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Pitfalls of AIA owner-contractor form agreements.

Given the opportunity, most contractors prefer to submit to their owner/client for signature the "Standard Form AIA (American Institute of Architects) Agreement" between owner and contractor.

There is little wonder why contractors prefer such a template agreement.

Standard AIA agreements are drafted from the perspective of the architect or contractor. They do little to protect the owner's interests. Because our firm typically represents owners, we draft agreements from the owner's perspective.

One AIA Standard Form Agreement regularly used by contractors calls for the contractor's work to be performed on the basis of the cost of the work, plus a contractor fee, without an upset cost or fee, or a guaranteed maximum price.

Standard agreements cede the owner's authority to the architect, as the owner's representative, to direct the work, withhold payment to the contractor for defective or deficient work, and authorize change orders. Instead, we use agreements ensuring that owners maintain authority for these decisions.

The agreement should provide milestone dates for substantial completion and final completion, as well as scheduling alternatives and options for collecting financial damages if delays occur.

There is generally no milestone date provided for final completion in AIA Form Agreements. Provisions relating to contractor delay and notice requirements lack comparable protections for owners.

We recommend that the contractor's compensation for a delay be limited to an extension of time. It is also vital to ensure that owners do not waive their recovery of consequential damages if there are contractor delays.

AIA Form Agreements provide for a mutual waiver of consequential damages.

Thus, the owner is prohibited from recovering damages not flowing directly from a contractor's default, but nonetheless as a consequence of the contractor's default. And AIA Forms contain no waiver by the contractor for delay damages.

Most significantly, the agreement must provide for either a lump sum, fixed-price cost or a guaranteed maximum price (GMP). The GMP or fixed price should include not only the project construction cost, but also the contractor's fee, a capped level of general conditions costs, and insurance and bond costs.

The cost of the work is defined in the AIA form and usually ranges from the hard construction and general conditions costs to mediation and arbitration costs.

The more "general conditions" items included in the cost of the work, the higher the contractor fee. Change order approvals should rest only with the owner.

The contractor should be deemed to waive any right to payment for work performed without approved change orders.

And contractors should be required to continue disputed work, even if change orders are not approved.

AIA forms state that architects may approve changes in the work and payment to the contractor. There is no contractor waiver of payment provision for work performed without approved change orders.

And AIA agreements allow for adjustment to the contractor's fee and unit prices established if changes in work would cause substantial inequity to the contactor.

The agreement should include a comprehensive indemnity provision requiring the contractor to indemnify the owner for all claims arising from a contractor's work.

The AIA agreement's indemnity is limited to personal injuries and property damage claims. Also, the indemnity is limited to claims arising from contractor negligence.

We recommend a broad basis for termination by the owner for cause, as well as requirements that contractors participate in the transition/completion phase in the event of termination.

AIA Standard Forms severely limit the owner's ability to terminate by requiring the architect's certification for termination.

Contracts should include a dispute resolution procedure involving an expedited disposition of claims whose cumulative sum is less than a designated amount, through mutually agreed-upon arbitrators.

This allows speedy disposition of minor construction claims, where contractors are required to continue to perform work on the project while the parties resolve their dispute.

The procedure will also require the joinder of all necessary parties to the arbitration so that all related claims are disposed of in one forum.

AIA forms lack any joinder of necessary parties to the arbitration, which could lead to separate arbitrations against the contractor, architect and engineers.

The template form includes a cumbersome mediation process and requires arbitration of all disputes, regardless of size.

Agreements between owners and contractors can go a long way in protecting owners against unexpected cost overruns and potential claims by contractors or third parties.

Owners wishing to reduce the likelihood of cost overruns and claims should avoid AIA form contracts and instead use agreements that include the protections discussed above.


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Author:Feingold, Ronald
Publication:Real Estate Weekly
Date:Dec 20, 2006
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