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A Primer of What Every Real Estate Lawyer Needs to Know About Architects Agreements and Construction Contracts HBA Real Estate November 19, 2014 Bruce Merwin, Partner 333 Clay Street, Suite 3300 Houston, Texas 77002 713-217-2859 Fax: 832-397-8005 bruce.merwin@tklaw.com Slide 2 TABLE OF CONTENTS PAGE I.INTRODUCTION/SCOPE...................................................3 II.WHO ARE YOU REPRESENTING?....................................5 III.OVERVIEW OF CONSTRUCTION CONTRACT PREPARATION...6 IV.WHAT FORM OF CONTRACT SHOULD YOU USE REPRESENTING THE OWNER STEPS INVOLVED IN PREPARING THE CONTRACT......9 V.TYPES OF CONTRACTS.....10 VI.NEGOTIATION OF CONSTRUCTION CONTRACTS..14 VII.NEGOTIATION OF ARCHITECTS AGREEMENTS.....30 VIII.KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS SELLING HOMES CONSTRUCTED BY BUILDERS ETC......................38 IX.CONCLUSION............................................................43 X.INDEX TO APPENDIX................................................44 2 Slide 3 I. INTRODUCTION/SCOPE The primary purpose of this outline is to advise the attorney for the developer, contractor, architect, lender or investor who is in the process of preparing or reviewing a construction contract or architects agreement for a commercial project or custom home on how to deal with certain key issues when utilizing the AIA documents or other forms of agreement. When you are drafting a Construction Contract or Architects Agreement, there are many variables in determining whether an AIA contract form is the best alternative and whether or how to revise such contract form. The Owners attorney should be sensitive to any existing relationship between the contracting parties, respect customary practices, be aware of drafting trade offs and appreciate different attitudes as to the basic objectives of the particular Construction Contract and/or architects Agreement. The most important thing I have learned in preparing and negotiating Construction Contracts over the past thirty years is that experienced lawyers representing Owners should strive to prepare and negotiate contracts which are pro-Owner in their approach but are perceived by Contractors and/or Architects to be fair contracts from the standpoint of: (i) informing each party what it must do and to what it is entitled, (ii) informing each party of its rights when the other party does not perform as promised, and (iii) reflecting the reality of contract administration and not requiring the Contractor to agree to procedures which will not likely be followed or will significantly increase the cost of construction. 3 Slide 4 4 To state it another way, each partys attempt to protect his/her interests should not cause the Contract to get out of balance to the point that the contract terms themselves become a more significant risk factor than the value and the complexity of the work itself. A note of caution: use the forms included in the Appendix carefully, making sure that each provision applies to your project. I have been successful in using the forms on various projects, but my success was often based upon provisions contained in the Bid Documents and the bargaining power of my Owner clients. Reservation of right to take conflicting positions in negotiatio ns.. INTRODUCTION/SCOPE (cont.) Slide 5 II. WHO ARE YOU REPRESENTING? Owner/Developer Commercial project Owner Custom home/speculative home project Contractor commercial projects Equity Investor in Developers commercial project Lender involved in commercial project Owner with respect to Architects Agreement Commercial or custom home project 5 Slide 6 III. Overview of Construction Contract Preparation Construction Checklist: Meet with the Client to review the Construction Contract checklist included in the Appendix to make sure that you have a clear understanding of the Clients goals with respect to the Project, as well as the Clients understanding of the qualifications and exclusions contained in the Contractors proposal; Architects Construction Administration Responsibilities: Review the Architects Agreement, if any, to determine the Architects role in construction administration; Contractors Proposal: Review the Contractors proposal (particularly the qualifications and exclusions) and/or Bid Documents, including the Plans and Specifications to obtain an understanding of the scope of the Project and whether any legal provisions (Supplementary Conditions) are contained in the Specifications section of the Project Manual. The Architect often prepares a Project Manual for larger commercial projects containing provisions relating to insurance, warranties, progress payments, testing, close-out requirements, lien releases and a number of other legal issues; 6 Slide 7 Overview of Construction Contract Preparation (cont.) Loan Documents: Review the loan documents, if any, to determine the draw procedure outlined in the Loan Agreement and any other Lender requirements with respect to the Construction Contract, including subordination provisions and consent and assignment provisions; Prepare/Revise Form: Revise the form submitted by the Contractor or prepare the form for the Owner, generally using one of the AIA forms; and Summary Letter: Prepare a letter to the client summarizing the payment procedures, lien release requirements and completion requirements, as well as outlining any potential problem areas. 