Practicing ArchitectureKnowledge Communities
Reprinted from the Spring 2005 edition of The Construction Lawyer, with permission of the American Bar Association
The AIA’s new 2004 design-build contract forms have arrived, and they are a major improvement over the 1996 edition. Breaking the AIA’s traditional 10-year cycle for contract form updates, the AIA Documents Committee produced a set of forms just as the design-build movement reaches a fever pitch. The new forms were released at the end of December 2004, barely qualifying as a “2004 edition” and avoiding a massive reprint to call them the “2005 edition.” The series introduces five new forms (A141, A142, B142, B143, and G704/DB) and retires all three of the old forms (A191, A491, and B901). The new documents are the result of intensive efforts by the Documents Committee—led by Paul Sieben, FAIA (former chair of the AIA Design-Build subcommittee) and by Tim Twomey, Esq., AIA, (in-house counsel for Shepley Bulfinch Richardson & Abbott)—with input from the Advisory Group of the AIA Design-Build Knowledge Community and several outside commentators, including many public and private owners. The result is a slick set of contracts that works with any type of design-build project—whether contractor-led, architect-led, or developer-led.
The Documents Committee attempted to make the design-build documents more “owner-friendly” while also “fair and balanced” for all participants. Here is an analysis of the new forms, soon to be seen at a project near you.
Major Changes Across the Board
Some global changes apply to the forms. Here are five of the more significant revisions:
Two-parts no more. The former AIA forms were in two parts: a Part 1 Agreement for preliminary design and budgeting (a feasibility study) and Part 2 for the full design and construction phase. The two-part format allowed owners to decide whether to go forward with the team (or with the project) after a feasibility study. However, some design-builders complained that owners sometimes terminated them after getting often-inexpensive design and estimating services. Now, the contract locks the owner in from Day 1 but gives the owner certain rights to use the documents even if it decides to change design-builders. Under the 2004 edition, the owner must proceed with the project and with the design-builder unless the owner elects to terminate the contract for convenience, which can be costly. If such a termination precedes the start of construction, the owner pays for design services performed, costs due to termination, and overhead and profit on design services not completed. If termination occurs after construction starts, the owner must pay for work performed, termination costs, and overhead and profit on work not performed, i.e., lost profits (A141, Exhibit A, section A.14.4). If the owner makes these payments, then the owner is permitted to use the design and documents to complete the project with another design-builder (see discussion, below). The Documents Committee felt this was a fair balance between the owner’s need for flexibility and the design-builder’s and architect’s interests.
New dispute resolution options. Mandatory arbitration has been a part of the AIA documents for more than a century. The AIA first incorporated arbitration clauses into its contract forms when it began publishing them in August 1888.1 After much debate and input from various groups on the issue, the AIA opted for a major philosophical and formatting change: a checkbox that allows the parties to designate whether they will arbitrate, litigate, or something else (A141, Exhibit A, section 6.2). Mediation is a condition precedent to either arbitration or litigation. The new design-build forms also introduce the concept of a “neutral” to help resolve disputes. Such a party may be hired in response to concerns that an architect who either holds the prime contract or is a subcontractor to the design-builder cannot be objective or neutral. The designation of a neutral is optional by the parties, and if no neutral is appointed, the owner decides disputes, as discussed below.
Multiple exhibits. AIA has left more flexibility (and less structure) in areas such as insurance and preconstruction services. Rather than set out specific terms, the forms merely furnish blank “exhibits” that the parties fill in with their own custom terms. The Design-Build Institute of America (DBIA) does something similar in its Owner and Design-Builder contract, No. 530 (1998 edition), section 10.1. In fact, of the “big three” organizations that have developed contract documents, only the Associated General Contractors of America (AGC) has a form with blanks to fill in the exact limits of insurance (see AGC Doc. No. 410 [1999 edition], sections 11.2 and 11.3).
Payment terms. The new forms have options for payment, including lump sum or cost-plus (either open-ended or with a guaranteed maximum price). The parties merely check the appropriate box for the selected method. If a cost-plus basis is used, a separate Exhibit B to the A141 prime contract spells out what costs are properly charged to the owner by the design-builder.
