What is an AIA Contractor Subcontractor Agreement?
The AIA Contractor Subcontractor Agreement is a standardized contract template published by the American Institute of Architects (AIA) that is used to establish the terms and conditions of the subcontractor’s work relative to the contractor’s responsibilities on a construction project. The AIA’s standard forms are not legally required or necessary, but they are important tools and resources for industry professionals in the construction space. AIA documents provide a framework for many different relationships and are frequently relied upon because they lay out basic language along with detailed responsibilities and expectations for the parties involved .
There are two types of AIA Contractor Subcontractor Agreements published by the AIA: AIA Document A401-2017 (Standard Form of Agreement between Contractor and Subcontractor) and AIA Document A104-2017 (Standard Abbreviated Form of Agreement between Owner and Contractor), Article 11 and General Conditions of the Contract for Construction (2017), Article 11. The agreement is generally signed (executed) at a pre-specified time in the construction project, often before any work commences. While these agreements are useful templates and standards within the construction industry, it is always a good idea to review site-specific labor laws, insurer requirements, project requirements, as well as both parties’ legal counsel and any relevant law.
The Essentials of the Agreement
There are several key components that are typically included in an agreement between a contractor and subcontractor. In an AIA Contractor Subcontractor Agreement, these components are generally found in sections 2 (Subcontractor’s Scope of Work), 7 (Payments by Owner), and 8 (Time of the Essence).
The first important section of the Agreement is the subcontractor’s scope of work (clause 2). Subcontractors must clearly understand their scope of work prior to commencing work on a project. Under most circumstances, a subcontractor is not allowed to perform work outside the scope. Since disputes often arise over the scope of work, it is important for subcontractors to take special care when drafting this provision of the agreement.
The second important component of the agreement is payment provisions (clause 7). Typically, payment provisions will outline how much the contractor must be paid by the owner for the subcontractor’s work, and when the contractor must pay the subcontractor once the payment has been received from the owner. The contract should also specify how much the subcontractor can require to be paid for performance of extra work. The agreement must be carefully drafted to avoid later disputes regarding the subcontractor’s right to receive payment.
The third component of an agreement between a contractor and subcontractor, which is often overlooked, is the "time is of the essence" clause (clause 8). Whenever there are a number of contractors/subcontractors working on the same project on a specified completion schedule, it is important that each contractor be required to commence and complete its work for the project within a specified time-frame. This clause is often drafted in a vague manner and the contractor expects the subcontractor to abide by the schedule without much supervision. Without proper scheduling and oversight, delays often cost the subcontractor additional fees, and in some cases, schedule delays can result in a negative impact to the subcontractor’s company reputation if it is unable to finish work on time.
Advantages of Using an AIA Agreement
When comparing contractual terms and conditions, and the forms that apply to a construction contract, generally speaking, you can use any contract, form or document you want. You can create your own from scratch. Parties are not (usually) required to use any particular form or document, unless a statute or government regulation specifically requires it. So, how did AIA Contracts come to be the most commonly used and accepted form of construction contracts?
One of the huge benefits to using AIA Contract Documents on a project is that everyone in the industry is familiar with them and, very likely, the parties’ respective rights, duties and obligations under those forms. Assuming the contractor and the owner agree to use an AIA form, the lawyer representing the owner or the contractor can almost always be reasonably assured that the other side’s counsel has seen that form a hundred times already and the terms and conditions contained therein should be familiar to him or her.
AIA Contracts have been in use and adopted by the majority of the construction industry for decades. Naturally, lawyers who represent contractors and subcontractors will also have a high level of familiarity with the forms. If, as a construction lawyer, you have a high level of familiarity with the forms, you will be all the more confident going into a situation that may involve a dispute.
For these reasons, allocating risk and liability among the parties can be easier with AIA forms than with other forms. In fact, when dealing with a dispute and AIA forms, the lawyer can usually reference specific provisions and case law interpreting those provisions more readily than if using a different form or document.
How to Personalize the Agreement
Since each construction project comes with its own unique set of challenges and goals, the AIA has provided blanks and a variety of places where additions can be made to the Contractor Subcontractor Agreement to reflect the requirements of the parties’ project. The parties, therefore, must review their own individual contract to determine what provisions they may want to modify or enhance. This is one of the benefits of utilizing the AIA forms as they are flexible enough to allow for individualization and customization.
The parties can closely look at the following three provisions when customizing their agreement:
- The Trade Contract Amount – Since this is where the parties list the most important item concerning the project, the cost of the work, it is imperative that the amount be clear and accurate. Careful attention must be paid to the type of compensation structure used, whether a GMP, lumps sum, unit price, etc., and the way in which the trade contractor is being compensated, as a prime contractor or as a specialty contractor.
- Schedule of Progress Payments – The parties can customize not only the schedule provided for payments, but also include other important provisions such as the payment process and the information that must be provided to the owner and contractor upon submission of an application for payment.