7 Slide 8 Overview of Construction Contract Preparation (cont.) Practical Tip: If you negotiate the Architects Agreement, request the Architect to include your Supplementary Conditions (included in the Appendix) in bid documents on large projects. Although the AIA forms are biased towards the architect and contractor, the AIA has been careful to seek input and endorsements from as many trade groups as possible. As a result, the AIA documents enjoy a wide reputation of fairness to all parties and are accepted by the construction industry as a natural starting point for use in writing and the administration of the construction process. 8 Slide 9 9 IV.WHAT FORM OF CONTRACT SHOULD YOU USE REPRESENTING THE OWNER STEPS INVOLVED IN PREPARING THE CONTRACT AIA forms, such as the A101, A102, A103, A105 or A107 and A201 (if applicable); The Contractors form which is generally a shortened version of the former AIA, A101, A107, A111 or A114 documents; The Owners form which is generally a modified version of the A101, A102, or A107 documents (with a number of Owner-oriented revisions to such AIA documents); and ConsensusDocs (the AGC and COAA published a set of standard form construction contracts in 2007 theoretically developed through a collaborative effort of Owner, Contractor, Subcontractor and Surety organizations. These forms were endorsed by these organizations as a fair and reasonable allocation of rights and responsibilities in a construction contract. Organizations with competing forms (e.g., AIA, DBIA and EJCDC) have not formally participated or endorsed the ConsensusDocs. While the ConsensusDocs have gained some traction, they have not yet become a real competitor of the AIA documents. A discussion of the pros and cons of the ConsensusDocs is beyond the scope of this presentation. Slide 10 V.TYPES OF CONTRACTS A.STIPULATED SUM OF CONTRACT The most common form of Contract is the stipulated sum contract. This form of Contract may be preferred by an Owner because it permits the Owner to budget for a known amount of money to be spent in exchange for a completed project. On the other hand, the "stipulated sum" is often overrun because of construction changes that increase the scope and cost of the Work. B.COST PLUS CONTRACT As may be inferred from its name, the General Contractor under a Cost Plus Contract is reimbursed its costs plus an amount of money to compensate for overhead and profit. The drafter of a Cost Plus Contract will need to pay special attention to the definition of the word "cost". The Contractor is reimbursed for costs periodically, usually monthly. Overhead and profit may be computed as a percentage of cost, or as a stipulated fixed fee. If there is no GMP, the Contract should include a provision preventing the Contractors estimate from being exceeded by more than a specific percentage without the Owners approval. 10 Slide 11 TYPES OF CONTRACTS (contd) C.COST PLUS CONTRACT WITH GUARANTEED MAXIMUM PRICE A form of Contract that combines, from the Owner's point of view, the advantages of the Stipulated Sum Contract with the advantages of the Cost Plus Contract is a Cost Plus Contract with a Guaranteed Maximum Price. Here, the Contractor's compensation is stated as an overall price, including the Contractor's costs and the fee. However, provision must be made to increase or decrease the Guaranteed Maximum Price when the scope of the Work is changed by additions to or deletions from the Work required by the Contract Documents. If any savings occur, all or a substantial part of the savings generally will accrue to the Owner, but such amount is subject to negotiation. D.DESIGN-BUILD CONTRACT In a design-build contract, the Contractor also takes responsibility for designing the project. Under a design-build contract, however, the Owner holds the Contractor responsible for design regardless of whether the Contractor performs design services with its own employees or through contracts with Architects and engineers. 