New terms. The customary AIA phrase “Contract Documents” is replaced in the prime agreement with the phrase “Design-Build Documents,” which consist of the contracts, exhibits, supplementary conditions, the design-builder’s proposal, and other listed documents. The old phrase “Contract Documents” remains, however, in the Agreement between Design-Builder and Contractor (e.g., A142, section 1.1). The long-standing “General Conditions” portion, incorporated into the older form, is now called “Terms and Conditions” and is Exhibit A to the prime A141 design-build contract. Another new term (as well as a new Exhibit B) is the “Control Estimate,” which is an estimate prepared by the design-builder when there is a cost-plus contract without a guaranteed maximum price (GMP). The Control Estimate is used “to monitor actual costs,” although this estimate is not itself a GMP.
Architects Take the Lead Role
The Advisory Group of the AIA Design-Build Knowledge Community is advocating architect-led design-build as an option many architects have overlooked. Ever since the first edition of AIA design-build contracts in 1985, the structure of the forms presumed that the architect would be a subcontractor to the design-builder. The position of “architect” has always been treated as someone separate and apart from the “design-builder.” The AIA continues to treat the architect and design-builder as distinct entities, but as the new instructions state, “The Design-Builder may be a design-build entity, an architect, construction contractor, real estate developer, or any person or entity legally permitted to do business as a design-builder in the jurisdiction where the project is located.” This time around, the instructions are even more empowering for architects, saying, “An architect or architectural firm choosing to function as a design-builder may directly contract to perform design-build services or, alternatively, may form a separate corporate entity or joint venture for design-build.” A bit of advice to architects taking the lead: If it is your intent to hold the prime contract and either self-perform the construction (as a general contractor) or to subcontract to a general contractor, there is no need for the form B143 Agreement between Design-Builder and Architect.2
The Five New Forms
The AIA 2004 design-build family of contract documents comprises the five forms described below.
A141 Agreement Between Owner and Design-Builder
The A141 (2004 edition) replaces the former A191, introduced in 1985 as the primary agreement between the owner and its design-builder. The form is straightforward, with no frills, just basic fill-in-the-blanks for essential information such as names of parties, contract amount, and payment terms. The essence of the agreement is left to Exhibit A, called the “Terms and Conditions,” a 29-page document that covers the standard AIA ground, normally found in the A201 General Conditions.
In this form, the “Contract Time” is measured from “commencement.” The words “date of commencement” are defined in section 3.1 to mean “the date of this Agreement unless a different date is stated below or provision is made for the date to be fixed in a notice issued by the Owner.” Many parties choose to modify this provision to tie commencement to either “notice to proceed” from the owner or the issuance of certain permits necessary to begin work. For example, DBIA’s Doc. No. 530, section 5.1, defines “Date of Commencement” as five days after receipt of the Owner's Notice to Proceed. If a cost-plus approach is chosen, then what qualifies as cost of the work is left up to Exhibit B. There is no blank left to fill in a shared savings of costs, unlike DBIA’s Doc. No. 530, section 6.5 (1998 edition), although there is an italicized note that the parties can insert such a clause if they wish. Nor is there any provision for a bonus for early completion.3 Insurance and bonds are left up to Exhibit C, which is a blank form with no specified types of insurance listed.
Under this form, the owner furnishes project criteria on which the design-builder is entitled to rely. The A141 does not include a form or exhibit for the project criteria, and the parties must attach their own exhibit for reference. The owner also furnishes surveys and geotechnical services. The contract allows the owner to obtain an independent peer review of the design-builder’s design by another architect, engineer, contractor, or cost estimator.
To correct a problem in the 1996 edition, which incorporated the A201 General Conditions for traditional projects, the new series transfers much of the architect’s construction administration duties to the owner. For example, the owner now is responsible for (1) review of submittals, (2) review of proposed changes to the documents, (3) periodic site visits, (4) rejection of nonconforming work, (5) inspections and certifications for substantial and final completion, and (6) review of pay applications. The owner may opt to have its consultant perform these functions by using new form B142 Agreement Between Owner and Consultant (2004 edition).
