This is the first in a series of three articles on the 1996 Edition of the AIA’s Design/Build Standard Forms of Agreement. This first article contains an overview and discusses the Owner-Design/Builder Agreement, AIA Document A191. The second article discusses the Design/Builder-Architect Agreement, AIA Document B901. The third article discusses the Design/Builder-Contractor Agreement, AIA Document A491.
This article is an abridged version of Federal Publications’ May 1997 Construction Briefings entitled “A User’s Guide to the 1996 AIA Design/Build Standard Forms of Agreement,” copyright 1997 by Federal Publications, Incorporated, written by Messrs. Donohue and Scott. A complementary copy of this Construction Briefing may be obtained by contacting our firm. Subscriptions to Construction Briefings are available from Federal Publications, Incorporated, 1120 20th Street, NW, Washington, D.C. 20036, Telephone (800) 922-4330 or (202) 337-7000, and at Federal Publications’ Website at http://www.fedpub.com.
Design/Build contracting is a fast growing segment of the construction industry. According to Engineering News Record, Design/Build contracting accounted for $39 billion worth of private construction in 1996, up from $36 billion in 1995, and $32 billion in 1994. The use of Design/Build contracting in the public sector has grown as well. The Defense Authorization Act of 1996 gave federal civilian and defense agencies authority to use Design/Build contracting. Thus we can expect to see more federal Design/Build construction projects in 1997 and beyond.
The American Institute of Architects (AIA) has published three contract forms for Design/Build construction projects that may be helpful to architects and contractors who wish to enter this growing market. This article is intended to give you a good background on using these contract forms, and it will also introduce you to some legal and insurance issues inherent in Design/Build contracting.
The essence of Design/Build contracting is that one firm undertakes responsibility to the Owner for design and construction of the Project. That firm may be a design firm, a general contractor, or a construction manager, and it may or may not perform some of the design or construction work. Since the Design/Builder may have to subcontract the design and/or construction, the AIA has three contract forms:
• A191-Standard Form of Agreement between Owner and Design/Builder
• B901-Standard Form of Agreement between Design/Builder and Architect
• A491-Standard Form of Agreement between Design/Builder and Contractor
We hope that this article will help you identify the areas in which you may need to tailor the AIA’s new standard forms to the needs of your specific project.
• Changes from the Prior Edition
The 1996 Edition is the first revision of the AIA’s Design/Build contract forms, which were published in 1985. The 1996 Edition reflects changes in AIA policies since the 1985 Edition, and also changes in response to developments in the design/build market. For example, each of the AIA’s Design/Build documents contains new Disputes provisions for mandatory mediation before arbitration under the American Arbitration Association rules. See Article 6 of A191, B901 and A491, Part 1. In addition, there are new provisions stating that the Architect’s ownership of design documents extends to electronic data. See ¶ 3.1 of A191, B901 and A491 Part 1. See Part 1 Agreements of A191, ¶ 3.1; B901, ¶3.1; and A491, ¶ 1.4. These types of provisions are also included in the 1987 Edition of AIA’s General Conditions of the Contract, AIA Document A201.
Each of these agreement forms also has expanded provisions concerning the obligation to provide accurate site information, which is to be passed down from the Owner to the Design/Builder, to the Architect, and to the Contractor. See Part 1 Agreements in A191, ¶¶ 2.1.4-2.1.9; B901, ¶¶ 2.3-2.8; and A491, ¶¶ 3.1.3-3.1.8. These changes are in response to changes in the industry since 1985. Specific changes are also noted in the body of this article.
The AIA forms all refer to the prime contractor with the Owner as “the Design/Builder.” This entity may be a design firm, a general contractor, a specialty contractor, a construction manager, or another type of entity. The AIA’s instructions for the Owner-Design/Builder Agreement suggest that the Design/Builder may be a separate firm established and controlled by the Architect, but this is not necessarily the case. The defining role of the Design/Builder is that it is responsible to the Owner to deliver the Project design, the Project budget, the Project schedule, and ultimately, the actual completed construction project. The AIA contract forms identify the Design/Builder’s design subcontractor as “the Architect” and the construction subcontractor as “the Contractor.”