11 Slide 12 TYPES OF CONTRACTS (cont.) E.CONSTRUCTION MANAGEMENT CONTRACT Modern Architects are increasingly refusing to perform construction administration services. This strategy has been effective to reduce liability, but has left some Owners at a loss for competent management and supervision of their construction projects. The professional construction management company has stepped into this void, sometimes as a licensed Architect/engineer, but more often as a licensed Contractor. The construction manager serves the same function as many General Contractors by soliciting bids from Subcontractors, selecting Subcontractors, negotiating and awarding Subcontracts, ordering materials, dealing with Architects/engineers and performing construction administration services, such as inspecting the job, processing change orders, processing payment requests, scheduling the job, and coordinating the Work. 12 Slide 13 TYPES OF CONTRACTS (cont.) F.FAST TRACK An Owner who has a large investment in property held for construction is highly motivated to convert the unimproved non-productive real estate to something that produces income. The carrying costs for real estate are considerable, and probably run in the neighborhood of at least fifteen percent (15%) per annum of the value of the unimproved real estate when the losses associated with lost opportunity are taken into account. Owners may have other practical reasons to need to expedite construction of a project. Under such circumstances, fast track construction may become attractive. This means that the Contractor will start building as soon as the foundation plans are ready and a foundation permit is issued, regardless of the fact that the Architect/engineer has not finished designing the project. Construction costs are higher due to greater risks. 13 Slide 14 Key Issues: Description of Work. -Intended that the Contract Documents include all items necessary for proper execution and completion and what is reasonably inferable from the Contract Documents to be necessary to produce the indicated results -List/attach key documents Leases, MWBE requirements -Contract Documents should provide a comprehensive description of the Work to be performed by Contractor by reference to incorporation of the Drawings and Specifications as well as by referring to the Contractors qualifications or clarifications -Contractors obligations to confirm benchmarks and physical characteristics of the site and to report discrepancies to Owner/Architect for adjustment before beginning Work VI. NEGOTIATION OF CONSTRUCTION CONTRACTS 14 Slide 15 Key Issues: 1.Description of Work (cont.) Definition of reasonably inferable--Non-material additional costs or material additional costs; additional design required versus minor submittals; material versus minor changes in sequencing and scheduling Include site work, if applicable Hierarchy for resolving discrepancies between the Contract Documents modifications and change orders, agreement, supplement, Contractors proposal, general conditions Hierarchy for resolving a specific type of conflict within a Contract Document NEGOTIATION OF CONSTRUCTION CONTRACTS (Cont.) 15 Slide 16 NEGOTIATION OF CONSTRUCTION CONTRACTS (Cont.) Contractors perspective Standard of Substantial Compliance with Drawings and Specifications Economically unproductive to correct certain deviations, but reduction in Contract Sum Avoid references to good and workmanlike or best efforts 2.Site Conditions Contractors obligation to study and compare Contract Documents Contractors obligation to take field measurements and verify field conditions Contractors obligation to review soils and other geotechnical tests, as well as any other documents delivered by Owner, without warranty from Owner 16 Slide 17 Key Issues: Site Conditions (cont.) Contractor assumes full responsibility for site conditions including any concealed conditions, and Contractor is provided with a contingency to assume such risk Obligation for Contractor to review Contract Documents prior to performing each portion of the Work and if Contractor performs Work in conformity with any Contract Documents knowing it to be inconsistent with another Contract Document, without obtaining approval from Owner, Contractor will be responsible for correcting Work, at Contractors expenseR to withhold for potential failure to satisfy GMP or Substantial 17 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) Slide 18 3.Progress Payments. -The contract should identify the supporting documentation for payment applications, including lien waivers and lender- required items. -Owner should be entitled to withhold the portion of payments necessary to protect its interests on account of 1) Contractors failure to deliver required lien releases, 2) defective work, 3) claims filed by third parties or 4) the persistent failure by Contractor to carry out the work. -Also right to withhold for potential failure to satisfy GMP or Substantial Completion date anticipatory breach where required performance is either extremely unlikely or impossible. -No right to suspend performance if withholding permitted by contract. 