TheAmerican 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 AIAcontracts 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.
Table of Contents
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
- Thepayment applicationto 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 AIAcontractdocuments are standardized forms that are applicable to many projects, commercial or residential. For subcontractors, the most common AIAcontract is theA401 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 AIAcontractdocuments on their project.
For this article, we’ll assume that the contract documents affecting the subcontractor are A401 (subcontractor agreement), A101 (general contractoragreement), 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 AIAdocument. 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 AIAdocuments 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 AIAcontractdocuments 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 AIAcontracts 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. Sinceprofit 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 retainageon construction projects.
Here’s the section on retainage:
§ 11.1.8 Retainage
§ 188.8.131.52 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.)
§ 184.108.40.206.1 The following items are not subject to retainage:
(Insert any items not subject to the withholding of retainage, such as general conditions, insurance, etc.)
§ 220.127.116.11.2 Reduction or limitation of retainage, if any, shall be as follows:
(If the retainage established in Section 18.104.22.168 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.”
David Salton, Houston-based construction attorney,recommends that subcontractors make this change:
§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, AIAcontractdocuments 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 AIAdocuments
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 AIAdocuments for subcontractors are:
- TheG702 Application and Certificate for Payment
- TheG703 Continuation Sheet, and
- TheG701 Change Order form
Alternatives to AIAcontractdocuments
Other groups in the construction industry produce standardized contracts that might fit your needs better than AIA contracts. ConsensusDocsproduces another common set of contracts and payment documents that are popular with contractors. TheNational Association of Homebuilders(NAHB) carry their own set of documents.
Levelet also provides several free contract templates for download, includinga standard construction contractanda 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.
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Fixed price contracts carry more risk to contractors than owners. They minimize the owner's (or GC's in contract with a subcontractor) construction cost risk and obligate the contractor to perform their work for a fixed dollar amount.What is an AIA Document? ›
The documents produced by The American Institute of Architects (AIA) are the most widely used standard form contracts in the construction industry. They facilitate communications among all the parties involved in construction, which makes it easier to produce a high quality project in a timely and economical fashion.How do I finalize AIA Contract documents? ›
- Go to the Projects tab.
- Click Import File.
- Click Choose File(s).
- Select your AIA document draft(s) from your computer and click Import.
- Click Finalize to the right of the imported draft title.
You may make as many changes as you like so long as the changes are made so that it is possible to see what has been changed. If you want, you can delete entire provisions, you can add entirely new provisions, and you can attach additional documents.What is the risk for subcontractors? ›
Outsourcing construction work comes with risks, including poor performance and low quality work, weak project management, legal disputes and financial instability and insolvency.What are the 4 types of contracts? ›
- Lump-Sum Contracts.
- Cost-Plus-Fee Contracts.
- Guaranteed Maximum Price Contracts.
- Unit-Price Contracts.
No. AIA Contract Documents are copyrighted works.What is the AIA form for contractors payment? ›
Different AIA forms
The G-702 is the contractor's application for payment, and the G-703 is a continuation for the 702.
- A-Series: Owner/Contractor Agreements.
- B-Series: Owner/Architect Agreements.
- C-Series: Other Agreements.
- D-Series: Miscellaneous Documents.
- E-Series: Exhibits.
- G-Series: Contract Administration and Project Management Forms.
AIA Contract Documents is an online document automation service that allows you to manage your project data and generate contract documents. You can access your projects and documents anytime and from anywhere using your favorite browser (Internet Explorer, Firefox, Chrome or Safari) for the PC or the Mac.
AIA Contract Documents are created by the AIA Documents Committee comprised of 35 dedicated men and women from diverse practices across the United States. Experts in the fields of design, construction, law, and insurance, Committee members work to draft and revise AIA Contract Documents over voluntary ten year terms.Is there an AIA document for final completion? ›
If the architect determines that the project has reached substantial completion, this step is formalized in a Certificate of Substantial Completion (e.g., AIA G704-2017). Final completion is the handover from contractor to owner.Are AIA contracts good? ›
The AIA is a well-known and trusted organization, and for this reason, the documents produced by the AIA are the most widely used standard form contracts in the construction industry. Many architects like them because: They are flexible. AIA documents can be modified to accommodate individual project demands.What happens if I change my mind after signing a contract? ›
The General Rule: Contracts Are Effective When Signed
Unless a contract contains a specific rescission clause that grants the right for a party to cancel the contract within a certain amount of time, a party cannot back out of a contract once they have agreed and signed it.
Complete the following steps to complete electronic signatures on your finalized documents: Generate a final contract document within the AIA Contract Documents online service. Click E-Sign to the right of the finalized document within your project.How do I protect myself as a subcontractor? ›
- Get Proof of Bonding, Licenses, and Insurance. ...
- Don't Base Your Decision Solely on Price. ...
