A Primer of What Every Real Estate Lawyer
Needs to Know About Architect’s Agreements
and Construction Contracts
HBA Real Estate
November 19, 2014
Bruce Merwin, Partner
333 Clay Street, Suite 3300
Houston, Texas 77002
713-217-2859
Fax: 832-397-8005
bruce.merwin@tklaw.com
TABLE OF CONTENTS
PAGE
I.
II.
III.
IV.
V.
VI.
VII.
VIII.
IX.
X.
2
INTRODUCTION/SCOPE ...................................................
WHO ARE YOU REPRESENTING?....................................
OVERVIEW OF CONSTRUCTION CONTRACT
PREPARATION…………………………….……………..……
WHAT FORM OF CONTRACT SHOULD YOU USE
REPRESENTING THE OWNER – STEPS INVOLVED
IN PREPARING THE CONTRACT………………….…….....
TYPES OF CONTRACTS………………….……………..…..
NEGOTIATION OF CONSTRUCTION CONTRACTS……..
NEGOTIATION OF ARCHITECT’S AGREEMENTS…...…..
3
5
9
10
14
30
KEY ISSUES IN NEGOTIATING CONTRACTS
WITH BUILDERS SELLING HOMES
CONSTRUCTED BY BUILDERS ETC. .....................
CONCLUSION............................................................
INDEX TO APPENDIX................................................
38
43
44
6
I. INTRODUCTION/SCOPE
•
The primary purpose of this outline is to advise the attorney for the developer,
contractor, architect, lender or investor who is in the process of preparing or
reviewing a construction contract or architect’s agreement for a commercial project or
custom home on how to deal with certain key issues when utilizing the AIA
documents or other forms of agreement. When you are drafting a Construction
Contract or Architect’s Agreement, there are many variables in determining whether
an AIA contract form is the best alternative and whether or how to revise such
contract form. The Owner’s attorney should be sensitive to any existing relationship
between the contracting parties, respect customary practices, be aware of drafting
“trade offs” and appreciate different attitudes as to the basic objectives of the
particular Construction Contract and/or architect’s Agreement.
•
The most important thing I have learned in preparing and negotiating Construction
Contracts over the past thirty years is that experienced lawyers representing Owners
should strive to prepare and negotiate contracts which are pro-Owner in their
approach but are perceived by Contractors and/or Architects to be fair contracts from
the standpoint of: (i) informing each party what it must do and to what it is entitled, (ii)
informing each party of its rights when the other party does not perform as promised,
and (iii) reflecting the reality of contract administration and not requiring the
Contractor to agree to procedures which will not likely be followed or will significantly
increase the cost of construction.
3
.
INTRODUCTION/SCOPE (cont.)
• To state it another way, each party’s attempt to protect his/her
interests should not cause the Contract to get out of balance to the
point that the contract terms themselves become a more significant
risk factor than the value and the complexity of the work itself.
• A note of caution: use the forms included in the Appendix carefully,
making sure that each provision applies to your project. I have been
successful in using the forms on various projects, but my success
was often based upon provisions contained in the Bid Documents
and the bargaining power of my Owner clients.
• Reservation of right to take conflicting positions in negotiations.
4
II. WHO ARE YOU REPRESENTING?
• Owner/Developer
– Commercial project
• Owner
– Custom home/speculative home project
• Contractor – commercial projects
• Equity Investor in Developer’s commercial project
• Lender involved in commercial project
• Owner with respect to Architect’s Agreement
– Commercial or custom home project
5
III. Overview of Construction Contract Preparation
• Construction Checklist: Meet with the Client to review the Construction
Contract checklist included in the Appendix to make sure that you have a
clear understanding of the Client’s goals with respect to the Project, as well
as the Client’s understanding of the qualifications and exclusions contained
in the Contractor’s proposal;
• Architect’s Construction Administration Responsibilities: Review the
Architect’s Agreement, if any, to determine the Architect’s role in
construction administration;
• Contractor’s Proposal: Review the Contractor’s proposal (particularly the
qualifications and exclusions) and/or Bid Documents, including the Plans
and Specifications to obtain an understanding of the scope of the Project
and whether any legal provisions (Supplementary Conditions) are contained
in the Specifications section of the Project Manual. The Architect often
prepares a Project Manual for larger commercial projects containing
provisions relating to insurance, warranties, progress payments, testing,
close-out requirements, lien releases and a number of other legal issues;
6
Overview of Construction Contract Preparation (cont.)
