Millis: Time’s up: AIA retires 2007 contract forms, makes key changes

Millis

By Matthew B. Millis

Commercial construction lawyers use American Institute of Architects (AIA) forms more than any other. Every 10 years, the AIA updates its contract documents to reflect legal trends and changes in the industry. Despite the AIA issuing its 2017 updates last April, I continue to see owners, contractors, architects and lawyers using the old 2007 AIA documents. If you are one who has waited to make the switch to the 2017 forms, your time is up.

After Oct. 31, the AIA software will no longer allow users to create or finalize many of its most commonly used 2007 forms, including the A101 and A102-2007 Owner-Contractor documents, the A401-2007 subcontract and the B101 and B102 Owner-Architect documents. Users will still be able to use the A201-2007 General Conditions until May 31, 2021 (due to its reference in other forms that the AIA did not update in 2017, like the A133 and A134-2009 documents). However, if you use any of the other new 2017 forms, you will want to make the switch now to the A201-2017 to ensure your contract documents work harmoniously together.

A comprehensive review of the updates to the 2007 AIA forms is beyond the scope of this article. I offer instead the following six key takeaways from the 2017 updates to the A101 and A102 Owner-Contractor agreements and the A201 General Conditions.

Simplifying retainage: Retainage can be one of the more heavily negotiated issues in construction contracts, and an area that is ripe for dispute if the parties do not specify how they intend to handle retainage. The 2007 versions of the A101 (§§ 5.1.6-5.1.8) and A102 (§ 12.1.7) embedded retainage language into the calculation of progress payments. The 2017 updates now address retainage in an independent section that allows parties to specify the retainage amount, items excluded from retainage (such as material purchases, insurance, general conditions or fees), and how retainage may be reduced before or at substantial completion.

Insurance: One of the most significant changes to the Owner-Contractor documents is the addition of a new insurance and bonds exhibit. Whereas the AIA formerly buried insurance requirements in Article 11 of the A201 General Conditions, the vast majority of insurance provisions can now be found in this standalone exhibit. Check-the-box insurance options force the parties to carefully consider the specific insurance needs of their project and detail precisely what insurance the owner and contractor must provide under the contract. Segregating insurance requirements into a separate document gives the parties more flexibility to adapt their insurance needs for each project and eases the review of insurance requirements by risk managers and insurance brokers. It also recognizes the fact that many parties already created standalone insurance exhibits to accompany their AIA documents. Please note, however, that Article 11 of the A201-2017 General Conditions still contains some key insurance-related terms that would be applicable to most projects.

Termination fee: Since 1997, the AIA contract documents have granted the owner the extraordinary contractual right to terminate the Owner-Contractor agreement for the owner’s convenience. To prevent the contractor from losing the benefit of its bargain, the 2007 edition of the A201 General Conditions provided that, if the owner terminated the Owner-Contractor agreement for convenience, the contractor was entitled “to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.” Owners, however, frequently struck the language allowing for recovery of anticipated overhead and profit on unperformed work. Recognizing this industry trend, the 2017 Owner-Contractor agreements eliminate the contractor’s entitlement to lost overhead and profit on unperformed work. Instead, the agreements include a new fill-point provision prompting the parties to insert a negotiated “Termination Fee,” which is intended to liquidate the owner’s liability for the contractor’s lost overhead and profit on unperformed work.

Liquidated damages: Prior versions of the AIA contract documents contemplated that parties may include provisions addressing liquidated damages, cost savings or other early completion incentives. But the only prompt in the Owner-Contractor documents addressing liquidated damages or other incentives was buried within a parenthetical in the Contract Time article. The 2017 updates now include a specific fill point prompting the parties to consider including a liquidated damages provision. Notably, the updates do not provide standard language for liquidated damages or other incentives, meaning the parties must still draft and negotiate the specific language and details for their project.

Contractor’s construction schedule: The 2007 version of the A201 General Conditions required the contractor to submit a construction schedule not to exceed time limits under the contract documents, revised at appropriate intervals, related to the entire project and providing for expeditious and practicable execution of the work. These minimal standards would be insufficient for construction schedules on most commercial projects. Balancing the need for a detailed schedule with the ability to use the A201 on projects of varying complexity, the 2017 updates add the requirements that the schedule “contain detail appropriate for the Project, including (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.”

Lien waivers and removing lien claims: When an unpaid subcontractor files a mechanic’s lien, it can have devastating impacts on a construction project. To reduce the risk of mechanic’s liens, prudent project owners require lien waivers from contractors and downstream subcontractors and suppliers as a condition of payment. The 2007 AIA documents, however, did not expressly require the contractor to submit lien waivers with progress payment applications. The 2017 updates to the A201 General Conditions take several steps toward fixing this glaring oversight.

First, section 9.3.1 now states that progress payment applications shall be “supported by all data substantiating the Contractor’s right to payment that the Owner or Architect require, such as copies of requisitions, and releases and waivers of liens from Subcontractors and suppliers …” (emphasis added). Second, a new section 9.6.8 requires the contractor to indemnify and defend the owner from all loss, liability, damage or expense, including reasonable attorney fees, arising out of any claim brought for nonpayment by a subcontractor or supplier of any tier. This obligation, however, is only triggered if the owner has fulfilled its payment obligations to the contractor. Even with these changes, owners would be well-served to modify section 9.3.1 to expressly require conditional lien waivers from both the contractor and all downstream subcontractors and suppliers in connection with each pay application.

The AIA’s 18-month phase-in period for its 2017 forms has come to an end. If you have waited to make the switch, your time is up. The AIA’s changes may help minimize the need for revisions to owner-contractor documents, but contracting parties are still encouraged to consult with construction counsel to assist in evaluating the legal ramifications of the updates to these forms on their next commercial construction project.•

• Matthew B. Millis is a partner at Wooden McLaughlin LLP. Opinions expressed are those of the author.