A Comprehensive Guide: Navigating & Negotiating Construction Contracts

Navigate construction contracts effectively as a subcontractor.
  July 6, 2023

Understanding and negotiating construction contracts is critical to the success of any subcontractor. The contract establishes the basis of the sub’s relationship with all stakeholders on a particular job, including the project owner and General Contractor. It is essentially the roadmap, defining the scope and schedule of the job, as well as payment terms and other details relevant to the project.

A quick web search reveals a wide variety of construction contract templates available for download. The American Institute of Architects (AIA), however, is the industry standard and most-recognized resource for construction contract agreements. Read on to explore the basics of AIA construction contracts, become familiar with the typical terms, conditions, and key elements of these documents, and discover strategies for effective negotiations with GCs or project owners.

What Are AIA Contracts?

The American Institute of Architects, commonly known as the AIA, hosts a comprehensive library of construction-related documents. Recognized industry-wide as the most up-to-date resource for construction contracts, AIA templates generally reflect the most recent changes in the industry and law.

AIA construction contracts break down the roles of all parties to the project, detailing obligations and defining responsibilities. In theory, such agreements are designed to be fair and balanced. In reality, though, most construction contracts are written with preference given to the project owners and architects, making it even more crucial that subcontractors understand these agreements.

Why Subcontractors Should Understand AIA Contracts

Trade contractors form the core of most construction projects, providing the specialized skills and expert labor required to bring a job across the finish line. In most cases, the sub’s agreement is with the General Contractor rather than the project owner. However, there are occasional instances when subcontractors contract directly with the client. In either event, the subcontractor must thoroughly understand the agreement and all terms and conditions therein. At the end of the day, the contract defines how contractors are compensated, the process for managing changes, and the guidelines for dispute resolution.

Key Elements of AIA Contracts for Subcontractors

The most frequently-used AIA contract documents relevant to subcontractors are the A401 Standard Form of Agreement Between Contractor and Subcontractor and the related A201 General Conditions of the Contract for Construction. Another related document important for subs to review is the A101 agreement between the General Contractor and the project owner.

A401 Standard Form of Agreement Between Contractor and Subcontractor

As indicated in its title, the AIA A401 Standard Form of Agreement Between Contractor and Subcontractor establishes the contract between the GC and the sub, laying out roles and responsibilities as well as the details of all work to be performed, how change orders are managed, and any processes in place for dispute resolution. The A401 agreement also typically incorporates the A201 document by reference, outlining the general conditions of the contract.

A201 General Conditions of the Contract for Construction

The A201 General Conditions of the Contract for Construction forms a fundamental part of the overall agreement between contractor and sub as outlined in the A401 document. It establishes general provisions as well as the rights, responsibilities, and relationships of all parties. Negotiations between the subcontractor and the General Contractor typically take place within the A201 document.

A101 Standard Form of Agreement Between Owner and Contractor

Another AIA document important for subs to be familiar with is the A101 Standard Form of Agreement Between Owner and Contractor. Also referred to as the prime contract, the A101 outlines the main agreement between the General Contractor and the project owner. Though some GCs are hesitant to share this information, subs should request access to the A101 in order to ensure that their payment terms are no more restrictive than what the GC and owner have agreed to. Of particular interest and importance to the subcontractor is the section regarding Payments, Insurance, and Dispute Resolution. In order to minimize risk, subcontractors should make certain that the prime contract references a “pay when paid” clause versus “pay if paid.” This ensures eventual payment even in the event of a dispute between the GC and the project owner.

Successful subcontractors know the importance of a complete and thorough understanding of these documents. They set forth the rights and responsibilities of the subcontractor, define the sub’s overall role in the construction project, and establish the relationship with the job’s General Contractor.

Tips for Negotiating AIA Contracts as a Subcontractor

Following are several suggestions subcontractors should consider for effectively negotiating AIA construction contracts:

Understand Your Scope of Work

Subcontractors must have a comprehensive understanding of the scope of the job before any negotiations can begin. Knowledge of the details of all required tasks, the project completion schedule, and any change management processes are critical before negotiating the construction contract.

Review Payment Terms

Among the most important parts of the construction contract are the payment terms. It’s essential that subs know when payments are expected, how much is being paid, and any conditions under which those disbursements are made. Subcontractors should take this opportunity to negotiate the removal or reduction of retention payments and ask for adjustments to improve or protect their cash position on the project. A detailed and comprehensive Schedule of Values also plays a vital role in the contract’s payment terms, so understanding how to structure an SOV properly is critical.

Consider Risk Allocation

Generally speaking, AIA contracts are written to allocate risk fairly and evenly across all parties to the agreement. Nonetheless, the subcontractor should carefully review the document, specifically for any provisions related to indemnity, insurance, and dispute resolution. Subs uncomfortable with their exposure should take this opportunity to negotiate better risk sharing.

Seek Legal Advice

A lawyer with significant construction law experience can be a valuable asset in understanding and negotiating the typical AIA contract. Subcontractors, particularly those just starting, will benefit from a top-to-bottom legal exploration of the boilerplate language used in AIA construction documents to better identify and understand potential future changes.

Retainage Reduction

Retainage can be among the most burdensome contract additions for subcontractors because of its potential impact on cash flow. Subs should try negotiating for a retainage reduction rider or otherwise strive to reduce retention to a more manageable level. Typically, subcontractors should argue for retainage amounts to not exceed 5% of the contract sum for milestone completion. Subs among the first trades on a job can be particularly susceptible to cash flow problems if payment percentages are withheld until the job is finished, many times 12-18 months later. In such cases, it’s appropriate to ask for additional reductions or the complete removal of retainage as milestones are hit to ensure financial stability over the course of the project.

Understanding and negotiating most construction contracts is reasonably straightforward. Subcontractors with a solid handle on the basics and sound advice from experienced industry professionals can generally ensure they enter into agreements that protect their interests and lay the groundwork for a successful project. Knowing the details of the contract and having the ability to negotiate effectively place subs in the best position to ensure the job goes smoothly and to protect themselves when it doesn’t.

Take Control of Your Construction Accounting with CrewCost

Understanding and negotiating construction contracts is just one part of the puzzle. Another key to success lies in the subcontractor’s ability to maintain proper financial health throughout the project. While many trade contractors are considered experts at their craft, most aren’t necessarily professional accountants. Thankfully, there’s CrewCost.

CrewCost is construction accounting and job costing software explicitly built to take the load off of contractors when it comes to managing their cash flow and financial health. CrewCost efficiently streamlines the job costing process, improves project tracking, and ensures profitability, allowing contractors to focus on the business of building. Discover how easy it can be to manage project finances and job costing with a free trial to CrewCost, the leading cloud-based accounting software built specifically for construction contractors.

Yancy Lassiter

Written by Yancy Lassiter

Yancy Lassiter, a CPA with a degree from the University of Texas, has 12 years under his belt as a Controller and CFO in the construction industry; he’s your go-to guy for finance in the building industry.

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