- Scope of Work – This is another key provision in determining the scope of the contractor’s work and whether or not any additional work will be included. The contractor should furthermore review this section of the contract carefully to ensure that it accurately reflects what its obligation to perform the work and how the parties will address payment for such work.
As stated, the contractor and subcontractor can also make additions to the agreement to accommodate for other changes that either party believes are necessary. Here are a few tips that may help in customizing the contract:
- Carefully review the contract and consider if there are any additional provisions that should be added or anything unusual about the current contract that is not common on the standard AIA forms or that you have not seen in the past.
- Be cautious of any contract provisions that seem ambiguous or unclear.
- Make certain that the contract is congruent with the contract with the owner and that each of the key terms are consistent to avoid any future problems.
- If you believe that the contract lacks something, find out what it is: review the AIA manual and compare the two contracts to see how the contracts deviate from the AIA approved contract language.
- Any time modifications are made to any contract, review them with an attorney that can provide you with any additional amendments that may be necessary.
Common Issues and Solutions
One common challenge is not fully understanding the scope of work being agreed to. Even if a person is experienced with a particular type of scope section, such as General Conditions, from using other types of agreement forms, it is still crucial they carefully review the AIA agreement with their attorney to determine the exact scope of work they may be bound to perform. A second challenge is how to handle any item that seems incomplete or incorrect in the AIA agreement. It is essential to remember that there are additional AIA documents that, while not formally part of the final agreement, are documents the parties should be reviewing for important terms unless the parties agree not to use those documents . A third common challenge is trying to change the forms. Oftentimes, the most experienced contractors and owners look to the AIA because of the forms’ familiarity, but what happens if they don’t like some of the language? In our experience, "customizing" forms, particularly when it comes to the AIA A201 General Conditions, can use up valuable resources with little return on investment. When working with an owner that is concerned about certain provisions of an AIA agreement they can look at other forms that maybe more to their liking instead of AIA agreements. While there are a number of similarly worded forms, owners should be aware of the minimum requirements under any government bid law before agreeing to those terms.
Legal Matters and Regulations
The use of AIA Contractor Subcontractor Agreements is not without its legal considerations and potential compliance issues. Contractors must be mindful of complying with applicable federal, state and local laws when entering into these agreements. For instance, regulations under the Walsh-Healey Public Contracts Act require all prime contractors and subcontractors over $10,000 doing work on federal property to adhere to minimum wage and work hour standards set forth by the Act. Federal legislation also establishes affirmative action requirements for subcontractors with federal contracts exceeding $100,000. Applicable federal regulations also establish termination rights for contractors and subcontractors for non-performance issues which must be addressed in the agreement language.
In addition, many states have similar requirements related to contractors and subcontractors related to prevailing wage law compliance, payment bond provision compliance, non-discrimination and affirmative action requirements, and compulsory employment contract provisions such as non-compete clauses and workers compensation provisions.
Local laws may also apply depending on the place of performance and jurisdictional reach of the local authority. Colors and logos, and name usage and employment practices guidelines may also be relevant in entering into an agreement with home builders.
Careful consideration should be given by each party to the roles and responsibilities of each party and the indemnification, compensation and liability limitations in the AIA Contractor Subcontractor Agreement. Because of the legally sensitive nature of these provisions, it is always a good practice to consult legal counsel before executing the AIA Contractor Subcontractor Agreement.
Examples of Successful Use
To further illustrate the utility of AIA Contractor Subcontractor Agreements, we present three case studies below:
Case Study 1 – The Rejection of an Overly Broad Indemnification Obligation
Several years ago, a prime contractor was awarded a sizeable contract for a complex renovation project at a military base. Shortly thereafter, the prime contractor sought subcontractors to perform several of the renovation tasks. In its bid advertisement, the prime contractor promised that it "would not require any indemnification obligations from subcontracts for work on this project." Of course, such a promise is an invitation for a subcontractor to submit a bid as it promises that the subcontractor will not be required to give up its legal rights just to work on this project.
Unfortunately, the prime contractor later violated its own promise. The prime contractor sent out an AIA A401 standard form agreement with a form SF1 Supplementary Conditions document attached. A review of the A401 revealed that the prime contractor included an onerous indemnification requirement in which the subcontractor was required to indemnify the prime contractor for essentially anything that went wrong on the project. It did not matter if the damages were caused by the prime contractor. In fact, it did not matter if the damages were caused by forces beyond the control of anyone involved in the project. The prime contractor simply wanted the subcontractor to indemnify it for the entire project.
A savvy subcontractor initially responded to the prime contractor’s position by requesting that the prime contractor accept the standard terms of the AIA A401 without the Supplementary Conditions. The prime contractor responded by pointing a finger and claiming that it could not eliminate the Supplementary Conditions because its client (the United States government) would not permit it. In order to get the project, the subcontractor followed the prime contractor’s instructions and ended up signing the onerous form AIA A401 Agreement with SF1 Supplementary Conditions.