• Two-Part Agreements
These Design/Build agreements have significant differences from traditional contract forms, and they are also quite different from the AIA’s other contract forms. Each of the AIA Design/Build agreements contains two separate contracts: the Part 1 Agreement covers the preliminary design schedule and budgeting phase of the Project, and the Part 2 Agreement covers the final design and construction phase. The Owner pays for the Part 1 Agreement preliminary design, and is under no obligation to execute or pay for the Part 2 Agreement construction unless the Owner decides to do so. However, it is well for the parties to agree at the outset on the terms of the Part 1 and Part 2 Agreements. Thus the AIA Part 1 Agreement form has a notice that states: “This document comprises two separate agreements: Part 1 Agreement and Part 2 Agreement. Before executing this Part 1 Agreement, the parties should reach substantial agreement on the Part 2 Agreement.”
The Part 1 and Part 2 Agreements of the AIA Design/Build contract forms operate this way: in the Owner-Design/Builder Part 1 Agreement, the Design/Builder agrees to provide the Owner with a Proposal consisting of a preliminary design, project budget, and project schedule for the construction of the Project. See A191, Part 1 Agreement, ¶ 1.1 “Services.” The Design/Builder may subcontract to an Architect the design and budgeting work by using the Design/Builder-Architect Agreement. The Design/Builder-Contractor Agreement may be used to obtain a price proposal and schedule from the Contractor for construction of the Project. The Architect’s design and the Contractor’s price are incorporated into the Design/Builder’s Proposal to the Owner. The Part 1 Agreements are fully performed once the Proposal has been delivered to the Owner and paid for. The Owner then reviews the Proposal and may use it to obtain financing or other Project approval. If the Owner does not accept the Proposal for whatever reason, the Project is at an end. The Part 2 Agreement does not take effect until the Owner has approved the Proposal developed in Part 1. If the Owner approves the Proposal, the Owner-Design/Builder Part 2 Agreement is executed and goes into effect. It requires the Design/Builder to deliver to the Owner the final design, the final Construction Documents and specifications, and to construct the Project to completion. See A191, Part 2 Agreement, ¶¶ 1.1.1, “Basic Definitions,” and 3.2.3, “Basic Services.” The Part 2 Agreement in the Design/Builder-Architect Agreement delegates the final design work to the Architect. The Part 2 Agreement in the Design/Builder-Contractor Agreement delegates the construction work to the Contractor in accordance with the Contractor’s Price Proposal.
The AIA Design/Build Agreements provide for a team approach to the project by requiring the Design/Builder, Architect, and Contractor to meet and review the design and specifications at each stage of the design process. They address each party’s basic responsibilities, and leave the parties room to modify or add responsibilities. They also address issues of time of performance, payment for performance, additional services, ownership of design documents, dispute resolution, and termination of the agreement.
This is the only agreement to which the Owner is a party. It establishes the scope of the Design/Builder’s work and also the duties of the Owner.
Part 1 Agreement - Preliminary Design, Budget, and Schedule
• The Design/Builder’s Duties
Article 1 of the Part 1 Agreement, “Design/Builder,” defines the Design/Builder’s role, and defines the Basic Services and possible Additional Services to be provided by the Design/Builder to the Owner. See ¶¶ 1.3 and 1.4. This agreement provides that all design services are to be performed by qualified Architects, whose contractual and professional obligation is undertaken in the interest of the Design/Builder. See ¶ 1.2.1. When the Design/Builder is not an architectural firm, this task must be subcontracted to an Architect. Such a subcontract may represent a marked change for an Architect, who typically contracts with and represents the interest of the Owner. In the Design/Build environment, only the Design/Builder has a relationship with the Owner. The Architect is a subcontractor to the Design/Builder.
The Basic Services of the Design/Builder include a preliminary evaluation of the Owner’s requirements and budget, a site visit, and a review of laws applicable to design and construction of the Project to see that the Owner’s requirements do not violate such laws. See ¶ 1.3.1; 1.3.3. The Design/Builder’s Basic Services culminate in delivering a “Proposal” to the Owner consisting of a preliminary design, a proposed budget for the project, and a proposed schedule for completion of the project. See ¶ 1.3.5. The Owner may accept or reject the Proposal. If the Proposal is accepted, the parties then execute the Part 2 of the Agreement. The parties may add additional Basic Services in Article 10, “Other Conditions and Services.”
