For larger jobs, whether a new house from the ground up or a major renovation, a one- or two-page proposal is not adequate. Many large jobs are done on the basis of a one- or two-page proposal, but that is a very risky proposition. If things go badly due to substandard work, excessive delays, cost overruns, disputes over what exactly the contractor has agreed to do for how much money, or any of the myriad things that can lead to disputes, then you will have little documentation to rely on to sort things out.
In reality, both parties are at greater risk without a good contract – the contractor is at risk of not getting paid for work completed and the owners are at risk of not getting the work they expected at the price they agreed to. Without clear guidelines, both parties are at greater risk of small disputes spinning out of control and leading to larger disputes and possibly lawsuits – always the worst, most expensive, most stressful way, and slowest way to resolve a problem.
Again, using one of the standard industry contracts has the benefit that it has been honed over the years and tested in court. Also, these are readily available for a modest fee and can be adapted to your specific project easily enough. It bears repeating that the ones written or furnished by contractor organizations, like the AGC (Associated General Contractors of America) tend to favor the contractor, whereas the contracts provided by the AIA (American Institute of Architects) are more protective of the owner’s interests.
If you have hired an architect to handle contract administration, he or she will most likely recommend an AIA contract for your job. AIA (American Institute of Architects) publishes a wide range of contracts for small, medium, and large projects and for a variety of contract types, including fixed-price, cost-plus, and design-build. The contracts most commonly used on residential projects are listed in the table below. They are available in hard copy or electronically from the American Institute of Architects. Editable text versions of AIA-type contracts can be also be downloaded from PEM Software Systems.
Standard forms A101, A102, and A103 are overkill for most residential projects. The short-form A105 is suitable for small and moderate-sized projects with a fixed price. Work done on a time-and-materials basis can be covered using the somewhat more detailed form A107. Form A107 also contains provisions for dispute resolution that are lacking in A105. Given today’s litigious world, A107 might be a better choice for a job involving large sums of money.
The construction manager contracts A132 and A133 are complex because they address the responsibilities of the owner, architect, contractor, and construction manager, and the complex relationships between them. Perusing these contracts may make you think twice about hiring a construction manager.
COMMONLY USED AIA CONTRACTS
|Contract Number||Contract Name||Length||Used for|
|A101-2007withA201-007||Standard Form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sum||A101: 7 pagesA201: 40 pages||Large or complex fixed-price projects. Used with A201, which contains the General Provisions|
|A102-2007||Standard Form of Agreement Between Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed Maximum Price||A102: 14 pagesA201: 40 pages||Large cost-plus (time-and-materials) projects with a guaranteed maximum. Used with A201.|
|A103-2007||Standard Form of Agreement Between Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee without a Guaranteed Maximum Price||A103: 13 pagesA201: 40 pages||Large cost-plus (time-and materials) projects without a guarantee maximum. Used with A201.|
|A105-2007||Standard Form of Agreement Between Owner and Contractor for a Residential or Small Commercial Project||11 pages||Small to medium-sized fixed-priced projects|
|A107-2007||Standard Form of Agreement Between Owner and Contractor for a Project of Limited Scope||26 pages||Medium to large projects, either fixed-price or cost-plus with or without a guaranteed maximum.|
|A132-2009withA232-2009||Standard Form of Agreement Between Owner and Contractor, Construction Manager as Advisor Edition||A132: 13 pagesA232: 41 pages||Projects where a construction manager assists the owner as an advisor. Either fixed-price or cost-plus.|
|A133-2009with A232-009||A133TM 2009 Standard Form of Agreement Between Owner and Construction Manager as Constructor where the basis of payment is the Cost of Work Plus A Fee with a Guaranteed Maximum Price||A133: 18 pagesA232: 41 pages||Projects where the construction manager also acts as the general contractor. Pricing is cost-plus with a guarantee maximum.|
|A141-2004||Standard Form of Agreement Between Owner and Design-Builder||10 pages||For design build projects for a fixed-price or cost-plus with or without a guaranteed maximum.|
In general the AIA contracts are very favorable to the owner. In fact, some contractors are not too happy about working with an AIA contract. However, contractors who are accustomed to architectural projects are used to this and it should not be a problem for them.
Not surprisingly, AIA contracts are also favorable to the architect. For example, the burden of finding errors, omissions, code violations, etc., in the plans and specifications falls mainly on the contractor, not the architect. For example, Section 3.2.2 of AIA201 states that the “Contractor shall, before starting each portion of the Work, carefully study and compare the various contract documents….take field measurements of any existing conditions… and promptly report to the Architect any errors, inconsistencies or omissions…”
And although you may be paying the architect to oversee the construction, the AIA 107 contract states that “the Architect will not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the Work” and that “The Architect will not be responsible for the Contractor’s failure to perform the Work in accordance with the requirements of the Contract Documents.”
