Decoding AIA Subcontract Agreements: What You Need to Know and Consider

What Exactly is an AIA Subcontract Agreement?

AIA Subcontract Agreements are standardized contractual documentation utilized between a prime contractor and subcontractor during the course of a construction project. The AIA, a national association of architects founded in 1857, has been publishing these standard forms since 1911. These agreements provide a framework for the legal relationships and expectations of all parties involved. They also protect both contractors and subcontractors by mitigating the potential for costly disputes .
Typically, AIA subcontract documents, which exist in several variations, provide a list of the prime agreement’s general provisions and special provisions, in addition to the subcontractor’s estimated schedule, scope of work, and payment terms. The AIA even publishes front-end specifications; such as recommendations for documents to include, contract conditions, general requirements, technical specifications, bidding requirements, and instructions for procurement.

Five Key Elements of an AIA Subcontract

Key components of an AIA subcontract are very much the same as the key components of an AIA contract, but with some additional items of concern for the subs. Here are some of the key components:

• Owner/general contractor agreement referenced. An issue comes up as to whether the sub is subject to the terms of the owner/contractor agreement. In order to be sure that the subcontractor is subject to the owner/contractor agreement, a specific provision in the subcontract requires that the contractor make the subcontractor subject to the owner/contractor agreement. However, it is not sufficient to make the subcontractor merely "bound" by the owner/contractor agreement; it must be "directly bound." Issue comes up when the subcontractor claims that the subcontractor’s rights with respect to payment or work with sub are somehow different than what the contractor is entitled to. For instance, if the contractor has no obligation to pay the subcontractor until it procures funds from owner, and therefore does not make payment to the subcontractor, the subcontractor cannot argue that it is entitled to payment without regard to any payment obligations with the owner. The subcontractor cannot recover any amounts until the contractor is entitled to recover such amount from the owner.
• Indemnification. The contractor agrees to indemnify and hold the owner harmless from any claims sustained by the subcontractor or its employees that are caused by the subcontractor, except for claims caused by the sole negligence of the owner. This means that the subcontractor cannot sue the owner, but must sue the contractor as soon as it gets word that the owner received notice of a claim from the subcontractor or the subcontractor’s employee.
• Insurance. Unreasonable to expect the sub to have umbrella insurance to cover a huge amount of personal injury damages, so typically the sub agrees to have its insurance provide coverage for the additional insureds only for $1 million per occurrence and $2 million in the aggregate. Make sure that the clause is clear that you will afford coverage to the additional insured as required by law, or all other provisions requiring you to maintain insurance, and to provide coverage to third-party persons "as required by contract", will not be effective to provide coverage to the additional insureds. Make the indemnification provisions subject to the other provisions.
• Limitation of liability. As discussed with respect to AIA contracts, limit your exposure. You will be liable to the contractor only for the direct costs, not consequential damages, and you will be limited to the total amount of the contract price.

Why Use AIA Subcontract Forms

Utilizing the AIA subcontract forms in the construction industry provides a standardized platform for the general contractor and subcontractor to create a positive working relationship. Because the subcontracts are typically inter-related with the prime contract, it creates a "language" for the parties that can be used to communicate with each other. The definitions and provisions contained in the subcontract are an extension of the prime contract and vice versa. The contractor and subcontractor can refer to the prime contract, AIA documents, and explain how it applies to their working relationship. The AIA subcontract forms are recognized by other associations such as the AGC and the ConsensusDocs. The form takes the position of one who has had hands on experience drafting and using the documents. The forms permit minimal changes so that the form remains relatively succinct. The subcontracts can be used as a model by the drafter to draft subcontracts for local specialty subcontractors. For example, the Florida Bar has approved the AIA A201 for use in Florida. It is well known, familiar and widely criticized at the same time. The subcontracts are protected by copyright and scanned copies may not be used for work without AIA’s permission. Using the AIA forms generally helps the prime contractor in obtaining financing from surety companies and lenders because the AIA documentation is well known and published. Contractors can avoid qualifying for bonding without committing irregularities in the language of the AIA forms. Sub subcontractors also benefit from the standardization of the forms. If all subcontractors use the same forms, then the subcontractors are on equal footing. It allows subcontractors to ask for equal treatment from the prime contractor. In addition, the industry experience that goes into drafting the subcontracts should give subcontractors reasonable confidence that the agreements grants them a level playing field to perform.

