When negotiating construction contracts, attorneys often focus on the American Institute of Architects (AIA) A201-2017 General Conditions, a widely used standard in the industry. However, construction loan agreements, drafted from the lender’s perspective, frequently contain provisions that conflict with or impose additional obligations beyond those in the AIA A201. These discrepancies can lead to disputes, funding delays, and misaligned risk allocation among owners, contractors, and lenders.

To avoid costly conflicts and minimize project disruptions, attorneys should proactively review and reconcile the following key provisions at the earliest stages of drafting and negotiating the project’s construction and financing agreements. While this list is not exhaustive, it serves as a practical starting point for identifying and addressing common areas of misalignment between the project’s construction and loan documents.

1. Payment Terms and Retainage

AIA Contract Term (A201-2017, §§ 9.3-9.8): The AIA A201 establishes that progress payments are made based on the contractor’s applications, certified by the architect (§ 9.4), and typically include a retainage (e.g., 5-10%) withheld from payments until substantial completion (§ 9.8.5).

Typical Construction Loan Term: Lenders impose their own disbursement conditions, such as retention percentages and lien waiver requirements before releasing funds. Lenders typically require that the last portion of the loan proceeds to be used for construction be withheld until Final Completion (as opposed to loan proceeds allocated to tenant improvements, leasing incentives, or capital expenditures).

Practical Solutions:

• Align the retainage percentages and payment milestones in both agreements. For example, if the AIA A201 permits 10% retainage up to 50% completion and 5% thereafter, the loan agreement should allow for the same.
• For both documents, ensure that payment terms and retention requirements comply with applicable state law requirements.
• Modify the AIA A201 to make contractor payments conditioned upon and subject to lender approval requirements.
• Ensure that contractor invoicing and lien waiver requirements align with lender mandates and applicable state law.

2. Change Order Approval Process

AIA Contract Term (A201-2017, §§ 7.2 & 7.3): The A201 allows changes to the scope, cost, or schedule through Change Orders (§ 7.2) or Construction Change Directives (§ 7.3). Work may proceed on a change order once it is agreed upon by the owner and contractor, sometimes without lender approval.

Typical Construction Loan Term: Lenders typically prohibit the use of loan proceeds for unapproved change orders, particularly if they increase the Contract Sum or adjust Contract Time or other project milestones. Many lenders require prior written approval from the lender before committing additional funding.

Practical Solutions:

• Modify the AIA A201 to require lender approval for material change orders. For example, the drafter can add a clause in § 7.2 clarifying that no change order affecting the Contract Sum or Contract Time shall be binding unless lender approval has been obtained if such approval is required under the loan agreement.
• Include a definition in the A201 for a “material change” that aligns with the lender’s requirements (e.g., define a material change order as one that requires lender consent). Similarly, ensure that the loan agreement only requires lender approval for changes that impact project financing, and not for routine field adjustments.
• Ensure that contractor pricing adjustments do not exceed the lender-approved budget without prior lender consent.
• Negotiate reasonable thresholds for change orders that require lender prior approval. For example, the AIA A201 and loan agreement could specify that change orders under $50,000 do not require lender approval.

3. Project Completion and Final Payment

AIA Contract Term (A201-2017, §§ 9.8, 9.10): The AIA A201 defines Substantial Completion (§ 9.8) as the stage when the owner can use the project for its intended purpose. Final payment is contingent on completion of punch-list items, submission of lien waivers, and fulfillment of closeout requirements (§ 9.10).

Typical Construction Loan Term: Lenders may have additional conditions for final disbursement, such as:

• A Permanent Unconditional Certificate of Occupancy and/or governmental/jurisdictional approvals;

• Final Completion to occur by a specific deadline (and always prior to the maturing date);
• Executed final lien waivers from all subcontractors;
• Executed Architect’s certification of completion;
• Third-party inspections (sometimes exceeding AIA requirements);
• Title endorsements;
• A final as-built ALTA Survey; and
• A capped or maximum amount to complete punch list items (e.g., no more than $20,000) to ensure minimal outstanding work at the time of final disbursement.

