Watch Out Owners And Developers: The 2017 AIA Documents Are Coming To A Project Near You

Has it really been ten years? Just when you thought you knew the ins and outs and all of the pitfalls for owners and developers in the 2007 AIA contract documents, the AIA released its 2017 suite of contract documents. Unfortunately, owners and developers (for the most part) fair no better in the AIA 2017 contract documents than they did in the 2007 AIA series of documents. What do Chicago sports’ fans say – wait ‘til next year? For owners and developers looking to limit their modifications to the AIA documents, you will have to wait until 2027. In the meantime, this article addresses some of the provisions revised in or added to the AIA 2017 A201 General Conditions of the Contract for Construction and their impact on owners and developers.

I. Revisions to AIA Document A201-General Conditions for the Contract for Construction Impacting the Owner/Developer Risk Profile

A. Section 2.2 Evidence of the Owner’s Financial Agreements

Section 2.2 of the A201 (2007 and 2017 versions) requires the owner to provide the contractor with evidence of the owner’s ability to finance and pay for the construction of a project. Both versions require the owner to provide such evidence if requested by the contractor prior to the commencement of the work and thereafter if (i) the owner failed to make payments to the contractor, (ii) a change in the work materially changed the contract sum, or (iii) the contractor identified in writing a reasonable concern regarding the owner’s ability to make payment when due.

The 2017 version, however, adds language allowing the contractor to essentially hold the project hostage if the owner cannot provide “reasonable evidence” of such financing. Specifically, prior to the commencement of work, the revised provision states that the contractor “shall have no obligation to commence the Work until the Owner provides such evidence” and “[i]f commencement of the Work is delayed…the Contract Time shall be extended appropriately.” Following commencement of the work, Section 2.2 provides that the contractor may immediately stop the work if after fourteen days of the contractor’s request for such evidence, the owner has not provided contractor with reasonable financial information. Further, the contractor shall be entitled to an increase in the contract sum and the contract time for “Contractor’s reasonable costs of shutdown, delay and start-up, plus interest.”

In other words, if an owner is waiting on its lender or equity partners to provide confidential financial information to the contractor, which certain financial institutions may reasonably frown upon or simply refuse to provide, the contractor may refuse to commence the work or cease the work in progress and be entitled to an extension of time and increase in the contract sum. The contractor’s ability to cease the performance of the work could cause a conflict with a reasonable interpretation of Section 15.1.4.1 – Continuing Contract Performance, which requires the contractor to continue the work while the owner and contractor resolve disputes. The revisions to Section 2.2 provide a loop hole to Section 15.1.4.1’s requirement to continue performance of the work.

My recommendation to owners and developers would be to modify Section 2.2 to eliminate the ability of the contractor to cease performance of the work and remove the contractor’s entitlement to an extension of the contract time and increase in the contract sum. One way to effectuate these suggested modifications is set forth below:

§ 2.2 Evidence of the Owner’s Financial Arrangements

§ 2.2.1 Prior to commencement of the Work and upon written request by the Contractor, the Owner shall furnish to the Contractor reasonable evidence that the Owner has made financial arrangements to fulfill the Owner’s obligations under the Contract. The Contractor shall have no obligation to commence the Work until the Owner provides such evidence. If commencement of the Work is delayed under this Section 2.2.1, the Contract Time shall be extended appropriately.

§ 2.2.2 Following commencement of the Work and upon written request by the Contractor, the Owner shall furnish to the Contractor reasonable evidence that the Owner has made financial arrangements to fulfill the Owner’s obligations under the Contract only if (1) the Owner fails to make payments to the Contractor as the Contract Documents require; (2) the Contractor identifies in writing a reasonable concern regarding the Owner’s ability to make payment when due; or (3) a change in the Work materially changes the Contract Sum. If the Owner fails to provide such evidence, as required, within fourteen days of the Contractor’s request, the Contractor may immediately stop the Work and, in that event, shall notify the Owner that the Work has stopped. However, if the request is made because a change in the Work materially changes the Contract Sum under (3) above, the Contractor may immediately stop only that portion of the Work affected by the change until reasonable evidence is provided. If the Work is stopped under this Section 2.2.2, the Contract Time shall be extended appropriately and the Contract Sum shall be increased by the amount of the Contractor’s reasonable costs of shutdown, delay and start-up, plus interest as provided in the Contract Documents.

§ 2.2.3 After the Owner furnishes evidence of financial arrangements under this Section 2.2, the Owner shall not materially vary such financial arrangements without prior notice to the Contractor.