18 Slide 19 Key Issues: Progress Payments (cont.) Payment Applications Specification of required supporting documents for progress payments, lien waivers, sworn statements and affidavits, Lenders requirements, monthly job cost reports, updated schedule of values and progress schedules Payment for storage of materials on-site and off-site Lenders Requirements Contractors perspective Release from obligation to supply partial lien releases from minor subcontractors and trade vendors NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) 19 Slide 20 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) -Should require Architect or other third-party to concur in withholding payment, limit withholding to defective work, uninsured claims or lien claims and/or require prompt payment following correction Establish procedure for payment for on-site and off-site stored materi als Contractors Cost of the Work; Fee Owner and Contractor negotiate over list of costs and excluded costs; many of the excluded costs are often included in the Contractors Fee Item A in the Appendix is a reasonable compromise from the Owners perspective and avoids the duplication of costs 20 Slide 21 NEGOTIATION OF CONSTRUCTION CONTRACTS Should attempt to identify categories of reimbursable costs that are part of general conditions costs and segregate them from other portions of the cost of the work Contingency/Contractor Contingency including access to contingency Contractors right to reallocate costs Savings percent payable to Contractor, following final accounting of costs, application against warranty work Key Issues: 4.Retainage. While 10% statutory retainage affords Owner maximum protection against lien claims, the amount of retainage is an economic issue to Contractor and subject to negotiation and approval by the lender. Owner seeks to protect itself against lien claims and provide an incentive for Contractor to complete the work. If Contractor is providing a payment bond, retainage is not as important. Whatever reduction in retainage is negotiated, Owner should hold an amount sufficient to ensure completion of punch-list items. 21 Slide 22 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) 5.Conditions to final payment. Owner should require final approval from the architect, a certificate of occupancy (or equivalent), warranties, as-built surveys and drawings, final lien releases (with any lien claims bonded around) and satisfaction of all lender and all other project close-out requirements. No substantial completion if a substantial number of punchlist items require correction or completion may reference a dollar amount that can not be exceeded, maintenance and operating manuals, record drawings and specifications; warranty book with names of all subcontractors and suppliers; Contractors Perspective Conditions to final payment should reflect objective standards; Warranty claims and disputes between contractor and subcontractors (as long as no liens exist that are not bonded around) should not hold up final payment 22 Slide 23 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) Key Issues: 6.Separate Contractors. Contractor must accommodate the work of Owner's separate contractors, but is the quarterback. The coordination, cooperation and scheduling provisions of each contract should be consistent, as well as dispute resolution procedures and delay, damage, insurance and indemnity requirements. Whichever party is responsible for damage, delay or loss should be liable to compensate the other party. Practical Tip Contractor needs to coordinate from inception of project on Owner/Tenants separate contractors access to site and for their use of Contractors equipment. 23 Slide 24 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) Key Issues: Insurance (cont.) 7.Insurance. Due to the complexity of construction-related insurance, Owner and Contractor should consult with their insurance advisors to provide comprehensive coverage. The insurance provisions of the contract should cover the following items: 1) Contractor's cgl coverage limits, including policy form, and Contractor's coverage should be primary as to Owner, 2) certificates of insurance, copies of policies 3) no cancellation or reduction of coverage without notice, 4) builder's risk coverage Owner vs. Contractor Owners (Lenders) right to proceeds, 24 Slide 25 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) 5) additional insured status for Owner and lender recognizing new statutory indemnity limitations, 6) Policy amounts stated as minimum amounts; aggregate limits shall, by endorsement, apply to subject project separately 7) cgl and worker's comp waiver of subrogation endorsements for Owner, and 8) a general mutual waiver of subrogation. 25 Slide 26 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) Key Issues: 8.Warranties. Contractor must correct defective work or remove it and replace it with non-defective work for one year following completion, plus correct any damage caused by defective work. If Contractor fails to timely perform, Owner may make the repairs at Contractor's expense. The warranty should exclude defects inherent in the required work, damage caused by Owner abuse or modifications or improper maintenance. Assignment of various warranties from Contractor to Owner Right to extend one year warranty with respect to items repaired during the warranty period, not to exceed 18-24 months Right to accept defective or nonconforming work and obtain reduction from Contract Sum 26 Slide 27 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) Key Issues: 9.Change Orders. The contract