Understandably, you're excited about your new project. The financing is in place, and all the zoning and other governmental agency problems are resolved. You have even selected an architect and may be ready to put the project out to bid or select a contractor. Caught up in the moment, will you leave the contract negotiations to your architect or some other designee, hoping that "everything will work itself out?" You probably think you can trust your architect and contractor to do the right thing, so you don't have to worry about that pesky contract. Should you?
A common brand of contract form, the American Institute of Architects' A201 General Conditions for Construction and the AIA B141 Owner/Architect Agreement underwent key changes in 1997. With some modifications, those forms can protect you, the owner/developer.
Should I use the AIA forms or make up one of my own?
Although many owners and developers hire an attorney to write their own contract form, the better practice is to use the standard AIA forms, or some other industry form such as the Associated General Contractors form or the Engineers Joint Council Document Committee form, and modify them to meet your needs. Architects and contractors are familiar with the AIA forms and are much more likely to accept changes made to these forms rather than a "home-grown" contract. Most attorneys who write these contracts make them one-sided and unfair - and more likely to produce higher bids to cover the contractor's increased risk and ultimately to generate disputes and litigation.
What are the key changes to A201 and B141?
1. Design delegation. The architect now can require contractors to perform certain design responsibilities as long as the contractdocuments are clear about the design tasks and the delegation is not prohibited by state law. This change formalizes what has been going on in the industry for years. For example, contractors typically design sheeting and shoring work, steel connections, curtainwalls and certain mechanical and electrical systems. This provision should not need changing.
2. Mutual waiver of consequential damages. This is a big change to A201 and B141. The owner, contractor and architect now agree to waive "consequential damages" claims against each other. What does this mean? In short, the owner gives up just about every claim he might have against the contractor or architect if the project is delayed, while the contractor and architect give up very little in return. Because the law is unclear on exactly what the term "consequential damages" means, strike this provision.
If the project is big enough and potential delay damages are huge, most contractors want to limit their liability for delay in the form of liquidated damages. Owners are better off without liquidated damages, because that usually is the maximum amount of damages they can recover if the contractor delays the project. If you have no choice, make sure the daily rate is high enough to cover you in case the project is delayed.
3. Indemnification. If you eliminate the mutual waiver of consequential damages clause, make sure you include "loss of use" of your facility damages in your indemnification provision. As it is now written, the contractor does not indemnify you for your "loss of use" damages.
4. Hazardous materials. A201 significantly broadens the definition of hazardous materials to cover anything encountered on site that could present a risk of bodily injury or death. A201 also requires the owner to indemnify the contractor for any claims arising out of such hazardous materials. While the indemnification provision is probably fair, make sure you have the proper pollution insurance coverage for such claims. Also, make sure that if such hazardous materials are encountered you contract with an environmental laboratory that will handle the pollution or hazardous materials from the site and one that has sufficient professional liability coverage with no pollution exclusion.
5. Contractor's repair obligations. A201 has been improved to make it clear that the contractor's repair obligation is independent from his general obligation to fulfill the terms and conditions of his contract. For example, even if the one-year correction period has expired, you still can sue the contractor for breach of contract if you determine in the second year that he failed to build the project in accordance with the plans and specifications. You are limited only by your state's statute of limitations for breach-of-contract claims.
6. Termination for convenience. Both A201 and B141 give you the right to terminate the construction contract and owner/architect agreement for your convenience, but they also permit the contractor to recover termination expenses and lost profit on work not performed. You should consider striking those provisions or modifying them to provide that you will pay only for work completed to date and for any reasonable termination expenses incurred as a result of your termination of the contract.
7. Evidence of financial arrangements. Like the previous editions, A201 gives the contractor the right to suspend the work if he doesn't think you have provided satisfactory evidence of your financial resources to continue the work. You should consider striking this paragraph, because it gives the contractor the unfettered right to make this judgment about your financial means.
8. Architect's right to suspend services. The B141 owner/architect agreement gives the architect the right to suspend services if you fail to a pay, even if the payment is disputed. Owners also are prohibited from withholding payments to the architect as a result of penalties, liquidated damages or other sums withheld from payment to the contractor or for the cost of changes in the work unless the architect has been adjudged liable for the cost. This means you have to go to court or arbitration before you can withhold payment from the architect.
The architect should not be able to stop work amid a good faith dispute over his services or his contribution to some other type of damage you have suffered on the project. You might compromise and agree to put the disputed portion in an escrow account and require the architect to continue working.
You also need to watch out for the architect's modifications to the B141. The architect might try to stick in a "limitation of liability" clause. These clauses purport to limit the architect's liability to, for example, his fee or the amount of insurance he has for errors and omissions. Because your liability is not limited for damages you may cause, why should the architect's liability be limited?
9. Architect's control of design documents. B141 now provides that the owner's use of drawings, specifications and other design documents prepared by the architect and its consultants are under a limited license that expires when the owner/architect agreement is terminated for any reason. For example, if the architect terminates the contract for nonpayment, even if the payment is disputed, all copies of the sealed documents must be returned to the architect within seven days after termination, unless the architect is "adjudged in default of the agreement." Even if there is a good faith dispute with the architect, an owner can be forced to redesign with a new architect.
These provisions should be modified significantly. While it might be fair for the architect to retain his copyright in his drawings and specifications, there would be no drawings and specifications if you, the owner, had not financed the project in the first place. Provisions should be added giving you the right to finish the project with the architect's design. If changes are to be made, the architect's name should be removed from the drawings and an appropriate indemnification and protection.
10. Dispute resolution. If something goes wrong on the project, the standard AIA form documents all contain mediation and arbitration provisions. While it is a good idea to resolve your dispute informally or through a nonbinding mediation, arbitration probably is not the best way to resolve disputes, unless the amount in controversy is very small. Arbitration hearings do not give you the same protections as court proceedings.
On the other hand, leaving your fate to a jury is probably too risky. As a compromise, change your contract to provide that any dispute will be resolved by a judge. This way, you will have all the legal protections afforded to you by the court system, without the uncertainty.
Overall, the AIA documents do a fair job of allocating risks among the owner and the architect and contractor. Even if you make significant modifications to the AIA forms, it is best to start with a form familiar to the parties. The project's success is more likely if the parties understand their risks before ground is broken and if the contract is fair.