Prompt payment of the architect by the design-builder “upon receipt of payment from the Owner” is required under section A.9.6.2 of the Terms and Conditions. The exact time for such payment is set out in section 5.8 of the B143 Design-Builder and Architect Agreement, which ties payment to the date of the architect’s invoice, not to the date the owner makes payment. Design-builders will want to coordinate these dates so that payment is not due before the date the owner is to make payment. The contracts do not contain an express “pay-when-paid” clause, and architects should be alert for clauses that are added on that subject.
Based on some court cases that have cast doubt on whether an architect’s “services” are covered by a “labor and material payment bond,” the AIA Terms and Conditions clarify in section A.11.5.1 that the payment bond covers “payment to design professionals engaged by or on behalf of the Design-Builder.”4
A142 Agreement Between Design-Builder and Contractor
The new A142 (2004 edition) replaces the A491 as the form of subcontract between a design-builder and a contractor. If the design-builder is a general contractor, this form most likely will be used as a trade subcontract; if the design-builder is an architect or developer, it may be used to hire a general contractor. The form does not have much detail but identifies the parties, the project, the method of payment, the contract amount, and the completion date. Like the owner’s agreement with the design-builder (A141), this contract lets the parties decide if they want to arbitrate or litigate disputes that are not settled via mediation. This form includes the following exhibits:
• Exhibit A, Terms and Conditions (a 28-page document)
• Exhibit B, Preconstruction Services (a blank form) (which would have been nice to see as an exhibit to the prime contract, A141, as well)
• Exhibit C, Scope of Work (another blank form)
• Exhibit D, Cost of the Work (for cost-plus jobs), requiring a “control estimate”
• Exhibit E, Insurance and Bonds.
B142 Agreement Between Owner and Consultant
The new B142 (2004 edition) does not replace any form from the prior edition; it is totally new, based largely on the traditional B141 Owner-Architect Agreement. This form addresses services that may be provided by an owner’s representative, which the Documents Committee calls simply a “consultant.” The committee chose the label largely to facilitate for the owner the opportunity to use the AIA documents without feeling that it must hire an architect for this role. Of course, an architect can perform the duties of an owner’s consultant if the owner so chooses. Project parameters, names, program, and budget are all set out in Exhibit A. A nicely detailed checklist of services is used as Exhibit B, in which the parties check a box if the consultant is to provide services listed.
B143 Agreement Between Design-Builder and Architect
The new B143 (2004 edition) replaces the old B901 (1996 edition) as the form of subcontract between a design-builder and an architect. This can be used easily for contractor-led or developer-led teams as well as in those cases where the architect leads either by using a separate entity to hold the prime contract or by forming a joint venture that subcontracts back to the architecture firm for services.
In this author’s view, this form contains one inconsistency from the prime A141 agreement: It states that the design-builder agrees to furnish surveys and geotechnical services to the architect, whereas the prime A141 says that the owner furnishes those services. A clarification here would be helpful, to point out that the design-builder is merely furnishing what the owner has provided and nothing more. The AIA Documents Committee discussed this topic when drafting but determined that because the owner has this obligation to the design-builder, the design-builder is merely passing on to the architect whatever it gets from the owner. If, however, the owner is not required to obtain surveys or geotechnical information through revisions to the prime agreement, the committee felt it was nonetheless essential that the architect obtain this needed information from the design-builder.
The architect must furnish a schedule to the design-builder in section 2.3.4. Warning to architects: Section 2.3.6 prohibits the architect from accepting employment that might compromise the architect’s professional judgment with respect to the project. An architect working as a subcontractor to a contractor on a design-build project also may have to disclose this team relationship to owners on other projects if the architect is hired on another traditional delivery project for which the owner has hired that same teammate or contractor. State and AIA ethical rules require disclosure and consent by third parties if any potential conflict might compromise the architect’s professional judgment.5
Cost estimating by the architect is an optional service, but in section 126.96.36.199 the AIA has deleted the word “best” with regard to such estimates representing the architect’s “best” judgment. The 1987 B141 owner-architect form used the word “best” in section 5.2.1, which some lawyers felt might create a higher standard of care than the architect’s insurers would cover. Exhibit A has blanks for the project name, budget, and other parameters, as well as the project criteria. Exhibit B is the Scope of Services, a checklist of services which can be tailored to fit each project.
