New Contract Clauses

Before assuming this article does not apply to you, know that most every contracting business experiences a project dispute resulting in a loss of money. Performing on verbal agreements is a flat out no-no. It is the fastest way to join the work for free or at financial cost club. Another contract peril is a poorly written or unclear agreement. Contracts should contain clear terms describing scope, exclusions, payment, performance, working/site conditions, schedule, start/end dates, contract termination and owner’s rights, among other important provisions.

It is a good idea that at least some of the terms be defined so that an “external” person/party would clearly understand the agreement. Savvy businesses develop fair and reasonable boilerplate contracts with input from a competent legal advisor that may stand alone or amend an owner’s or general contractor’s agreement. Amendments, like additional work orders, must be binding and as relevant as the original document.

When contract terms do not follow industry “standards”, certain provisions may be less enforceable. Industry standards may also affect court or arbitration judgements. American Institute of Architects (AIA) model agreements contain many “standards”, however these instruments are often amended to favor the owner or general. It is worthwhile to stay up to date on AIA changes.

According to Dean W. Farley*, at the inception of a construction agreement, an owner and contractor endeavor to outline their respective rights and obligations during the course of a project. They do so with the expectation that a successful project lies ahead for both of them

Unfortunately, those in the industry know that not every project ends well. Parties to a construction agreement need to consider, in advance, what happens when a contract is terminated — and recent updates to an industry-standard construction document platform can help.

Key Updates to AIA Construction Document Platform

The American Institute of Architects (AIA) recently updated the 2007 version of its construction document platform, including a number of changes that have been incorporated into the new A201-2017 General Conditions of the Contract for Construction. Among the many areas in which the AIA made changes to the standard form document, one key provision addresses an owner’s right to terminate for convenience. The change to this termination right should help facilitate a broader discussion between contracting parties when analyzing their risks and costs in the event of an unplanned termination of a project.

Termination by the owner for convenience can become a messy affair. Under the A201-2007 document, the contractor was “entitled” to receive payment for work executed and costs incurred along with reasonable overhead and profit on the work. Contracts that utilized only the AIA default language exposed the parties to uncertain arguments regarding whether a contractor was entitled to receive payment and the determination of reasonable overhead and profit.

Costs of completed work, lost labor productivity, profit, claims preparations and settlement expenses are difficult to establish in the best of circumstances, but are especially problematic at the untimely conclusion of a project. The AIA updates seek to give the owner and contractor a new starting point that can help add certainty in the event of an owner’s termination for convenience.

Determining Costs Regarding Owner’s Termination for Convenience

The A201-2017 provides that in case of an owner’s termination for convenience, “the Owner shall pay the Contractor for Work properly executed, cost incurred by reason of the termination, including cost attributable to termination of the Subcontracts; and the termination fee, if any, set forth in the Agreement.” This default language provides a launching pad for owners and contractors to more clearly define costs related to an owner’s termination for convenience.

The A201-2017 says that owners shall pay for work properly executed, rather than that contractors are entitled to receive payment for work executed, a change that creates a presumption of payment by the owner rather than an entitlement for payment for the contractor. Parties should expect an increased focus on whether work was properly executed, as that language now provides the primary basis for an owner’s dispute.

Additional language includes costs attributable to the termination of subcontracts, which can sometimes be overlooked during the negotiation of a contract, and provides further relief for contractors from expenses that may not have been clearly defined at the time the owner and contractor executed their construction agreement.

The “termination fee” is a meaningful change and improvement in the default AIA A201 and provides the ability for owners and contractors to achieve a greater level of clarity for what used to be referred to as reasonable overhead and profit. Instead of disputes arising out of what is reasonable, the termination fee allows the parties to schedule termination expense as either flat fees for the entire contract or adjusted termination fees at certain project phases or milestones.

Projects with longer durations would benefit greatly from the certainty of termination fees that are greater at the commencement of the project and decrease at a defined rate or schedule as the project progresses.

Termination by an owner for convenience is never the anticipated outcome of a project, but the new default language in the AIA A201-2017 provides parties to a construction contract an improved starting point in which to address the problems that typically develop when a project unexpectedly ends. Unplanned terminations are difficult enough — disputes born from such terminations are even more challenging. A measure of planning by counsel, owners and contractors in regard to the risks and costs of termination for convenience pays dividends to all parties when the construction agreement fully addresses owner’s termination for convenience.

Written by Dean W. Farley – Special Counsel, Much Shelist

*Dean W. Farley is an experienced transactional attorney and litigator who helps a broad array of construction, real estate, manufacturing and other companies identify, pursue and achieve their strategic business objectives. He advises developers, investors, owners, tenants, investment funds, contractors and subcontractors, privately held and family-owned companies, and mid-sized corporations on matters ranging from construction financing, contracts and agreements to lease negotiations and real property acquisitions and sales.

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