The American Institute of Architects (AIA) is one of the largest professional organizations in the design and construction industry. They create and sell documents commonly used in construction projects, including contracts, payment applications, and more. In this article, we’ll explore the pros and cons of AIA contracts for subcontractors.
The AIA produces some of the most widely used construction contracts in the industry. Because the construction contract governs all aspects of the project, including site conditions, the scope of work, and payment, it’s important for every subcontractor to understand the implications of the documents they sign. The terms of the contract directly affect a subcontractor’s cash flow on a project. Failing to understand the implications of the terms could delay or interrupt payment.
The importance of the construction contract
When it comes to getting paid, few documents will be more important to the subcontractor than their contract with the GC or prime contractor. The contract will generally specify:
- How much you will be paid
- The work you must do to get paid
- The payment application to use
- The terms and procedures for payment
- Whether retainage will be withheld, and how much
- How to handle payment disputes
It should be easy to see why the contract holds so much power, and why it’s important to understand the document completely.
The pros of AIA contracts
The AIA contract documents are standardized forms that are applicable to many projects, commercial or residential. For subcontractors, the most common AIA contract is the A401 Standard Form of Agreement Between Contractor and Subcontractor.
However, the A401 also automatically adopts the terms and conditions of higher-level agreements between the prime contractor and the owner. The AIA produces a variety of contracts that could apply in this scenario, depending on the type of project. Two of the most common are the A101 Owner-Contractor Agreement (for a project using lump sum payments) and the A201 (General Conditions of the Contract for Construction). Subcontractors should read and understand all of the AIA contract documents on their project.
For this article, we’ll assume that the contract documents affecting the subcontractor are A401 (subcontractor agreement), A101 (general contractor agreement), and A201 (general contract conditions).
Here are the most important benefits for subcontractors:
They are customizable
Several sections of the contract provide space for specific terms that the parties can negotiate together, like retainage rate, bonds or insurance required by the subcontractor, interest rates on late payments, etc.
Section 15 of the A401 allows for additional documents that modify or add to the terms of the agreement. If your company has standard terms or language that you prefer to use on your projects, you can include them here as an exhibit.
They are commonly used by industry professionals
Since they’re so popular, contractors, insurance agencies, project owners and legal parties know and understand their obligations, rights and concepts behind the AIA document. The legal framework has already been established and it is easier to understand and facilitate finalizing the contracting process. Construction lawyers should be
They give the subcontractor a remedy for nonpayment
Article 4.8 of A401 gives the subcontractor the explicit right to walk off the job if the GC doesn’t pay them within a week of the time the contract lays out. The agreement gives them this right “without prejudice to any other available remedies,” meaning the subcontractor isn’t required to find an alternative resolution before they stop work.
Here’s the text:
§ 4.8 Remedies for Nonpayment
If the Contractor does not pay the Subcontractor through no fault of the Subcontractor, within seven days from the time payment should be made as provided in this Agreement, the Subcontractor may, without prejudice to any other available remedies, upon seven additional days’ notice to the Contractor, stop the Work of this Subcontract until payment of the amount owing has been received. […]
They set retainage as negotiable by default
While the contract does include retainage in its own article, it doesn’t set specific retainage percentages. Instead, it provides space for the parties to include their own retainage terms.
They use progress billing by default
AIA progress billing means using other standardized AIA documents to facilitate, and ease the payment process. AIA billing allows subcontractors to bill for payments as the project progresses. This gives them more control over their own cash flow. If a payment is late or non-existent, the sub can has more negotiating power to make sure the payment comes through.
They provide guidance on project claims and arbitration guidelines
Article 15 of the AIA 201 sets out the full notice requirements and procedure for handling any disputes or claims on the project. In addition to that, there are also provisions outlining the mediation and arbitration requirements to resolve disputes without having to resort to lawsuits.
They are generally simple and easy to understand
AIA considers input from a variety of parties when writing contract documents. They do their best to strip them of confusing language, and use simple, easy-to-understand text. Of course, any contract document will contain sometimes dense legal wording that requires some close consideration.
The cons of AIA contracts
While the AIA contract documents bring a number of benefits for everyone on a project, they don’t always prioritize the interests of subcontractors. The contract document is not intended for every single project, so you might need to customize or modify it with addendums that meet your specific needs.
However, modifying a standardized contract can invite legal risk. It is always a good idea to consult legal counsel before signing a contract, whether modified or not.
Here are some of the common drawbacks to AIA contracts for subcontractors:
They can be expensive
While the subcontractor generally won’t have to pay for the contract itself, they may have to pay for modifications to the document.
Subcontractors will also likely have to pay for the payment documents that the contract calls for. These may include pay applications, continuation sheets, and change orders. If you purchase individual documents, they start at $10 apiece. If a subcontractor is submitting payment applications over the course of multiple months or years, those costs can quickly add up.