• Loan Documents: Review the loan documents, if any, to
determine the draw procedure outlined in the Loan Agreement and
any other Lender requirements with respect to the Construction
Contract, including subordination provisions and consent and
assignment provisions;
• Prepare/Revise Form: Revise the form submitted by the
Contractor or prepare the form for the Owner, generally using one
of the AIA forms; and
• Summary Letter: Prepare a letter to the client summarizing the
payment procedures, lien release requirements and completion
requirements, as well as outlining any potential problem areas.
7
Overview of Construction Contract Preparation (cont.)
• Practical Tip: If you negotiate the Architect’s Agreement, request
the Architect to include your Supplementary Conditions (included in
the Appendix) in bid documents on large projects.
• Although the AIA forms are biased towards the architect and
contractor, the AIA has been careful to seek input and
endorsements from as many trade groups as possible. As a result,
the AIA documents enjoy a wide reputation of fairness to all
parties and are accepted by the construction industry as a natural
starting point for use in writing and the administration of the
construction process.
8
IV. WHAT FORM OF CONTRACT SHOULD YOU USE REPRESENTING
THE OWNER – STEPS INVOLVED IN PREPARING THE CONTRACT
• AIA forms, such as the A101, A102, A103, A105 or A107 and A201 (if
applicable);
• The Contractor’s form which is generally a shortened version of the former
AIA, A101, A107, A111 or A114 documents;
• The Owner’s form which is generally a modified version of the A101, A102,
or A107 documents (with a number of Owner-oriented revisions to such
AIA documents); and
• ConsensusDocs (the AGC and COAA published a set of standard form
construction contracts in 2007 theoretically developed through a
collaborative effort of Owner, Contractor, Subcontractor and Surety
organizations. These forms were endorsed by these organizations as a
“fair and reasonable” allocation of rights and responsibilities in a
construction contract. Organizations with competing forms (e.g., AIA,
DBIA and EJCDC) have not formally participated or endorsed the
ConsensusDocs. While the ConsensusDocs have gained some traction,
they have not yet become a real competitor of the AIA documents. A
discussion of the pros and cons of the ConsensusDocs is beyond the
scope of this presentation.
9
V. TYPES OF CONTRACTS
A. STIPULATED SUM OF CONTRACT The most common form of Contract
is the stipulated sum contract. This form of Contract may be preferred by
an Owner because it permits the Owner to budget for a known amount of
money to be spent in exchange for a completed project. On the other hand,
the "stipulated sum" is often overrun because of construction changes that
increase the scope and cost of the Work.
B. COST PLUS CONTRACT As may be inferred from its name, the General
Contractor under a Cost Plus Contract is reimbursed its costs plus an
amount of money to compensate for overhead and profit. The drafter of a
Cost Plus Contract will need to pay special attention to the definition of the
word "cost". The Contractor is reimbursed for costs periodically, usually
monthly. Overhead and profit may be computed as a percentage of cost, or
as a stipulated fixed fee. If there is no GMP, the Contract should include a
provision preventing the Contractor’s estimate from being exceeded by
more than a specific percentage without the Owner’s approval.
