Move Over AIA: There’s a New Standard Form Construction Contract for Owners and Developers

The Associated Owners and Developers (AOD) is a new standard form construction contract that promises to change dramatically the way the construction industry uses, negotiates and views standard form agreements. Known as the AOD 2002 Standard Form of Agreement Between Owner and Contractor for a Lump Sum (AOD Agreement), the AOD Agreement incorporates lessons learned from the past with a view towards the future.

Coming this fall, the Associated Owners and Developers (AOD) will release a new standard form construction contract that promises to change dramatically the way the construction industry uses, negotiates and views standard form agreements. Known as the AOD 2002 Standard Form of Agreement Between Owner and Contractor for a Lump Sum (AOD Agreement), the AOD Agreement incorporates lessons learned from the past with a view towards the future. “We took a hard look at the provisions in the other standard agreements, and asked how they could be improved to promote the project and better preserve the interests of the owner,” said Harvey L. Kornbluh, Chairman and CEO of the McLean, Virginia-based AOD. “We then set out to draft an agreement that was concise, plainly written and fundamentally fair to all parties while being innovative and well-supported by legal precedent.”

To oversee the development of the AOD Agreement, AOD formed a contracts committee consisting of key representatives from DuPont, Mercedes-Benz, Intel, Princeton University, Home Depot, Marriott Hotels, Sun International, Flour City International, Marsh, Inc., Clark Construction Group, Tishman Realty & Construction, Georgia-Pacific Corporation, and The Trane Company. Ira Genberg, head of Smith, Gambrell & Russell’s construction law and litigation practice group, served as the committee’s chair and led the drafting effort.

The result is an equitable, comprehensive agreement that provides common-sense solutions to issues typically encountered on construction projects. Key features include:

  • balanced provisions with a unique “success of the project” focus;
  • an innovative menu system to customize the agreement; and
  • essential terms and general conditions in a single-document format.

LEVELING THE PLAYING FIELD

Before the AOD’s inception, owners and developers lacked a strong, unified national presence. Consequently, they had no meaningful representation in the alliances that produced many of the standard agreements used in the industry. With time, many owners and developers came to believe that those agreements were not always designed to fairly address their interests.

This fact may best be illustrated by the controversial decision of the American Institute of Architects (AIA), in tandem with the Associated General Contractors of America (AGC), to include a mutual waiver of consequential damages in its standard form agreement, AIA Document A201-1997. The AGC did the same for its family of documents.

To put this in context, claims for construction damages are often broken down into direct damages and consequential damages. Courts historically had awarded owners consequential damages for delays caused by contractors, usually through liquidated damages. Importantly, consequential damages often represented the only meaningful damages an owner would incur. Courts traditionally did not allow contractors to recover most types of consequential damages.

Both AGC and AIA standard agreements now require both the owner and contractor to waive consequential damages. As a result, the owner’s damages are limited to the less meaningful direct damages. The contractor’s damages are not proportionally restricted, however. Both AIA and AGC standard agreements give the contractor the right to seek damages for field office overhead, general conditions costs, subcontractor delay costs, labor and material escalations, loss of productivity, and the like. Hence, through a mutual waiver of consequential damages, the owner gives up its chief source of damages. The contractor does not. The contractor merely foregoes something it traditionally had not been allowed to recover while maintaining a significant avenue of recovery.

The AOD Agreement aims to resolve these types of inequities. In the instance above, the AOD agreement gives the parties control over the treatment of consequential damages. Through a menu of choices, the parties can decide between provisions providing for no waiver, a mutual waiver, or a unilateral waiver of consequential damages. The parties also may include consequential damages in a liquidated damages provision, irrespective of whether they choose to waive or allow consequential damages.

PUTTING THE PROJECT FIRST

Seeking a fair balance of interests, the AOD Agreement gives more weight to the interests of the project than the interests of any particular party. “Each provision was drafted to promote the project’s success, while balancing the interests of the parties,” said Kornbluh.

