Collaborative effort yields construction contracts designed to head off disputes and streamline projects through inclusion of best practices
It might not be a “Kumbaya, all-join-hands” moment, but a construction contract signing session in your future could send everyone away from the table effusing a new spirit of camaraderie and trust. In fact, a new set of contract documents, collaboratively designed to reflect the interests of all parties, establish a more level playing field for all, and yield better overall projects, is being touted as a harbinger of important change in the construction industry.
Dubbed ConsensusDOCs because they were drafted by Associated General Contractors (AGC) and a coalition of trade associations representing “DOCS” — designers, owners, contractors, subcontractors, sureties, and other stakeholders — the voluntary documents define and assign the rights, responsibilities, and risks of everyone involved based on “industry best practices.” Endorsed by some 20 groups, they're seen as an improvement over existing AGC standard documents and a fresh alternative to widely used standard documents from the American Institute of Architects (AIA) and a raft of often-problematic proprietary documents.
While only one of many groups whose voices were heard in the three-year ConsensusDOCS drafting project, subcontractors stand to see some noteworthy gains. Provisions in one group of six that incorporate more than 70 new documents (available for viewing at www.consensudocs.org/catalog) are recognized as offering better protection for subcontractors than those in most proprietary contracts in use today by contractors. Numbering 13 in all, including the ConsensusDOCS 750 standard form of agreement between contractor and subcontractor, the subcontracting documents contain a variety of equitable terms for subcontractors in the areas of risk exposure, timely payments, and retainage reduction.
“What we're doing with these new documents is getting back to developing an environment of trust and more equitable sharing of risks across a project,” says D.L. Smith, the retired founder of Topeka, Kan.-based D.L. Smith Electrical Construction, Inc., who monitored the ConsensusDOCS process as the National Electrical Contractors Association (NECA) trustee to Associated Specialty Contractors (ASC), which had a seat at the negotiating table. “Over time, contracts have passed more risk down the line to subcontractors, but these new documents alleviate some of that and spread risk more equally. From general conditions and insurance to substantial and final completion terms and final payment terms, the language in the new documents adds up to a major gain for the industry.”
Less time for conflict
But fair and balanced terms for electrical contractors and other subcontractors are merely a byproduct of a broader effort to design contracts that meet changing construction demands and realities.
AGC spearheaded the ConsensusDOCS initiative because it saw its own and other standard contracts (often packed with amendments and modifications designed to offload risk and protect narrow but powerful interests) as counterproductive to overall project success. AGC's goal was to collaboratively develop a new set of contracts that addressed such issues up-front, freeing up parties to focus more on positive project outcomes and less on watching their backs.
The new documents, which AGC will substitute for contract documents it previously developed and published, were unveiled on September 28. Their use, however, will be strictly voluntary. It will be up to lead parties such as project owners and general contractors to determine whether or not ConsensusDOCS offer a better option. Nevertheless, AGC and the groups it worked with to fashion the new contract documents are strongly encouraging their use. Arguing that the changing nature of construction demands more collaboration and less squabbling over contract terms among parties, these parties say ConsensusDOCS lays the groundwork for smoother projects and greater protection of all interests. Because of the breadth of trade association input, drafters say parties can have a measure of confidence that the contracts have most of their legitimate interests covered.
That's the assessment of one of the groups that collaborated on ConsensusDOCS: the American Subcontractors Association (ASA). In ASA's view, ConsensusDOCS offer subcontractors and other parties a way to sidestep contentious issues that often come up in the course of a project. By defusing disputes with binding language that more clearly sets out parameters of risks and rights, the contracts establish a new “gold standard” for contracts by helping set the stage for parties focusing on the project first and foremost, says E. Colette Nelson, ASA executive vice president.
“These documents encourage practices that are in the best interest of all parties to a project rather than merely reflecting existing unfair business practices and industry trends,” she says.
AGC's Chief Executive Officer, Stephen Sandherr, goes a step further, characterizing the collaborative effort to redesign construction contracts as a watershed event in the history of the construction industry.
“The release of ConsensusDOCS is one of the most significant industry developments in the last 20 years,” Sandherr says. “We believe this effort will positively transform the industry's use of standard contract documents.”
