At the inception of a construction agreement, an owner and contractor endeavor to outline their respective rights and obligations during the course of the construction. They do so with the expectation that a successful project lies ahead for both of them.
Unfortunately, those in the industry know that not every project ends well. Parties to a construction agreement need to consider, in advance, what happens when a contract is terminated — and recent updates to an industry-standard construction document platform can help.
Key Updates to AIA Construction Document Platform
The American Institute of Architects (AIA) recently updated the 2007 version of its construction document platform, including a number of changes that have been incorporated into the new A201-2017 General Conditions of the Contract for Construction. Among the many areas in which the AIA made changes to the standard form document, one key provision addresses an owner's right to terminate for convenience. The change to this termination right should help facilitate a broader discussion between contracting parties when analyzing their risks and costs in the event of an unplanned termination of a project.
Termination by the owner for convenience can become a messy affair. Under the A201-2007 document, the contractor was "entitled" to receive payment for work executed and costs incurred along with reasonable overhead and profit on the work. Contracts that utilized only the AIA default language exposed the parties to uncertain arguments regarding whether a contractor was entitled to receive payment and the determination of reasonable overhead and profit. Costs of completed work, lost labor productivity, profit, claims preparations and settlement expenses are difficult to establish in the best of circumstances, but are especially problematic at the untimely conclusion of a project. The AIA updates seek to give the owner and contractor a new starting point that can help add certainty in the event of an owner's termination for convenience.
Determining Costs Regarding Owner's Termination for Convenience
The A201-2017 provides that in case of an owner's termination for convenience, "the Owner shall pay the Contractor for Work properly executed, cost incurred by reason of the termination, including cost attributable to termination of the Subcontracts; and the termination fee, if any, set forth in the Agreement." This default language provides a launching pad for owners and contractors to more clearly define costs related to an owner's termination for convenience.
The A201-2017 says that owners shall pay for work properly executed, rather than that contractors are entitled to receive payment for work executed, a change that creates a presumption of payment by the owner rather than an entitlement for payment for the contractor. Parties should expect an increased focus on whether work was properly executed, as that language now provides the primary basis for an owner's dispute. Additional language includes costs attributable to the termination of subcontracts, which can sometimes be overlooked during the negotiation of a contract, and provides further relief for contractors from expenses that may not have been clearly defined at the time the owner and contractor executed their construction agreement.
The "termination fee" is a meaningful change and improvement in the default AIA A201 and provides the ability for owners and contractors to achieve a greater level of clarity for what used to be referred to as reasonable overhead and profit. Instead of disputes arising out of what is reasonable, the termination fee allows the parties to schedule termination expense as either flat fees for the entire contract or adjusted termination fees at certain project phases or milestones. Projects with longer durations would benefit greatly from the certainty of termination fees that are greater at the commencement of the project and decrease at a defined rate or schedule as the project progresses.
Termination by an owner for convenience is never the anticipated outcome of a project, but the new default language in the AIA A201-2017 provides parties to a construction contract an improved starting point in which to address the problems that typically develop when a project unexpectedly ends. Unplanned terminations are difficult enough — disputes born from such terminations are even more challenging. A measure of planning by counsel, owners and contractors in regard to the risks and costs of termination for convenience pays dividends to all parties when the construction agreement fully addresses owner's termination for convenience.
For more information regarding a specific matter or questions about termination costs, contact your Much Shelist attorney.