The AOD’s focus on the all-around success of the project represents an innovative departure from the self-serving ideology of some conventional standard agreements. For example, AIA Document B141-1997 revokes the owner’s license to use the architect’s plans if the architect is terminated for default. The license is reinstated only after a court or arbitrator determines that the architect was in default.

No matter how egregious the architect’s behavior, an owner’s unauthorized use of the plans before or during the pendency of the arbitration or litigation likely will infringe the architect’s copyright and subject the owner to damages. As a result, the owner must shut down the project, infringe the architect’s copyright, or attempt to resolve the dispute with the architect who is holding the plans hostage.

Many owners believe that an architect’s interests can be adequately protected without revoking the license to use the plans. Returning the parties’ focus to the project, AOD recommends that the architect grant the owner a limited, non-revocable license. If the owner is in default, the architect still can recover monetary damages and perfect his lien rights, irrespective of the architect’s copyright, allowing the architect to protect his right to payment without significantly impacting the project.

GENERAL INNOVATIONS

The Menu System

The AOD Agreement’s menu system represents an innovative approach to contract drafting. Early in the process, the AOD Agreement’s drafters recognized that a truly superlative standard agreement must be flexible enough to meet the needs of the parties and the project, yet comprehensive in scope. To achieve this result, AOD added a menu system that provides users with a choice between alternate provisions for some of the more commonly negotiated and modified contract terms. Reducing the use of nonstandard language and the time spent negotiating terms, the menu system allows the user to review several alternate provisions, and select the provision that best suits the user and the project. The menu system also provides a default if no particular provision is selected. – Menu choices cover such common topics as:

  • dispute resolution;
  • damages;
  • waiver of damages;
  • claims procedure;
  • time of performance;
  • document review;
  • retainage; and
  • indemnification.

Single Document

The AOD Agreement offers a second, simple improvement over traditional forms: it is a single document. AOD found that the two-document system — agreement and general conditions — tends to create confusion and conflict. For example, it is not uncommon for one or both parties to a standard agreement to fail to realize that the agreement they signed incorporated a second, separate set of general conditions or for a party to add language to one document without realizing that the same issue is addressed by the other. The AOD Agreement’s single document system sidesteps these and related problems altogether.

SPECIFIC ADVANTAGES TO THE AOD AGREEMENT

Managing Claims

Many owners believe that existing standard agreements have weak notice and claims procedures. These procedures typically foster misunderstandings, ignore the possibility of mitigation, and delay resolution of claims. For example, AGC Document No. 200 requires “prompt written notice to the Owner of the cause of [any] delays after the Contractor first recognizes the delay.” This provision provides little guidance since it fails to specify when notice is “prompt” and provides no objective standard to determine when the contractor “first recognizes” a delay.

Similarly, AIA Document A201-1997 requires the initiation of a claim within 21 days of the occurrence of the event or the claimant’s first knowledge of the condition giving rise to the claim, whichever is later. The contractor is not obligated to actually make the claim or provide essential facts relating to the claim within any particular time.

These procedures breed adversity and misunderstanding because claims are often made too late to avoid, mitigate or monitor their impact. The claimant believes it is entitled to reimbursement for costs already incurred while the non-claimant believes it was denied an opportunity to investigate the claim and decide how best to manage it.

The AOD Agreement provides a clear procedure for making claims when they occur, requiring early and full disclosure of all facts relating to such claims, cooperation among the parties to avoid or mitigate the impacts of a claim, and prompt resolution of all claims. Processing claims as they arise allows for a more focused and accurate evaluation of the claim’s merits. As a result, the parties treat the claim as a common enemy to conquer rather than a question of entitlement, making it easier to mitigate or resolve the issue before it grows out of control.

Claims for Force Majeure Events

Traditionally, neither party could recover damages for delays caused by events outside their control (i.e., force majeure) because, by definition, a force majeure event is a delay not attributable to either party. Some current standard form agreements have altered this conventional approach, however.