should accommodate Owner's changes, specifying the procedure for determining additive and deductive costs, including Contractor's fee, and requiring Contractor to perform the change before final agreement is reached on cost, at least up to a specified amount. If no agreement on cost of change order, Contractor must still perform pursuant to Construction Change Directive with price to be determined pursuant to a formula Agreement on any change order to be a final settlement of all matters related to the change order Certain minor changes involving materials, color, manufacturer, dimension or other questions require Owner approval No course of conduct or dealing or implied acceptance of changes shall result in a change order 27 Slide 28 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) Key Issues: 10.Default and Remedies. Enumerated list of Contractor defaults with reasonable notice and cure Owners right to terminate contract, stop work or perform work on behalf of Contractor If terminated for cause, no additional payment until completion Unless the contract has been terminated, Contractor should be obligated to continue performance during the pendancy of a dispute, and Owner should make undisputed payments. Bankruptcy issue / adequate assurances If Owner fails to make required payments or Owner otherwise defaults, the Contractor may stop the work until the default is cured. If not cured within 30-60 days, Contractor should be able to terminate and recover for worked performed and proven loss. The parties also should consider utilizing mediation/arbitration to resolve disputes. The AIA forms have check the box elections. If so, it is important to outline detailed procedures applicable to mediation/litigation/arbitration, usually incorporating the American Arbitration Association Construction Industry Rules. 28 Slide 29 NEGOTIATION OF CONSTRUCTION CONTRACTS (cont.) Key Issues: 11.Termination For Convenience. Current versions of most AIA documents permit Owner to terminate without cause. This allows Owner to change its mind and may avoid a bitter dispute between the parties following a breakdown of communications or trust. Right to terminate for convenience at any time on seventy-two (72) hours or less written notice cooling off period Establish step-by-step procedure for stopping work and easing transition to successor Contractor Provided certain conditions are satisfied, payment for all work done to date but no profit or overhead (or a reduced profit and overhead) on unperformed work Assumption of obligations under Contractors subcontracts and purchase orders and indemnity of Contractor against claims Continued liability of Contractor under warranty for work performed prior to termination as long as Owner can demonstrate Contractor caused the problem assignment of warranties for post-termination warranty work 29 Slide 30 VII. NEGOTIATION OF ARCHITECTS AGREEMENTS 1.Overview of Architects Agreement Preparation Architects Checklist Meet with the client to review the Architects checklist included in the Appendix; make sure that you understand the scope of the project and the role of the Architect; Architects Consultants/Owners Consultants; Review the Architects proposal for detailed scope of services, compensation, hourly rates for additional services, exclusions; and Prepare/revise the form submitted by the Architect or prepare the form for the Owner, generally using one of the AIA forms or an Addendum to the Architects proposal. 30 Slide 31 KEY AREAS OF CONCERN TO OWNERS - ARCHITECTS AGREEMENTS 2. Key Issues 1.Architects phased design responsibility schematic design phase design development phase construction document phase construction phase Owner's approval of work in each phase Owners right to disapprove any portion of Architects work on Project during any design phase on any reasonable basis, including costs, without additional costs unless revisions are made to drawings previously approved by Owner under prior phases Architects Key Personnel cannot be replaced without Owners approval Architects standard of care 2.Responsibility for design vs. coordination of design activities require Architect to hire structural engineer, mechanical, electrical and plumbing engineer All consultants hired by Architect should be the responsibility of the Architect including any errors or omissions 31 Slide 32 KEY AREAS OF CONCERN TO OWNERS - ARCHITECTS AGREEMENTS (cont.) Key Issues (cont.) With respect to the Owners consultants, Architect shall be responsible for coordination of Owners consultants drawings and design documents, but not the accuracy thereof except for failure of Owners consultants drawings to fit into the Architects design or for errors discovered in such drawings or specifications by Architect and Architects failure to promptly report such errors to Owner 3.Basic Services vs. Additional Services Owner must have full understanding of the scope of basic services, including, without limitation, all of the phased design services to produce construction documents and Architects coordination and cooperation responsibility, including with respect to LEED certification. No Additional Services without Owners prior written approval. 