Recently, an association board president was explaining an upcoming construction
project and I offered to draft and negotiate the contract with the contractor. The president assured me that wouldn’t be necessary, because, as he explained, “We’re using the AIA contract.”
There was both good and bad in that statement. The good: Recognition that AIA (American Institute of Architects) contracts are the gold standard for construction contracts – well-designed, well-respected, and widely used. The bad: Failure to understand that these are “standard form” contracts containing generic language that will not be appropriate for all projects. Just as a suit must be tailored to fit an individual, the AIA contract must be modified to “fit” a particular association and the specific needs of its project.
Our office generally uses two AIA contract forms for association construction projects: (1) the A-104 (used primarily for projects involving a design professional); and (2) the A-105 (used primarily for projects without a design professional).
There are many reasons for involving a design professional, including having a licensed and insured professional design expert: (1) prepare the plans and specifications; (2) assist in the competitive bidding process; and (3) provide both contract and construction administration services during the construction. Additionally, the design professional, not the association, assumes responsibility and liability for these services. When associations forgo the services of a design professional (which many do, usually for budgetary reasons) I often suggest that they use the shorter, simpler A-105 contract, so that’s the one on which I will focus here.
Essential Changes
At the beginning of a project, the AIA contract can serve as a kind of screening test for interested contractors. Contractors who are comfortable with using these contracts are more likely to be experienced, sophisticated and professional than contractors who are not comfortable with their use.
Although the A-105 contract is well-designed and comprehensive, it is just a starting point. Construction projects are different, associations are different, and the contracts they use must be different, too. Obviously, the contract must be fair; otherwise, the contractor won’t accept it. But as association counsel my goal is to protect the association, to anticipate, mitigate and avoid problems, and to ensure that if problems arise, they can be promptly and fairly resolved. To achieve that goal, I will propose dozens of changes, both large and small, to the standard language. The following are some of the most important ones.
Control
Generally, a design professional would design the project and prepare plans and specifications, which would be attached as an exhibit to the general contract. In the A-105 context, a design professional usually is not involved. Instead, it is the contractor who typically provides proposed specifications and/or sketches as part of a proposal to the association. The proposal should identify in detail the work to be done and its cost. The best practice is to attach the proposal as an exhibit to the contract and note that only the project description and cost specified in the proposal are included as terms of the contract. This ensures that except for these two components, it is the terms and conditions detailed in the A-105 agreement, and not those detailed in the contractor’s proposal, that will govern the relationship between the contractor and the association.
Insurance
The standard language in the AIA contract requires the association’s insurer to waive its “subrogation rights.” This means that if the association’s insurer pays a covered claim for damages caused by the contractor, it will not seek reimbursement from the contractor’s insurer. I generally delete this waiver language because it tends to cause problems that arise uniquely in the community association context. Upon explanation, most contractors will accept the change. If the contractor resists, the standard waiver language can remain, provided that the association’s insurer accepts it. If the insurer rejects the waiver, the association must either: (1) find another contractor; or (2) retain the waiver language anyway, accepting the risk that the insurer may not renew the association’s policy as a result.
Indemnification
The standard contract tends to mirror insurance language, requiring the contractor to indemnify the association for claims arising from the performance of the work to the extent that they are attributable to bodily injury, sickness, disease, death or property damage (other than to the work itself I substitute broader language requiring full indemnification for the association, covering all claims arising out of the performance of the work or any material breach of the agreement.
Use of the site
We recommend eliminating the single sentence in this section of the standard contract and substituting new and detailed provisions addressing use of the site, on-site storage of equipment and materials, responsibility and liability for site conditions, risk of loss while on site, and site clean-up and cleanliness.
Time and
compensation for delays
Under the standard contract language, if the project is delayed by circumstances beyond the contractor’s control, the contractor could demand compensation for expenses incurred because of the delay. The better approach is to revise this language to expressly limit the contractor’s remedy for delays to solely and exclusively an extension of time. This mitigates against any argument that the association is liable for monetary damages for delays.
Payment
The payment processes under both the A-104 and the A-105 contracts contemplate a monthly payment application process. This standard payment process works well when there is a design professional involved but less well when one is not. Because most associations lack the knowledge and experience necessary to manage construction payment applications, depending upon the specifics of the project, it is usually better to structure a modified payment process using arbitrarily chosen payment points (e.g., initial deposit, payment at 50% mark and final payment). Unfortunately, even this modified schedule can create risks for an association – primary among them, the failure to make timely payments. I attempt to mitigate this risk by reducing the interest penalties for late payments. While zero interest is ideal for the association, it isn’t always accepted. Where interest on late payments is allowed, I recommend inserting language requiring the contractor to provide written notice of the late payment and to allow a brief window to cure before the interest is applied.
Protection of Persons
& Property
Termination
The standard language allows termination of the contract either “for cause” or for “convenience” – for no reason. The standard language allows a contractor terminated for convenience to recover significant costs for overhead and anticipated profits. The addition of language prohibiting the contractor from recovering costs related to work not yet performed is critical.
Other
terms and conditions
Article 17 of the A-105 agreement is a blank section allowing the drafter to include all sorts of additional terms and conditions. In the association context, I add several provisions to address unique association issues, for example, specifying that:
·
The
individuals who signed the agreement did so in their representative – not
individual – capacity and the agreement is subject to the documents governing
the association;
·
The
contractor must repair at its cost all damages the contractor causes to the
site (including individual units) and to the work; and
· All disputes arising out of the agreement are subject to litigation in a state court of competent jurisdiction (associations do not want to litigate construction disputes in federal courts).
The contract should be fair – or at least, not unfair – to the contractor. But our primary obligation is to protect the interests of our association clients. Therefore, if a contract provision is going to tilt toward one side or the other, we try to tilt it toward the association whenever that is possible. The details matter. That is true of many things in life, but it is especially true when negotiating and drafting construction related agreements.
Dwight is a senior associate with
Marcus Errico Emmer & Brooks, PC concentrating his practice on construction
law, contracts and civil litigation.
With more than two decades of experience representing and advising all
manner of clientele in connection with construction projects and construction-related
disputes, Dwight has extensive experience in the analysis, interpretation,
drafting and negotiation of all manner of construction-related contracts,
including AIA documents and surety bonds, as well as services agreements,
wireless and cable leases/agreements and other commercial agreements. Dwight can be contacted by email at dburns@meeb.com