- Ask for References. ...
- Avoid Paying Too Much Upfront. ...
- Secure a Written Contract. ...
- Be Wary of Pressure and Scare Tactics.
Choosing to be a subcontractor can mean a reliable source of work without seeking new clients or being employed by a company. However, it can come with some significant drawbacks — pay may be less reliable, taxes may be more complicated and you'll probably have less control over who you work with on a day-to-day basis.What are the disadvantages of sub contracting? ›
Disadvantages of contracting and subcontracting
Contractors/subcontractors may cost your business more than the equivalent daily rate for employing someone. By relying on contractors and/or subcontractors, your business does not acquire or develop skills in-house.
For a contract to be valid and recognized by the common law, it must include certain elements— offer, acceptance, consideration, intention to create legal relations, authority and capacity, and certainty. Without these elements, a contract is not legally binding and may not be enforced by the courts.
The 5 elements of a legally binding contract are made up of:
- An offer.
- Mutuality of obligation.
- Competency and capacity.
Your benefits through your local and state chapters include networking and education opportunities, legislative advocacy, awards programs, community awareness campaigns, and local events. Many local chapters also offer Architect Registration Exam® prep classes.Can you join AIA if you are not an architect? ›
Join AIA as an Associate member
Open to architecture degree holders, those working under an architect or in AXP, or faculty. Join AIA as an Associate member and be part of our mission to design a more sustainable, equitable world.
A master subcontract agreement is a legal contract between parties outlining the terms and conditions of a business partnership where one party, typically a general contractor, is managing subcontracting services for a project.What is a subcontractor payment certificate? ›
The document that you send to a subcontractor that a subcontractor signs and returns to you to acknowledge that you withheld the value-added tax (VAT) from the payment to the subcontractor. Certificate.Is an AIA document an invoice? ›
AIA form G702 has the official title “Application and Certificate for Payment,” but most people refer to it as simply the “application.” In AIA billing, the architect (or owner or general contractor, in many cases) gets to approve the amount the contractor bills. Therefore, the form isn't technically an invoice.How do I structure a contractor payment? ›
- The name of the contractor or vendor.
- Description of the work or materials.
- Amount of the payment due.
- Due date for the payment.
- Actual amount paid.
- Actual payment date.
- Payment method.
The three most common contract types include: Fixed-price contracts. Cost-plus contracts. Time and materials contracts.What are the 4 requirements of an insurance contract? ›
- Declaration Page.
- Insuring Agreement.
The AIA typically updates documents on a 10-year cycle. However, not all documents are updated every 10 years and many documents with older dates continue to be relevant and current offerings. Once the AIA publishes an updated document, it replaces the former version of that document.
AIA members are dedicated to the highest standards of professionalism, integrity and competence. The AIA Code of Ethics guides members' conduct in fulfilling those obligations. The Code applies to the professional activities of all AIA members, regardless of their membership category.How often are AIA contracts updated? ›
AIA Contract Documents are Traditionally Updated on a 10-Year Cycle.How do I get an AIA contract document? ›
Anyone may purchase AIA Contract Documents license or a single document, it is not necessary to be an AIA member. Purchase online on our website or call 800-942-7732 to speak with a Customer Service Representative.How do I get an AIA document? ›
Purchase AIA Contract Documents online, or call 800.942. 7732. Wondering what document to use? Call AIA National Document support at 202-626-7526.Who is responsible for making contracts? ›
Regardless of organization type, one consistency is that contract managers are the primary individual responsible for the creation and management of all contracts those organizations use. To successfully oversee contracts from drafting all the way to execution, contract managers need to be skilled in numerous areas.What is AIA G702 and G703? ›
The AIA G702—often called the AIA billing form, progress billing form, payment app, or pay app—is the summary sheet of billing progress. AIA Document G703-1992 breaks the contract sum into portions of the work in accordance with a schedule of values. Key elements of the invoice forms include: Original contract price.WHO issues final completion certificate? ›
At the satisfactory completion of any required rectification work, your architect will issue the final certificate.WHO issues a certificate of completion? ›
Certificate of Completion means certificate issued by the Company to the Contractor stating that he has successfully completed the jobs/works assigned to him and submitted all necessary reports as required by the Company.How do you know if a contract is good? ›
- Key Clauses & Terms. Every line in a contract is important and needs to be reviewed closely, but some clauses and terms are clearly more significant than others. ...
- Termination & Renewal Terms. ...
- Clear, Unambiguous Language. ...
- No Blank Spaces. ...
- Default Terms. ...
- Important Dates & Deadlines.
- Focus on the most critical clauses. ...
- Strive for clear language. ...
- Review default terms. ...
- Check for blanks. ...
- Read termination and renewal provisions. ...
- Note significant milestones. ...
- Allocate risk fairly. ...
- Understand the remedies provisions.
