Code and Legal Topics
August 2003

Construction Contracts

American Institute of Architects Construction Contracts

The Industry Standard

This bulletin addresses A.I.A. construction contract forms, specifically those in most common use between building owners or tenants and general contractors.

The A.I.A. contract documents are recognized as a standard in our industry because their documents' relationship to the design and construction industry parallels their relationship to the law. Design and construction contracts case law has, for the past 115 years, been based largely on the standard A.I.A. documents' contract language.

When using these contracts it is important to know that there are actually two parts: 1) the Contract itself containing the specifics, i.e. the Contract Sum, the Contract Time, an enumeration of the Plans, Specifications and the Addenda and 2) the General Conditions of the contract which:

• Establishes the rights and obligations of the parties.
• Creates procedures to secure approvals, settle claims, process changes in the work and payments to the contractor, secure lien waivers, correct deficiencies and initiate termination.
• Defines terms like “ substantial completion” and addresses other issues like insurance, safety requirements and document interpretation.

The following is an overview of five of the most well known contracts, used as agreements between general contractors and owners, separated into two types, Stipulated Sum and Cost Plus Fee contracts. Each of these contracts is customized to reflect the nature of the project development and the relationship between the owner and contractor.

Stipulated Sum Contracts: Design - Bid - Build project sequence, multiple competitive bids, low bidder usually getting the award, opposition of interests.

Cost Plus Fee: Flexible sequence, Negotiated contract, confluence of interests.

Stipulated Sum Contracts

Stipulated Sum contracts are most often used in cases where the project has either been thoroughly defined by design professionals or, if not well defined, is so simple in nature that a contractor is willing to submit a stipulated sum for the work.The most common project sequence is one in which a) the design professionals prepare the drawings and specifications b) the owner or the architect supervises a bidding process in which several contractors compete for the work and c) the project gets built.

The contractor submits a lump sum figure for the project based on the plans and specifications – the difference between the contractor’s cost to perform the work and the sum stipulated in the contract is his fee. Wherever he is able to reduce his cost he will increase his fee.

The solicitation of competitive quotes from contractors that may be unfamiliar to the owner will entail degrees of risk that can be mitigated by a rigorous qualification process.

Three Stipulated Sum Contracts:

A101 - 1997 Standard form of Agreement between Owner and Contractor

The granddad of construction contracts, born as the ”Uniform Contract” in 1888, this agreement is most commonly used on larger projects that have fully developed construction documents (plans and specifications). The contract form is seven pages in length but it is used in conjunction with the A 201 “General Conditions of the Contract”, some sixty pages in length.

A107 - 1997 Abbreviated Standard form of Agreement between Owner and Contractor for Projects of Limited Scope

Developed for projects that do not require contractual complexity especially where the owner and contractor have an ongoing working relationship or where the project is simple in detail and/or short in duration. This contract form does not require the tandem use of a “general conditions” document.

A105 - 1993 Standard form of Agreement between Owner and Contractor for a Small Project and A205 –1993 General Conditions of the Contractor for Construction of Small Project

These documents were developed for use where the basis of payment is a stipulated sum and where the project is modest in size and the contractual issues are resolved in a simpler set of “general conditions”.

Cost Plus Fee Contracts

The most significant characteristic of Cost plus Fee contracts is their usefulness in commencing the contractual relationship, and often the work itself, prior to full development of construction documents. The contractor and owner agree to the fee in advance, usually a percentage of the contractor’s cost to perform the work. The Guaranteed Maximum Price (GMP), which is essential to both of the following contract forms, is submitted by the contractor who will have obtained a schematic and performance basis for his estimate from the owner's designer.

The basis of payment to the contractor is one in which the contractor’s actual costs of construction are tabulated at completion of the work and then the negotiated fee amount is added to the costs yielding the actual contract amount. Costs that cause the contract to exceed the GMP, unless authorized by change orders, are borne by the contractor. If the actual contract amount is less than the GMP, the savings are frequently split (a negotiated point) between the owner and the contractor. Over the course of construction the contractor is obliged to keep accurate accounting records for audit by the owner.

The cost plus fee contract allows an owner to negotiate with a single contractor, getting the benefit of his expertise and early participation in the project, while (with a GMP) capping his total cost and controlling the contractor’s profit margin on the project.

Two Cost Plus Fee contracts:

A111 –1997 Standard form of Agreement between Owner and Contractor – Cost of the Work Plus a Fee with a Negotiated Guaranteed Maximum Price (GMP)

This contract form is generally used when the contractor is to work on a cost plus fee basis with a guaranteed maximum price but is not to be particularly involved with discovery and design issues.

A121CMc –1991 Standard form of Agreement between Owner and Construction Manager where the Construction Manager is also the Constructor.

There are two distinct contractual phases in this agreement and it is intended for use in cases where the contractor will act as a construction manager during the Pre-construction phase where his duties will be in support of the design team i.e. site investigation, budgeting, schedule building, means of construction and development of the GMP. If the owner accepts the contractor's Guaranteed Maximum Price, after the design work is sufficiently complete to allow the establishment of the GMP, the project proceeds to the Construction phase where the the contractor performs as the builder. If the parties fail to reach an agreement on the GMP the contract allows the owner to go elsewhere for his builder, redesign the project to save costs or abandon it altogether.

Both of these Cost Plus Fee contracts use the AIA 201 General Conditions in tandem with the agreement.

There are more than 80 contracts and administrative forms available from the A.I.A. in both print and electronic versions which can be ordered through their web site at www.aia.org or through the local office of the A.I.A. in San Jose Ca. located at 325 S. First Street, Suite 100, San Jose CA 95113 (408) 298-0611