April  7, 2000

Bulletin #34: The Search For a User-Friendly Contract Part II

Contract Bulletin #33 discussed some of the frustrations experienced by subcontractors in reviewing and negotiating construction contract documentation. Almost a century of work has been spent by the American Institute of Architects (“AIA”) and the Associated General Contractors of America (“AGC”) to develop uniform contract forms and to bring some order to the process of contract documentation. Yet, the arrival of the general contractor’s draft of the subcontract form remains one of a subcontractor’s least favorite events on a typical project.

While construction subcontracts can vary in length and complexity from a few pages to the thickness of a book, each subcontract typically encompasses the same primary elements. These include:

1. Definition of the work; 2. Specification of the price; 3. Project schedule; 4. Allocation of responsibility and risks (with insurance specifications to cover certain risks); and 5. Remedies in the event a party fails to perform.

The longer form AIA and AGC contracts cover each area with considerable specificity. While the two sets of forms may each allocate responsibilities and risks somewhat differently, each of the forms takes a fairly balanced approach among the parties. This is particularly true in the more recent versions of the documents.

On the other hand, many subcontractors have to deal with proprietary subcontract forms. Some of these subcontracts may function and look much like an AIA or AGC document. Others are deliberately lengthy, complex and vague. The scope of work may be poorly defined, permitting the general contractor to compel additional work without a price adjustment. The allocation of responsibility and risk may be entirely one-sided. The remedy provisions may provide for impossibly short notice periods as to claims or disputes, broad waivers of claims, or dispute resolution mechanisms designed to work against the subcontractor. While a longer form of contract may not necessarily equate to an unfair contract, the longer and more complex a contract form is, the easier it is to hide unfair and unreasonable terms. Typically, the more “legalese” is used in a contract, the more intimidating it is to negotiate and the less likely it is to be understood by the subcontractor’s personnel. A subcontractor confronted with the combination of potentially good work and a confoundingly complex subcontract will find it very tempting to simply sign and move forward. Only when a problem arises will the subcontractor come to fully understand the unfairness of the subcontract document it has executed in order to obtain the work.

From the perspective of the subcontractor, this experience suggests the need for clear, concise, and understandable contract forms. One example (there are others) is the new AGC Document No. 603, which will be available on May 1, 2000. Identified as the “Standard Short Form Agreement between Contractor and Subcontractor,” the form contains approximately four and one half pages of text printed so that it can be read without a microscope. The entire Agreement comes in at just over 2,000 words. The form uses plain English and cross-references are kept to a minimum. The absence of the words “whereas,” “heretofore,” “hereinafter,” and obscure Latin phrases suggest that the AGC and its collaborators took seriously the notion of producing a document that would actually be understood by both parties. The subcontractor may not agree with a specific term in the AGC-603. However, the subcontractor will at least understand the terms to which it has agreed when it signs the document and enters into the project work.

One of the other advantages of the AGC-603 is that it allows the parties to focus primarily on attached exhibits for project-specific items. With the form laying out the general contractual framework, the exhibits cover the following categories:

Exhibit A: Subcontract Work (Scope) Exhibit B: Prime Agreement, Drawings Specifications, etc. Exhibit C: Progress Schedule Exhibit D: Alternates and Unit Prices Exhibit E: Insurance Provisions Exhibit F: Bonds (if applicable)

This approach makes the subcontract form adaptable to almost any kind of project. (Of course, the subcontractor must still exercise care in making certain that the exhibits accurately reflect the work to be performed).

While the next Contract Bulletin will discuss how the AGC-603 differs from some earlier contract forms in its substantive treatment of the subcontractor, an example from the language will indicate how the goal of creating a clear and concise contract form has been achieved. The AGC-603 addresses “mediation” in its entirety with the following language: “Disputes between Subcontractor and Contractor not resolved by direct discussion shall be submitted to mediation pursuant to the Construction Industry Mediation Rules of the American Arbitration Association. The parties shall select a mediator within fifteen (15) days of the request for mediation. Engaging in mediation is a condition precedent to any form of binding dispute resolution.” In 56 words, the procedure for mediation has been fully addressed. On the other hand, the language concerning mediation in another commonly used contract form is four times as long and begins as follows:

“Any Claim arising out of or related to the Contract, except Claims relating to aesthetic effect and except those waived as provided for in Subparagraphs 4.3.10, 9.10.4 and 9.10.5 shall, after initial decision by the Architect or 30 days after submission of the Claim to the Architect . . .”

While a case can be made for the substantive content of either contract form, the AGC-603 form is certainly more “user friendly” from the standpoint of the subcontractor.

There is no question that some projects, due to their scope or complexity (or lender requirements) will keep the 50 page subcontract from going the way of the dinosaur. However, the movement toward contract forms like the AGC-603 should, as to most projects, make the contracting process considerably more efficient for all concerned.


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