Minnesota Cities Magazine
More from Nov-Dec 2016 issue

Avoiding Pitfalls in Contracting for Building Projects

By James M. Strommen and Andrew M. Biggerstaff

When cities make the decision to undertake large building projects, they are confronted with a library of documents that outline the scope of the project. Among thoseWoman examining a contract with a magnifying glass documents are often the standard uniform agreements prepared by the American Institute of Architects (AIA).

While cities may rely on the uniform nature of these agreements and conclude that they need not be reviewed, that would be a mistake. A city may find itself at a significant disadvantage if it fails to carefully review these agreements as they relate to public projects.

This article will address three common provisions in the AIA family of contracts that could pose added legal and cost risk to the unsuspecting public entity:

  • Provisions that assign full authority to an owner’s representative, who may arguably bind the public entity to contract changes. (In this article, the “owner” always refers to the city.)
  • The detailed reciprocal claims process, which applies not only to the contractor, but also to the owner, often inappropriately.
  • Use of arbitration for dispute resolution, or combining arbitration for some contracts with litigation (state or federal court) in others.

Limit the authority of the owner’s representative
The off-the-shelf AIA General Conditions (A201-2007) include a provision that delegates full decision-making authority from the city council to a designated third party known as the “owner’s representative,” such as a city staff member or a contractor the city has hired for this purpose. The design team and contractors alike often seek to shift the owner’s authority from the city council because it helps speed up the decision-making process on public projects.

One of the major risks posed to cities under this provision is that an inexperienced individual owner’s representative may commit the city to pay additional contract sums, or increase the amount of time that the contractor has to complete the work. This may happen as a result of a statement or alleged statement by the owner’s representative, unbeknownst to the city council, which would not approve such a commitment itself.

The solution is to modify the above-mentioned provision to limit the authority of the owner’s representative to those matters that the city council expressly delegates to the owner’s representative by written resolution.

The general condition “claim” provisions
The AIA General Conditions also define how claims for things like extra time or extra money may be instituted by either the owner or the contractor. Delayed claims of the contractor brought well after the fact are unfair to the owner because they do not allow immediate attention to the issue. The remedy or payment becomes more complicated if the problem is raised only after project completion.

These General Condition terms also require the owner to bring its “claims” shortly after it discovers such a claim. The AIA provides for a claim within 21 days of the event, but that provision should be applicable only to the contractor. While it makes sense for the contractor to act in that time frame, the owner’s claims should be governed by the statutes of limitation applicable to a contractor’s failure to complete the work, or defective work.

The 21-day contract limitation period is unreasonable and impractical for the owner. The city’s attorney should also look at this series of claim provisions and modify them to protect the city from losing a claim right.

Use litigation to resolve disputes
For several reasons, cities should select litigation for any necessary dispute resolution. In a large project, the city will have contracts with its architect, a construction manager, and possibly multiple prime contractors. The architect and construction manager will often select arbitration in their proposed contract with the city, but propose litigation between the city and its contractors.

If the city ignores these selections, it will be faced with different disputes with its contractors and design team, even though the issues involve both aspects of the project. This will be much more expensive for the city and can result in inconsistent decisions to the detriment of the city. While arbitration enables the disputing parties to hire experienced construction practitioners, it is an expensive process between the hourly rates of the arbitrator and the filing and management fees required for arbitration.

State court in or near the city will be more convenient and will require all potentially liable parties to be joined. The owner must have this complete group to obtain the proper measure of recovery to which it is entitled.

James M. Strommen and Andrew M. Biggerstaff are attorneys with Kennedy & Graven, Chartered (www.kennedy-graven.com). Kennedy & Graven is a member of the League’s Business Leadership Council (www.lmc.org/sponsors).

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