10
TYPES OF CONTRACTS (cont’d)
C. COST PLUS CONTRACT WITH GUARANTEED MAXIMUM PRICE A
form of Contract that combines, from the Owner's point of view, the
advantages of the Stipulated Sum Contract with the advantages of the
Cost Plus Contract is a Cost Plus Contract with a Guaranteed Maximum
Price. Here, the Contractor's compensation is stated as an overall price,
including the Contractor's costs and the fee. However, provision must be
made to increase or decrease the Guaranteed Maximum Price when the
scope of the Work is changed by additions to or deletions from the Work
required by the Contract Documents. If any savings occur, all or a
substantial part of the savings generally will accrue to the Owner, but such
amount is subject to negotiation.
D. DESIGN-BUILD CONTRACT In a design-build contract, the Contractor
also takes responsibility for designing the project. Under a design-build
contract, however, the Owner holds the Contractor responsible for design
regardless of whether the Contractor performs design services with its own
employees or through contracts with Architects and engineers.
11
TYPES OF CONTRACTS (cont.)
E. CONSTRUCTION MANAGEMENT CONTRACT Modern
Architects are increasingly refusing to perform construction
administration services. This strategy has been effective to reduce
liability, but has left some Owners at a loss for competent
management and supervision of their construction projects. The
professional construction management company has stepped into
this void, sometimes as a licensed Architect/engineer, but more
often as a licensed Contractor. The construction manager serves
the same function as many General Contractors by soliciting bids
from Subcontractors, selecting Subcontractors, negotiating and
awarding Subcontracts, ordering materials, dealing with
Architects/engineers and performing construction administration
services, such as inspecting the job, processing change orders,
processing payment requests, scheduling the job, and coordinating
the Work.
12
TYPES OF CONTRACTS (cont.)
F. FAST TRACK An Owner who has a large investment in property
held for construction is highly motivated to convert the unimproved
non-productive real estate to something that produces income. The
carrying costs for real estate are considerable, and probably run in
the neighborhood of at least fifteen percent (15%) per annum of the
value of the unimproved real estate when the losses associated with
lost opportunity are taken into account. Owners may have other
practical reasons to need to expedite construction of a project.
Under such circumstances, fast track construction may become
attractive. This means that the Contractor will start building as soon
as the foundation plans are ready and a foundation permit is issued,
regardless of the fact that the Architect/engineer has not finished
designing the project. Construction costs are higher due to greater
risks.
13
VI.
NEGOTIATION OF CONSTRUCTION CONTRACTS
Key Issues:
• Description of Work.
- Intended that the Contract Documents include all items necessary
for proper execution and completion and what is reasonably
inferable from the Contract Documents to be necessary to
produce the “indicated results”
- List/attach key documents – Leases, MWBE requirements
- Contract Documents should provide a comprehensive description
of the Work to be performed by Contractor by reference to
incorporation of the Drawings and Specifications as well as by
referring to the Contractor’s qualifications or clarifications
- Contractor’s obligations to confirm benchmarks and physical
characteristics of the site and to report discrepancies to
Owner/Architect for adjustment before beginning Work
14
NEGOTIATION OF CONSTRUCTION CONTRACTS (Cont.)
Key Issues:
1. Description of Work (cont.)
‾ Definition of reasonably inferable--Non-material additional costs
or material additional costs; additional design required versus
minor submittals; material versus minor changes in sequencing
and scheduling
‾ Include site work, if applicable
‾ Hierarchy for resolving discrepancies between the Contract
Documents – modifications and change orders, agreement,
supplement, Contractor’s proposal, general conditions …
‾ Hierarchy for resolving a specific type of conflict within a Contract
Document
15
NEGOTIATION OF CONSTRUCTION CONTRACTS (Cont.)
‾ Contractor’s perspective
2.
‾
Standard of Substantial Compliance with Drawings and
Specifications
‾
Economically unproductive to correct certain deviations, but
reduction in Contract Sum
‾
Avoid references to “good and workmanlike” or best efforts”
Site Conditions
Contractor’s obligation to study and compare Contract Documents
16
‾
Contractor’s obligation to take field measurements and verify field
conditions
‾
Contractor’s obligation to review soils and other geotechnical
tests, as well as any other documents delivered by Owner, without
warranty from Owner
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
Key Issues:
Site Conditions (cont.)
