Contracts

Changes in the Work

Section D-1

Whenever a change in the work is required, the Joint Committee recommends that an adjustment in the contract sum be made on a lump sum basis. The amount for such changes is to be submitted by the contractor, and agreed to by the Architect and Owner, with a formal change order issued, before the work is commenced.

When a lump sum agreement is not practical, the changes may be performed on a cost-plus basis, with a reasonable allowance for overhead and profit, or an agreed-upon unit price basis in accordance with the requirement of the General Conditions of the Contract.

A change in the work may also require a change in the contract time. Time extension should be agreed upon at the same time as the change in the contract sum. All parties involved in the project, including all subcontractors, should be allowed to evaluate changes and be notified of all agreed-upon changes and/or time extensions.

Glossary Terms for the Best Practices Guide

History of Recommendation:
Revised October, 2009
Revised January, 1990
Reviewed April, 1987
Revised December, 1981
Revised September, 1981
Reviewed April, 1976
Revised November, 1971
Revised January, 1967
Approved September, 1958

Final Acceptance of Contract Work

Section D-2

It is recommended that the following procedures be observed:

1. As the work nears completion, the Contractor shall review the requirements of the Contract Documents, shall inspect the work, and shall inform all parties involved of work to be corrected or completed deeming the project is substantially complete. “Substantial Completion” should be established as the date the Owner can occupy and utilize the work or a designated portion for its intended use.

2. Upon receipt of a written statement from the Contractor signifying that work is substantially complete and containing a list of items to be corrected or completed, the Architect will visit the site to verify. If the Architect agrees that the work is substantially complete in accordance with the Contract Documents, he will make a pre-final inspection in the presence of a representative of the Contractor and will prepare a “Certificate of Substantial Completion.”

3. The Architect will confirm the list of required corrections and attach the punch list to the Certificate of Substantial Completion. This document shall establish (a) the date of Substantial Completion; (b) the responsibilities of the Owner and Contractor for security, maintenance, temporary utilities, damage to the existing building, and insurance; and (c) the timeframe in which the Contractor shall finish all items on the punch list. The Certificate of Substantial Completion shall be submitted to the Owner and Contractor for their written acceptance of responsibilities assigned to them in such Certificate. Upon such acceptance and consent of surety, if any, the Owner shall make payment of retainage applying to such Work or designated portion thereof. Such payment shall be adjusted for Work that is incomplete or not in accordance with the requirements of the Contract Documents. A sum equal to one and one-half times the value as estimated by the contractor and the architect will be withheld until the punch list work is complete. Warranties required by the Contract Documents shall commence on the date of Substantial Completion of the Work or designated portion thereof unless otherwise provided in the Certificate of Substantial Completion. (See also section D-5: “Retained Percentage” for related information regarding retained percentage and substantial completion.)

4. The Contractor shall divide the list into each trade, with provision on the list for indicating satisfactory completion by a mutually agreed upon date. When the Contractor has satisfied all items on the list have been satisfactorily corrected or completed, the Contractor shall notify the Architect in writing and make Application for Final Payment.

5. The Architect will make the final inspection to confirm the Contractor’s statement and, based upon the condition of work inspected, the Architect will take appropriate action.

6. Punch list work should not delay normal approval of Contractor request for payment, including Certificates for reduction and/or elimination of retained percentage due the Contractor provided a sum sufficient to complete remaining work is withheld.

7. It is the Contractor’s responsibility to notify the Architect of “Substantial Completion,” in order to minimize the punch list being prepared by the Architect. The Architect/Engineer shares a responsibility to make the Contractor aware, throughout the course of the work, of conditions known that would eventually become punch list items if not promptly corrected, thus minimizing corrective work and reducing the number of final punch list items.

8. Whenever possible, there should only be one punch list developed and the items on the list should be corrected or completed by the Contractor within a reasonable and stipulated number of days after issuance.

