Real Estate and Construction Newsletter - October 2018

by Barley Snyder
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When One Door Closes …

How the 2017 Changes to the AIA Construction Contract Documents May Affect You: Part 3

NewsletterBy: Reilly Noetzel
 

Editor's note: This article is the third part of a three-part series addressing the American Institute of Architect’s (AIA) 2017 changes to its contract forms. The first and second articles in the series addressed various changes to the Owner-Contractor and Owner-Architect contract forms. This article will highlight the significant changes to the AIA Contractor-Subcontractor contract form, the A401.

October 31 is an important date in the construction industry.

That is when the 2007 versions of many AIA forms will no longer be available on the AIA software platform, meaning it will be crucial for contractors, architects, design professionals, suppliers, and others in the construction industry to become familiar with the 2017 AIA contract changes.

Not all AIA forms have been updated with the 2017 revisions, but many have. Below are the major changes to the A401 – 2017 “Agreement Between a Contractor and a Subcontractor” (the AIA form subcontract):

1. New Representations and Warranties of Subcontractor

New language has been added to the AIA form subcontract that includes certain representations and warranties made by the subcontractor when submitting shop drawings, product samples, and other submittals. The subcontractor in producing and submitting these materials is representing and warranting that it has read and approved the materials, verified the materials used and other construction criteria and has ensured the submittals match the requirements of the work to be performed under the prime contract. This new provision shifts the risk of any deficiencies in the subcontractor’s submittals to the subcontractor. Additionally, the new A401 requires all material, equipment and special warranties to be issued or transferrable to the owner – a change that may owners have already been adding to the prior version of the A401.

2. Prohibition Against Certain Professional Services

The AIA appears to have addressed the unauthorized practice of professional services among subcontractors. It’s added a provision to the form subcontract that prohibits subcontractors from rendering services that constitute the practice of architecture or engineering. The language also protects the subcontractor from being required to provide any professional services in violation of applicable law and from being asked to perform outside the scope of its contractor’s license. It also limits liability of the subcontractor in undertaking its duties set forth in the subcontract, which better allows the subcontractor to rely on the accuracy of performance and design criteria received from the contractor.

3. Termination for Convenience

Where an owner terminates the prime contract for convenience, the subcontractor is still given the right to receive reasonable overhead and profit on work not executed, in addition to other costs incurred as a result of the termination. However, the A401 now clarifies that in the event of an owner’s termination for convenience, the subcontractor is only entitled to payment for work properly executed. This means that a subcontractor may not be paid for deficient work post-termination.

4. Changes in Contract Time and Contract Sum

The new A401 requires adjustments to the contract sum and contract time for delays, interruption, or suspension. While the old form permitted, but did not require, adjustments to the contract sum for delays, interruption or suspension to include profits on increased costs of work, the new A401 mandates these items be included in the adjustment.

5. Simplified Date and Payment Options

The A401-2017 includes more detailed computation formulas for calculating progress payments and retainage. The formulas are generally clearer and more user-friendly than the prior version. In addition, the new A401 allows users to select from several commencement dates and substantial completion date options. While there is still the option to fill in an alternative provision not listed, the menu of options is designed to encourage parties to agree on a definitive date or timeframe.

6. Insurance

The A401-2017 contains more detailed insurance limit and coverage thresholds. One important change is that the subcontractor’s additional insured coverage must be primary and non-contributory to any of the contractor’s general liability policies and apply to ongoing and completed operations. The subcontractor is required to procure additional insured coverage that meets specific thresholds set by Insurance Services Office Inc, if that coverage is available. The changes to the insurance provisions in the A401 suggest that the AIA drafters intend to reallocate risk among the contractors, subcontractors, and owners of a project to especially make sure the insurance protections flow down at each tier of a project. The new insurance provisions also allow the contractor to suspend the work if there is a lapse of insurance coverage carried by the subcontractor.

7. Addressing the Use of Building Information Models (BIM)

As with the A101 and A201 forms, the new A401 contains a provision related to use of and reliance upon BIMs as well as electronic transmission of data. Just like in the A201, the A401 now requires the contractor and subcontractor to agree upon “protocols governing the transmission and use of” digital information. This provision also references AIA E203, the BIM and Digital Data Exhibit, as the appropriate means to establish such protocols. Use or reliance upon BIMs without any set protocols in the AIA contract documents or in the AIA E203 is done at that party’s sole risk. If the parties are not agreeing to set such protocols, they may wish to remove this risk-assumption provision.

8. Use of Contractor’s Equipment

The A401-2017 imposes a standard that the contractor’s facilities and equipment is generally not available for use by the subcontractor unless the contractor agrees and approves the terms of the use. There is a space to add exceptions where the subcontractor may use the contractor’s facilities and equipment without approval from the contractor. Parties should consider adding exceptions to this provision.

9. General Indemnity Clause

The AIA drafters have added a general indemnity clause to the A401 that requires the subcontractor to indemnify the contractor and owner from all damages, losses, and liabilities resulting from a lien or payment claim by any sub-subcontractors, suppliers or vendors. This is a broad indemnity clause and would apply to most situations where a subcontractor has failed to pay someone else for supplies or work rendered. The main exception to this indemnity clause is that it does not apply if the contractor has failed to pay the subcontractor for the subcontractor’s work.

It is important for contractors and subcontractors to be aware of the changes to the A401-2017 and to ensure the terms of their prime contract account for these changes. In case there are discrepancies among the terms of the prime and subcontract, it is always important to include a “flow-down” clause or otherwise state how gaps or conflicting provisions are handled.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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