OP-ED: Standard Form Construction Contracts: Uses and Misuses
Standard form construction contracts are ubiquitous in the industry and for good reason. They are cost effective, the terms have been vetted over years of drafting and redrafting—and through court challenges—and most property owners, design professionals and contractors understand the agreement terms, or at least how the terms operate in the day-to-day realities of a building project.
While there are a number of different organizations that offer such form contracts, they all serve the same basic function: providing an off-the-shelf form with many useful clauses that can be modified for use on specific projects. The American Institute of Architects (AIA), ConsensusDocs, Design Build Institute of America (DBIA) and Engineers Joint Contract Documents Committee publish the most common forms used in the United States, while international projects often use forms available from the International Federation of Consulting Engineers (FIDIC) and the International Chamber of Commerce (ICC). In addition, many government agencies either draft their own standardized contract forms or adapt published forms, such as the AIA forms, for the agencies’ specific use. While government contract forms often become creatures of the unique laws applicable to public projects, agencies and the designers and contractors that do business with them can benefit from standardization, which makes review of the agreement and the understanding of risk allocation much easier to process and work under.
And while these forms offer many advantages, the key is to use them correctly. The forms usually have specified functions defined by the parties, the delivery method and the payment method: for example, owner/architect, owner/engineer or owner/general contractor agreements; design-bid-build, CM/GC or design/build delivery; and lump sum price or guaranteed maximum price payment. The forms can also vary in complexity, with many publishers providing forms for small projects, projects of limited scope (such as tenant improvements or remodel) and even forms with specific environmental or sustainability goals. Publishers often also draft forms in a series that are meant to work together. Mixing and matching incompatible forms, failing to review the automatically incorporated additional documents, and simply using the wrong form for the parties or project involved can sow chaos should anything go wrong.
Some common mistakes I have seen include:
(1) General contractors failing to use subcontractor agreements that are compatible with the language of the standard forms and that pass through the required obligations, such as insurance limits, adding additional insureds and requiring consolidated arbitration (or using no written subcontractor agreements at all). This puts the general contractor in breach of the owner agreement before construction even starts;
(2) Making major modifications to a standard form, such as the AIA A101 (standard form agreement between owner and contractor), without making any needed revisions to the incorporated documents, such as the General Conditions of the A201; and
(3) Simply using the wrong form, such as hiring a structural engineer using an architect’s contract form without changing the standard scope of work, thus making the engineer, at least technically, responsible for the architect’s management of construction.
The key to using a standard form is to use the right form for the right job, making sure that it is modified as required by the law of the state where the project is located. The more complex the project, or the more expensive, the more important it is to review and customize the forms to fit the needs of the job. It is also important to keep the forms up to date. Most standard forms go through significant rewrites every ten years, but even in the interim laws change and clauses may become unenforceable or worse and can subject a party to unforeseen liability.
And, even though standard language forms are often very thorough, it does not mean that they cannot be improved upon given the nature of a project. Given the complexity and specialization of many new buildings, designers and the contractors must often rely on specialty trades or products and sometimes in novel and untested ways. Building owners and developers may be willing to take the risk on “new” building designs or materials in order to be on the cutting edge. In those situations, the standard allocations of risk in form contracts may not reflect who should be bearing the liability should something go wrong with the next big thing, and protective clauses and carve-outs should be added to the standard form.
That said, any modification to the standard language of a form should be closely scrutinized. The benefits of industry standard language used in many form contracts are that the meaning of the language is well understood, not only by the parties to the contracts but also subcontractors, materials suppliers, manufactures and even insurance companies. On this last point, it is very important to review changes to the standard language in form contracts from the point of insurability. Changes to the standard of care, especially regarding the performance of design professionals, could render certain contract clauses uninsurable, which rarely if ever benefits any party to the contract.
Standard form contracts can save time and money, but should be reviewed periodically by a legal professional and read carefully in the context of each project to make sure the right form is being used, with the needed modifications, and that all of the agreements within a given project are consistent with each other.
Column first appeared in the Daily Journal of Commerce on February 27, 2018.