In fast-paced industries such as the construction industry, it is easy to assume that standardized form contracts provided by the American Institute of Architects (“AIA”) will prevent, rather than cause, problems further down the road. An effective construction contract will provide performance, timing standards and set forth effective remedies and risk allocation should issues arise. However, when parties fail to follow the prescribed protocols, this is not always the case. This article focuses on a couple of pitfalls that tend to occur more often than necessary when such form contracts are used in the construction industry relative to effectuating change orders and documentation of work in connection with requisitions for payment, and it also discusses the importance of well-thought-out and strong arbitration clauses.
Documentation of Work and Requisitions for Payment — Protocol is Paramount
Change orders typically modify the initial scope of work under a contract, thereby increasing the contract price, adjusting the timeline for construction completion, or both. Under the AIA Form Contracts, there are protocols which must be followed to effectuate a proper change order. All change orders must be made in writing, prepared by the architect, and signed by the owner, contractor, and architect. Without the proper sign-offs, the change order is not valid, and can lead to consequences should a conflict regarding payment arise. Furthermore, all changes, price adjustments, and time adjustments must be set forth in the written instrument. Failing to follow this protocol can later lead to issues when seeking requisitions for payment. Many times in the fast-paced construction industry, parties neglect to follow protocols and expect to “mop things up later”.
For this same reason, it is important to maintain a strict habit of documenting all work, and what work was conducted by whom. Requisitions for payment, another term for billing or invoicing, is generally a reoccurring invoice which sets forth any work completed, work remaining to be done, and the value of the work due. AIA Form G702 is generally required to be used for requisitions. Documenting all work conducted by parties ensures that they can protect themselves, and the owner of the property, from any potential liability arising out of failures of a contractor failing to pay a subcontractor or architect, or vice versa. Why is this? Parties may not realize that they are on the hook for damages, even potentially liquidated damages, at the time of contract signing. When problems arise later, a party may be stunned to find out that they are being sued for the monies owed, not realizing that they agreed to this risk. Parties can requisition payments from the owner in several different manners. The requisition can be for a percentage of the work performed. This type of requisition is the one that often creates the most pitfalls. It is incumbent on the general contractor to document each and every subcontractor and vendor whose work is being submitted for payment. The need to document is based on the fact that billing by percentages will group many subcontractors and vendors into one requisition, but it is important to know if and when a subcontractor or vendor has been paid in full. This may not be reflected in percentage billing. As one can imagine, a subcontractor may complete their entire portion of the project long before the overall project is complete. So despite requisition for payment based off the completion of the entire project, the general contractor is required to know if a subcontractor or a vendor has been paid in full.
The final additional benefit to this accounting process is the ability to seek lien waivers after subcontractors and vendors are paid in full. Without a lien waiver, a subcontractor may be able to pursue the owner for payment. In some instances, the owner has paid the full amount to the general contractor and the contractor (for whatever reason) may not have paid the subcontractor. Detailed billing and requisitions for payment will allow the owner to determine if a subcontractor or vendor has been paid in full, thus protecting themselves.
Arbitration Clauses — Do You Know Your Arbitrator?
First and foremost, it is important to keep in mind that most AIA form contract provisions are simply that — forms. A party on either side of such a form contract should be comfortable negotiating those terms or seeking legal advice prior to signing. To that end, one of the first clauses a party should review in such a contract is the arbitration provision. Arbitration is an alternative dispute resolution that is cost-effective and keeps parties out of court. Arbitration clauses often set forth the procedure and timeline for requesting arbitration along with the venue. For those engaged in the construction industry, parties using an AIA form contract should be sure to agree that arbitration is administered by the American Arbitration Association in accordance with its Construction Industry Rules.[1] When conducted pursuant to the American Arbitration Association’s Construction Industry Rules, the arbitrator is selected from a national panel of individuals experienced in the construction industry.[2] Individuals appointed to the national panel are recommended by the National Construction Dispute Resolution Committee, regional advisory committees, and customers.[3] Those individuals on the national panel are actively engaged in the construction industry and they are required to attend periodic training.[4] All of the American Arbitration Association arbitrators are well trained and experienced, but the panelists from the construction industry typically have the experience in the industry that will benefit the parties when discussing technical issues or the complicated procedure of contracting, financing, constructing, and paying for a large construction project.
The importance of requesting arbitration to be administered pursuant to the Construction Industry Rules cannot be stressed enough. As set forth above, these arbitrators are those with a wealth of experience in the construction industry, actively devote a significant amount of time to the industry, and must attend periodic training to remain on the panel. These arbitrators have the ability to fairly hear and decide complex disputes, making arbitration a favorable alternative to litigation.
Conclusion
While AIA Form Contracts are a great resource for those in the construction industry, they can lead to more harm than good when not properly followed. For these reasons, it is of the utmost importance to follow all procedures. Doing so will not only assist a project in running more smoothly, but will allow for the involved parties to protect themselves from substantial costs later on. These forms do not run themselves, so it is incumbent on the parties to craft the contract to their own needs and specifications.