4.Owners responsibilities civil engineering, landscaping, interior design Need cooperation and responsibility from Architect Architect to advise Owner of any error to prior documents or omissions in Owners consultants and submittals. 32 Slide 33 Key Issues (cont.) 5.Architect's budget responsibility - revision of drawings Architect may agree to revise on one occasion at no additional expense or provide up to a designated number of hours (20-30) at no additional expense to redesign to reduce costs. 6.Ownership of drawings and specifications Owner needs right to use documents on this project and any renovation, repair or expansion project without using architect; right to use documents to complete project in the event of termination It is important to note that Architect has all ownership rights without assignment by contract On some commercial projects, Architect assigns all ownership rights, including all copyrights, to Owner If Owner delivers unit plans or designs of other specific items to the Architect for incorporation into the project, the ownership of such items, including derivative rights, should remain with the Owner 33 KEY AREAS OF CONCERN TO OWNERS - ARCHITECTS AGREEMENTS (cont.) Slide 34 Key Issues (cont.) Joint ownership is often the custom If Owner uses drawings and specifications on additional projects without Architect, Owner must indemnify Architect against claims to the extent permitted by law Should Architects right to reuse a unique design be limited in any manner? Architects right to use standard details on additional projects. 7.Termination, suspension or abandonment Termination for cause Termination for convenience Suspension or abandonment of project Compensation payable to Architect Architects right to suspend/terminate for nonpayment by Owner 34 KEY AREAS OF CONCERN TO OWNERS - ARCHITECTS AGREEMENTS (cont.) Slide 35 Key Issues (contd) 8.Payments to the Architect-conditions to payments Right to withhold payment for default, nonconforming services, failure to make payment to consultants, where Architect is ahead of Owner in terms of completion of services vs. payment received; Owner should assert right within 30 days following receipt of a payment request with reasonable description of required curative action 9.Insurance/indemnity Commercial general liability coverage, including automobile liability coverage, primary coverage as to Architects acts or omissions Amount of coverage -- $1 million per occurrence; $2 million general aggregate, with or without umbrella coverage; automobile liability - $1 million combined single limit coverage Workers compensation with employers liability of $500,000/$1 million 35 KEY AREAS OF CONCERN TO OWNERS - ARCHITECTS AGREEMENTS (cont.) Slide 36 Key Issues (contd) Professional liability -- $1 million per occurrence, $2 million aggregate with project specific coverage of additional $2 million (amount to be determined based as to project and potential risk); On major commercial projects, professional liability limits need to be increased substantially. These projects generally require specific project coverage of an additional amount Certificate of insurance with appropriate endorsements; Owners right to obtain copies of policies Additional insured and waiver of subrogation endorsements Indemnification against negligent acts or omissions and violations of law (do not want indemnification to be so broad that Owner loses protection of Architects professional liability policy 36 KEY AREAS OF CONCERN TO OWNERS - ARCHITECTS AGREEMENTS (cont.) Slide 37 10.Lender's requirements assignment and subordination; 11.LEED Considerations Is Architect the Responsible Party for LEED filings or is Owners LEED Consultant the Responsible Party? 12.Limitation of Architects Liability Architect seeks to limit to greater of fee or available insurance, but available professional liability insurance should provide minimum designated coverage for the project (generally $1 million to $2 million depending upon cost of project) 37 Slide 38 VIII.KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS SELLING HOMES CONSTRUCTED BY BUILDERS ETC. Builders of luxury homes/townhomes generally use the GHBA Custom Home set of contracts or their own contract form based upon the GHBA forms. These contracts are extremely pro-builder and need to be carefully reviewed and revised to provide some basic protection for the Purchaser buying the lot and home constructed on the lot as a speculative home. Greater input by the Purchaser in the final design and construction of the home occurs when the Purchaser enters into the Contract before the home is 50-60% complete and may require additional revisions that are discussed in this outline. The major issues requiring revision from the Purchasers perspective are listed below. 