The 2017 A201 also added Section 2.2.4, which puts the burden on the owner to designate the financial information furnished under Section 2.2 as confidential. As it is likely that all of the information required by Section 2.2 is confidential, it makes more sense for such information to be automatically designated as such instead of requiring some sort of affirmative action by the owner. Proposed revisions to address this reality are:

§ 2.2.4 Where the Owner has designated All information furnished under this Section 2.2 shall be deemed as “confidential,.” Tthe Contractor shall keep the information confidential and shall not disclose it to any other person. However, the Contractor may disclose “confidential” information, after seven (7) days’ notice to the Owner, where disclosure is required by law, including a subpoena or other form of compulsory legal process issued by a court or governmental entity, or by court or arbitrator(s) order. The Contractor may also disclose “confidential” information to its employees, consultants, sureties, Subcontractors and their employees, Sub-subcontractors, and others who need to know the content of such information solely and exclusively for the Project and who agree to maintain the confidentiality of such information.

Though the 2017 version of Section 2.2 includes a number of changes, it – like the 2007 version before it – remains a provision requiring modification by owners and developers. Consulting a construction attorney regarding modifications to this provision is advised.

B. Section 8.3.1 Delays and Extensions of Time

While only a small change to a provision that is regularly modified during negotiations of an AIA contract, the 2017 revision to Section 8.3.1 allows the architect to extend the contract time, for “other causes the Contractor asserts” without a change order. Though a change order was required in prior versions, 2017 version eliminates the requirement. It is unclear, based on other provisions of the contract, how the architect can order an extension of time without agreement of the owner in a change order. This revision creates a significant ambiguity in determining contractor’s entitlement to extensions of time instead of a clarification. Given the ambiguity, it is important to discuss the potential consequences of the 2017 revision to Section 8.3.1 with a construction attorney before agreeing to be bound by this provision as drafted.

The other revision to Section 8.3.1 which is of particular concern for owners and developers is the contractor’s ability to seek an extension of time for “other causes that the Contractor asserts.” Such language opens the door for the contractor to claim an extension of the contract time for any reason – even if such delay is caused by contractor. Significant modifications to Section 8.3.1 are necessary to protect owners and developers from the risks imposed by the 2017 revisions to Section 8.3.1.

C. Revised Article 11 and New Exhibit A for Contractor’s Insurance and Bonds

The provisions of Article 11 of the 2017 A201 have been significantly reduced as a result of the inclusion of a separate insurance exhibit to the owner/contractor agreement, whether the AIA A101 or A102. The 2017 A201 seems to recognize that most parties to an AIA agreement drafted their own separate insurance exhibits instead of relying on the insurance requirements set forth in Article 11 of the 2007 A201. All contractor insurance and bond requirements set forth in the former Article 11 have not only been moved to the exhibit to the owner/contractor agreement, but have been revised to provide greater specificity of types of coverages and requirements for the contractor’s insurance coverage. The provisions remaining in Article 11 primarily govern the owner’s requirements for insurance coverage such as the owner’s obligations to procure loss of use insurance, property insurance and requirements for settling claims under the owner’s property insurance, and standard waiver of subrogation provisions. Though the newly AIA created insurance exhibit provides additional detail, it is likely that parties will revise such exhibit to reflect project-specific needs or continue to use their own separate insurance exhibits.

D. Section 14.4.3 Termination for Convenience

Section 14.4.3 of the AIA 2017 A201 provides that upon owner’s termination for convenience, the owner shall pay the contractor a “termination fee” as set forth in the owner/contractor agreement. In contrast, the 2007 version of Section 14.4.3 provided that upon termination for convenience the owner shall pay the contractor “unearned profit on the work not executed,” language typically deleted by owners. It is likely that the 2017 A201’s “termination fee” language will also universally be deleted by owners.

The termination fee referenced by the 2017 A201 requires the owner and contractor to agree upon and insert a fee in the owner/contractor agreement in the event of owner’s termination for convenience. Essentially the AIA is asking an owner to determine an amount of additional fee it will pay to the contractor in the event the owner terminates for convenience. Considering termination of a contract is a radical remedy – even termination for convenience — it is hard to believe that an owner would be inclined to agree to a “termination fee” at the beginning of a project – at a time when the owner has no plans to terminate the contractor, whether for convenience or cause. Typically, owners lose time, money and quality in any termination, so paying a termination fee when the owner decides it needs to walk away from the contract is not something an owner would typically accept.