G704/DB Acknowledgement of Substantial Completion
The new G704 (2004 edition) is similar to the standard G704 form used on traditional delivery method projects. The primary difference is that the architect does not sign this form; it has signature lines only for the owner and the design-builder. Why the architect does not sign is unclear, although there is some fear that aggressive design-builders would pressure their architect-subcontractors to sign off on a date that might ensure an early completion bonus or limit liquidated damages for late completion. Taking the architect off this form eliminates that ethical dilemma.
Ownership and Reuse of Documents
A hot topic in design-build is who owns the copyrights. The owner? The design-builder? Or the architect? AIA’s clauses on copyrights and ownership in the prime A141, Exhibit A Terms and Conditions, leave it somewhat vague as to who owns the rights to the drawings and specifications prepared by the architect and “furnished” by the design-builder.
At first reading, the contract implies co-ownership by stating in section A.1.6.1 that the “Design-Builder, Design-Builder’s Architect, and other providers of professional services individually shall retain” the copyrights in Instruments of Service “furnished by them.”6 Perhaps the intent is that each entity owns what it “prepares,” but by using the word “furnish” the A141 form leaves vague whether the design-builder has ownership rights in documents it “furnishes” to the owner. This is cleared up, however, in the subcontract between design-builder and architect. That form, the B143 Agreement between Design-Builder and Architect, says in section 3.2.1 that the architect and its consultants are the authors and owners of all copyrights in their work. The design-builder’s right to use the documents terminates if the architect’s services are terminated unless the termination was “for cause.” If terminated for cause, the design-builder can give the documents to another professional to complete the project.
Under the A141 and B143 contract forms, the owner holds a nonexclusive license to reproduce the documents in connection with the project, and the design-builder must obtain such a license from its architect and other professionals. To solve the dilemma that occurs if the owner terminates its design-builder, section A.1.6.4 says that the owner is granted a license by all of the design professionals upon termination of the prime design-builder to use the documents for completion of the project as long as the owner (1) assumes the design-builder’s duties to the design professional and (2) pays all amounts due the design professional and its consultants. If the owner does not agree to assume these duties, then the owner can still use the documents to complete the project as long as the owner indemnifies and holds harmless the design professional from claims, expenses, and attorney’s fees incurred as a result. Again, this was part of the Documents Committee’s attempt to be “owner-friendly” while striking a fair balance among all parties, and it seems the committee succeeded.
What if the team of design-builder and architect come up with a creative and marketable new design? Can the design-builder use it on other projects? Not under the AIA forms, because section 3.2.5 of the B143 (2004 edition) expressly bars the design-builder from using the architect’s design documents for “future additions or alterations to the Project or for other projects” unless the architect has given prior written consent.
Some Concerns about the New AIA Forms
AIA has done a great job. No set of form documents is perfect, however, nor are they suitable for every project. A few concerns about the new forms from the perspective of various users will certainly include those described below.
For those architects who act as the prime design-build contractor, some awkward clauses still treat the architect as someone separate and distinct from the design-builder—a holdover from the former AIA format and philosophy of architect-as-subcontractor. For example, the A141 Owner and Design-Builder Agreement, section 7.1, says, “The Architect, other design professionals and consultants engaged by the Design-Builder shall be persons or entities duly licensed to practice their profession . . . and are listed as follows.” Exhibit A to the A141, section A.1.1.3, defines the “Architect” as someone having “a direct contract with the Design-Builder.” It would be simple to add to Page 1 of the A141 a general statement that “The Architect and Design-Builder are the same entity and all references to ‘Architect’ shall be deemed to refer to the Design-Builder.” Otherwise, there are many paragraphs to modify to make sense when the architect and design-builder are one entity.
