The ABCs of AIA Contracts: Legal Considerations

Whether you love them, hate them or this is your first-time hearing of them, the AIA form document set, created by the American Institute of Architects (AIA), are the most widely used forms in the construction industry today. AIA construction documents were intended to ease contract negotiations and the compliance process. The purpose was to create a comprehensive set of standardized forms to ease the creation and management of various construction projects; yet, they can be tricky documents to negotiate as owners and contractors have different goals and can be overwhelmed with all the construction jargon.

This article aims to help owners familiarize themselves with the most important elements of the AIA construction documents, or what I fondly refer to as the “ABCs” of the AIA.

A: AIA Has Many Forms – What Type of Contract Do I Need?

The most common standard form of agreement between an owner and contractor is the A101, and it is based on a fixed price (which may change based on change orders – discussed below). For larger construction projects, when the basis of payment to the contract is the cost of the work plus a fee, the A102 and A103 are used. The A102 is a work contract with a Guaranteed Maximum Price (“GMP”), meaning the contractor agrees that the cost of the work and any additional fees due will not exceed a certain amount (the GMP). The A103 does not include a GMP and therefore the full contract sum will not be known at the start of construction.  Of course, knowing the GMP in advance of a construction project has a lot of benefits (including, without limitation, how it affects the project budget or any construction financing), but the A103 does require the Contractor to provide a “Control Estimate” and implement a cost control system to provide the owner with timely information on the total cost of work. Other than how the construction fee is determined, these forms are very similar to each other. The A201 is a companion document to the A102 and A103. Where the A102 and A103 will include specific details as to the project and agreement, the A201 includes more general terms and conditions applicable to all projects, such as Change Orders, Progress Payments and Substantial Completion. A big tip to any owner, no matter which form you use nor the size of the project, all these forms are negotiable, even if the contractor pushes against it.

B: But What Are Change Orders?

One of the most important terms in the construction industry (and of course in the AIAs) is the concept of Change Orders. A “Change Order” is a written agreement that either increases or decrease the Contract Sum (the total amount of money paid to the contractor for the cost of work, including all necessary items and services plus a contractor fee) or extends or reduces the Contract Time (the time period allotted for Substantial Completion (more on this later) of the work, including authorized adjustments), or both. The need for a Change Order can be owner or contactor caused, often due to an unforeseen event that is typical with larger construction projects. For an owner to mitigate risk associated with Change Orders, they  should negotiate as many consent rights with respect to Change Orders as possible. Especially if there is construction financing involved, it is imperative an owner has the right to consent because in the construction loan agreement, if the Change Order leads to a significant increase in project costs or delays the project schedule; the Change Order may require construction lender consent as well.  Additionally, an owner will want the construction contract to clearly outline the Change Order process, including requirements for documentation (requiring contractors to submit detailed Change Order requests with clear justifications), approvals required and cost calculation methods.

An owner should also be familiar with the concept of Allowances. A construction “Allowance” is a set amount of money to cover the cost of certain items or services when the exact price is unknown, such as for specific materials or appliances that could increase in price. Like Change Orders, an owner will aim to negotiate as much authority as possible over the contractor’s use of Allowance money.

C: Contractors Need to be Paid

For owners, the least fun part of construction is paying for it. Most of the time, for larger projects, contractors do not receive a single, lump-sum payment. Instead, a construction contract will break the full contract value into a clear payment schedule outlining amounts and due dates tied to specific phases of the project, which are known as “Progress Payments.” The goal of Progress Payments is to ensure there is a system for payment through the life of a project, ensuring that the contractor gets paid as work progresses and that the owner is allowed to monitor such progress. Payments can be based on a monthly schedule or at certain percentages of completion. The more detail required from a Contractor when they submit an “Application for Payment” (the formal request from a contractor to an owner for payment based on the schedule), the better it is for the owner; owners should strive to outline any expectations for the Application for Payment in the construction document. Typically, the Application for Payment will involve such details as the work performed, the value of the work, materials supplied, the amount due and any retainage (or holdback of a portion of a contractor’s payment until a project is complete) that the owner is withholding. Especially when there is construction financing (but ideally for any project), the owner will want to make sure any documentation due under the construction loan agreement is also required from the contractor under the construction contract, such as unconditional lien waivers and releases of liens for the current Application for Payment from the contractor and subcontractors.

D: Do you Know All Construction Will Come to an End?

Despite any bumps along the way, the goal of all AIAs is to create a path to a finished project. When a project can be occupied and utilized for its intended use by the owner, the project has achieved a milestone known as “Substantial Completion.” When a project achieves Substantial Completion, this also triggers the transfer of responsibility for the project from the contractor to owner (such as utilities, maintenance and insurance). To mitigate any liability risk, when reviewing the draft AIA, the owner will want to ensure that the contractor cannot cut any corners towards Substantial Completion, as once achieved there will be only an agreed upon “punch-list” or list of minor tasks or imperfections (key word being minor) that the contractor needs to fix before a project is considered complete. Therefore, the more detailed the requirements are for a project to be considered substantially complete, the better. Substantial Completion is the most critical milestone in the overall project, as it has the potential to affect other areas of overall project management (perhaps a lease rent commencement date with a tenant, delayed submission of an application for permitting requirements or Certificate of Occupancy, or breach a covenant in a loan agreement). If there are any unforeseen or extraordinary events that could impact such Substantial Completion, this is known as “Force Majeure” (the Covid-19 Pandemic comes to mind). It is critical to ensure that the construction contract has clear language that determines how a Force Majeure event impacts the Substantial Completion date and the process for how a contractor can claim additional time.

E: Efficiency is Always the Goal

While AIA forms may have greatly simplified the drafting aspect of a construction contract, it is still important that owners know their ABCs of the AIA to be able to timely and efficiently negotiate, to get contractors under contract and, most importantly, to get contractors on site working. Consulting with legal counsel to ensure their interests are protected is always recommended.

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