Four types of potential Additional Services are listed in Article 1 of the Part 1 Agreement. The first is making revisions to Preliminary Design Documents due to changes in the Owner’s requirements. See ¶ 1.4.2. The second is consulting with the Owner to identify project requirements, functions, and other fundamental data concerning the objectives of the Project. See ¶1.4.3. The third includes site evaluations and surveys concerning choice of a site. See ¶¶ 1.4.5 and 1.4.6. The fourth is developing operating or ownership costs, interior design, or tenant services. See ¶¶ 1.4.7, 1.4.11, and 1.4.13.
Article 1 was renamed “Design/Builder” from the 1985 Edition’s “General Provisions”, and it now is focused exclusively on the Design/Builder’s duties. The 1996 changes to Article 1 include provisions recognizing that other design professionals may be retained by the Design/Builder, such as consulting engineers, and it provides that the Owner shall be given copies of such agreements. See ¶ 1.2.2. The 1996 Edition also adds provisions that specifically say that qualified persons will prepare construction budgets, and that the Design/Builder and the Architect will not be obligated to violate any applicable law. See ¶ 1.2.3 and 1.2.5. Although such terms probably would be implied, it is usually a good idea to express them to clarify the parties’ understanding.
• The Owner’s Duties
It is essential for the parties to define the Owner’s responsibilities to the Design/Builder. The Owner has information, resources, and expectations that must be communicated to the Design/Builder for the project to be a success. Article 2, “Owner” defines the Owner’s responsibilities to provide information needed for the Design/Builder’s work. The Owner is responsible for providing the Design/Builder with a written program of the Owner’s objectives, schedule, constraints, and criteria, a program that is to supply the parameters within which the Design/Builder must work. See ¶ 2.1.1. The Owner agrees to render decisions promptly when questions and/or documents are submitted by the Design/Builder, so as not to hinder the Design/Builder’s work. See ¶ 2.1.3. In provisions new to the 1996 Edition, the Owner is required to reveal the Owner’s knowledge and any test reports concerning site conditions, to obtain necessary easements, and is required to furnish geotechnical engineering services necessary for the Design/Builder to prepare site information. See ¶¶ 2.1.4, 2.1.5, 2.1.6 and 2.1.8. Basically, the Owner is required to provide available information to the Design/Builder, to reveal the Owner’s relevant knowledge concerning the site and to make decisions promptly. It is essential that the Owner provide accurate information, since the Design/Builder, Architect, and Contractor will rely on it for both design and construction.
Another new provision requires the Owner to furnish “all legal, accounting and insurance counseling services” for the project. See ¶ 2.1.7. The purpose of this provision is unclear and its broadness makes it a likely candidate to be stricken from the contract by the Owner. This provision probably is intended to address situations where legal, accounting or insurance advice must be obtained to comply with financing or zoning requirements. Obtaining such services may be made the responsibility of either party and the parties may provide for payments of these costs as reimbursable costs or on another basis. It is well to anticipate this type of expense, and to decide which party will have the responsibility to obtain the services and which party will pay for the services.
Article 3, “Ownership and Use of Documents and Electronic Data,” follows the policy in recent AIA Contract Documents that provide that the Architect retains ownership and copyright of all design drawings and other documents, and that the Owner essentially has a license to use the design only for purposes of the one specific project. The Part 1 Agreement provides that the “Design/Builder’s Architect” retains all common law and statutory rights in the design, including copyright. See ¶ 3.1. If the Part 2 Agreement is not executed-i.e. the project is never built-the Part 1 Agreement provides that the Owner shall not use the drawings without the written permission of the Design/Builder. See ¶ 3.2. This provision is not particularly clear. If the Architect retains all rights in the design, it is unclear what interest the Design/Builder retains, such that the Design/Builder could grant the Owner permission to use the design. Presumably, the Design/Builder would have to obtain the permission of the Architect before granting the Owner permission to use the design. If the Design/Builder is terminated for default by the Owner, Article 3 now provides that the Owner may use the Architect’s design to build the project if the Owner pays the Architect’s fee. See ¶ 3.3. This change from the 1985 Edition is a common sense balance of the interests of the Owner and Architect.