Common Issues With AIA Subcontract Agreements

While the AIA Subcontract Agreement is a superb form that has been used for many years, there are some areas that may be problematic and require additional attention. Many of these issues are experienced by Subcontractors and Contractors alike. Having an experienced construction attorney review your AIA Subcontract Agreement will help identify any potential issues and help you address them.
Payment Issues
In some instances, Contractors agree to pay their Subcontractors within a certain number of days upon receipt of payment from the Owner. Many Subcontractors agree to this provision as a matter of course due to the fact that they are looking to do business with the Contractor. Unfortunately, if the Contractor is unable to get paid by the Owner, the Contractor is not obligated to make payment to the Subcontractor until payment is actually received by the Contractor. In other words, there is no payment due from the Contractor until the Contractor is paid. This is a common problem with the AIA Subcontract Agreement.
Additional work is another area that can cause the AIA Subcontractor Agreement to no longer apply. If additional work is being performed on the project, the AIA Subcontract Agreement is no longer in effect and the Contractor and Subcontractor will need to enter into a new Subcontract Agreement. This is due to the fact that the AIA Subcontract Agreement states "[i]f the Contractor and Subcontractor agree that the Scope of Work has changed, the Contract Documents shall be modified to include these changes."
Additional work is a frequent issue in the construction industry. Often times, Contractors will attempt to classify additional work as extra work due to the fact that the Contractor does not want to be responsible. Subcontractors should be cognizant of this fact and determine whether the additional work being requested is work that falls within the Subcontract Agreement.

AIA Subcontract Terms – Top Tips for Negotiating

When negotiating an AIA Subcontract Agreement, a general contractor must make sure the subcontract terms give their subcontractor the right to perform its own work and not merely have to do whatever the general contractor demands. The general contractor/subcontractor relationship is not one of an owner/contractor relationship. It is a mutually beneficial relationship. To the extent possible, the terms of the subcontract should reflect this necessary level of cooperation.
An easy way to ensure that a subcontractor retains some control over its contemplated scope of work is to ensure that the language of the subcontract makes it clear that the subcontractor only has to perform in accordance with the subcontract and any plans and specs for the project, as well as with industry standards. There is no need to grant the general contractor additional rights and privileges over and above what it is entitled to and can demand of its subcontractors under a typical AIA subcontract.
In addition, a subcontractor’s right to suspend work for non-payment should be maintained and not diluted or removed. Where there is no time of the essence requirement, the subcontractor should be afforded the opportunity to await payment prior to performing work. There is no reason to force a subcontractor to finish work and wait for payment until the end of the project, especially where the subcontractor remains unpaid in accordance with the agreed upon schedule of values. All too usually , opportunities to suspend work for non-payment are undermined by contractual provisions that state the subcontractor can only suspend work for non-payment after providing notice to and receiving a cure period from the general contractor.
There is no advantage to a subcontractor to agree to this unless the subcontractor has the ability to continue to permit the project to move forward by: (1) substituting work that was to be performed by others, or (2) rearranging previously scheduled subcontractor work. Realistically, however, it is not possible for most subcontractors to perform their own work and the work of those who are not being paid. By refusing to correct the contractual provisions that require notice and a cure period before a subcontractor can stop working, even when the subcontractor is materially and substantially unpaid pursuant to a schedule of values, many general contractors understand that they are making the subcontractor’s ability to halt work for non-payment at certain times almost impossible. Rather, a better approach is to either provide upfront the terms of payment and have payment terms in a schedule of values, or, stick with the traditional AIA subcontract that does not include notice and a cure period as an absolute pre-condition to the subcontractor’s suspension of work. There is absolutely no need to eliminate the subcontractor’s narrow right to suspend work for non-payment if the general contractor is acting in good faith.

