February 24, 2017
ConsensusDocs Updates its Standard Contracts to Reflect Today’s Construction Industry
Brian M. Perlberg, Esq.
Executive Director & Senior Counsel, ConsensusDocs, LLC
American Bar Association's Under Construction, Vol. 18 No. 3, Spring 2017
A construction contract sets the foundation for a construction project’s success. Case law, technology, and insurance have changed dramatically over the past nine years. Are you best serving your clients if you wait 10 years to update your clients’ contracts? In December 2016, ConsensusDocs, a coalition of now 40 construction organizations with a mission to improve the design and construction industry, published comprehensively updated contracts to its design-bid-build prime agreements (200 series) and subcontracts (700 series).[i]
These updates impact the general terms and conditions integrated in the ConsensusDocs 200 long form agreement and the ConsensusDocs 205 short form agreement that will later be flowed into updates to the design-build (400 series) and CM At-Risk (500 series) in the first quarter of 2017. To keep ahead of the curve, ConsensusDocs updates its documents every 5 years, in addition to interim updates to address discrete issues, such as when the ACORD forms were changed impacting certificates of insurance. Free samples as well as redline comparison between the old and new standards are available by registering at www.consensusdocs.org.
Changes in the construction insurance market and the impact of technology drove many of the substantive changes in this revision cycle. This article highlights the revisions to the ConsensusDocs’ prime and subcontract agreements for design-bid-build.
Insurance Updates: Changing the Default for Builder’s Risk
One of the larger changes was in the area of insurance. Purchasing Builder’s Risk property insurance now defaults to be purchased by the Constructor, rather than the Owner. While the owner can opt out and buy the policy itself, it was determined that it is more common and cost effective for the Builder to buy this policy (some report a 50% savings). The new language also makes sure it covers renovation work. It will be important for builders to include their cost in a lump sum price or modify language to seek a change order to reflect the price based upon the actual cost of procuring builder’s risk insurance. In addition, risk of loss for work completed before substantial completion will rest with the entity responsible for procuring the Builder’s Risk policy, which again, will now default to the builder. In the subcontract agreement, the Risk of Loss has been changed to reside with the Constructor.
A check the box for pollution liability insurance has been added when the project site or the nature of the work raises this concern. A provision allowing Owner’s self-insurance is being eliminated from the standard contract.
Additional language has been added to the Additional Insured section at subsection 10.4.1 to address case law developments in Illinois and New York regarding vertical and horizontal exhaustion that was making additional insured coverage less effective while also significantly raising policy limits and costs. The new language states, “the insurance, (both primary and excess) of the Constructor and Subcontractor shall be primary and non-contributory to any insurance available to the Additional Insured.
Professional liability insurance coverage for design delegation now requires prior acts coverage, as well as a delineation of a combined total deductible and self-retention maximum.
Termination for Convenience:
Under the 2011 edition of ConsensusDocs, an improper termination for cause was automatically converted to a termination for convenience. The remedies for a termination for convenience in the owner agreement would depend upon what the parties specifically agreed to in addition for reimbursement for work completed and demobilization costs. ConsensusDocs will no longer automatically convert an improper termination for cause to a termination for convenience. Consequently, an improper termination for cause may have larger damages, such as lost profits on work not yet performed under common law. Associations involved with the coalition have the opportunity to publish ConsensusDocs Guidebook comments to highlight especially important issues for possible education and modification. Termination for convenience is a now addressed in the AGC members-only Guidebook comments. Currently, the ConsensusDocs subcontracts do not allow for termination for convenience, unless triggered by the Owner.
Termination for Cause:
The period for a Constructor to correct defective work has been shortened. The Constructor now has an initial notice of 7 days, and then a period of 3 days. Termination for cause can occur upon the expiration of the second period. Previously, the timing for an Owner to effectuate termination on the second period was much longer. Another important change is new language requiring written permission to use a terminated Constructor’s tools and equipment left on the worksite, and indemnification in using such tools and equipment.
The indemnification section now explicitly covers intentional wrongful acts in addition to negligence.
No Fiduciary Relationship Language:
Over the years, some design professionals and insurance stakeholders complained about the possibility of unintentionally creating a fiduciary relationship in the ConsensusDocs 240 Owner and Design Professional Standard Agreement. In 2011, language referencing a covenant was stricken. Now in 2016, language stating that the “Design Professional accepts a relationship of trust and confidence;” and will “further the interests of the Owner” has been stricken. With this revision, there should be little concern that a fiduciary relationship is being created by contract language. Creating a fiduciary relationship would be problematic in that it would require a design professional to put the owner’s interest above its own, and potentially create extra liability exposure beyond insurance coverage.
