The Dotted Line: ‘Carrot and stick’ provisions help architects and GCs get along

This feature is a part of “The Dotted Line” series, which takes an in-depth look at the complex legal landscape of the construction industry. To view the entire series, click here.

Come on people, can’t we all just get along?

That’s the question that a recent report asks of architects and construction contractors.

The American Institute of Architects and the Associated General Contractors of America’s report looked at the supposed conflict between good design versus effective cost management, and why it causes friction between these cohorts.

“The ‘hard bid’ relationship is structured to be confrontational,” one architect said in the report. “The architect does not have the time or [get paid the] fee to show scope completely or to fully coordinate the project. The GC is required to bid low to get the project, then exploit information gaps in bid documents to improve profitability.”

One particular area of contention since the onset of the COVID-19 pandemic with the resulting supply chain snarls has been material substitutions.

Less than a fifth of architects believe contractors propose material substitutions or other changes to serve the client’s best interests. Contractors indicate they best serve clients by ensuring projects stay within their schedule and budget, the report found. 

About half of architects who responded said the architect has the majority of the responsibility to make decisions in the best interest of the client. By contrast, 88% of contractors said they share the responsibility equally. 

Despite the difference in outlook, construction attorneys say that contract provisions can help bridge this collaboration gap.

Battle lines

For construction attorney Randy Heller, a partner at New York City-based Gallet Dreyer & Berkey, the problem of architects and general contractors not seeing eye to eye extends across the building lifecycle.

“The battle lines are drawn throughout the entire construction process,” Heller told Construction Dive.

Randy Heller

Permission granted by Gallet Dreyer & Berkey

 

He noted that in an ideal situation, architects would specify every nut and bolt, fixture and piece of drywall for a project, with nothing left to the imagination. But in reality, architects have limited budgets and time. The result is that the construction contract usually obligates the contractor to provide not only all that is specified, but “everything inferable therefrom.” 

That’s where the problems begin.

“The question remains, what exactly is the contractor supposed to do to fill in those inferable gaps?” Heller said.

The solution in construction contracts, he said, has traditionally been twofold: The contractor is required to submit shop drawings with sufficient detail so the architect can confirm that the contractor is fulfilling the design intent, and the architect is required to answer requests for information to clarify any questions the contractor may have. 

But in practice, that workflow often gets contentious, quickly.

“The contractor does not want to be in the mind-reading business and peppers the architect with multiple RFIs,” Heller said. “The overworked architect doesn’t have the time – and often isn’t paid – to answer an endless stream of RFIs in a prompt manner.”

Compounding the problem is the fact that project owners often push out contract documents before designs are fully complete. From Heller’s perspective, the solution is for owners to provide sufficient time – and compensation – in the contract for architects to address RFIs.

“Stated more bluntly, you get the level of design detail you pay for,” Heller said. “You can pay for it up front, pay for it in the RFI process or pay for it in change orders when the battle lines are drawn between architect and contractor for alleged scope gaps.”

Heller noted that in some cases, he’s seen liquidated damages on projects that go over schedule add up to as much as $150,000 per calendar day.   

A photo of attorney Felix Rodriguez.

Felix Rodriguez

Courtesy of Bilzin Sumberg

 

“Would that justify paying the architect some reasonable sum to increase its workforce to keep RFI response times to a minimum?” Heller asked. “Sounds like it would to me.”  

Carrots and sticks

Doing so requires a carrot and a stick approach in the contract for both architects and contractors to perform.

 “The carrot can be to pay architects via an additional services provision for the time spent responding to RFIs,” Heller said. “The stick is a contract provision obligating them to respond in a set time frame, say seven days from receipt, failing which some form of penalty might kick in.”

Felix Rodriguez, a partner in the construction law group at Miami-based law firm Bilzin Sumberg, said he likes to include contract provisions that incentivize both sides in the RFI process.

“I obligate the contractor to submit RFIs early on in the process as part of the constructability review of the project so that the RFIs begin to flow shortly after the contractor is engaged,” Rodriquez said. “I also require the architect to respond to RFIs in a timely manner.”

Substitution clauses

On the contractor’s side, especially when there are material substitutions, there shouldn’t be an incentive for the contractor to make a higher profit just because cheaper products are used.

“A substitution clause, properly written, will cause a re-evaluation of the price of that product, either as an increase or decrease,” Heller said. “So, in theory, use of a cheaper product will result in a deduct change order — keeping the contractor from benefitting.”

One way to do that is to use “or equal” provisions, which give owners, architects and contractors more options to substitute substantially the same, or equal, materials on jobs.

“With supply chain issues at the forefront, flexibility is key,” Heller said. “‘Or equal’ clauses, which are often implied in contracts even when not expressly included, permit this flexibility.”

A photo of attorney George Green.

George Green

Courtesy of Weinberg, Wheeler, Hudgins, Gunn & Dial

 

Another approach to avoid gaming material substitutions is to use a “cost-plus” contract, said George Green, a partner and construction attorney in the Atlanta office of Weinberg, Wheeler, Hudgins, Gunn & Dial.

“In a cost-plus contract, the contractor bills the client for direct costs related to the job, such as labor and materials, plus a fixed percentage of that amount that represents the profit to the contractor,” Green said. “That provides an incentive to choose the best materials for the job rather than trying to cut corners to save money and increase profit margins.”

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The Dotted Line series is brought to you by AIA Contract Documents®, a recognized leader in design and construction contracts. To learn more about their 200+ contracts, and to access free resources, visit their website here. AIA Contract Documents has no influence over Construction Dive’s coverage within the articles, and content does not reflect the views or opinions of The American Institute of Architects, AIA Contract Documents or its employees.

 

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