Revising AIA Contracts. The AIA contracts assume that you have hired an architect to design the project, administer the contract, and supervise the construction. If you are not using an architect for contract administration or supervision, then you’ll need to modify the contract to use it. Assuming you are not using a construction manager, then the responsibilities assigned to the architect generally revert to you, the owner. So one approach is to substitute “owner” or “architect” where appropriate. Alternately, you can add an addendum that makes the changes by referring back to these clauses. Don’t get too creative, however, or you may inadvertently change the substance of the contract, defeating some of the value of using a well-established contract accepted by the building industry and the courts. If you’re not comfortable messing around with contract language, you can always run the changes by a lawyer with experience in construction contracts.
Some contractors are very accustomed to working with architects and long, formal contracts; others aren’t and may be scared off or will raise their prices for what they expect will be a more demanding and difficult process. Depending on the size of the project, the level of trust you have in your contractor, and your budget, you will have to decide on the best strategy. But whatever way you go, make sure you use a written contract that covers the key issues relevant to your project.
OTHER STANDARD CONTRACTS
The AGC (Association of General Contractors) publishes a series of standardized contracts similar to AIA’s. NAHB (National Association of Homebuilders) does not publish its own contracts, but sells a book of contract forms developed and used by its members, called Home Builder Contracts & Construction Management Forms. In general contracts provided by a contractor’s organization will be tipped to a greater or lesser extent toward the contractor, but some are reasonably well balanced.
The important thing is to actually read the contract to see if it contains any key clauses that could come back to haunt you. Comparing the contract to an AIA contract can help you identify any potential sticking points. Also refer to the section on Red Flag Clauses to see where the contract might come back to bite you.
DRAFTING YOUR OWN CONTRACT
While there are advantages to using well-established contracts widely accepted by the building industry and courts, especially for large, expensive, and complex projects, drafting a contract from scratch is also acceptable. To save money, you can do this on your own and have a lawyer review it. The most common approach is to borrow and adapt clauses from other contracts to suit your own needs. While there are specific legal phrases that should be used where relevant, as their legal meaning is well established ( for example, “substantial completion,” “time is of the essence,” “workmanlike manner”), in most cases clear and precise plain language will accomplish the task of creating a binding and enforceable agreement.
The BuildingAdvisor Model Construction Contract is a good place to start since it was drafted by a construction attorney specifically to protect the homeowner in medium to large-size projects.
Since the contract’s main function, in most cases, is to provide all the participants with a clear roadmap for the project – a plain-language, commonsense document may do a better job than a long-winded contract full of legalese that neither party fully understands. If a contract covers the important issues, and both parties understand the meaning, it will serve the purpose of guiding the project from start to completion. By providing a clear roadmap, a good contract helps prevent disputes and lawsuits.
In creating your own contract, make sure it is compliance with state law. Also make sure it covers the key items that any construction contract should address. A quick review by a lawyer will buy you some peace of mind that you have a covered all the important bases.’
Issues to consider in drafting your own agreement include:
Ambiguous contract language: In the unlikely event of a major dispute or lawsuit, a clearly written, plain-language contract will generally hold up in court. Clarity is important, however. Anything that is ambiguous in a contract will generally be held against the party who provided the contract. So it’s in everyone’s best interest to make the terms of the contract clear to both parties.
However, since the vast majority of cases involving residential construction are settled out of court, the specific language used will probably never be tested in court. The contract’s most important function on most jobs is to prevent disputes and keep you out of court. Clear contract language, understood by both parties, along with good communication throughout the project is the best way to prevent conflicts.
Reducing risk. That said, on rare occasions, things go really badly and you end up in arbitration or court over disputes that could cost you many hundreds or thousands of dollars. In that case, you will want a contract that reduces your risk as much as possible. The section on Red Flag Clauses identifies the critical issues that should be addressed in every contract, and a few specific phrases that should be included in your contract.
Compliance with state law. Whether you are using a standard contract or writing your own, if it does not comply with state law governing construction contracts, it may not hold up in court. When in doubt, review by a lawyer experienced in construction law might be a good idea — especially on a large and expensive job.
Bring in the lawyers. For a large complex job, with a long, complex contract, it’s probably worthwhile to pay a few hundred dollars to a lawyer familiar with residential construction to review the contract and identify anything that exposes you to excessive risk. If you are providing the contract, you can do this well ahead of time. If you are using a contract provided by the builder, then simply ask for a few days to review the contract. If you find a problem area, explain your concerns and suggest an alternative that is more balanced – no need to mention your lawyer, which may start out the relationship on the wrong foot. If the contractor won’t budge, it’s probably time to start looking for another builder.