Subcontract Changes are Coming Soon

Kegler Brown Construction Newsletter

AIA is preparing its revisions to most of its key contract documents for the first time in a decade. While these changes are not yet finalized, it is anticipated that the following changes will be featured:

  • Additional insured coverage will be required of contractors and subcontractors by virtue of the A201 general conditions.
  • There will be limitations on the contractor’s ability to request financial assurances from the owner.
  • The architect can be replaced by an Initial Decision Maker (IDM) who will act as a third-party neutral in disputes between the owner and contractor. Only if there was a demand within thirty (30) days could those decisions be “appealed” to mediation and ultimately arbitration or litigation. Otherwise, the decision of the IDM becomes FINAL.
  • Mandatory arbitration, in AIA documents since 1888, is out and the parties can elect arbitration or litigation by checking a box. If not, the “default” is litigation.
  • Owners will be able to inquire about the payment status of subs/suppliers, and make joint check payments if necessary.

The final AIA documents are expected to be released in the fall of this year.

In view of the proposed 2007 AIA revisions, including the revisions to the AIA A201 general conditions (which are incorporated by reference into the AIA A401), contractor and subcontractor groups are evaluating whether they want to continue to endorse the AIA A401 subcontract, which has been traditionally endorsed by ASA and ASC.

There is the likelihood that both contractors and subcontractors concerned about the inclusion of “additional insured” will choose not to utilize the AIA A401 form any longer. Some contractors and subcontractors believe that an additional insured requirement in effect mandates a broad form of indemnity, which many believe is unfair because it shifts the risk and cost of another’s negligence upon a non-negligent party or their insurer.

A coalition group called the Construction Industry Contracts Council (CICC), consisting of subcontractor, general contractor, owner and surety associations, including ASA, ASC, AGC, COA, CURT and other industry groups, is drafting its own contract documents, called ConsensusDOCS, which will be available later this year, together with the 2007 editions of the AIA documents.

ConsensusDOCS contain the following provisions favorable to subcontractors:

  • Sub is entitled to payment within seven (7) days after the contractor is paid. (“PAY WHEN PAID.”)
  • When the sub is not timely paid, the sub may stop work.
  • Conflicts between documents are construed in favor of the subcontract terms.
  • Indemnification is limited to the sub’s negligence.
  • Review of plans/specs does not imply constructability.
  • Unconditional lien waivers are prohibited.
  • Liquidated damages are limited to the sub’s actual responsibility.
  • Arbitration must take place where the project is located.
  • Sub is not required to indemnify the contractor’s willful and repeated safety violations.

Some of the differences that ConsensusDOCS believes make their forms superior to AIA (2007) are the following:

  • Options for dealing with the additional insured dilemma.
  • Right of the contractor to request evidence of project financing before starting work and during the project.
  • No Initial Decision Maker (IDM) (which could lead to inadvertent waiver of claims), but instead direct discussions between company representatives.
  • The requirement of choosing arbitration or litigation by checking a box (AIA’s “default” is litigation if no box is checked).

The effect of these contract document changes on the construction industry remains to be seen, but end-users will have greater choice in selecting a form contract document that works best for them.