The 2017 AIA Construction Documents Are Here. Contractors, Here Are the Helpful Provisions.
Every ten years, the American Institute of Architects (AIA) revises its form construction and design agreements. In theory, these agreements will evolve so that the standard provisions reflect changing industry norms and market conditions, while clarifying formerly ambiguous terms or terms that the parties using the agreements would frequently end up modifying.
This year, the Guaranteed Maximum Price form agreement (A102) and the corresponding General Conditions (A201) underwent several revisions. Some revisions favor the contractor, and others favor the owner. Fortunately, many of these revisions accomplish the underlying goals of incorporating commonly negotiated terms into the form documents.
Below are some key concepts and revisions to the A102 and A201 that particularly benefit general contractors. (Not to worry, owners and developers: we will have a tailored article for you next week!)
Cost Savings and Incentives
When assuming the risk of cost overruns in a guaranteed maximum price contract, including potential liquidated damages, many contractors request an equitable incentive to complete the work under budget. Such incentive is characterized as “cost savings” in which the contractor would be entitled to a percentage of the difference between the final cost of the work (with fee) and the guaranteed maximum price. Although a cost savings could be a 50/50 split between the contractor and owner, or 100% back to the owner, the market term is generally somewhere in the middle of those two extremes.
Prior to 2017, the parties were forced to draft a custom incentives provision in Article 5 of the A102. Now, Section 5.1.6 of the revised A102 specifically anticipates negotiations over cost savings and other incentives to the contractor by including a blank space to address a split of cost savings. Indeed, the inclusion of this new provision reflects changing market norms and forces parties to address the issue at the onset of negotiation. Rest assured that contractors will look to Section 5.1.7 to demand strong incentives up front.
The updated A102 document now takes into account variations in retainage. Many contractors negotiate certain portions of work, such as general conditions, to be excluded from the owner’s retainage, or to request early release of retainage for work that is completed early in the construction project (e.g., when lien rights expire after ninety days, it would be unreasonable for a shoring subcontractor to wait until final project completion to collect its retention).
Like past incentive terms, the parties typically negotiated stand-alone retainage exclusions and early release schedules for the benefit of the contractor. Section 12.1.8 of the A102 now includes specific provisions to identify retainage exclusions and the early release (or reduction) for retainage. Again, these revisions reflect changing market conditions and will aid in drafting cleaner retainage provisions.
Termination for Convenience
Upon a termination for convenience, the traditional standard provisions permitted the contractor to recover its lost overhead and profit for work not performed beyond the date of termination. Unsurprisingly, owners would strike that provision consistent with a belief that it was inequitable to allow contractors to profit on unperformed work. In response, contractors began negotiating a termination fee to be paid upon a termination of convenience.
What was once a contractor request is now a market provision recognized in the document. Section 14.1.3 of the A102-2017 and Article 14 of the A201-2017 include distinct provisions to define the termination fee and require the owner to reimburse the contractor for the costs incurred when terminating subcontracts. Rather than merely striking the contractor’s right to profit for unperformed work, these default provisions will force the parties to negotiate fair compensation to the contractor in the event of termination without cause. Expect contractors to lean on these new provisions to justify a termination fee in the form of a lump sum amount or a percentage of the unperformed work. Similarly, general contractors can expect their subcontractors to request corresponding provisions upon a termination for convenience in order to reflect the evolving market condition.
The last contractor-oriented provision is to heed notice. As many contractors are aware, Washington law requires strict compliance by contractors concerning all notice requirements set forth in the contract—thanks Mike M. Johnson! Despite the court ruling, the construction industry understands that it is near impossible to comply consistently with those harsh legal standards (e.g., it is unrealistic to expect contractors to notify the owner via hand delivery or certified mail upon discovery of every conceivable change in the work).
The new AIA documents address that concern by creating more reasonable notice standards. As a default, Section 1.6 of the A201 now permits a contractor to achieve day-to-day notice through electronic transmission. Thus, owners would have to revise that provision to impose more stringent notice requirements. This is a step in the right direction to create legal standards that correspond to the communication methods actually used during construction.
Be advised that notice of claim, however, is a more formal process and still requires effectuation via hand delivery or certified (or registered) mail.
Although not specifically a party favored provision, it is worth noting that the new A102 replaces its former Article 17 provision governing insurance and bonds with the stand-alone Exhibit A. The new insurance exhibit contains default insurance coverages to be maintained by the contractor and owner, and includes place markers for the parties to insert the respective policy limits. It also includes optional coverages that may be industry standard for specific projects. Providing a stand-alone insurance exhibit containing default coverages will result in cleaner contracts, as parties would formerly attach their own custom insurance exhibit or merely bullet point the insurance requirements in the text of the A102. Further, the parties can now forward the exhibit to their insurance brokers for input, rather than sending the entirety of the contract, which will undoubtedly lead to more efficient negotiations.
The A102-2017 and A201-2017 contain several other revisions that are contractor friendly (or neutral), but those will have to wait for a future article. From the other side of the table, we will next discuss the owner-oriented revisions.