• Time and Payment Provisions
Article 10, “Other Conditions and Services,” provides a space to establish the contract time, with the start date and the completion date for the Design/Builder’s services. Article 4, “Time,” provides that the Design/Builder shall prepare a schedule for performance of the Design/Build Part 1 design work. See ¶ 4.1. It also provides for time extensions for delays that occur “through no fault of the Design/Builder.” See ¶ 4.2. This provision is unclear because there is no mention of whether delay damages will be paid. The parties should make some provision as to whether damages will be paid for these delays.
One Design/Build benefit is that using one firm for design and construction can shorten total project development time. In a “fast track” project, for example, a Design/Builder may be able to start construction of the foundation before the rest of the design is completed. Since the Owner’s requirements dictate the time frame for the project, the parties should pay close attention to the overall time stated in the contract. The Design/Builder must be satisfied that the time is realistic before executing the Part 1 Agreement.
Article 5, “Payments,” recites that the Design/Builder’s basis for compensation will be as stated in Article 9, and that payments shall be made within ten days of the Owner’s receipt of an Application for Payment. See ¶ 5.3. Article 9 provides the parties with spaces to provide compensation for basic services (initial payment and subsequent payments) and also the basis for Additional Services and stipulated Reimbursable Expenses. See ¶¶ 9.1.1, 9.2.1 and 9.3.1. It likewise provides a space to stipulate a rate of interest for past due payments. Article 9 provides for an equitable adjustment for the Design/Builder if the project scope is “changed materially,” and if the project has not been completed within a specified time from the date of execution of the Part 1 Agreement. See ¶ 9.6 and 9.7. This type of provision forces the parties to be fairly specific concerning the time of performance of the design services in Part 1 of the agreement, but is a bit vague. You should provide for any anticipated changes or delays in Article 10, “Other Conditions and Services” or elsewhere in the agreement.
• Other Provisions
Article 6, “Dispute Resolution - Mediation and Arbitration,” follows the policy in other AIA contracts of providing for mandatory mediation under the auspices of the American Arbitration Association, followed by binding arbitration if the mediation fails to resolve the controversy. See ¶¶ 6.2, 6.3 and 6.4. Article 7, “Miscellaneous Provisions,” contains the usual provisions common to AIA documents. For example, the governing law is that of the location of the Project, the Agreement is binding on the parties’ successors, and the written Agreement supersedes all prior negotiations. See ¶¶ 7.1, 7.2 and 7.4. It also says that the Design/Builder does not undertake, design for, or budget the cost of remediation of hazardous materials on the site. See ¶ 7.3.
Article 8, “Termination of the Agreement,” provides for seven day written notices for termination, as are common in AIA agreements. Either party may terminate for a substantial failure in performance by the other on seven days written notice. See ¶ 8.1. The Owner may terminate the agreement without cause on seven days written notice to the Design/Builder, and the Design/Builder is entitled to compensation for its services to date, plus its reimbursable expenses and termination expenses. See ¶¶ 8.2 and 8.3. Following default termination of the Design/Builder, a new provision allows the Owner to obtain a license to use the Architect’s design upon payment to the Architect. See ¶ 3.3.
Part 2 Agreement - Final Design and Construction
Under the scheme of the AIA Design/Build forms, the Part 2 Agreement is executed and takes effect only after completion of the preliminary design, budget, and schedule under the Part 1 Agreement and the Owner’s approval of the “Proposal.” The Part 2 Agreement covers preparation of the final design documents and performance of the actual construction work through completion of the Project.
• The Design/Builder’s Duties
The Design/Builder is required to complete the design and to produce Construction Documents, which include contract drawings, specifications, and documents required for governmental approvals, such as regulatory and zoning agencies. See ¶¶ 3.2.3 and 3.2.4. Of course, the Design/Builder also actually builds the Project, and is required to provide or pay for all design services, labor, material, equipment, tools, and utilities required for execution and completion of the work. See ¶ 3.2.5.