‾ Contractor assumes full responsibility for site conditions including
any concealed conditions, and Contractor is provided with a
contingency to assume such risk
‾ Obligation for Contractor to review Contract Documents prior to
performing each portion of the Work and if Contractor performs
Work in conformity with any Contract Documents knowing it to be
inconsistent with another Contract Document, without obtaining
approval from Owner, Contractor will be responsible for
correcting Work, at Contractor’s expenseR
to withhold for potential failure to satisfy GMP or Substantial
17
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
3. Progress Payments.
- The contract should identify the supporting documentation for
payment applications, including lien waivers and lenderrequired items.
- Owner should be entitled to withhold the portion of payments
necessary to protect its interests on account of 1) Contractor’s
failure to deliver required lien releases, 2) defective work, 3)
claims filed by third parties or 4) the persistent failure by
Contractor to carry out the work.
- Also right to withhold for potential failure to satisfy GMP or
Substantial Completion date – anticipatory breach where
required performance is either extremely unlikely or
impossible.
- No right to suspend performance if withholding permitted by
contract.
18
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
Key Issues:
Progress Payments (cont.)
Payment Applications
‾ Specification of required supporting documents for progress
payments, lien waivers, sworn statements and affidavits,
Lender’s requirements, monthly job cost reports, updated
schedule of values and progress schedules
‾ Payment for storage of materials on-site and off-site –
Lender’s Requirements
‾ Contractor’s perspective
‾ Release from obligation to supply partial lien releases from
minor subcontractors and trade vendors
19
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
-
‾
‾
Should require Architect or other third-party to concur in
withholding payment, limit withholding to defective work,
uninsured claims or lien claims and/or require prompt
payment following correction
Establish procedure for payment for on-site and off-site
stored materials
Contractor’s Cost of the Work; Fee
− Owner and Contractor negotiate over list of costs and excluded
costs; many of the excluded costs are often included in the
Contractor’s Fee
− Item A in the Appendix is a reasonable compromise from the
Owner’s perspective and avoids the duplication of costs
20
NEGOTIATION OF CONSTRUCTION CONTRACTS
−
Should attempt to identify categories of reimbursable costs that are
part of general conditions costs and segregate them from other
portions of the cost of the work
−
Contingency/Contractor
contingency
−
Contractor’s right to reallocate costs
−
Savings percent payable to Contractor, following final accounting of
costs, application against warranty work
Contingency
–
including
access
to
Key Issues:
4.
Retainage.
‾
21
While 10% statutory retainage affords Owner maximum protection
against lien claims, the amount of retainage is an economic issue to
Contractor and subject to negotiation and approval by the lender. Owner
seeks to protect itself against lien claims and provide an incentive for
Contractor to complete the work. If Contractor is providing a payment
bond, retainage is not as important. Whatever reduction in retainage is
negotiated, Owner should hold an amount sufficient to ensure completion
of punch-list items.
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
5.
22
Conditions to final payment.
‾
Owner should require final approval from the architect, a certificate of
occupancy (or equivalent), warranties, as-built surveys and drawings,
final lien releases (with any lien claims bonded around) and satisfaction
of all lender and all other project close-out requirements.
‾
No substantial completion if a substantial number of punchlist items
require correction or completion – may reference a dollar amount that
can not be exceeded, maintenance and operating manuals, record
drawings and specifications; warranty book with names of all
subcontractors and suppliers;
− Contractor’s Perspective
•
Conditions to final payment should reflect objective standards;
•
Warranty claims and disputes between contractor and
subcontractors (as long as no liens exist that are not bonded
around) should not hold up final payment
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
Key Issues:
6. Separate Contractors.
‾ Contractor must accommodate the work of Owner's separate
contractors, but is the quarterback.
