Words: Paul Potts
When I started in the construction industry in the eighties I was as an owner’s representative building jails, juvenile homes, and office buildings for a central Michigan county. All projects of a million dollars or larger in outstate Michigan were general contracting projects where the owner negotiated agreements with a general contractor or put out an advertisement for bids to available general contractors who in turn hired all the subcontractors. Although I wasn’t aware of it at the time, most of the projects used AIA forms of Agreement Between Owner and Contractor and AIA Document A201 General Conditions of the Contract for Construction 1987 edition to complete agreement with the general contractor. The general contractor was at risk for all mistakes by his subcontractors If any delays occurred that were significant or affected the critical path the owner had only to look to the general contractor to straighten things out. This was a very effective process because general contractors had a lot of clout, they could bring to bear on subcontractors to keep them in line and settle differences without disrupting the project. Few owners have this kind of clout.
The first construction management project where I was employed as a construction and contract administrator was after I began working for a larger architectural firm as a construction and contract administrator building schools and office buildings.
My experience with construction management came over me slowly. I marveled at the glee that was obvious in members of the Association of General Contractors to be able to shift financial responsibility for subcontractor’s performance from their balance sheet to the owner’s.
The first in-depth experience I had with multiple prime contract construction management came when I was consulted as the initial decision-maker to review and give an opinion on a conflict that had arisen between the mason and electrical contractor. The electrical contractor had fully manned the project at the start, but the mason contractor was slow to man up the project and as a result, the electrician had too many electricians to be kept busy by the mason’s workforce.
The electrician had some experience with construction management contracting and more or less knew what to do. He submitted a claim for delay of the project in the amount of $50,000.00 for me to review as an initial decision-maker. This represented his losses due to the mason’s lack of progress. Ultimately, after it was out of my hands, the decision was made to reimburse the electrical contractor for the claim, but there was no real effort to recoup the loss from the mason.
Another interesting facet of early construction management services was the construction manager furnished services scheduling, preparation of change orders for example, that had traditionally been performed by the architect. There was no question that the construction manager was replacing services that had not been performed so well by architects. The caveat was that the construction manager employed extra clerical people to perform these services and charged the owner for the extra clerical services.
As you read the following article keep the above in mind. Some projects do not require critical path scheduling and are not complex enough to require the extra services of a construction manager and could be built just as well by a general contractor.
This article presents the differences in delay responsibilities under AIA contract agreements – AIA A101-2017 Standard Form of Agreement Between Owner and Contractor including AIA A133™–2019 Standard Form of Agreement Between Owner and Construction Manager as Constructor hereafter referred to as A101/A133. Agreement AIA A101/133 incorporates by reference general conditions AIA Document A201 ® — 2007 General Conditions of the Contract for Construction. In each case, the contractor or construction manager is at risk for the performance of the trade subcontractors.
Alternately in A132–2019 Standard Form of Agreement Between Owner and Contractor, Construction Manager as Adviser Edition, hereafter referred to as A132 has its own General Conditions AIA Document A232-2019 General Conditions of the Contract for Construction, Construction Manager as Adviser Edition.
NOTE: It is the premise of this article that all parties are using (AIA) standard agreements and general conditions for contracting purposes.
NOTE: All examples cited in this article are for illustration purposes and do not represent factual claims or cases.
In AIA A101-2017 Standard Form of Agreement, the owner has a single agreement with a general contractor that has agreements for construction with each of the trade subcontractors. There is no construction manager. In AIA A133™–2019 agreement for construction, a construction manager, in addition to serving as an adviser to the owner, also provides construction of the project employing all trade contractors taking on the risk of being the sole responsible party for delay. The owner has a single contract with a construction manager who has contracts with each of the trade subcontractors.
A more comprehensive construction management Agreement is AIA A132–2019 Standard Form of Agreement Between Owner and Contractor, Construction Manager as Adviser Edition. In the A132 agreement subcontractors, now called prime trade contractors, each have a separate prime contract with the owner. The construction manager is solely an adviser to the owner with no risk for the performance of the prime trade contractors. The owner inherits this risk.
In A132 The owner has an agreement with the construction manager as adviser and multiple separate prime contracts with each trade contractor: mechanical, electrical, etc. The construction manager remains an adviser to the owner throughout the project but has no risk or liabilities for the performance of the trade contractors. Thus, A132 is titled Standard Form of Agreement Between Owner and Contractor, Construction Manager as Adviser Edition. Delay liabilities differ considerably in these two separate contract formats (A101/133 versus A132). In the case of A101 and A133, the general contractor or construction manager is at risk for delays of their subcontractors. In A132 the owner is at risk for the performance of the prime trade contractors and the construction manager is not an at-risk entity.
The following are some important details regarding liability for delay in either contracting method are worth review before we go further.
Excusable or Inexcusable Delay
Delays may be excusable or inexcusable. Each party signing project contracts may be financially responsible for delays including the owner or architect. In A101 general contractor agreement, it doesn’t matter which contractor is responsible for the delay because all subcontractors have agreements with the general contractor that has an all-encompassing construction agreement with the owner. Responsibility for subcontractor delays lies with the general contractor regardless of which subcontractor is at fault. Excusable delays may be the result of weather, hidden earth conditions, or other conditions beyond the control of the delaying party. The owner may be responsible for the delay by asking for too many changes in the design after the contracts have once been signed.