Perhaps the most troublesome new provision is the certification in A141, Exhibit A’s section A.3.2.9. The AIA has created a new certification to be issued by “each of the Design-Builder’s professionals,” attesting that, to the best of their knowledge, the documents are consistent with the owner’s project criteria and comply with applicable standards, laws, and regulations and that the owner’s own consultants can rely upon the accuracy of such certifications. No other industry standard form requires this certification from a design professional, and the AIA is breaking new ground here. The Documents Committee intentionally added this new provision as part of its “owner-friendly” approach to the drafting, so that owners have a level of assurance that the documents furnished by the design-builder reflect the owner’s project criteria. Although the A141 states that it does not create a contract between the owner and architect (section 1.1) and Exhibit A says that the architect’s services are for “the exclusive benefit of the Design-Builder” (all in an effort to distance the architect legally from the Owner), this new certification may create direct liability to the owner and other consultants that rely on it.7 Has the AIA gone too far in accommodating owners at their own members’ expense? Only time will tell whether these certifications expose architects to any direct or increased liability and whether owners will now come to expect this certification as standard when use of the 2004 series becomes widespread.
Express warranties are not covered by professional liability insurance and, therefore, you will not find the architect making any express warranty or guarantee in the B143 Agreement Between Design-Builder and Architect. However, in A141’s Terms and Conditions, the AIA’s section A.3.5.1 warranty starts off by limiting its application solely to “materials and equipment” but then expands the warranty to “the Work” as being free from defects. The problem here is that A141’s Terms and Conditions defines “the Work” as “the design, construction and services.” Therefore, although the law does not require architects to warrant their designs as flawless, nor are architects insured for express warranties or guarantees, the new AIA documents may have inadvertently created a design warranty by the design-builder to the owner that is not insurable. Modifications may be needed here to exclude design services from any express warranties.
The AIA does not publish a generic agreement between design-builder and design professional, so architects who take the lead role in design-build must either use the C141 or C142 form of agreement between architect and consultant or modify the B143 Agreement Between Design-Builder and Architect to make it work for consulting engineers.
The role of neutral is now filled by a new player (at the parties’ option)—someone who must be hired and paid to help resolve disputes. With owners hiring “consultants” to help with the project, and now a “neutral” to handle claims, the streamlined process of design-build seems to become more fragmented unless the consultant is designated as the neutral.8 Of course, the parties could agree that even the design-builder’s architect act as the neutral. The presumption seems to be, however, that architects working as a subcontractor to a design-builder cannot be ethically neutral due to a conflict of interest. What this overlooks is that architects working for owners have for decades been acting as neutral to resolve disputes between owners and contractors. So why is it presumed that the architect working for the design-builder cannot be neutral? Hiring another party only adds costs to the process. In either structure the architect is paid by a party who has a vested interest in the dispute.9 The AIA’s A201 General Conditions currently calls for all disputes “including those alleging an error or omission by the Architect” to be referred initially to the architect, so it would appear that architects are capable of acting neutral even if their own work is in question.10 This new role of “neutral” may even lead to a new profession of project “neutrals.”11
Although insurance is left up to a blank exhibit, the types of insurance are set out in section 11.2 of the Terms and Conditions. Noticeably absent from the list of eight types of insurance is “professional liability” or “errors and omissions” insurance. Owners will have to specify whether this is required and its limits in Exhibit C. Both AGC’s Doc. No. 410 (section 11.3) and DBIA’s Doc. No. 535 (section 5.1.4) address professional liability insurance, so it is somewhat surprising to find that contracts published by the AIA do not mention this topic.