‾ The coordination, cooperation and scheduling provisions of each
contract should be consistent, as well as dispute resolution
procedures and delay, damage, insurance and indemnity
requirements.
‾ Whichever party is responsible for damage, delay or loss should be
liable to compensate the other party.
‾ Practical Tip – Contractor needs to coordinate from inception of
project on Owner/Tenant’s separate contractors access to site and
for their use of Contractor’s equipment.
23
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
Key Issues:
Insurance (cont.)
7. Insurance.
‾ Due to the complexity of construction-related insurance, Owner and
Contractor should consult with their insurance advisors to provide
comprehensive coverage.
‾ The insurance provisions of the contract should cover the following
items:
1) Contractor's cgl coverage limits, including policy form, and
Contractor's coverage should be primary as to Owner,
2) certificates of insurance, copies of policies
3) no cancellation or reduction of coverage without notice,
4) builder's risk coverage – Owner vs. Contractor – Owner’s
(Lender’s) right to proceeds,
24
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
5) additional insured status for Owner and lender recognizing
new statutory indemnity limitations,
6) Policy amounts stated as minimum amounts; aggregate
limits shall, by endorsement, apply to subject project
separately
7) cgl and worker's comp waiver of subrogation endorsements
for Owner, and
8) a general mutual waiver of subrogation.
25
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
Key Issues:
8. Warranties.
– Contractor must correct defective work or remove it and replace it with
non-defective work for one year following completion, plus correct any
damage caused by defective work.
– If Contractor fails to timely perform, Owner may make the repairs at
Contractor's expense.
– The warranty should exclude defects inherent in the required work,
damage caused by Owner abuse or modifications or improper
maintenance.
26
‾
Assignment of various warranties from Contractor to Owner
‾
Right to extend one year warranty with respect to items repaired during
the warranty period, not to exceed 18-24 months
‾
Right to accept defective or nonconforming work and obtain reduction
from Contract Sum
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
Key Issues:
9.
27
Change Orders.
‾
The contract should accommodate Owner's changes, specifying the procedure
for determining additive and deductive costs, including Contractor's fee, and
requiring Contractor to perform the change before final agreement is reached on
cost, at least up to a specified amount.
‾
If no agreement on cost of change order, Contractor must still perform pursuant
to Construction Change Directive with price to be determined pursuant to a
formula
‾
Agreement on any change order to be a final settlement of all matters related to
the change order
‾
Certain minor changes involving materials, color, manufacturer, dimension or
other questions require Owner approval
‾
No course of conduct or dealing or implied acceptance of changes shall result in
a change order
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
Key Issues:
10. Default and Remedies.
28
‾
Enumerated list of Contractor defaults with reasonable notice and cure
‾
Owner’s right to terminate contract, stop work or perform work on behalf of
Contractor
‾
If terminated for cause, no additional payment until completion
‾
Unless the contract has been terminated, Contractor should be obligated to continue
performance during the pendancy of a dispute, and Owner should make undisputed
payments.
‾
Bankruptcy issue / adequate assurances
‾
If Owner fails to make required payments or Owner otherwise defaults, the
Contractor may stop the work until the default is cured. If not cured within 30-60
days, Contractor should be able to terminate and recover for worked performed and
proven loss.
‾
The parties also should consider utilizing mediation/arbitration to resolve disputes.
The AIA forms have check the box elections. If so, it is important to outline detailed
procedures applicable to mediation/litigation/arbitration, usually incorporating the
American Arbitration Association Construction Industry Rules.
NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.)
Key Issues:
11. Termination For Convenience.
29
‾
Current versions of most AIA documents permit Owner to terminate without cause.
This allows Owner to change its mind and may avoid a bitter dispute between the
parties following a breakdown of communications or trust.
