RISK SHIFTING IN CONTRACT DOCUMENTS

INTRODUCTION ............................................................................................................ 1

DIFFERING SITE CONDITIONS ................................................................................... 1

1. Absence of Clause ..................................................................................... 1
2. AIA Clause .............................................................................................. 1
   1. Type I .................................................................................................. 2
   2. Type II ................................................................................................. 2
3. Site Investigation ...................................................................................... 2
4. Notice ...................................................................................................... 3
5. Hazardous Materials ................................................................................. 3
6. Historical Perspective/Trend ..................................................................... 3

INSURANCE ................................................................................................................. 4

1. Builder's Risk ........................................................................................... 5
   1. AIA Clause ........................................................................................ 5
   2. Coverage ............................................................................................ 6
2. Commercial General Liability ................................................................... 7
   1. Completed Operations ........................................................................ 7
      1. Coverage - Broad Form Endorsement ...................................... 7

CHANGES CLAUSES .................................................................................................. 9

1. Validation for Changes . . ........................................................................ 9
2. Cram-Down Provisions. . ........................................................................ 10
3. Entitlement to Compensation................................................................... 10
4. Determination of Adjustments to Contract Price and Time....................... 10
5. Disputes Over Changes ........................................................................... 11
6. Changes by Contractor ........................................................................... 11
7. Changes Clauses in Subcontracts ............................................................ 12
8. Changes Clauses AIA A401 .................................................................. 13
9. Changes Under the AGC Form 600 ....................................................... 13
10. Limitations on Compensation for Changes Under AGC Form 600 ......... 14
11. Flow-Down of Changes Provision of General Contract ......................... 14
12. Checklist for Analysis of Non-Standard Changes Clauses ...................... 15
13. Conclusion ............................................................................................ 15

PAYMENT CLAUSES ............................................................................................... 15

1. Absence of Payment Clauses ................................................................ 15
2. Progress Payment Clauses/Types.......................................................... 16
   1. State of Completion ..................................................................... 16
   2. Cost Plus Payments....................................................................... 16
   3. Percentage of Completion Payments ............................................. 16
3. Payment Risks Identified .................................................................. 17
4. Payment Clause Analysis Checklist ................................................... 18
5. Subcontract Payment Clauses/Flow Down - Conduit Clauses............ 18
6. Early Analysis of Payments Clauses ................................................. 19
7. Modifications of Oppressive Payments Clauses................................. 20

FLOW-DOWN/CONDUIT CLAUSE .................................................................... 20

1. Purpose of Flow-Down Clause ........................................................ 20
2. AIA Flow-Down Clause ................................................................. 22
3. Flow-Up Clause .............................................................................. 22
4. Alternate Conduit/Flow-Down Clause ............................................ 23
5. Risk of Ambiguity............................................................................ 23
6. Conclusion ...................................................................................... 24

SHIFTING RISK THROUGH INDEMNIFICATION: STANDARDS OF INTERPRETATION ....................................................................................... 24

1. Types of Indemnification Defined.................................................... 24
2. Historical Standards........................................................................ 25
3. Ethyl .............................................................................................. 26
4. Ethyl's Progeny .............................................................................. 27
5. Indemnification Against Costs of Defense ...................................... 29

APPENDIX 1 - Changes Clauses Analysis Checklist ............................................. 31
APPENDIX 2 - Payments Clauses Analysis Checklist ........................................... 35
APPENDIX 3 - AIA Document A101 and AGC Form 600 ................................ (not incl.)
APPENDIX 4 - Sample Indemnification Clauses .................................................. 40

Abstract

The days of performing construction work on a handshake are long over. Today's construction contracts are usually extremely lengthy and fraught with language designed alternatively to define responsibilities and to shift risks and liabilities typically assumed by one party. This collection of papers focuses on several of the more common risk shifting clauses found in the industry today. The appendices attached provide useful checklists and sample clauses.

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