Cost-Plus Contracts: Watch Out For 11.1

Paragraph 11. 1 of the AIA Cost-Plus Owner Contractor Agreement (AIA Document A111, Ninth Edition, 1978) reads:

All portions of the Work that the Contractor's organization does not perform shall be performed under Subcontracts or by other appropriate agreement with the Contractor. The Contractor shall request bids from Subcontractors and shall deliver such bids to the Architect. The Owner will then determine, with the advice of the Contractor and subject to the reasonable objection of the Architect, which bids will be accepted.

That language could be a time bomb for an unwary contractor. If the cost plus arrangement also involves a guaranteed maximum price or a provision for sharing of cost savings, allowing the owner the opportunity to choose which subbids will be accepted may cost the contractor money.

The risk of the owner's selection of a higher bid would cost the contractor if he is thus forced to use a more expensive subcontractor. His costs may then exceed the guaranteed maximum price or his share of any savings might be reduced.

The solution is relatively simple. If the owner wishes to reserve the right to accept a higher subcontractor bid, the contract language should be revise to provide that any additional costs thus incurred by the contractor would be borne by the owner if there is a responsible subcontractor submitting a lower bid.

If the contractor wishes to use a qualified subcontractor whose bid is $100,000, but the owner insists that a different subcontractor with a bid of $110,000 be used, then the guaranteed maximum price should be increased by $10,000, or the budget from which any cost savings split is to be calculated should be increased by that amount.

Through a simple modification of the contract language the contractor will protect himself against loss while, at the same time, giving the owner an opportunity to participate in the selection of subcontractors.

A sample of language which may be used to accomplish this result might be the addition of the following:

However, in the event that the Owner rejects a responsible subcontractor whom the Contractor proposes to use for any portion of the work on the project, the difference in cost between the bid of that Subcontractor and another approved by the Owner shall be borne by the Owner and the guaranteed maximum price [or cost savings sharing provisions] shall be adjusted accordingly.