‾
Right to terminate for convenience at any time on seventy-two (72) hours or less
written notice – cooling off period
‾
Establish step-by-step procedure for stopping work and easing transition to
successor Contractor
‾
Provided certain conditions are satisfied, payment for all work done to date but no
profit or overhead (or a reduced profit and overhead) on unperformed work
‾
Assumption of obligations under Contractor’s subcontracts and purchase orders and
indemnity of Contractor against claims
‾
Continued liability of Contractor under warranty for work performed prior to
termination as long as Owner can demonstrate Contractor caused the problem –
assignment of warranties for post-termination warranty work
VII. NEGOTIATION OF ARCHITECT’S AGREEMENTS
1. Overview of Architect’s Agreement Preparation
•
Architect’s Checklist
‾
Meet with the client to review the Architect’s checklist included in the
Appendix; make sure that you understand the scope of the project and the
role of the Architect;
• Architect’s Consultants/Owner’s Consultants;
• Review the Architect’s proposal for detailed scope of services,
compensation, hourly rates for additional services, exclusions; and
• Prepare/revise the form submitted by the Architect or prepare the form
for the Owner, generally using one of the AIA forms or an Addendum
to the Architect’s proposal.
30
KEY AREAS OF CONCERN TO OWNERS - ARCHITECT’S
AGREEMENTS
2.
Key Issues
Architect’s phased design responsibility
1.
‾
schematic design phase
‾
design development phase
‾
construction document phase
‾
construction phase
‾
Owner's approval of work in each phase
•
Owner’s right to disapprove any portion of Architect’s work on Project
during any design phase on any reasonable basis, including costs, without
additional costs unless revisions are made to drawings previously approved
by Owner under prior phases
•
Architect’s Key Personnel cannot be replaced without Owner’s approval
•
Architect’s standard of care
2. Responsibility for design vs. coordination of design activities – require Architect to
hire structural engineer, mechanical, electrical and plumbing engineer
−
31
All consultants hired by Architect should be the responsibility of the Architect
including any errors or omissions
KEY AREAS OF CONCERN TO OWNERS - ARCHITECT’S
AGREEMENTS (cont.)
Key Issues (cont.)
− With respect to the Owner’s consultants, Architect shall be responsible
for coordination of Owner’s consultants’ drawings and design
documents, but not the accuracy thereof except for failure of Owner’s
consultants drawings to fit into the Architect’s design or for errors
discovered in such drawings or specifications by Architect and
Architect’s failure to promptly report such errors to Owner
3. Basic Services vs. Additional Services
− Owner must have full understanding of the scope of basic services,
including, without limitation, all of the phased design services to produce
construction documents and Architect’s coordination and cooperation
responsibility, including with respect to LEED certification. No Additional
Services without Owner’s prior written approval.
4. Owner’s responsibilities – civil engineering, landscaping, interior design
− Need cooperation and responsibility from Architect
− Architect to advise Owner of any error to prior documents or omissions
in Owner’s consultant’s and submittals.
32
KEY AREAS OF CONCERN TO OWNERS - ARCHITECT’S
AGREEMENTS (cont.)
Key Issues (cont.)
5. Architect's budget responsibility - revision of drawings
− Architect may agree to revise on one occasion at no additional expense
or provide up to a designated number of hours (20-30) at no additional
expense to redesign to reduce costs.
6. Ownership of drawings and specifications – Owner needs right to use
documents on this project and any renovation, repair or expansion project
without using architect; right to use documents to complete project in the
event of termination
− It is important to note that Architect has all ownership rights without
assignment by contract
− On some commercial projects, Architect assigns all ownership rights,
including all copyrights, to Owner
− If Owner delivers unit plans or designs of other specific items to the
Architect for incorporation into the project, the ownership of such items,
including derivative rights, should remain with the Owner
33
KEY AREAS OF CONCERN TO OWNERS - ARCHITECT’S
AGREEMENTS (cont.)
Key Issues (cont.)