If the parties do not designate a neutral to resolve disputes, then A141, Exhibit A, section A.4.2.2, says that “the Owner shall provide an initial decision,” and section A.4.2.3 says that the owner’s decision “shall be final and binding on the parties,” subject to mediation and other dispute resolution methods. The AIA apparently felt that “someone” must decide disputes and that the owner would be the best person if no neutral is designated. How courts interpret the “final and binding” effect of the owner’s decisions is yet to be seen because this is a radically new concept for AIA contracts. By contrast, DBIA forms neither require a “neutral” nor have the owner decide disputes but instead require a process of joint negotiation.12
Although the new AIA 2004 design-build series is not perfect, this set of form is much improved over the 1996 edition. It will take a few projects to become familiar with the formatting, the exhibits, and the new terms and certifications, but over time the new 2004 forms likely will become the primary contracting forms for design-build, maintaining AIA’s leadership in the contract form market. Congratulations to the AIA Documents Committee for developing a flexible and updated set of contracts tailored to today’s design-build project delivery. The waiting has been worthwhile.
G. William Quatman, FAIA, is a licensed architect and practicing attorney with the law firm of Shughart Thomson & Kilroy, P.C. He serves on the Advisory Group of the AIA Design-Build Knowledge Community and as the National Chairman of the Laws and Regulations Committee of the Design-Build Institute of America (DBIA). Quatman is both a Fellow of the American Institute of Architects (AIA) and a Designated Design-Build Professional (DBIA).
1. The AIA’s earliest owner-contractor agreement provided for arbitration before a three-member panel, " . . . to be appointed as follows: one by each of the parties to this contract, and the third by the two thus chosen; the decision of any two of whom shall be final and binding, and each of the parties hereto shall pay one-half of the expenses of such reference." Form of Contract, adopted by the Joint Committee of the American Institute of Architects, the Western Association of Architects, and the National Association of Builders, Art. 3d, p. 1 (August 1888).
2. The old philosophy is still seen in the new forms. For example, section 1.1 of the A141 says that the agreement between owner and design-builder does not create a contract between the owner and the architect—again treating the architect as separate from the design-builder.
3. The AIA’s instructions sheet to A141 contains a sample clause for liquidated damages that clearly makes the design-builder and its surety liable for liquidated damages in an amount to be set by the parties. However, there is no provision for an early completion bonus, unlike the DBIA Doc. No. 530, section 5.5 (1998 edition).
4. See, e.g. Fields Hartwick Architects v. Capitol Indem. Corp., 884 P.2d 198 (Ariz.App. 1994); see also Herbert S. Newman & Partners v. CFC Constr. Ltd. Partnership, 674 A.2d 1313 (Conn. 1996).
5. Ethical Standard 3.2 and Rule 3.201, AIA Code of Ethics and Professional Conduct (1997).
6. Section A.9.3.3 requires the design-builder to warrant that title to “all Work other than Instruments of Service” passes to the owner no later than the time of payment.
7. Section 2.2.7 of the owner-consultant agreement, AIA B142 (2004), says that the owner shall “require” the design-builder to obtain this certification from its design professionals and that the owner’s consultant can rely on it. This opens the door to some “third-party beneficiary” liability on the part of architects, perhaps even for “economic loss” in states where normally such a consultant could not sue the design-builder’s architect absent some direct contract. Architects need to get legal counsel on this before agreeing to provide such certifications to third parties. Section 2.3.11 of the B143 (2004) Agreement Between Design-Builder and Architect requires the architect to issue this certification.
8. In the design-build contracts published by the Canadian Construction Association (CCA), Form 14 (2000 edition), Part 5, pay applications are submitted to yet another third party, a “payment certifier,” to eliminate any conflict of interest that an architect might have when working as a subcontractor to a design-builder. This takes fragmentation of the process to another level of absurdity.
9. Also in the CCA design-build contracts, Form 14 (2000 edition), Section 8.1.1, states that disputes are to be first submitted to “the Consultant”—which in that case is the design professional hired by the design-builder.
10. See Section 4.4.1, AIA A201 General Conditions of the Contract for Construction (1997 edition).
11. The concept of a project neutral is not a new one. The international design-build forms published by the Federation Internationale des Ingenieurs-Conseils (FIDIC) use a “dispute adjudication board” as a neutral, consisting of from one to three persons, to resolve disputes. See, e.g. Section 20.2, Conditions of Contract for EPC Turnkey Projects, FIDIC (1999 edition).
12. See, e.g., Section 10.2, DBIA General Conditions (1998 edition).