Choosing the right contract is one of the most important actions contractors can take to minimize their legal and financial risks on a building project. By putting terms and conditions into writing, each party agrees to the specific roles and responsibilities that will govern their performance on the project.
It is absolutely vital for a contractor to choose an unbiased contract that apportions risks and responsibilities in a fair and balanced manner. The A201™–2007, General Conditions of the Contract for Construction is the keystone document in a majority of projects that set forth a contractor’s roles and responsibilities on a construction project. The A201 is incorporated by reference into other contract documents with owners, architects and subcontractors and puts a contractor on solid legal footing with the owner of a project by balancing risks and responsibilities equitably.
Three areas where the contractor will find this common-sense approach to contract drafting are provisions regarding owner financing, consequential damages and insurance:
- On any construction project, one of the owner’s primary duties is to pay the contractor in a timely manner for the work performed. The A201 gives the contractor the ability to confirm, before work has begun, that the owner has adequate funding for the project by requiring that the owner provide proof that it has made financial arrangements to meet its obligations under the contract. The agreement stipulates that the owner cannot materially change these financial arrangements during the course of construction without first notifying the contractor. Knowing that the owner has the funding to pay for the project from the beginning will go a long way in minimizing surprises later in the project.
- Another strategy for mitigating unforeseen risk is to waive liability for certain types of damages. Consequential damages are often difficult to define and may result in large and unexpected damage awards. It can be challenging for courts to calculate and price the loss to business and reputation sustained by an owner in the event of a late delivery of a project after the damage has occurred. It is even more challenging to consider this potential risk when developing pricing for a project in the beginning. Because of this difficulty, the A201 contains a mutual waiver of consequential damages that protects both the owner and contractor from a judgment for consequential damages.
- Insurance provisions are among the most important risk management features of a contract. The AIA has consulted with numerous industry experts to provide (in A201) a comprehensive set of insurance provisions and the most common contractor insurance coverages that will offer protection from many of the insurable risks frequently encountered by contractors on a construction project. But contractor’s insurance is only part of an effective risk management strategy. It is also important that owners provide the appropriate coverage. The A201 requires the owner to purchase property insurance to protect it from damage to its own property. If the owner declines to provide this coverage, the contractor is afforded the opportunity to purchase property insurance at the owner’s expense. Memorializing these common-sense insurance measures into a written contract protects contractors from assuming unnecessary liability.
AIA Contract Documents® are also the leading choice for subcontractors seeking to limit their risks during a building project. The A401™–2007, Agreement Between Contractor and Subcontractor ensures that a subcontractor’s scope of work is clearly defined and affords subcontractors many of the risk prevention provisions found in A201. For example, under A401, subcontractors are afforded the benefit of a waiver of consequential damages. If the subcontractor is unsure of any of its obligations under the prime contract, the language of the A401 also permits subcontractors to obtain and review all contract documents prior to execution so that no surprises occur once the project is under way. These measures reflect the central AIA drafting principle that liability should be assigned to the party in the best position to manage and limit the risk.
For a basic overview of AIA construction contracts, a good starting point is the AIA’s Contract Relationship Diagrams. This free tool breaks down every project delivery method into a visual diagram that shows how the different parties and contract documents in a project interact with one another. It also lists key attributes of every project delivery method and serves as a helpful tool to determine which contract is appropriate for a given situation. The Reference Material section of the AIA Contract Documents® website contains many other resources for understanding and properly using AIA’s agreements and forms. These include explanations and synopses of every document, organized by series, family and delivery method. Contractors may find a comparison of all owner/contractor agreements in the conventional family especially useful.
The AIA’s nearly 200 agreements and forms allocate and mitigate project risks in a fair and balanced manner, offering unsurpassed protection to contractors. AIA Contract Documents® offers nearly 200 standard form contract templates. AIA’s agreements and forms are the industry standard because of their widespread familiarity and their reputation for balancing risks equitably and sensibly among all project participants.