This approach contrasts to other standard contract documents. The 2014 American Institute of Architects (AIA) A141(2014), Design-Build Amendment Exhibit A, states at section 5.6, “The Design-Builder accepts the relationship of trust and confidence established by this Agreement and covenants with the Owner to exercise the Design-Builder’s skill and judgment in furthering the interests of the Owner….)
Mediation and Arbitration: More Options, Faster Administration
The ConsensusDocs approach to avoid and minimizing claims and litigation is a trademark feature in ConsensusDocs. In order to minimize the time and cost involved in arbitration, revised arbitration provisions provide for AAA Fast Track procedures for claims under $250,000. Fast Track procedures generally provide for only a single day of hearing and the entire process to be completed within 45 days. ConsensusDocs is the first to address expedited arbitration procedures in a standard contract, and has chosen to expand the presumption of expedited procedures for total claims under $250,000.
Also added is a check-the-box option for choosing the rules and administration of mediation providers. JAMS and the AAA are listed with the AAA being the default choice.
Another significant clarification regarding arbitration is in response to recent case law out of New Jersey as well as other jurisdictions that appear to be hostile to enforcing arbitration provision even when the parties choose arbitration for resolving disputes.[ii] Recently, in another New Jersey case, the arbitration provision in the AIA A201 was nullified, even though arbitration selection was clearly checked, because it was a “post construction” claim.[iii] Consequently, updated language is in bold text and uppercase to clearly affirm that the parties understand their selection of arbitration for all claims.
Bonds and Penal Sum:
Based on feedback from the surety industry, standard language automatically establishing a floating penal sum when the contract price increases or decreased by more than 10% has been eliminated. The parties are encouraged to coordinate with their sureties on the project if there is significant price creep on a project, which will keep the surety on the loop of changes and the chance to re-underwrite a project, without automatically giving approval. Note that additional bond premiums are automatically collected from increased contract price changes. There is language in the ConsensusDocs Guidebook to help guide users to navigate this issue should they desire to further refine this issue in their agreements.
ConsensusDocs has used the term Interim Directed Changes as the term for owner directed changes. ConsensusDocs changed its terminology to Interim Directive and expanded the definition to include written instructions that do not necessarily cause changes in price or time.[iv] It is thought that the term better reflects an Owner’s perspective that its ordered direction is not necessarily a change.
Significantly, the determination of 50% payment to Constructor for disputed changed work is now determined by actual invoiced cost, and not an estimate.
A timeframe of 7 days has been added to memorialize change orders in writing that are generated and agreed upon through the submittal process. Additionally, a Constructor’s obligation to follow field instructions that are now covered by the definition of Interim Directives, means that such instructions must be in writing to trigger a Constructor’s obligation to perform[v].
Differing Site Conditions:
Once the Constructor gives prompt notice of a changed condition, additional clarifying language instructs an Owner to respond with an Interim Directive instructing the Constructor how to proceed provided the Owner agrees the changed or unknown condition exists.
The basic elements of critical path method (CPM) scheduling are now contractually required in section 6.3.[vi] This is the first standard contract to incorporate language addressing CPM scheduling, even though doing so is common industry practice.
Payment is now required within 15 days from Constructor’s submitting a complete and accurate application. Previously, this requirement was 20 days in the ConsensusDocs 200 and this change aligns the time requirements in other documents. Also, the Design Professional of Record’s certification for payment is no longer required to process an application of payment. An Owner may certainly defer to or solicit a Design Professional’s judgment for such determinations, but requiring this extra step by contract didn’t prove to add significant objectivity to the process.
There are hundreds of minor changes in the new ConsensusDocs contract editions. However, the majority of changes are editorial in nature for greater clarity, brevity, and consistency. Within the ConsensusDocs library of 100 contract documents, there were some minor differences between some language in say the design-bid-build and design-build language. Great care was given to choose the best worded language and then have the same language appear in across the contracts for project delivery methods, as appropriate. In some instances, sections were moved so that you can expect to the see contract provision language in similar order across different (project delivery method) families of contract.
Future Outlook: Growth and What’s Around the Corner
ConsensusDocs has become the second most used standard contracts in the construction industry and has over 2,000 subscribers throughout the United States. In March 2017, ConsensusDocs will publish updates to the 400 design-build series and the 500 Construction Manager At-Risk contracts. The updates will be consistent with the highlights covered in this article.
*This article originally appeared in the American Bar Association (ABA) Forum on Construction Law, Under Construction V18. No. 3 Spring 2017.
[i] ConsensusDocs Updates Industry Best Practice Standard Contracts, Press Release, December 7, 2016 at https://www.consensusdocs.org/News/ViewArticle?article=ConsensusDocs-Updates-Industry-Best-Practice-Standard-Contracts.