9. When the Contract Documents are satisfied and the punch list is completed, the Architect will promptly issue a final Certificate for Payment representing his acceptance of the work.

Glossary Terms for the Best Practices Guide

History of Recommendation:
Revised October, 2009
Revised October, 2008
Revised April, 1987
Reviewed January, 1987
Approved April, 1976

Liquidated Damages

Section D-3 

The Joint Committee recommends that Liquidated Damage Clauses be used sparingly and with discretion because these clauses can create adversarial relationships amongst the project team and add additional costs to a bid. Furthermore the Joint Committee recommends use of Liquidated Damage Clauses only in cases to provide monetary relief for specific and identifiable damages resulting from the project not being completed on schedule for reasons attributable to a contractor’s non-performance. It is important to understand the full impact of the time of completion, especially if exceptional efforts will be needed to meet the schedule. If the owner is considering liquidated damages, a bonus for early completion is recommended. Additionally, the owner should not consider liquidated damage clauses as a mechanism to achieve an unrealistic completion date.

Where such clauses are necessary, the contract should be based on a reasonable completion time, the amount of damages should be factual and calculable, and adequate provisions should be made for extension of time for delays not caused by the Contractor.

This dollar amount of said Liquidated Damages shall be identified as part of the bidding process prior to the time of bidding.

Glossary Terms for the Best Practices Guide

History of Recommendation:
Revised May, 2009
Revised April, 1987
Reviewed February, 1983
Reviewed September, 1976
Revised November, 1971
Approved January, 1967

Order of Precedence Between Drawings and Specifications

Section D-4

The Joint Committee, realizing that there are options to the contrary, recommends that specifications and plans be considered as complimentary. Where a Contractor finds a discrepancy between them, he should immediately call it to the attention of the Architect or Engineer and request that a written clarification be issued. Where the Architect or Engineer finds a discrepancy, he should immediately call it to the attention of the Contractor, clarifying the discrepancy, and issue a written clarification of the requirement.

In cases of conflict, case law generally supports written specifications as ruling over graphic information.

TAGS: Specifications.

Glossary Terms for the Best Practices Guide

History of Recommendation:
Revised July, 2010
Reviewed April, 1987
Reviewed February, 1983
Revised December, 1976
Revised November, 1971
Revised January, 1967
Approved September, 1958

Retained Percentage

Section D-5

Retention of payment (retainage or retention) is the practice of withholding a portion of the payment due to a contractor. Retention can be an effective tool for Owners to obtain contract compliance. For contractors and subcontractors, retention can be a burden on cash flow and profitability. The objectives of the Owner and the impact on the contractor should be properly balanced to achieve the project objectives.

The amount of retention and any special circumstances that affect the amount of retention should be clearly defined in the contract documents. Typically, retention is calculated as a percentage of the payment due, but specific amounts at certain defined events may also be used. Common practice is ten percent (10%) of each approved payment due from the Owner to the contractor where there has been proper performance of the contract. Common practice also includes a stipulation that at 50% of project completion, the retention amount should be reduced to 5% until substantial completion. Upon substantial completion, the retention should be reduced to 1 1/2 times the value of the uncompleted work (150%).

In order not to unduly burden subcontractors that perform work early in the project, retention can be reduced at certain project milestones.

Retention should not be confused with denial of payment for work that does not comply with the contract documents, breaches of contract or for reasons to protect the Owner from claims from third parties.

Users are directed to AIA-MBA Joint Committee Best Practices Guide D-2 Final Acceptance of Contract Work.

TAGS: Retainage and Section D-2.

Glossary Terms for the Best Practices Guide

History of Recommendation:
Revised May, 2009
Reviewed April, 1987
Revised February, 1983
Revised November, 1976
Revised January, 1976

Unit Prices

Section D-6

The Joint Committee recommends that Unit Prices be used only when necessary and when the scope of work can be accurately described. Unit Prices should include the Contractor’s overhead and profit. There should be a differential allowed between “add” and “deduct” unit prices.

