Stay Ahead of the Contractual Curve

Construction is a risky business and so is predicting the future. Looking forward, two types of general contractors will exist: those that embrace change and plan accordingly, and those that stay the course and sink. Industry standard contracts establish the foundation for risk in construction, and they are changing too. 

ConsensusDocs, a coalition effort that produces best practice standard construction contracts, has recently updated its most used prime and subcontract agreements as part of a five-year revision cycle. 

Overall, the design-bid-build (200 and 700 series), design-build (400-series) and CM At-Risk (500-series) families of documents have been refined, not rewritten. Updates were driven by changes in the construction insurance market, case law and technology’s impact on sharing information on projects. The mission remains the same: Facilitate better project results with fair contracts that allocate risk to the party in the best position to mitigate that risk. 

Fair contracts eliminate inflated contingencies to hedge against uncontrollable risk and wasted time negotiating away “gotcha” provisions. Rather than funnel information and create contractual silos, ConsensusDocs contracts encourage owners and contractors to communicate directly. Lastly, contracts written in plain English help guide performance and contract administration, rather than litigating poorly written contracts (or worse, fighting over handshake agreements that aren’t worth the paper they are not written on). With a healthy construction economy and labor shortages, contractors and specialty contractors are leveraging their negotiating position and conditioning their bids to work under fair contracts to all parties. 

Time and Money
Essential elements to any construction contract are time and money. Payment times in the ConsensusDocs 200 Owner/Constructor with General Conditions agreement have been shortened from 20 to 15 days. Timely payment is the lifeblood of a general contractor, and this change is beneficial. 

Surprisingly, standard contract documents had not required or referenced critical path method scheduling (CPM). ConsensusDocs now includes a general requirement to use CPM scheduling, which is not only best practice, but already common practice for the industry. 

Insurance Updates, Builder’s Risk, Exhaustion and Pollution Liability
Insurance changes drove several substantive changes in this comprehensive update. Significantly, ConsensusDocs now defaults that the constructor/general contractor purchase the builder’s risk insurance policy, and not the owner. It is more cost effective for the builder to buy the policy (some report a 50 percent savings) and often results in better coverage. 

While the contract provides an option for the owner to opt out and buy the policy, this new approach is already quite common, and should be reflected in bid and project cost estimates. If using another standard contract, request a change order for the builder to get reimbursed for the policy cost. 

New language addressing additional insured responds to recent case law that nullified the intent of parties regarding additional insured coverage. States such as New York and Illinois have unfavorable case law that essentially negates additional insured protection from subcontractors’ excess coverage until an owner’s and general contractor’s primary insurance exhausts (horizontal exhaustion). The new language indicates the parties’ intent to utilize a vertical exhaustion, which protects upstream parties’ additional insured coverage status. 

Pollution liability insurance requirements are now called out as a check-the-box option. When the project site or the nature of the work raises pollution liability issues, owners are increasingly requiring this type of insurance. Moreover, the updated contracts now require owners to supply information about pollution liability coverage because this impacts a general contractor’s insurance procurement decisions for a project site. 

Indemnification
Indemnification is one of the most important contract provisions that is often highly negotiated. Surprisingly, indemnification language protects a party from negligence, but not another party’s intentional wrongdoing. It seems strange to be protected against a party’s unintentional harm, but not if it was on purpose. 

ConsensusDocs becomes the first standard document to take a commonsense approach to indemnity and cover damaging intentional acts. 

Termination 
ConsensusDocs no longer automatically converts an improper “termination for cause” to be treated as a “termination for convenience.” Consequently, an improper termination for cause may have larger damages, such as lost profits on work not performed. In regard to termination for convenience, legal fees attributed to the termination for convenience are now eligible for reimbursement under a termination for cause. 

This new language will help contractors that believe they have been terminated for convenience in bad faith (such as bid shopping). 

Notice
ConsensusDocs embraces technology advances in the industry, as evidenced by creating the industry’s first standard BIM contract document (301) and an electronic communications protocol (200.2). This addition allows parties to communicate by email or any other effective means in giving notice, except for contract termination. 

Dispute Resolution and Mitigation
To help potentially save time and money, ConsensusDocs utilizes the Fast Track procedures from the American Arbitration Association (AAA) for all claims under $250,000. The AAA’s Fast Track review generally provides for only a single day of hearing and the entire process to be completed within 45 days. The new arbitration section expands the cases that normally apply to these arbitration procedures.  

In regard to choosing mediation and arbitration alternative dispute resolution rules and service providers, parties are empowered to choose between AAA, JAMS or their own named provider for arbitration or mediation (AAA now explicitly serves as the default choice). ConsensusDocs made some off-cycle revisions to the arbitration section in 2014 based on new case law that impacted the time limitations for bringing a claim in arbitration. 


Brian Perlberg is executive director of ConsensusDocs, Washington, D.C. For more information, email bperlberg@consensusdocs.org.


Discount Alert
Members of Associated Builders and Contractors are entitled to a 20 percent discount on all ConsensusDocs subscriptions with the code ABC100. ConsensusDocs will continue to create new documents, guidebook comments and updates to help move the entire industry forward in a way that benefits constructors, owners and design professionals alike with better project results and fewer claims.