For example, AGC Document No. 200 now provides that the owner is responsible for paying the contractor’s actual costs, without fee, for any “delay in the progress of the Work caused by adverse weather conditions not reasonably anticipated, fire, unusual transportation delays, general labor disputes impacting the Project but not specifically related to the Worksite, governmental agencies, or unavoidable accidents or circumstances…”

The AOD believes that this new approach is unfair; the owner should not be required to pay for delays that are beyond its control or fault, costs not ordinarily covered by insurance. To remedy this inequity, the AOD Agreement offers a rational solution by providing the contractor with a time extension but no money damages in the event that the work is delayed by a force majeure event.

Contractor’s Use of Payments

The success of any project depends to a large extent upon the proper and timely disbursement of payments to those furnishing labor and materials. Delays in payment can result in abandonment of work, decreased productivity, increased claims, substandard work, and liens. Late payments also may damage the reputation of both the owner and contractor in the community where the project is located.

Many in the industry believe that the standard agreements being used today do not adequately ensure proper and timely disbursement of payments to subcontractors and materialmen. For instance, AIA Document A201-1997 permits commingling of funds, delayed disbursements and unresolved liens. AGC Document No. 200 addresses liens, but fails to include any time period for making payments to subcontractors.

The AOD Agreement reflects the belief that the project benefits significantly when payments are promptly made to all participants. Thus, the AOD Agreement requires that, absent good cause, the owner pay the contractor within an agreed-upon time and that the contractor pay its subcontractors within seven days thereafter.

Additionally, the AOD Agreement requires that the contractor hold payments in trust for the benefit of subcontractors, keeping funds identifiable to ensure that they will be used to satisfy project obligations before any other purpose. Although the AOD Agreement stops short of requiring contractors to segregate funds, this trust approach is designed to afford added protection to subcontractors in the event of a contractor’s bankruptcy.

Finally, the AOD Agreement provides a procedure that allows an owner to withhold payment from the contractor and, upon notice to the contractor, to pay subcontractors by direct or joint payment if the contractor becomes unwilling or unable to make timely and proper subcontractor payments.

Separate Contractors

Projects where multiple prime contractors join forces are becoming more commonplace, and for good reason. This arrangement often allows a project to be completed faster through the combined efforts of several prime contractors who individually may lack the size or expertise to perform the entire scope of work alone. Disputes between the owner’s separate contractors can arise, however, due to lack of coordination, congestion and many other factors.

To address this common problem, the AOD Agreement departs from conventional standard form agreements by providing for direct arbitration between the separate contractors. Now, one contractor can resolve a dispute with another without involving the owner.

A NEW STANDARD FOR THE 21ST CENTURY

The AOD Agreement promises to offer an innovative solution to those in the construction industry who believe that the focus of a construction contract should be on the project, rather than the individual team members. Kornbluh has no doubt that it will be well received. “For the past several years, AOD has worked hard to create a unique agreement that balances the interests of everyone in the construction process. Our organization firmly believes that the construction industry will soon see the AOD Agreement as advanced, effective and fair, and embrace it as an important new standard.”

Demanding a Seat at the Table

Professional and trade organizations like the American Institute of Architects (AIA) and the Associated General Contractors of America (AGC) have shaped the standard form agreements predominantly used in the construction industry. Well organized and funded, these groups also effectively promote the interests of their members. Traditionally, owners and developers lacked a similar, unified voice.

That is, until the formation of the Associated Owners & Developers (AOD). Organized in 1994, the group has brought together construction owners and developers, and provided a forum through which they can share information, monitor trends and speak out collectively on issues relevant to their businesses. “In the past, owners and developers as a unit were unrepresented at the construction industry table. AOD sought to change that,” says Harvey Kornbluh, AOD’s Chairman and CEO.

After a number of successful years, the group is ready to roll out its first standard form construction agreement, the AOD 2002 Standard Form of Agreement Between Owner and Contractor for a Lump Sum. Kornbluh promises that others will follow shortly. “AOD’s lump-sum agreement is the first in a line of standard agreements AOD believes will change the way the construction industry does business.”