Advantages of being a contractor
Better remuneration - As a contractor you would typically receive higher payment in your role than your permanent counterpart.
If the consumer decides to cancel the contract, the consumer must send the contractor a written notice of his or her decision. The consumer may use the Notice of Cancellation form that the contractor has provided (see D. below) but the consumer is not required to use this form.Can I break a contract I just signed? ›
You usually cannot cancel a contract, but there are times when you can. You can cancel some contracts within certain time limits. Some contracts must tell you about your right to cancel, how to cancel them, and where to send the cancellation notice.Can I get my money back if I signed a contract? ›
One can get a full refund. This time period to withdraw we call “cooling off time”. In other types of transaction one can withdraw from the contract, because the law protects parties and allows that party to withdraw where the deal is against the public policy of the state of California.Can I put AIA after my name? ›
AIA = The American Institute of Architects http://aia.org/about/index.htm Only those that have passed the Architectural Licensing Exam and have paid their dues to the organization may use the letters after their name.How do I finalize an AIA document? ›
- Go to the Projects tab.
- Click Import File.
- Click Choose File(s).
- Select your AIA document draft(s) from your computer and click Import.
- Click Finalize to the right of the imported draft title.
The American Institute of Architects (AIA) is a professional membership association for architects and emerging professionals. The organization offers several designations based on licensure status and other criteria: AIA: Members who are licensed in the United States.
Cost reimbursable (or Cost Plus) Cost reimbursable (CR) contracts involve payment based on sellers' actual costs as well as a fee or incentive for meeting or exceeding project objectives. Therefore, the buyer bears the highest cost risk.Which Fidic contract is the riskiest for contractors to use? ›
In so far it is evident that the Silver Book imposes most of the risks, especially in respect to price and time for completion on the contractor.Which type of contract has more risk for the buyer? ›
Cost Plus Fixed Fee (CPFF) presents the most risk for the buyer. There is less incentive for the seller to keep control of costs than with a fixed-price contract and the buyer would need to provide resources to oversee the costs to make sure they are reasonable.
453). Cost-based contracts, on the other hand, are the highest risk to the client and lowest risk to the supplier.How can you avoid contract risk? ›
- 7 Ways to Mitigate Contract Risk. ...
- Eliminate Missed Milestones and Obligations with Alerts and Notifications. ...
- Regulate Who Can Access Contracts with Role-Based Security. ...
- Protect Contract Data Using Encryption. ...
- Increase Compliance with Clause and Template Libraries.
Fixed Price Contracts. This is the best contract type when someone knows exactly what the scope of work is. Also known as a lump sum contract, this contract is the best way to keep costs low when you can predict the scope.Under what circumstances is it better for a contractor to subcontract? ›
When your business needs some extra hands on a large project, hiring subcontractors is often much more cost effective than bringing on new, full-time employees. It also helps avoid risk by hiring a reliable and safe firm with substantial niche experience.Which contract has least risk? ›
Fixed Price Contracts
The buyer is in the least risk category since the price the seller agreed to is fixed.
- FIXED PRICE. Fixed price construction contracts, also commonly referred to as “lump sum” or “stipulated sum” contracts, are the most common types of construction contracts. ...
- COST PLUS. ...
- GUARANTEED MAXIMUM PRICE.
- Risk 1: A condition precedent isn't met, or a sunset clause passes without action. ...
- Risk 2: A missed deadline, milestone or deliverable. ...
- Risk 3: The contract contains an automatic rollover clause. ...
- Risk 4: Inconsistent treatment of contracts, or ad hoc document management systems.
- Contract Types Overview.
- Express and Implied Contracts.
- Unilateral and Bilateral Contracts.
- Unconscionable Contracts.
- Adhesion Contracts.
- Aleatory Contracts.
- Option Contracts.
- Fixed Price Contracts.
Federal government contracts are commonly divided into two main types, fixed-price and cost-reimbursement. Other contract types include incentive contracts, time-and-materials, labor-hour contracts, indefinite-delivery contracts, and letter contracts.What are the four 4 sources of risk in procurement? ›
- Inadequate Needs Analysis. ...
- Poor Supply Chain Management. ...
- Inefficient Contract Management. ...
- Fraud and Corruption.
- 1) The project's scope. ...
- 2) The cost and payment terms. ...
- 3) The project's time frame. ...
- 4) Protection against lien law. ...
- 5) Dispute resolution clauses.
Types of contract risk
Revenue leakage and cost overruns - including failure to monetise high value services appropriately. Scope creep and quality failures - including failure of the contract to meet the business needs. Damage to business - from loss of competitive edge to personal reputation.
Steps to Identifying Risk
Which contracts have a higher exposure to risk? These can be identified by evaluating contract types such as MSA or SOW, value, financial terms, privacy requirements, contract age, the use of certain clauses, or other data points.