Overcoming contract inertia
ConsensusDOCS, however, will probably gain traction over time, but definitely not overnight. Standard contracts, such as those developed and recently updated by AIA (see AIA Unveils Revised Contracts on page C29), dominate in the marketplace and aren't likely to be unseated any time soon. Furthermore, nothing can stop parties from drafting and trying to get others to sign proprietary documents, which critics say often contain the seeds of project-disrupting disputes that can end in costly, time-consuming litigation — byproducts that were in the crosshairs of ConsensusDOCS drafters.
Pressure from parties that helped draft ConsensusDOCs, though, could factor heavily into whether and how quickly the documents filter into the market. Parties that either see their interests better protected with ConsensusDOCS — or that value their “project-first” approach — are likely to lobby forcefully for their use.
Dan Walter, vice president and chief operating officer of NECA and president of ASC, advises electrical contractors (especially those serving as subcontractors on construction projects) to make their bids contingent on using either ConsensusDOCS 750 or AIA's subcontract (A401), both of which better protect their interests.
“That won't guarantee their use, of course, but it gives subcontractors the opportunity to keep the door open to withdraw a bid if they get offered a contract they don't like, as well as a strategy for negotiating better terms,” Walter says.
As one of several specialty contractor groups whose interests were represented by ASC during the ConensusDOCS drafting, NECA endorses the new contracts. Whether in the more common role of subcontractor, or even in cases where they're prime contractors, electrical contractors probably stand to benefit by participating in projects that use contracts that seek to head off rather than set the stage for conflict, Walter says.
“This will bring more uniformity to the contract-writing process, with the goal of having better understood terms that will allow the construction process to move ahead more efficiently,” Walter says. “Time is much more of the essence today, arguing for a more interactive sort of model.”
Walter notes, however, that ConsensusDOCS are still just one option. AIA documents, especially since they have been newly revised, also emphasize collaboration. In addition, they incorporate language and terms that protect subcontractors, he says.
Subs may see gains
Electrical contractors are likely to benefit most from the level playing field contracts. Provisions in ConsensusDOCS 750, a big majority of which were carried over from AGC's subcontract (AGC 650) gives subcontractors rights and protections that should help reduce risk exposure and give them greater assurance that they'll be paid for their work than when using proprietary documents.
While it doesn't right the ship entirely or reverse all inequities that subcontractors have traditionally borne, the ConsensusDOCS subcontract is a viable alternative for subcontractors, according to a contract attorney who reviewed a draft of the ConsensusDOCS 750 subcontract and wrote about it recently in ASA's journal, The Contractor's Compass.
“(Its) terms and conditions put the document firmly in the plus column for subcontractors,” wrote R. Russell O'Rourke, a principal in O'Rourke & Associates, Cleveland. “It largely stays true to the principles and best practices embraced by professional subcontractors.”
One ConsensusDOCS 750 term, drawn from AGC 650, entitles subcontractors to be paid by the general contractor within seven days of that contractor receiving payment. It also continues to limit withholding payment to subcontractors by stating clearly that a general contractor's obligation to subs is independent of the status of payments to them by owners.
“This former AGC 650 payment provision is a key one because it spells out that there's not a contingent payment agreement,” says Walter. “This contrasts with ‘pay-if-paid’ contracts. While many states have outlawed pay-if-paid contracts, it still represents a departure from many individually developed contract documents that are now in use.”
Also carried forward from AGC 650 are rights for subcontractors to stop work and recover costs of demobilization and remobilization if they aren't paid. The consensus contract gives the subcontractor a right to information regarding the owner's continuing ability to pay. The subcontract also addresses issues of indemnification, insurance, retainage, liens, and other terms relative to risk exposure that can determine whether the subcontractor makes a profit on a job or incurs crippling losses. In many instances, observers say, ConsensusDOCS 750 allows the subcontractor to breathe a little easier and ease the nagging fear of battles over taking responsibility for things he doesn't control.
Another important provision borrowed from AGC 650, Walter says, is limiting the scope of general contractors' ability to require lien waivers.
“Some of the more onerous contracts require unconditional lien waivers, under which subs effectively have to sign away all of their lien rights in order to get payment,” he says. “They state that by accepting an interim payment, subs agree to waive any current and future liens they might put on a project. The 750 allows lien waivers on only what's been paid for.”