Legal Aspects of AIA Subcontracts

The AIA A401 Subcontract Agreement, as well as the other AIA Subcontract forms, have certain legal considerations that the parties should be sure to address before executing the documents.
The first legal consideration is whether the Subcontract Agreement should be in a signed form, or whether it should be treated as a condition precedent agreement that does not require a signature for enforceability. Because this is an issue of contract formation, it is within the scope of the law of most states’ laws of contracts. Based upon the contract formation jurisprudence of most states, the Subcontract Agreement should not contain a space for signature if the agreement can stand on its own unless and until it is signed. Conversely, should the parties intend that the document not bind the parties until executed, a space for signature should be provided in the AIA A401 form.
The second legal consideration for the parties to be aware of is whether any state’s mechanic’s lien laws will affect the enforceability of the Subcontract Agreement. Many states do not allow a contractor to waive the Subcontractor’s mechanic’s lien rights, and any such attempts to waive contractor’s lien rights by the Subcontractor in the Subcontract Agreement will likely be held unenforceable. Similar rules apply to waivers of lien rights by Subcontractors to the Subsubcontractors. Accordingly, the requests for waivers of lien rights should be carefully considered by the attorney for the Subcontractor to ensure that they do not contain any prohibited language or attempt to waive any of the Subcontractor’s mechanic’s lien rights.
The third legal consideration is the extent to which the A401 form includes the requirement that the Subcontractor indemnify the Contractor – and possibly the Owner — from claims for bodily injury, death, or property damage caused by the Subcontractor’s subcontractors. Some states do not allow for indemnity clauses such as this in construction contracts, and any indemnity clause in violation of the statute will be void and unenforceable. Likewise, many states do not allow parties to a construction contract to indemnify one another for loss arising out of their own negligence. The only way that a party can be indemnified for its own negligence is if the indemnifying party paid a much higher amount for the indemnity – i.e., by purchasing insurance and being appropriately compensated for the additional cost in the transaction.
The fourth legal consideration is whether the Subcontract Agreement includes or incorporates any pay-if-paid clauses in violation of the state’s mechanic’s lien statutes, particularly if the contractors are compelled to pay claims asserted by the Subcontractor on account of work performed by the Subcontractor’s Subsubcontractors. Any such contractual disclaimer of payment obligation that is contrary to the statutorily-created rights of the Subcontractor or its Subsubcontractors will be void and unenforceable.

How to Make Changes to an AIA Subcontract Agreement

When a project’s conditions change and impact the scope of work under an AIA subcontract agreement, modifications to the AIA subcontract agreement terms may be necessary. Most AIA subcontract agreements contain either an explicit or implicit agreement on the availability of equitable adjustments under the following circumstances: (1) there is a change in scope of the work (i.e., owner changes the design or scope); (2) there is an extension of time for performance due to delay or disruption of the subcontractor’s work that is not the subcontractor’s fault; and/or (3) there is a delay or disruption by the owner or general contractor in the progression of the subcontractor’s work.
AIA A401-2007, "Standard Form of Agreement Between Contractor and Subcontractor," contains an extensive list of necessary and optional administrative provisions that govern the subcontractor’s obligations for modification of the work and equitable change to the work.
For example, AIA A401-2007 requires that the subcontractor submit its properly documented claim within 21 calendar days, after occurrence of the event giving rise to the claim, and is contingent upon 30-day notice . The contractor has 14 calendar days to review the subcontractor’s claim and respond with a request for additional supporting data. If the subcontractor does not respond to the contractor’s request for additional information, the contractor is required to reserve its right to claim it has not waived the subcontractor’s claim by responding with a statement of the issues in dispute — otherwise, it may be barred from objecting later. A response to the additional supporting data is required within 14 calendar days. If the contractor rejects the subcontractor’s claim, the contractor is given 14 calendar days to provide a written statement to the subcontractor as to the reasons for rejection. This provides the subcontractor additional time to amend the claim and submit it in compliance with the A401-2007 requirements.
The A401-2007 also indicates that if the just compensation sought by the subcontractor for a changed condition is unanticipated at the time of the agreement and if the agreement fails to include the method of determining equitable adjustment, the subcontractor has the right to recover the appropriate formula determine the just compensation for such changed condition.