Otherwise, the Design/Builder has many rights and responsibilities typically accorded a prime general contractor under the AIA General Conditions. The Design/Builder is responsible for all construction means and methods, for coordinating all portions of the work, correcting all non-conforming work, securing all required permits, paying all licensing and inspection fees and complying with all applicable copyright and patent requirements, including payment of royalties and license fees, and keeping the site clean. See ¶ 3.2.6, 3.2.8, 3.2.10, 3.2.11 and 3.2.12. The Design/Builder gives the same warranty as the prime general contractor under AIA’s General Conditions. See ¶ 3.2.9, similar to A201, “General Conditions,” (1987 Edition), “Warranty,” ¶ 3.5.1. That is, the Design/Builder warrants to the Owner that the material and equipment furnished in the construction are new and of good quality, that the construction will be free from faults and defects and will conform to the requirements of the Contract Documents.
The Owner accepts the Project in the traditional way. That is, the Design/Builder notifies the Owner of substantial completion, and issues a certificate of substantial completion after the Owner’s inspection. See ¶ 3.2.14. The Design/Builder is required to do whatever is necessary to perform and complete the work according to the design and construction documents approved by the Owner. See ¶ 1.2, “Execution, Correlation and Intent.” The Design/Builder is not required to do anything that would violate any applicable law. See ¶ 1.2.2.
• The Owner’s Duties
The 1996 Edition contains more specific provisions concerning the Owner’s duties than the 1985 Edition. The Owner is required to cooperate with the Design/Builder and to do those things necessary for the Design/Builder to perform as promised. The Owner thus is required to make timely decisions, to cooperate in obtaining permits and licenses, and to furnish surveys and information concerning environmental and subsurface conditions. See ¶¶ 2.1 and 2.3. The Owner specifically is required to reveal all known environmental information about the site. See ¶ 2.5. In addition, the Owner must show reasonable evidence of its financial ability to complete the Project, at the request of the Design/Builder. See ¶ 2.10.
• Time of Performance
The completion date for the Project will have been set in the Design/Builder’s Proposal created under the Part 1 Agreement. Thus, the Part 2 Agreement requires the Design/Builder to reach substantial completion of the Project within that period, and states that these time limits are of the essence. See ¶¶ 4.1, 4.2, 4.3 and 4.4. Delays caused by the Owner are grounds for time extensions, but the Part 2 Agreement is silent on whether the Design/Builder can recover additional costs due to Owner-caused delays. See ¶ 4.5. The parties should clarify the consequences of Owner-caused delays by additional language-either state that no damages can be recovered, or provide for an equitable adjustment. Of course, if the Design/Builder will have design or construction subcontractors, those agreements should reflect the same provisions concerning Owner-caused delays. Otherwise, the Design/Builder may be stuck in the middle over a delay caused by the Owner.
• Payment Provisions
The payment provisions in the Part 2 Agreement, Articles 5 and 13, are similar to those in the AIA’s General Conditions. A191, Part 2 Agreement, Article 5, “Payments,” similar to A201, “General Conditions,” (1987 Edition), Article 9, “Payments and Completion.” Article 13 “Basis of Compensation,” provides space for the parties to state the payment terms for the Design/Builder’s Basic Services, Additional Services, Reimbursable Expenses, and Interest on past due payments. The parties may provide for any payment schedule-lump sum, fixed price, reimbursable cost plus incentive fee, progress payments, penalty and bonus provisions, etc. The payment terms in Article 5 “Payment,” presume the parties will provide for Progress Payments, retainage and return of retainage upon substantial completion. See ¶ 5.1, “Progress Payments,” subparagraphs 5.1.1 and 5.1.8. Payment is due within 10 days of the Owner’s receipt of the Design/Builder’s Application for Payment to the Owner, or interest on the payment will accrue at the interest rate specified in Article 13. See ¶¶ 5.1.1, 5.1.2, 5.3 and 13.3. The Design/Builder’s Application for Payment represents that the work covered by the Application has been performed according to Contract requirements and is free of liens and security interests-that is, all subcontractors and suppliers have been paid. See ¶¶ 5.1.3 and 5.1.7.
The Part 2 Agreement contains a one-year warranty that the Design/Builder will correct non-conforming work within one year after substantial completion of the work. See ¶¶ 9.1, 9.2 and 9.3. Failure by the Design/Builder to correct the work entitles the Owner to do it and to back-charge the Design/Builder. See ¶¶ 9.4 and 9.5.