They take on the terms of higher-level documents
As I mentioned earlier, subcontractor agreements adopt the terms of the contractor’s agreement with the owner. In A401, Article 2 sets the agreement to take on the conditions of the contract between the prime contractor and the owner, as well as the terms of A201 (general contract conditions).
While this may not be a drawback inherently, it does require the subcontractor to review and keep track of multiple contract documents, including any changes that the owner and prime contractor negotiated.
They include retainage by default
While withholding retainage has become a pretty standard practice in the construction industry, it’s not required. And it is definitely not a benefit to the subcontractor.
Retainage, also known as retention, is typically 5-10% of the contract price. For subcontractors, it can be difficult to collect for months or even years after the project is over. Since profit margins in construction average under 4%, a delay in collecting retainage can have a serious impact on a subcontractor’s cash flow, and their ability to survive.
Keep in mind that some states impose limits on the amount of retainage, and the duration that it can be withheld. New Mexico actually prohibits retainage on construction projects.
Here’s the section on retainage:
§ 11.1.8 Retainage
§ 220.127.116.11 For each progress payment made prior to substantial completion of the Subcontractor’s Work, the Contractor may withhold the following amounts as retainage from the payment otherwise due:
(Insert a percentage or amount to be withheld as retainage from each Application for Payment. The amount of retainage may be limited by governing law.)
§ 18.104.22.168.1 The following items are not subject to retainage:
(Insert any items not subject to the withholding of retainage, such as general conditions, insurance, etc.)
§ 22.214.171.124.2 Reduction or limitation of retainage, if any, shall be as follows:
(If the retainage established in Section 126.96.36.199 is to be modified prior to substantial completion of the entire Work, including modifications for substantial completion of portions of the Subcontractor’s Work as provided in Section 9.2.3, insert provisions for such modification.)
They give power to the architect by default
Only the architect can propose changes in scope, rather than through a negotiation process between the contractor and the architect. The IDM or Initial Decision Maker is part of the contractual clause that identifies the Architect, by default, as the one responsible to make determination when claims arise during any other dispute. This concept could present a conflict of interest, since the project owner usually hires the Architect directly.
Some see the AIA contract as giving preference to the project owner, as it put most of the burden into the contractor when dealing with delays, changes or even payment. The contract assumes that the design package is pretty much perfect. It makes it the contractor’s responsibility to demonstrate the issues arising from the design.
They limit the subcontractor’s access to information
Provides limited accessibility from the contractor to obtain owner’s financial information. According to Constructor Magazine, “before 2007, AIA A201 had a provision that a contractor could get assurance of the owner’s financing at various times during the project. As of 2007, a contractor can ask for financial information only at the beginning of a job.”
Similarly, under the A401 document, the subcontractor is given access to information about the general contractor’s financial health on the project – but they must submit their request before they sign the subcontract.
Because AIA docs bind the subcontractor to the terms of the prime-owner agreements, the subcontractor obviously needs access to those documents. But the A401 doesn’t actually require the prime to supply that information to their subs. It only requires the prime to “make documents available.”
§1.6: Upon request, the Contractor shall provide the Subcontractor with a complete set of the Subcontract Documents make Subcontract documents available for subcontractor before executing the Subcontract…
Modifying AIA documents
If the terms of the contract don’t meet the needs of a subcontractor, AIA contract documents are modifiable. Make sure you pass it by a construction attorney before you sign it, even if you wrote the modifications.
Note that it is usual for the AIA to update the contract documents from time to time. They try to ensure that terms are fair, and that they reflect current best practices and law changes.
Other common AIA documents
The AIA doesn’t just write contracts. They also produce a variety of documents that work in conjunction with them. Some of the most common AIA documents for subcontractors are:
- The G702 Application and Certificate for Payment
- The G703 Continuation Sheet, and
- The G701 Change Order form
Alternatives to AIA contract documents
Other groups in the construction industry produce standardized contracts that might fit your needs better than AIA contracts. ConsensusDocs produces another common set of contracts and payment documents that are popular with contractors. The National Association of Homebuilders (NAHB) carry their own set of documents.
Levelet also provides several free contract templates for download, including a standard construction contract and a subcontractor agreement. Their documents incorporate some of the best practices in the industry. They generally provide a balance between a contractor and those at the top of the construction payment chain.
Ultimately, the goal of any contract is to minimize risk and establish clear responsibilities for each party involved. A good contract will reduce the opportunities for work disputes, payment delays, and legal battles. All of which can derail a construction project.
Whether you are using AIA contract documents or not, always consult legal counsel before signing an agreement. It’s especially helpful to find one that specializes in construction; they’ll know what to look out for.