December 2-December 15, 2015 —
COLORADO REAL ESTATE JOURNAL
— Page 21
Law & Accounting
I
t’s currently a contrac-
tor’s market in Colorado,
but that doesn’t mean
that contractors should get to
dictate all of the terms of a proj-
ect. For many construction con-
tracts, contractors commonly
will propose a form agreement
from the American Institute of
Architects for the owner to sign.
While the AIA forms are a good
base for an owner-contractor
agreement and include many
important provisions, owners
should carefully review the
AIA form and also any modifi-
cations to the formmade by the
contractor. Additionally, those
who are planning to hire a gen-
eral contractor should consider
making modifications to the
AIA form agreements to better
protect their interests, and this
article provides some changes
to consider from the owner’s
perspective.
n
Lender requirements.
It
is likely that an owner will
obtain financing for the proj-
ect, and the owner’s lender
may impose obligations on the
owner to get the funds. For
example, a lender may require
conditional lien waivers from
the contractor and any subcon-
tractors in order to disburse
funds to the owner. Therefore,
owners should consider add-
ing a provision to AIA form
agreements requiring the con-
tractor to furnish the owner’s
lenders with documents and
certificates as may be required
by the lender in a form accept-
able to the lender. Lenders
may also require that funds
be placed into escrow before
any payments are made to the
contractor. The owner should
carefully review and revise
any language in the contract
regarding the owner’s obliga-
tions relating to terms of pay-
ment to comply with the terms
of any of the loan agreements.
n
Lien indemnity.
The owner
may want to include language
in the construction agreement
requiring the contractor to
indemnify and hold harmless
the owner and others from
actions and claims related to
liens filed on the project. With
such an indemnity, if a subcon-
tractor files a lien against the
owner’s property, such as due
to a claim
that the con-
tractor did
not pay the
subcontrac-
tor, the con-
tractor would
protect the
owner from
losses caused
by the lien.
Additionally,
the
owner
may
want
the right to
settle disput-
ed mechanic’s lien claims by
(the owner) making payments
directly to the lien claimant,
with the contractor liable for
reimbursing any such pay-
ments made by the owner.
n
Owner assignment rights.
While an owner may not plan
to assign a construction agree-
ment at the time of execution, it
may want to reserve its right to
do so as a business matter. Con-
sider modifying the language
of the form AIA agreement to
reflect that the contractor is not
allowed to assign or transfer its
interest in the agreement with-
out the prior written consent of
the owner, but the owner may
freely assign its rights under
the agreement. The owner also
may want to include language
limiting its future liability to
the contractor under the agree-
ment following the situation
where the owner assigns the
agreement.
n
Express insurance require-
ments.
The owner should
place in the contract any insur-
ance requirements that the con-
tractor and its subcontractors
are obligated to maintain. Con-
sider including a schedule of
insurance requirements in the
construction agreement setting
forth the mandatory parame-
ters of such insurance policies.
Language also may be added
to the AIA form clarifying that
the contractor is responsible for
its subcontractors’ compliance
with insurance requirements
and requiring the contractor
and its subcontractors to pro-
vide evidence of such insur-
ance in a form satisfactory to
owner.
n
Liquidated damages.
While not a standard term
of the AIA
con t r ac t o r -
owner form
agreements,
owners may
want to con-
sider adding
a liquidated
d a m a g e s
provision to
the
agree-
ment. A liq-
uidated dam-
ages provi-
sion sets a
fixed amount in advance that
the owner agrees will be the
remedy in case of delays by
the contractor (instead of hav-
ing to prove an actual amount
of damages after the breach).
The provision should clarify
that such liquidated damages
are not intended to be a pen-
alty but are instead a way to
simply quantify damages that
would otherwise be hard to
ascertain. A well-drafted liqui-
dated damages provision spec-
ifies a reasonable amount to be
assessed for each day past the
agreed-upon completion date
the project is delivered, which,
in conjunction with the stan-
dard AIA language mutually
waiving consequential dam-
ages, can be beneficial to both
the contractor and owner. The
contractor benefits by knowing
in advance what its exposure is
for project delays. The owner
benefits because the contrac-
tor is no longer incentivized to
pad its price to protect itself for
unknown delay damages.
The use of AIA contracts is
very common with construc-
tion contracts and helps sim-
plify the negotiation process.
An owner, however, should
carefully review the base AIA
form to make sure it works
for the contemplated project
and also review changes to the
form made by the contractor.
The owner should modify the
form to ensure that it is not vio-
lating its own obligations to a
landlord, lender or other third
party. Additionally, an owner
can make its own changes to
the form to better protect its
interests. All of these modi-
fications will help guide the
construction process from start
to finish.
s
Laurie K. Choi-
Brochu
Attorney, Beltzer LLC,
Denver
Evan L. Randall
Partner, Holland &
Hart LLP, Denver
Adding value to the commercial
real estate industry for over 25 years.
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