March  10, 2000



Bulletin # 33: The Search For A User-Friendly Contract Part I

ZZZ Sheetmetal valued its reputation as the best “HVAC subcontractor” in its metropolitan area. Over twenty years it had grown from operating out of a small bus garage to having its own headquarters and fabrication facility. In the old days, each of the principals had to know every aspect of the business, but with growth had come specialization. The accounting department now had more people than the entire business had employed in its first few years. Responsibility and pressure were part of many positions with the firm and coming up through the ranks was not unlike Marine basic training. However, there was one job that everyone avoided like the plague: contract administrator.

Joe now occupied this unfortunate position. He had seen his career side-tracked several years earlier when he mentioned, at a construction meeting, that the company had gotten a little sloppy in its review of the contract on a particular job. He recounted some of the problems this had caused him and made suggestions for improving the process. His suggestions were enthusiastically received and it was unanimously agreed that Joe should be put in charge of reviewing and negotiating contracts. His days were now consumed with poring through small print. He could not decide whether it was his imagination or whether the contract forms were actually getting longer, the print smaller, and the terms more unreasonable. He asked whether others might be in line to take over his job. The response made it clear to Joe that his position was viewed as the business equivalent of a Siberian labor camp.

The breaking point for Joe came when he was asked to review a proprietary subcontract which, with exhibits, totaled over 100 pages. On the first page, Joe encountered the following language under the heading “Scope of Work”:

“Notwithstanding any other terms of this Agreement to the contrary, and subject to Subsection 11(b)(iii), the Subcontractor shall be bound to all of the terms of this Agreement and the Prime Contract and shall have all obligations and responsibilities toward the Contractor and Owner as the Contractor possesses under the Prime Contract, as it may be amended. Except as otherwise provided in this Agreement and to the fullest extent permitted by law, the Subcontractor waives any defense, at law or in equity, based upon the definition of the scope of the Work or the adequacy or completeness of disclosures made to the Subcontractor in conjunction with its entry into this Agreement.... This Agreement shall be fully subject to the provisions of Exhibits B and C (as modified by Subsection 14(b)(iv)), which shall supersede the terms of this Agreement relative to the contents thereof, except that this shall in no way be deemed to limit or waive any rights of the Contractor to demand the scope of performance by the Subcontractor inferable in any way from this Agreement or the Prime Contract...”

Joe then started to count the number of crossreferences to other sections of the Agreement and uses of the “notwithstanding anything contained herein to the contrary” and “except as otherwise provided herein” phrases. At the point that he reached double figures in one sub-paragraph, he headed for the window ledge. When a secretary convinced him that a jump from the second floor would neither be fatal nor injure him sufficiently to allow him to miss work, he cursed quietly and went back to reading the endless gibberish.

The point of this depressing saga is not to understate the importance of contracts in the construction process or to diminish the role of the personnel that have to deal with contract issues day-today. In fact, depending upon how a project progresses, the terms of the contract documents may well dictate whether or not a project is a success. In the worst case, the terms of the contract may determine whether or not the contractor survives serious problems with a job. However, the process of getting to an understandable and reasonable contract remains a major source of frustration, particularly for subcontractors. What is it that makes construction contracts so complicated? At its essence, such a contract should simply set out, as clearly as possible, what each party’s expectations are with regard to a project. In the law, the concept is referred to as achieving a “meeting of the minds” between the parties. What is unique to construction is the need to make the contracts of the construction manager, general contractor, subcontractors, architects, engineers, and all other construction professionals fit together to achieve an overall “meeting of the minds.” If the various contracts are incompatible or poorly drafted, it may be unclear which party is responsible for a particular aspect of the work, which party’s insurance applies to a casualty situation, whether a subcontractor is entitled to payment upon completion of its work or only when the entire job is finished, etc. On a large job with multiple tiers of major subcontractors and suppliers, the proper coordination of the contracts poses a huge challenge.

The unique complexity of construction projects eventually led industry groups to advocate for standardized contracting. If a standardized set of agreements could be developed and adopted, all of the parties signing the agreements would have some confidence that the agreements for each of the project participants would be compatible. The contracting process would be streamlined, insurance could be more effectively and reliably incorporated into project risk management, and the frequency of contract disputes and resulting lawsuits could be (at least theoretically) reduced. The development of standardized construction contracts through the American Institute of Architects (“AIA”) and the Associated General Contractors of America (“AGC”) represented a huge step forward in dealing with these issues. From the first version of the A201 General Conditions published in 1911 and the A401 Subcontract form in 1915 (as well as equivalent AGC documents), tens of thousands of hours have been spent by industry professionals negotiating, drafting and refining standardized forms of agreements applying to almost every aspect of construction. The forms have also changed as the industry evolved, most recently beginning to reflect a movement toward a “partnering” concept among the various construction disciplines.

On the other hand, despite all of the efforts at standardization of contracts over the past century, it is the perception of many contractors that construction documentation remains too cumbersome.

In the next several issues, this Contract Bulletin will discuss the latest effort by the AGC to simplify the contractual relationship between general contractors and subcontractors. The new form, “AGC Document No. 603, Standard Short Form Agreement Between Contractor and Subcontractor,” is now in the final stages of approval. It incorporates concepts and ideas not only from the AGC but also from a number of other industry groups, such as the Associated Specialty Contractors. While the complexity of some projects may still make the longer AGC 600 or AIA A401 Subcontract forms more appropriate, the availability of an up-to-date four and one-half page subcontract form should be greeted with enthusiasm by most industry professionals. When the “heretofores” and “hereinafters” get replaced with “you will do this work for this amount over this time period,” everyone in the industry should benefit. This is particularly true as to the “Joes” of the world who may now find it possible to make it through an entire day without their eyes glazing over at the thought of another contract review.

 

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