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Bad A/E contracts
There are two primary situations when an architect and engineers (A/E) contract is reviewed. First - when the parties are developing the terms and conditions for the project, and second - when there is a problem on the project and they want to determine who is liable. There are a number of reasons why design professionals end-up with bad contracts that cause problems for their firm and projects. However, no matter what the reason, these contracts often lead to disastrous results for design professionals.
Based on a SmartRisk Survey of 20 law firms across the U.S. that specialize in design and construction litigation -
A/E firms are taking on more risk driven by slow economic conditions. One primary driver of increased risk,
“firms are accepting and not pushing back on unfavorable contract provisions.”
SmartRisk Law Firm Survey Report
Design firms find themselves in circumstances where contracts are more risky. One is when working with Clients and placed with a “take it or leave it” contract situation. Another is the Client is in such a rush to start a project, work begins before a contract is signed with agreed upon terms and services. Another is many A/E firms feel comfortable and pull out a standard or association agreement with “boilerplate” language feeling they will be adequately covered.
While working with DPIC, a past industry leading carrier for design professional insurance coverage, a survey was conducted by the claims organization on which types of “contracts” were involved with the majority of claims. Surprising, the results identified that most claims were related to professional association contracts (AIA, EJCDC, etc.) not Client generated contracts. The reason -
the parties accepted the professional association contract without conducting a complete review and applying project specific details.
A/E firms must realize that each contract needs to be customized to the project. Based on the perceived risk, Client contacts obtain the extra attention needed including reviews by third parties such as risk managers, attorneys and insurance carriers. Contracts that do not accurately define the parties’ expectations, responsibilities, agreement on services and payment terms can expose a firm to excessive liability and risk. Certain client provisions can also be viewed as uninsurable where insurance coverage could be denied.
10 Contract Provisions Design Firms Should Carefully Consider
Standard of Care - Watch for language that increases your standard above legal requirements. A clause that raises the standard of care to a higher level, you must delete and revise to an "ordinary" or "reasonable" level. It is recommended that you always have a clause that clearly defines the standard of care to which your services will be performed.
Scope of Services – Scope of services should be developed specific to every project. General language such as provide “any and all” services to complete the project is problematic and increases risk for the firm. Scope of services should included; 1) basic services for a fee; 2) services available for an additional fee; and 3) services that are specifically excluded. Another option for 3) is any services not identified is excluded.
Limitation of Liability – Having a Limitation of Liability (LoL) is an agreement that establishes the maximum liability the firm will be responsible for if there is a claim. The rational is limiting liability and allocating risk in proportion to the profits and benefits of the parties. Options include - a specific dollars amount based on servics rendered, deductible or insurance limit available at the time of a claim.
Indemnities – Indemnification is shifting risk from one party to another and assuming liability in the event of a loss. The trend today is Clients are developing strongly worded indemnity language in their favor, including a duty to defend which can have far-reaching liability implications for the firm. It is critical that design firms understand this provision and work closely professional liability (PL) specialists to review and negotiate reasonable indemnification language.
Warranty and Guarantees – Clearly define that your services will be provided without any warranty or guarantees including the performance of the Contractor of the construction contract. You want to further clarify that you will not be required to sign any documents having to certify, guaranty, or warrant the existence of conditions that you did not observe or cannot ascertain.
Dispute Resolution – Based on industry surveys, the majority of claims (75%) are resolved through negotiation. The approach that disputes will be handled should be clearly defined. It is recommended that you identify negotiation as the first step followed by mediation, arbitration for the right situations prior to any litigation.
Billing and Invoicing – The management of account receivables is critical for any design firm. Cash flow is the life blood of every design firm. How and when you will be paid should be clearly outlined in the contract agreement or fee proposal. The more precisely design professionals define the process, and adhere to payment terms, the greater the likelihood of prompt payment and the fewer fee-related payment disputes.
Changed Conditions – If project conditions change from when the original scope, fee and schedule were first developed, remedy-granting provisions should be included. These changes should include additional services, changes to the project schedule, fee, and scope.
Construction Observation – This is a powerful weapon in the loss prevention arsenal of any design professional firm. Only when visiting the jobsite at appropriate intervals can you observe if the Work is progressing in accordance with the design documents. If an Owner does not want you to provided construction observation services, obtain a release from liability and claims that arise from others in the interpretation of design documents.
Suspension of Services - The Owner and design firm need to have a clear understanding when services would be suspended. The basic terms and conditions of the contract will remain in force while the duty to perform services is suspended. Reasons should include a breach of contract by the Client including failure to pay for services.
I hope you found this information helpful. You are welcome to forward this newsletter to others who may be interested.
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