The AIA provides no guidance as to how the parties should calculate such termination fee — is the termination fee 50% of the remaining unpaid fee at termination or 25% of the remaining unpaid fee if the project is terminated at 25% completion? It is unclear how the parties negotiating a contract are to determine what this amount should be.

We would recommend that Section 14.4.3 be modified to delete references to the termination fee and clearly delineate payment to the contractor upon a termination for convenience. Potential revisions include:

§ 14.4.3 In case of such termination for the Owner’s convenience, the Owner shall pay the Contractor solely for Work properly executed and costs directly incurred by reason of the termination. including costs attributable to termination of Subcontracts. and the termination fee, if any, set forth in the Agreement

The newly revised language entitling contractor to a termination fee upon termination of the contract for convenience will likely be as universally deleted as contractor’s entitlement to unearned profit and overhead in the 2007 AIA A201.

II. Additional Revisions to the 2017 AIA A201

In addition to the revisions set forth above, the following supplemental changes have been made to the 2017 AIA A201. These revisions do not necessarily impact owners and developers from a risk standpoint, but they do govern certain procedures on a project.

A. Section 1.7 Digital Data Use and Transmission and Section 1.8 Building Information Models Use and Reliance

Sections 1.7 and 1.8 mandate the use of agreed-upon protocols to govern the parties’ use of digital data and building information models (BIM). The 2007 AIA A201 only required that the parties “endeavor” to create protocols for use of digital data. These supplemental provisions reflect the differences in development since 2007 and underscore owners’ and contractors’ reliance and increased use of electronic forms of the instruments of service and models to develop and construct a project.

B. Section 3.10.1 Contractor’s Construction Schedules

Section 3.10.1 of the AIA 2017 A201 supplements the 2007 version of the AIA A201 by requiring the contractor’s construction schedule to include certain scheduling details, specifically:

“(1) the date of commencement of the Work, interim schedule milestone dates, and the date of Substantial Completion; (2) an apportionment of the Work by construction activity, and (3) the time required for completion of each portion of the Work.”

While these additional scheduling requirements increase the detail of a contractor’s schedule, the provision lacks key elements of the construction schedule upon which owners and developers rely. For example, Section 3.10.1 does not require the schedule to be a contract document, does not require the contractor to indicate the critical path of the schedule, does not provide for agreement on a scheduling software, and does not require the contractor to agree to provide the construction schedule and updates to the schedule in native and electronic form.

C. Section 9.6.8 Subcontractor Lien Claims and Section 9.10.2 Final Payment

Unlike many of the provisions listed above, the addition of Section 9.6.8 and certain terms in Section 9.10.2 provide additional protections to owners and developers under the 2017 AIA A201.

The 2017 AIA A201 adds Section 9.6.8 which requires the contractor to defend and indemnify the owner from lien claims or substitute a surety bond for the lien claim if the owner has fulfilled its payment obligations under the contract. Because the AIA has added Section 9.6.8 to the 2017 A201, owners will no longer need to add such requirement to protect owners and developers from lien claims.

Section 9.10.2 adds a requirement that the contractor provide the owner with “special warranties, such as manufacturer’s warranties, or other Subcontractor warranties” as a condition to final payment. While such requirements are typically inserted by owners and developers to this section of the A201, we would also recommend adding as a condition precedent to final payment the contractor’s provision of: “all operating manuals, parts lists, repair source lists; all permits, licenses, approvals, certificates, including, but not limited to, certificates of occupancy, and all other certificates and approvals required to lawfully occupy and operate the Project; and reports acceptable to Owner that all mechanical systems have been and are balanced properly and commissioned.”

While Sections 9.6.8 and 9.10.2 provide added protection to developers and owners, the document as a whole will still require significant modification to properly address developer and owner risks on a project.

III. Conclusion

Despite the analysis provided above, the AIA’s 2017 revisions to the A201 and the other AIA contract documents are really more subtle than drastic. Such evolution of the contract documents over the last 10 years is apparent in the increased focus on digital data and BIM protocols and the switch to an insurance exhibit instead of relying on Article 11 – an exhibit most owners and developers already created on their own to govern contractor insurance requirements.

For our owner and developer clients, one thing that has not changed with the 2017 version of the AIA A201 is that many of the risks can be addressed and better allocated if the document is negotiated before it is incorporated by reference into your contracts. As to when an owner can reduce the revisions to the AIA documents, that remains to be seem.

Watch Out Owners And Developers: The 2017 AIA Documents Are Coming To A Project Near You

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