− Joint ownership is often the custom
− If Owner uses drawings and specifications on additional projects without
Architect, Owner must indemnify Architect against claims to the extent
permitted by law
− Should Architect’s right to reuse a unique design be limited in any
manner?
− Architect’s right to use standard details on additional projects.
7. Termination, suspension or abandonment
− Termination for cause
− Termination for convenience
− Suspension or abandonment of project
− Compensation payable to Architect
− Architect’s right to suspend/terminate for nonpayment by Owner
34
KEY AREAS OF CONCERN TO OWNERS - ARCHITECT’S
AGREEMENTS (cont.)
Key Issues (cont’d)
8. Payments to the Architect-conditions to payments
− Right to withhold payment for default, nonconforming services, failure
to make payment to consultants, where Architect is ahead of Owner
in terms of completion of services vs. payment received; Owner
should assert right within 30 days following receipt of a payment
request with reasonable description of required curative action
9. Insurance/indemnity
− Commercial general liability coverage, including automobile liability
coverage, primary coverage as to Architect’s acts or omissions
− Amount of coverage -- $1 million per occurrence; $2 million general
aggregate, with or without umbrella coverage; automobile liability - $1
million combined single limit coverage
− Worker’s compensation with employer’s liability of $500,000/$1
million
35
KEY AREAS OF CONCERN TO OWNERS - ARCHITECT’S
AGREEMENTS (cont.)
Key Issues (cont’d)
− Professional liability -- $1 million per occurrence, $2 million
aggregate with project specific coverage of additional $2 million
(amount to be determined based as to project and potential risk);
− On major commercial projects, professional liability limits need to be
increased substantially. These projects generally require specific
project coverage of an additional amount
− Certificate of insurance with appropriate endorsements; Owner’s right
to obtain copies of policies
− Additional insured and waiver of subrogation endorsements
− Indemnification against negligent acts or omissions and violations of
law (do not want indemnification to be so broad that Owner loses
protection of Architect’s professional liability policy
36
KEY AREAS OF CONCERN TO OWNERS ARCHITECT’S AGREEMENTS (cont.)
10. Lender's requirements – assignment and subordination;
11. LEED Considerations – Is Architect the Responsible Party for LEED
filings or is Owner’s LEED Consultant the Responsible Party?
12. Limitation of Architect’s Liability
− Architect seeks to limit to greater of fee or available insurance, but
available professional liability insurance should provide minimum
designated coverage for the project (generally $1 million to $2
million depending upon cost of project)
37
VIII.KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS
SELLING HOMES CONSTRUCTED BY BUILDERS ETC.
Builders of luxury homes/townhomes generally use the GHBA Custom
Home set of contracts or their own contract form based upon the GHBA
forms. These contracts are extremely pro-builder and need to be
carefully reviewed and revised to provide some basic protection for the
Purchaser buying the lot and home constructed on the lot as a
speculative home. Greater input by the Purchaser in the final design
and construction of the home occurs when the Purchaser enters into the
Contract before the home is 50-60% complete and may require
additional revisions that are discussed in this outline. The major issues
requiring revision from the Purchaser’s perspective are listed below.
1. Description of Work
A.
B.
C.
D.
38
Plans
Specifications
List of Allowances
Installation of Owner-furnished Items
KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS
SELLING HOMES CONSTRUCTED BY BUILDERS ETC. (cont.)
2. Acknowledgement of Design-Build Obligations and third-party
beneficiary rights – Responsibility of Builder for architect/engineers
3. Commencement Date – commence construction by date certain or
Purchaser’s right to terminate
4. Completion Date – substantial completion by date certain, inclusive
of force majeure delays, or right to terminate
5. Contract Sum – Stipulated Sum Arrangement with Allowances
6. Warranties
A. 1 year from Substantial Completion
B. Extended Warranties – HVAC, roof
C. Exclusions from Warranties
D. Assignment of Warranties from Subcontractors and Suppliers
39
KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS
SELLING HOMES CONSTRUCTED BY BUILDERS ETC. (cont.)