Liquidated Damages are amounts that the contractor agrees to pay the owner, often on a per diem basis, if the contractor fails to complete a substantial portion of the project (completing a usable portion of the project) by the agreed-on date of substantial completion. The contractor can take refuge from paying liquidated damages if there is an excusable delay involved.
In AIA A101 – 2017 Standard Form of Agreement Between Owner and Contractor Article 4 Contract Sum Para. 4.5 Liquidated Damages (if any) are made part of the agreement between the owner and contractor. Often this paragraph is left blank, and no damages are set. If there is an amount entered, it must not be punitive but represent some tangible losses the owner would suffer if the project were not substantially complete to the point the owner can make use of the project for the purpose it is intended by the date of substantial completion.
In many cases of delay in AIA 101, the owner is not required to make a claim of delay. The contractor is ipso facto responsible for liquidated damages if the project is not substantially complete by the agreed-upon date of substantial completion. The owner can deduct the liquidated damages from the contractor’s monthly pay request without making a claim.
Direct Versus Consequential Damages
When an error in the documents or miscalculated movement of a crane causes damage to the structure under construction the cost to rebuild the structure is considered a direct cost and can be the subject of a claim under the contract. However, any lost profits or rents due to the setback in the completion of the structure are considered consequential damages and are not collectible under the contract (see para. 15.1.7 of the general conditions). The recoupment of consequential damages has been controversial in design and construction circles since at least 2007 when the AIA chose to incorporate para. 15.1.7, as part of AIA Document A201 — 2007 and AIA Document A232-2019 General Conditions of the Contract for Construction. Para. 15.1.7, a waiver of claims for consequential damages, states that consequential damages could not be sought between parties to AIA agreements. This waiver is a part of A201and A232 General Conditions and is incorporated by reference in A101/A133 and A132 agreements.
The following is a direct quote from the AIA document A201 – 2017 and AIA document A232 para. 1 5.1 .7 Waiver of Claims for Consequential Damages
“The Contractor and Owner waive Claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes:
“.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business, and reputation, and for loss of management or employee productivity or of the services of such persons: and”
“2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business, and reputation, and for loss of profit, except anticipated profit arising directly from……”
AIA A132–2019 Standard Form of Agreement Between Owner and Contractor, Construction Manager as Adviser Edition.
There are many benefits to multiple prime contract agreements like A132. The owner gains a valuable resource in the construction manager’s counsel and the benefits of fast-track schedules would be less manageable without similar agreements. Also, the owner with the counsel of the construction manager is no longer an outsider in the construction process.
While there are significant benefits for the owner, the design team, and the construction manager in the AIA A132–2019 Standard Form of Agreement there is also a significant transfer of liabilities from the builder (construction manager) to the owner. In the A132 agreement, the construction manager sheds many risks that are normally the responsibility of the builder but are now inherited by the owner.
Under the A132 agreement, the owner has separate contracts with each prime trade contractor and inherits the liabilities that go with each contract relationship. Prime contractors have no agreements with each other and are bound together only by the requirements of their contract with the owner and the AIA A232™–2019 general conditions, which are incorporated in each agreement by reference. Any dispute brought by a prime trade contractor would start with a claim against the owner the only party with which the trade contractor has a contract. Fast track scheduling and other benefits acquired by the owner in the A132 agreement must be compared with the liabilities inherited by the owner.
Another complication for the owner in contract agreements where multiple prime contractors have individual contracts with the owner is that there are no contracts between individual prime contractors. If one prime contractor delays another, the injured prime contractor can only make a claim against the owner, the only party with which they have a contract. The owner must sort out who is responsible for the delay (see introduction) and as is often the case the contractor responsible for the delay will attempt to throw the blame on another prime trade contractor that also has a contractor. For example, the electrical contractor will attempt to make a claim of costs for delays caused by the mason contractor that has failed to have enough manpower to keep up with the critical path schedule. Claiming the mason fell behind schedule requiring the electrician to experience a waste of worker’s resources who were at the site based on the critical path schedule but spent much of their time in unproductive activities.
Many trades could simply withhold sending workers to the site until the masonry was ready for their work to be done, but several contractors are fundamental to the critical path and must have workers on the site from the beginning.
In the case of one prime contractor delaying another, the injured contractor could file a claim against the owner seeking to recover losses for delays caused by the delaying prime contractor. The injured contractor must prove, more than likely in court, that the contractor was responsible for the delay and the damages sought to have a factual basis. Some projects should not be organized by these principles.
In conclusion, some projects should be performed under the more traditional A101 contract agreement unless there are real reasons for the owner to take on the liabilities inherent in the A132 construction management approach.
Disclaimer: This article represents the observations and opinions of the author and does not necessarily reflect the position of the AIA. The author’s experience is limited to the Midwest. Civil law varies considerably within the United States from state to state. The reader should consult with legal counsel to determine the complex interaction of laws, suggestions, and illustrations with specific situations within their geographic area of construction activities.