Years later, this subcontractor won a substantial damages verdict against the prime contractor for excessive delays caused by the prime contractor. The case went to trial and the jury returned a verdict for $2.4 million. The prime contractor then argued that the subcontractor should not have been able to collect because…you guessed it…the subcontractor’s contract with the prime contractor required the subcontractor to indemnify the prime contractor for excessive delays on the project. While the terms of the indemnification obligation were certainly broad, the court held that the prime contractor could not avoid liability because the indemnification obligation did not apply to damages caused solely by the negligence of the prime contractor. The prime contractor was simply too greedy and the broad language was unreasonable, so it could not avoid liability simply because it insisted on including it in the contract with the subcontractor.
Case Study 2 – The Importance of Including a Time and Materials Rate
An electrical subcontractor signed an AIA A401 Standard Form Agreement with a form SF1 Supplementary Conditions document in which the subcontractor agreed to perform certain electrical work for a substantial price. The contract terms were clear and agreed to by both parties. Nothing was vague about the scope of work. The average reader would be able to easily determine the scope of the work that the subcontractor agreed to provide to the prime contractor.
The project encountered many problems with the existing building. The pre-existing circuits were damaged. The ceilings were in disrepair and the project owner requested that the subcontractor replace certain ceilings. The unforeseeable problems mounted and at the completion of the project, the contractor owed the subcontractor extra compensation for the additional work. The parties attempted to resolve their dispute and nothing was resolved. Finally, the prime contractor filed a lawsuit against the electrical subcontractor.
The subcontractor’s main defense to the lawsuit was to deny liability to the prime contractor. The subcontractor argued it was not responsible for the problems that the prime contractor did not foresee . It simply priced the work that the contractor told it to price. If the work was outside of the contract, the subcontractor charged the prime contractor separately for the work. During this testimony, the prime contractor’s counsel asked the subcontractor’s project manager how the subcontractor determined its pricing. The prime contractor’s counsel was proving that the subcontractor was liable to the prime contractor because its own witness testifies that the subcontractor regularly charged the prime contractor for labor and materials. The counsel asked how the rates for work were calculated. The subcontractor’s project manager testifies that "there wasn’t necessarily one set rate." Later, the prime contractor’s counsel confirms the rates by showing the subcontractor work order forms.
Problem solved, right? The subcontractor’s apparently inconsistent statements about how the pricing for the work was calculated and created discredited the subcontractor. However, careful crossexamination of the subcontractor’s project manager revealed that the subcontractor had not only charged the prime contractor a dollar amount, but had also charged the prime contractor a time and materials rate. The subcontractor’s project manager gave testimony that the subcontractor billed the prime contractor the time and materials rate because he was instructed by the prime contractor to do so. The representative of the subcontractor explained that although the prime contractor initially directed that the electrical work be performed on a fixed price basis, as it was contained in the original scope of work, the parties decided that a time and materials rate was appropriate due to the uncertainty involved. And moreover, the construction project was governed by Contract Document Article 7 – Changes in the Work. Article 7 is supported by AIA Document G701, which requires that pricing for work performed on a time and materials basis is to be recorded on Change Order forms. The Change Order forms in this case contained time and materials rates that were agreed to. As required by the contract documents, the subcontractor presented those Change Order forms as evidence and they simply cannot be ignored. The subcontractor prevailed.
Case Study 3 – The Payment Retention Problem
A prime contractor was sued by a subcontractor over an unpaid retainage payment on a public works project. The subcontractor refused to sign a formal release because the prime contractor had not paid the retainage. The prime contractor responded with a series of approximately 60 interrogatories and document requests. The subcontractor responded to each of them. However, the prime contractor only used about ten of those interrogatories to make its legal argument, saying if the subcontractor cared about getting paid, it should have adequately defended itself.
The prime contractor’s attorneys then tried to depose the owner of the subcontractor in an attempt to have him testify that he was not entitled to payment. The prime contractor’s attorneys were not attempting to gather any new information or evidence. Their sole purpose in deposing the owner of the subcontractor was to make a point and then place him under oath. At trial, the judge threw out the prime contractor’s arguments based upon several grounds. First, the court found that the prime contractor had failed to provide sufficient evidence in the form of affidavits and documents to meet its burden of proof. Second, the court found that the interrogatory and document requests were so voluminous that the owner of the subcontractor was overwhelmed. Rather than doubting the subcontractor’s owner, the Court recognized the volume of paperwork, the expense in preparing written responses, the difficulty in finding every piece of documentation requested, and the likely exhaustion in the sheer volume of the paperwork. All of those factors led to the Court holding that there was not enough evidence to support a claim from the prime contractor, and it lost at trial.
Three years later, a settlement was reached in which the prime contractor paid the subcontractor $175,000 for its services, along with $25,000 in legal fees.