Subcontractors also tally a win with new language that puts limits on the subcontractor's need to defend claims against other parties. This brings the former AGC “hold harmless” terms in line with AIA and Engineers Joint Contract Documents Committee contract language, according to Tom Barfield, a consultant to ASC who was active in the development of both ConsensusDOCS and the revision of AIA's contract documents.
Michael W. Smith, a project manager for Schaeffer Electric Co., an ASA board member who has followed the ConsensusDOCS process, says that and similar clauses help to bring more common sense and fairness back to the contracting process.
“Electrical contractors and other subs now won't be held liable for things we're not responsible for,” he says. “It says we're responsible for our actions and events we have control over. What so often happens is that it comes back to our insurance, and we ultimately take the hit, affecting our ability to get insurance in the future.”
Dawn of a new day?
Provisions in ConsensusDOCS that are favorable to subcontractors or that otherwise seek to level the playing field don't ensure the end of construction contract disputes. But by addressing combustible issues that have been known to flare into contentious, costly, and time-consuming legal battles, contract reformers have tried to build consensus among parties, clearing the air as much as possible before a project starts.
In a construction environment where projects increasingly employ design-build and building information modeling (BIM) approaches, cooperation and partnering is becoming more essential. In the assessment of some electrical contractor observers at least, ConsensusDOCS look to be another good vehicle for adapting to change in the construction world.
“These documents don't necessarily mean a power shift when it comes to drawing up contracts, but they do mean everyone has more of a voice and some aren't in the position of getting all the risks passed down to them,” says D.L. Smith. “Years ago, the partnering concept was big in construction. Hopefully, these documents can replicate that and have an even better effect.”
Michael Smith says the time has come for cooperatively designed contract documents that offer an alternative to contractor forms that simply invite clashes.
“There's been a lot more litigation on construction projects gone bad, and I think this will help deter that a bit and make owners, general contractors and subcontractors stand up to what's agreed upon in the documents,” he says. “Consensus is an apt term. We all need fair, win-win documents that allow us to go into projects with fewer concerns and believing that things that do come up will be dealt with fairly.”
Zind is a freelance writer based in Lee's Summit, Mo.
Sidebar: AIA Unveils Revised Contracts
The construction industry's oldest and most-used standard contracts have gotten a face-lift, incorporating some notable benefits for subcontractors. Following a three-year intensive review with major parties of interest, the American Institute of Architects (AIA) unveiled its latest 10-year refresh of standard contract documents on November 5.
For electrical contractors and others who work as subcontractors, changes to AIA's A401 subcontract offer many new benefits, according to Tom Barfield, a consultant to Associated Specialty Contractors (ASC), who helped ASC draft the new contracts.
However, they also impose more risk through inclusion of an additional insured requirement — albeit limited to losses caused in whole or in part by a subcontractor's negligent acts or omissions, he adds. Barfield maintains they are superior in some ways to the new ConsensusDOCS introduced in September by Associated General Contractors (AGC), which he also helped draft. For instance, A401 obligates contractors to furnish all temporary facilities to subcontractors at no cost, except as specifically noted, Barfield says. By contrast, such services must be noted in detail in a separate exhibit in the ConsensusDOCS 750 subcontract.
“This may result in many of the myriad services not being addressed,” he says.
Owners also have more obligations to subcontractors in the new A401. They now have the option of facilitating payment to subcontractors, including the use of joint checks, Barfield says. Subcontract assignments to owners when a contractor is dismissed, he adds, require that the owner accept all of the original contractor's obligations, even after a replacement contractor is engaged.
However, Barfield says that ConsensusDOCS 750 gives subcontractors more power than A401 to request project financing information from owners and their lenders, and it entitles them to an equitable adjustment in contract amount and time for contractor changes in the timing, order, or priority of subcontract work. It also makes additional insured an option rather than a requirement, offers Owners' and Contractors' Protective Liability (OCP) as an alternative, and limits a subcontractor's liability to the extent of losses caused by its negligence.
Although both contracts are worthy documents that “provide subcontractors valuable benchmarks in negotiating equitable terms with subcontractors,” Barfield says, A401 rates better. Why? It's more versatile, he says.
“The A401 includes the sub-friendly terms of the A201 general contract's general conditions by reference, whereas the 750 does not include the terms in the ConsensusDOCS 200 general contract,” he says. “Hence, important Consensus 200 terms are ordinarily lost when another general contract form applies.”