provides it, and if they don’t, the contractor can stop work on the project.” ∼ Brian Perlberg, AGC senior counsel for construction law and contracts
“It puts the contractor in the middle between owner and subcontractor,” says Perlberg. AIA A201 does allow the contractor to receive ‘Costs attributed to termination of subcontract,’ but it’s unclear whether that includes lost profit and overhead of the subcontract.
“It is an argument that will have to be made,” believes Ciotti.
Majerus is concerned about several aspects of AIA’s new approach to insurance. “Most of the insurance clauses were taken out of general conditions and added to an insurance exhibit that gets attached to the contract,” says Majerus. He worries if the parties don’t put in an insurance exhibit, “they’re going to rely on the provisions in the contract, and they’re virtually nonexistent.”
“Moreover, in the exhibit, some of the mandatory insurance products and insurance certificates are no longer commercially available. Some of those products haven’t been available for 10 years. The contract has to be modified to make it workable. If you don’t modify it, the contractor signs onto something that’s no longer available,” says Majerus.
The most recent revision of ConsensusDocs was written in consultation with the insurance and surety industries, and with brokers. Majerus, who was closely involved in writing the ConsensusDocs provisions, boasts wryly, “We came up with a set of clauses for required insurance which you can actually buy.”
WHAT TO DO
How should a contractor approach these problems?
Perlberg suggests, if possible, using ConsensusDocs. “AGC recommends members condition their bids contingent on an unmodified ConsensusDocs contract. They need to engage the owner and say, ‘Fairer contracts lead to better projects and better pricing.’ Try to use your relationship before the contract is let,” says Perlberg.
If it has been let using AIA A201, try to modify the contract terms. “I don’t think the AIA A201 is a horrible document,” states Ciotti. “It can be revised properly, but you’re going to have to heavily revise it. Any party using an AIA contract will need to have their lawyer modify it.”
Both Ciotti and Majerus stress the need for a real construction lawyer, at various phases from contracting through arbitration. “I think one of the biggest mistakes made is not having a construction-specific attorney,” suggests Ciotti. “When I’m representing a contractor, and the attorney on the other side is somebody who doesn’t specifically get involved with construction, it doesn’t go as smoothly. A lot of non-construction lawyers don’t understand that risk is a part of this process, and they will find a way to kill a deal. A construction attorney understands how to protect their client’s interests while still ensuring the project proceeds smoothly, not shifting or mitigating risk to the point of stalling the project.”
AGC issued a detailed commentary on AIA 201-2017, laying out these pitfalls and more. It is available at https://bit.ly/2FGJJZx.