Practical Solutions:

• Include lender-specific completion conditions in the AIA A201’s final payment clause.
• Modify § 9.10 to specify that the contractor’s final payment request must comply with lender funding conditions.
• Require the contractor to cooperate with lender inspections as part of project closeout.
• Ensure the loan agreement’s final completion deadline occurs after (or at a minimum corresponds with) the AIA contract’s outside completion date and is subject to extension for force majeure (which definition would ideally include any force majeure events recognized under the A201).

4. Insurance Requirements

AIA Contract Term (A201-2017, §§ 11.1, 11.2): The A201 requires the contractor to carry general liability (§ 11.1.1), workers’ compensation (§ 11.1.2), and builder’s risk insurance (§ 11.2). It also establishes whether the owner or contractor provides coverage for the work in progress (§ 11.2.1).

Typical Construction Loan Term: Lenders frequently impose additional insurance requirements, such as:

• Higher coverage limits than required in the AIA A201.
• Lender endorsements on contractor’s policies (e.g., lender as additional insured on general liability policies; lender as loss payee under builder’s risk policies).
• Specialty coverages depending on the project location (e.g. earthquake insurance in seismic zones; flood insurance in FEMA-designated flood zones; pollution insurance for brownfield sites or projects with environmental exposure).

Practical Solutions:

• Review insurance coverage limits in both documents to ensure compliance.
• Amend § 11.1.3 to include lender-required endorsements (lender as additional insured on CGL and excess policies; loss payee on builder’s risk; lender-mandated cancellation notice periods).
• Verify that builder’s risk insurance terms align with lender expectations, particularly regarding deductibles, exclusions, and policy effective dates. If applicable, negotiate that tenants are not required to provide builder’s risk insurance until construction begins, rather than at lease execution.

5. Default and Termination Rights

AIA Contract Term (A201-2017, §§ 14.2-14.4 ): The AIA A201 allows the owner to terminate the contractor for cause (§ 14.2) or for convenience (§ 14.4), in which case the contractor is entitled to compensation for work performed plus reasonable termination costs.

Typical Construction Loan Term: Lenders frequently prohibit termination of the contractor without lender consent, as an unplanned termination can disrupt project financing and jeopardize the loan repayment schedule. Additionally, the lender typically retains the right to: (i) complete construction itself; (ii) exercise the borrower’s rights under the AIA A201 and related contracts; and (iii) declare a loan default if the project is delayed beyond the agreed timeline.

Practical Solutions:

• Require lender consent before the owner terminates the contractor.
• Modify § 14.4 to clarify that termination for convenience may impact funding availability.
• Ensure that lender default provisions align with project termination procedures (e.g. modify AIA contract language to provide that if lender assumes control, the contractor must continue work without triggering a breach of contract claim).

Key Takeaways:

Ensuring AIA contract provisions align with construction loan agreements is critical to avoiding funding delays and disputes. By proactively reviewing payment terms, change order approvals, project completion requirements, insurance mandates, and termination rights, attorneys can help streamline project financing and mitigate risk.

• Compare AIA retainage and payment terms with the lender’s disbursement schedule.
• Ensure change order approval procedures contemplate lender restrictions and approvals.
• Align completion requirements with lender’s final payment conditions.
• Verify that insurance coverage limits and lender endorsements match loan agreement.
• Require lender approval before contractor termination to prevent project disruptions.

If you have questions about any of the matters discussed above, please contact one of the authors or your regular Nelson Mullins contact.

Jake Carroll advises clients in the construction, manufacturing, and real estate industries handling matters relating to commercial transactions, complex disputes, and corporate issues. Carroll is the co-author of the Georgia Construction Law Handbook, a leading treatise published annually and is an active member of the Construction Law Section of the Atlanta Bar Association, serving as the section’s Chair in 2022-2023.

Jenna Lasseter represents real estate developers, investors, and commercial lenders—including banks, life insurance companies, CMBS lenders, and fixed-income lenders—in complex real estate finance and corporate transactions across multifamily, retail, mixed-use, industrial, and office sectors. Lasseter’s sophisticated understanding of capital markets and structured finance, including syndicated and single-lender credit facilities, construction financing, CMBS loans, bridge loans, balance sheet loans, and mezzanine financing, allows her to provide strategic insights and creative solutions from both the lender and borrower perspectives.