In fast-paced industries such as the construction industry, it is easy to assume that standardized form contracts provided by the American Institute of Architects (“AIA”) will prevent, rather than cause, problems further down the road. An effective construction contract will provide performance, timing standards and set forth effective remedies and risk allocation should issues arise. However, when parties fail to follow the prescribed protocols, this is not always the case. This article focuses on a couple of pitfalls that tend to occur more often than necessary when such form contracts are used in the construction industry relative to effectuating change orders and documentation of work in connection with requisitions for payment, and it also discusses the importance of well-thought-out and strong arbitration clauses.
Documentation of Work and Requisitions for Payment — Protocol is Paramount
Change orders typically modify the initial scope of work under a contract, thereby increasing the contract price, adjusting the timeline for construction completion, or both. Under the AIA Form Contracts, there are protocols which must be followed to effectuate a proper change order. All change orders must be made in writing, prepared by the architect, and signed by the owner, contractor, and architect. Without the proper sign-offs, the change order is not valid, and can lead to consequences should a conflict regarding payment arise. Furthermore, all changes, price adjustments, and time adjustments must be set forth in the written instrument. Failing to follow this protocol can later lead to issues when seeking requisitions for payment. Many times in the fast-paced construction industry, parties neglect to follow protocols and expect to “mop things up later”.
For this same reason, it is important to maintain a strict habit of documenting all work, and what work was conducted by whom. Requisitions for payment, another term for billing or invoicing, is generally a reoccurring invoice which sets forth any work completed, work remaining to be done, and the value of the work due. AIA Form G702 is generally required to be used for requisitions. Documenting all work conducted by parties ensures that they can protect themselves, and the owner of the property, from any potential liability arising out of failures of a contractor failing to pay a subcontractor or architect, or vice versa. Why is this? Parties may not realize that they are on the hook for damages, even potentially liquidated damages, at the time of contract signing. When problems arise later, a party may be stunned to find out that they are being sued for the monies owed, not realizing that they agreed to this risk. Parties can requisition payments from the owner in several different manners. The requisition can be for a percentage of the work performed. This type of requisition is the one that often creates the most pitfalls. It is incumbent on the general contractor to document each and every subcontractor and vendor whose work is being submitted for payment. The need to document is based on the fact that billing by percentages will group many subcontractors and vendors into one requisition, but it is important to know if and when a subcontractor or vendor has been paid in full. This may not be reflected in percentage billing. As one can imagine, a subcontractor may complete their entire portion of the project long before the overall project is complete. So despite requisition for payment based off the completion of the entire project, the general contractor is required to know if a subcontractor or a vendor has been paid in full.
The final additional benefit to this accounting process is the ability to seek lien waivers after subcontractors and vendors are paid in full. Without a lien waiver, a subcontractor may be able to pursue the owner for payment. In some instances, the owner has paid the full amount to the general contractor and the contractor (for whatever reason) may not have paid the subcontractor. Detailed billing and requisitions for payment will allow the owner to determine if a subcontractor or vendor has been paid in full, thus protecting themselves.
Arbitration Clauses — Do You Know Your Arbitrator?
First and foremost, it is important to keep in mind that most AIA form contract provisions are simply that — forms. A party on either side of such a form contract should be comfortable negotiating those terms or seeking legal advice prior to signing. To that end, one of the first clauses a party should review in such a contract is the arbitration provision. Arbitration is an alternative dispute resolution that is cost-effective and keeps parties out of court. Arbitration clauses often set forth the procedure and timeline for requesting arbitration along with the venue. For those engaged in the construction industry, parties using an AIA form contract should be sure to agree that arbitration is administered by the American Arbitration Association in accordance with its Construction Industry Rules.[1] When conducted pursuant to the American Arbitration Association’s Construction Industry Rules, the arbitrator is selected from a national panel of individuals experienced in the construction industry.[2] Individuals appointed to the national panel are recommended by the National Construction Dispute Resolution Committee, regional advisory committees, and customers.[3] Those individuals on the national panel are actively engaged in the construction industry and they are required to attend periodic training.[4] All of the American Arbitration Association arbitrators are well trained and experienced, but the panelists from the construction industry typically have the experience in the industry that will benefit the parties when discussing technical issues or the complicated procedure of contracting, financing, constructing, and paying for a large construction project.
The importance of requesting arbitration to be administered pursuant to the Construction Industry Rules cannot be stressed enough. As set forth above, these arbitrators are those with a wealth of experience in the construction industry, actively devote a significant amount of time to the industry, and must attend periodic training to remain on the panel. These arbitrators have the ability to fairly hear and decide complex disputes, making arbitration a favorable alternative to litigation.
Conclusion
While AIA Form Contracts are a great resource for those in the construction industry, they can lead to more harm than good when not properly followed. For these reasons, it is of the utmost importance to follow all procedures. Doing so will not only assist a project in running more smoothly, but will allow for the involved parties to protect themselves from substantial costs later on. These forms do not run themselves, so it is incumbent on the parties to craft the contract to their own needs and specifications.
[1] See American Arbitration Association – Construction Rules and Mediation Procedures https://www.adr.org/construction.
[2] See American Arbitration Association – Construction Industry Arbitration Rules and Mediation Procedures at p. 11.
[3] See id.
[4] See id
