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The Construction Contract Administration Knowledge Community (CCA) has been established to help our members better understand the issues, actions and resultant impact of the decisions required in this often neglected part of Project Delivery. It is our goal to provide clear answers to issues of concern to the Institute’s membership and share case studies and best practices. We further hope to provide guidance and direction in developing guidelines for new and evolving approaches to Project Delivery as well as guidance in the continuing education of our emerging young professionals.

     

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Indemnity and Liquidated Damages language in construction contracts between General Contractor and Subcontractor

  • 1.  Indemnity and Liquidated Damages language in construction contracts between General Contractor and Subcontractor

    Posted 02-03-2024 09:55 PM

    Hi,

    I would like to understand better the practice I have seen by most General Contractors when they write Subcontractor agreements for construction projects.

    While almost all of them respect the lien mechanism to protect the ability of the Subcontractor to collect, almost none include balanced or reciprocal language when it comes to Indemnification and Liquidated Damages clauses.

    Indemnification. It is common to make the Subcontractor (let's say plumbing) liable for any lawsuits where an employee, agent, or (sub)Subcontractor (let's say insulation company working for the plumber) sues the General Contractor for injury, death, or property damage, however, the risk for the plumber of being sued by other Subcontractors working for the General Contractor (let's say electrical, mechanical, etc.) is ignored (no reciprocity), and no remedies are considered by General Contractor.

    When this is brought to their attention, they normally look the other way, leveraging on an unequal negotiation power, as in many cases a Subcontractor is a small business with fewer resources, when compared to the General Contractor.

    Similar response with Liquidated Damages. General Contractors, when they include a monetary penalty for delays attributed to the Subcontractor, ignore a monetary remedy (other than an extension of time) when the General Contractor causes a delay to the Subcontractor; needless to say the Subcontractor, to be efficient, has committed their resources to the next project, where also penalties for delays apply. The costs incurred by the General Contractor for delays caused by the Subcontractor are generally larger than those caused to the Subcontractor (though they are equally important) by the General Contractor, but when this inequality is brought to the General Contractor, they look, again, the other way.

    Is it possible for the AIA to introduce changes to the standard language of these construction contracts? Is there a way, other than fighting each one-sided contract, at the risk of losing a customer, to make the playing field a more leveled one?

    Lastly, am I looking at this the right way, with the right angle? I have sufficient experience in the construction industry, and I have used these two types of clauses in a perfectly balanced way between the parties, but when I invested in this small business, I was certainly surprised by this practice, to say the least.

    I welcome all constructive comments.



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    Daniel Elizondo
    Daniel Elizondo Person
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    Join us at AIA24 for CCA-related sessions! June 5 through 8, Washington, DC. Click here to learn more.


  • 2.  RE: Indemnity and Liquidated Damages language in construction contracts between General Contractor and Subcontractor

    Posted 02-05-2024 05:47 PM

    This is a very interesting discussion. 

    One place that I can answer for is to make a distinction between some party external to the project contracts creating a liability or claim, and, alternately, when a problem or claim occurs between two parties within the project set of contracts. An example was the question regarding "injury, death, or property damage." 

    Each of the subcontractors most/very likely will be required to have certain types and amounts of insurance, generally dictated by their subcontract agreement, often based upon the types and amounts of coverage required by the owner of the general contractor.  Most of the insurance and contract conditions, including standard AIA documents, will require a waiver of subrogation agreement, such that (as I understand this concept!!) if there is insurance coverage for a loss, we won't fight about who caused the events leading to the loss. So, again as I understand this, there is some cross coverage and relief included within the contracts for this situation.



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    Arlen Solochek, FAIA
    Owner/Principal/Founder
    Arlen Solochek FAIA, Consulting Architect
    Phoenix, AZ
    ArlenSolochek@gmail.com
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    Join us at AIA24 for CCA-related sessions! June 5 through 8, Washington, DC. Click here to learn more.