• Insurance Requirements
The Part 2 Agreement also requires the same type of construction insurance coverage by the Design/Builder and the Owner as are required by the AIA’s General Conditions. The Design/Builder must obtain workman’s compensation and liability insurance in favor of the Owner. See ¶ 7.1, “Design/Builder’s Liability Insurance,” similar to A201, “General Conditions (1987 Edition), ¶ 11.1, “Contractor’s Liability Insurance.” The Owner is required to obtain property insurance on an all-risk policy form against losses due to fire, theft, collapse, and demolition. See ¶¶ 7.3.1 7.3.2 and 7.3.5; similar to A201, “General Conditions” (1987 Edition) ¶ 11.3, “Property Insurance.” The Part 2 Agreement also provides that the Owner may, at its option, obtain loss of use insurance. However, the Owner waives all rights of action against the Design/Builder for loss of use caused by fire or other insurable hazards. See ¶ 7.4, “Loss of Use Insurance,” similar to A201, “General Conditions” (1987 Edition), ¶ 11.3.3, “Loss of Use Insurance.”
With respect to the construction portion of the work, the Part 2 Agreement contains the same provisions for Owner-directed Changes as does AIA’s General Conditions. See Article 8, “Changes in the Work,” similar to AIA document A201, “General Conditions,” (1987 Edition), Article 7. A change order is defined as a change agreed upon by the Owner and Design/Builder, reduced to writing, and signed by both. See ¶ 8.1.2 and ¶ 8.2, “Change Orders.” A “Construction Change Directive” is a written, unilateral directive issued by the Owner, by which payment is to be made on a force-account basis based on records kept by the Design/Builder of costs of labor, burden, materials, equipment, bonds and insurance, markup supervision, and field office expense. See ¶ 8.3, “Construction Change Directives,” and ¶ 8.3.2. The 1996 Edition also provides for a minor change category that was not addressed in the 1985 Edition. A minor change is one that has no cost or time impact, and may be made unilaterally by the Design/Builder, with notice to the Owner. See ¶ 8.4, “Minor changes in the Work.” A claim by either party must be made within a reasonable time not exceeding 21 days after first observance. See ¶ 11.4, “Claims for Damages.”
• Other Provisions
The Part 2 Agreement carries forward the same dispute resolution procedure common to other AIA documents. The Agreement provides for mandatory mediation under the auspices of the American Arbitration Association followed by binding arbitration at the request of either party. See ¶¶ 10.1 through 10.5. The Design/Builder agrees to indemnify the Owner from loss due to personal injury or injury to property (other than the construction work itself) to the extent the losses were caused in whole or in part by the negligence of the Design/Builder or the Design/Builder’s subcontractors. See ¶ 11.5, “Indemnification.” Where the Architect is a subcontractor to the Design/Builder, the Design/Builder is responsible to the Owner for the Architect’s design. Thus, this indemnification provision would require the Design/Builder to indemnify the Owner from the Architect’s negligence. The Design/Builder should take this into account in its negotiation of its subcontract with the Architect and in obtaining insurance.
Article 11, “Miscellaneous Provisions,” contains several important changes from the 1985 Edition. Paragraph 11.4 establishes a 21-day time limit for giving notices of claims for damages. You must keep this limit in mind. However, the team-approach reflected in the Design/Build con-tract forms should reduce the number of claims that arise.
Article 14 provides an area for the parties to specify the contract time, additional Basic Services, and other Additional Services. See ¶¶ 14.1, 14.2 and 14.3. In addition, Paragraph 14.5 allows the parties to list the specific documents included in the Design/Builder’s Proposal, such as the Contract Drawings, the specifications, the Contract Budget, the Contract Schedule, or other documents.
The AIA Design/Build Standard Forms of Agreement provide a great starting point for negotiation of an agreement for your specific project. The Owner-Design/Builder Agreement form addresses many risks common to design/build projects that you might otherwise fail to address. Before you complete your contractual arrangements, it is important to review the other Design/Build Agreements discussed in the other two articles in this series-the Standard Form of Agreement between Design/Builder and Architect, and between Design/Builder and Contractor. These agreement forms must have complimentary terms in order properly to assign risks and responsibilities among the parties. We hope this article is helpful to parties undertaking Design/Build projects.
— Daniel J. Donohue and John Randall Scott, Esq.
Copyright © 1997 Kilcullen, Wilson & Kilcullen. All rights reserved.