In a lump sum bid situation, unit prices should not be used in determining the successful bidder. If the scope of work has changes equaling an addition or subtraction over 10% of the originally scheduled amount, the Owner should renegotiate the unit prices with the Contractor or consider completing the work on a lump sum basis.

TAGS: Lump Sum and Unit Prices.

Glossary Terms for the Best Practices Guide

History of Recommendation:
Revised May, 2009
Reviewed April, 1987
Revised July, 1985

Allowances

Section D-7

Allowances should be converted to include a defined scope of work as quickly as possible. When allowances are called for in the specifications, all items included therein should be clearly stated.

Unless otherwise provided in the Contract Documents:

  1. Allowances shall cover the cost to the Contractor, of the materials, labor and equipment required to be delivered, furnished and installed at the site.
  2. Allowances should clearly state whether the costs of freight, installation, unloading and handling, and tax are included.
  3. The contract should define whether Contractor’s overhead and profit are to be applied to adjustments in the contract price.
  4. Whenever the cost is more than, or less than the allowance, the Contract Sum shall be adjusted accordingly by Change Order.
  5. Where any trade discounts shall be applied to materials, said discount shall be granted to the Owner.
  6. The contract documents should fully describe the materials and associated costs in the allowances.

TAGS: Allowances, Change Orders, and Specifications.

Glossary Terms for the Best Practices Guide

History of Recommendation:
Revised May, 2009
Revised January, 1992
Reviewed May, 1990
Reviewed April, 1987
Revised June, 1985

Securing of Building Permit Procedure

Section D-8

A building permit is typically required for new construction, additions, and major renovations to pre-existing structures. Failure to obtain a permit can result in significant fines and penalties, and even the removal of unauthorized construction if it cannot be made to meet code. The permitting process is complicated by the complexities of construction technology, guidelines for accessibility, overall safety and welfare of the intended occupants, and ecological concerns. Some of these items are administered locally, and some by other layers of governing agencies.

The schematic design phase should include a determination of the Authorities Having Jurisdiction (AHJ) over the project, and a review of their permitting process(es). The Design Professional should review preliminary plans with the proper boards, commissions, and agencies that have jurisdiction over the project. For example, in addition to a building permit, the project may also require review and approval by the local zoning board, the contextual design review board for the community, etc. It is never too early for the Design Professional to establish a dialogue with the AHJ in order to avoid potential issues at the time of permit filing.

The obligation for securing approval of plans and specifications rests wholly upon the Owner or the Architect, whose plans must conform to the requirements of the building codes and the building department. The permitting process should be initiated by the Owner or the Architect, at the time when Contact Documents are completed, or not later than at the time the documents are issued for bidding. This provides the opportunity to resolve any building code issues that may arise during plan review, which often require redesign and modification of the working drawings and specifications. Certain work, such as pre-engineered buildings, requires approval by the specialty contractor.

The Contract Documents should clearly identify who will apply for and obtain permits, as well as whose responsibility it is to pay for them. Whoever files the applications should be someone with a good working knowledge of the permitting process. Typically, the Contractor is responsible for obtaining the building permits. The cost of the permit fee is usually based either on the building area or the project construction cost. It is best to obtain all necessary permits as early as possible, to minimize delays in beginning construction on a project.

The project delivery method, such as early packages for fast track delivery, may require alterations to the permitting process. Some municipalities may issue partial permits such as for grading, foundation, or demolition.

Generally, the new construction must be inspected during construction and after completion to ensure compliance with national, regional, and local building codes. If a municipality, county, or state for which you are applying for a permit has third party inspections, the cost of the inspections should be included in the overall cost of the permit.

TAGS: Fast Track and Specifications.

Glossary Terms for the Best Practices Guide

History of Recommendation:
Revised April, 2010
Revised March, 2010
Revised October, 2009
Reviewed April, 1987
Revised March, 1986