1.Description of Work A.Plans B.Specifications C.List of Allowances D.Installation of Owner-furnished Items 38 Slide 39 KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS SELLING HOMES CONSTRUCTED BY BUILDERS ETC. (cont.) 2.Acknowledgement of Design-Build Obligations and third-party beneficiary rights Responsibility of Builder for architect/engineers 3.Commencement Date commence construction by date certain or Purchasers right to terminate 4.Completion Date substantial completion by date certain, inclusive of force majeure delays, or right to terminate 5.Contract Sum Stipulated Sum Arrangement with Allowances 6.Warranties A.1 year from Substantial Completion B.Extended Warranties HVAC, roof C.Exclusions from Warranties D.Assignment of Warranties from Subcontractors and Suppliers 39 Slide 40 KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS SELLING HOMES CONSTRUCTED BY BUILDERS ETC. (cont.) 7.Tests/Inspections Purchasers right to review copies of tests, inspection reports and governmental approvals relating to construction procedures and progress 8.Substitutions of materials Purchasers right of reasonable approval 9.Commencement fee/construction progress fee non-refundable except for Builders default or other permitted termination by Purchaser 10.Allowances A.Schedule for selection of allowance items B.Approval of selection of allowance items and cost C.Timing of additional deposits for exceeding allowances 40 Slide 41 KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS SELLING HOMES CONSTRUCTED BY BUILDERS ETC. (cont.) 11.Financing and Title Contingencies A.Purchasers proof of available funds B.Review and approval of restrictions and other title matters C.Requirement that Builder release all liens created by, through or under Builder and satisfy all Schedule C requirements affecting the Builder 12.Effect of concealed conditions and changed circumstances Is it Builders or Purchaser s risk? 13.Effect of inspections during construction observable defects 14.Land use and environmental disclaimers adjacent land usage depends on whether owned by Builder 15.Moisture and mold responsibility generally imposed on Purchaser, but Purchaser should require maintenance instructions from Builder to avoid mold issues 41 Slide 42 KEY ISSUES IN NEGOTIATING CONTRACTS WITH BUILDERS SELLING HOMES CONSTRUCTED BY BUILDERS ETC. (cont.) 16.Risk of Loss if damage exceeds 30%, both parties should have right to terminate 17.Builders right to terminate in the event of a bona fide dispute and pay Purchaser nominal Stipulated Damages ($500 to $2,500) Purchaser should attempt to delete this or require mediation or increase damage amount to $25,000 18.Re-purchase option if within the first 5 years following closing, Purchaser discovers defects costing more than a specified percentage 10% to 20% of the then fair market value, upon receipt of notice from Purchaser, Builder may elect to re-purchase the home. Builder obligated to repay the purchase price and all closing costs incurred by Purchaser, plus the cost of any permanent improvements made by Purchaser, reasonable moving expenses and reasonable and necessary attorneys fees and inspection costs. 42 Slide 43 IX.CONCLUSION This presentation was intended to provide an overview and summary of the preparation and negotiation of Construction Contracts and Architects Agreements primarily using the AIA forms, plus Purchasers concerns relating to construction of speculative home purchases. The Appendix contains various forms that provide provisions for most, if not all, of the items covered in the PowerPoint presentation. AIA Documents referred to are available online at www.hba.org/sections/real-estate-law www.hba.org/sections/real-estate-law 43 11925174.1 Slide 44 X.INDEX TO APPENDIX A.Architects Agreements 1.AIA Document B101-2007 - Standard Form of Agreement Between Owner and Architect 2.AIA Document B105-2007 - Standard Form of Agreement Between Owner and Architect for a Residential or Small Commercial Project 3.AIA Document B109-2010 - Standard Form of Agreement Between Owner and Architect for a Multi-Family Residential or Mixed Use Residential Project 4.Architects Checklist B.Construction Contracts 1.AIA Document A102-2007 - Standard Form of Agreement Between Owner and Contractor where the basis of payment is the Cost of the Work Plus a Fee with a Guaranteed Maximum Price 2.AIA Document A201-2007 General Conditions of the Contract for Construction (Companion to A102 above) 3.AIA Document A105-2007 - Standard Form of Agreement Between Owner and Contractor for a Residential or Small Commercial Project 4.AIA Document A107-2007 - Standard Form of Agreement Between Owner and Contractor for a Project of Limited Scope 5.AIA Document A107-2007 - Exhibit A - Determination of the Cost of the Work (Companion to A107 above) 6.Contractors Checklist 7.Supplementary Conditions 8.Addendum to Builders Lot Sale and Home Agreement Appendix items referred to are available online at www.hba.org/sections/real-estate-law.www.hba.org/sections/real-estate-law Reference to AIA license limitation appears on documents in the Appendix. 44 11925174.1