7. Tests/Inspections – Purchaser’s right to review copies of tests,
inspection reports and governmental approvals relating to
construction procedures and progress
8. Substitutions of materials – Purchaser’s right of reasonable approval
9. Commencement fee/construction progress fee – non-refundable
except for Builder’s default or other permitted termination by
Purchaser
10. Allowances
A. Schedule for selection of allowance items
B. Approval of selection of allowance items and cost
C. Timing of additional deposits for exceeding allowances
40
KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS
SELLING HOMES CONSTRUCTED BY BUILDERS ETC. (cont.)
11. Financing and Title Contingencies
A. Purchaser’s proof of available funds
B. Review and approval of restrictions and other title matters
C. Requirement that Builder release all liens created by, through or
under Builder and satisfy all Schedule C requirements affecting
the Builder
12. Effect of concealed conditions and changed circumstances – Is it
Builder’s or Purchaser’s risk?
13. Effect of inspections during construction – observable defects
14. Land use and environmental disclaimers – adjacent land usage –
depends on whether owned by Builder
15. Moisture and mold responsibility – generally imposed on Purchaser,
but Purchaser should require maintenance instructions from
Builder to avoid mold issues
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KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS
SELLING HOMES CONSTRUCTED BY BUILDERS ETC. (cont.)
16. Risk of Loss – if damage exceeds 30%, both parties should have
right to terminate
17. Builder’s right to terminate in the event of a bona fide dispute and
pay Purchaser nominal Stipulated Damages ($500 to $2,500) –
Purchaser should attempt to delete this or require mediation or
increase damage amount to $25,000
18. Re-purchase option – if within the first 5 years following closing,
Purchaser discovers defects costing more than a specified
percentage – 10% to 20% of the then fair market value, upon
receipt of notice from Purchaser, Builder may elect to re-purchase
the home. Builder obligated to repay the purchase price and all
closing costs incurred by Purchaser, plus the cost of any permanent
improvements made by Purchaser, reasonable moving expenses and
reasonable and necessary attorney’s fees and inspection costs.
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IX. CONCLUSION
This presentation was intended to provide an overview and summary of
the preparation and negotiation of Construction Contracts and
Architect’s Agreements primarily using the AIA forms, plus Purchaser’s
concerns relating to construction of speculative home purchases. The
Appendix contains various forms that provide provisions for most, if not
all, of the items covered in the PowerPoint presentation.
AIA Documents referred to are available online at
www.hba.org/sections/real-estate-law
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11925174.1
X. INDEX TO APPENDIX
A.
B.
Architect’s Agreements
1.
AIA Document B101-2007 - Standard Form of Agreement Between Owner and Architect
2.
AIA Document B105-2007 - Standard Form of Agreement Between Owner and Architect for a Residential or Small
Commercial Project
3.
AIA Document B109-2010 - Standard Form of Agreement Between Owner and Architect for a Multi-Family
Residential or Mixed Use Residential Project
4.
Architect’s Checklist
Construction Contracts
1.
AIA Document 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
2.
AIA Document A201-2007 – General Conditions of the Contract for Construction (Companion to A102 above)
3.
AIA Document A105-2007 - Standard Form of Agreement Between Owner and Contractor for a Residential or
Small Commercial Project
4.
AIA Document A107-2007 - Standard Form of Agreement Between Owner and Contractor for a Project of Limited
Scope
5.
AIA Document A107-2007 - Exhibit A - Determination of the Cost of the Work (Companion to A107 above)
6.
Contractor’s Checklist
7.
Supplementary Conditions
8.
Addendum to Builder’s Lot Sale and Home Agreement
Appendix items referred to are available online at www.hba.org/sections/real-estate-law.
Reference to AIA license limitation appears on documents in the Appendix.
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