Architect's HandBook of Professional Practice: Objective 1.4

Chapter 16 Building Information Modeling

BUILDING INFORMATION MODELING Building information modeling (BIM) continues to develop and is gaining widespread adoption. What started as a 3D tool used solely by the architect to generate 2D con- struction drawings is finding other users and uses. It is those other users now that are creating additional risk—potentially blurring the lines of responsibility for the design and construction. Depending on how the BIM for a project is developed and used, there is potential that the architect could be held responsible for construction means and methods, while the contractor could be held responsible for design. For now at least, in conventional project delivery methods (not IPD), the traditional lines of responsibility should be preserved—that is, until legal precedent suggests other ways of managing the risk brought on by the use of BIM. Properly Pitching the Benefits of BIM BIM is made to order for collaboration, allowing architects, owners, contractors, and subcontractors to share detailed design information as it suits their own needs. Architects want to see the design three-dimensionally, to understand how the engi- neering components are integrated and coordinated, and, as a residual benefit, to automatically generate tedious schedules and alternate views. Contractors want to use the model for quantity takeoffs (estimating), coordination of the trades, and for analysis of staging and sequencing (construction means and methods). Subcontrac- tors want access to the data to generate shop drawings for fabrication of their work, saving drafting time. Owners want to pay only for a single model that is shared, rather than multiple and separately drawn versions—then they want a copy of the completed model to manage their facility. These benefits have indeed been real- ized, seeing improvements in coordination and quality, shortened project sched- ules, and better cost management. PART 4: CONTRACTS AND AGREEMENTS 1026 Risk Management In this shared environment—multiple parties accessing the model as it develops— it is possible to lose sight of who is responsible for the design. In order to clarify (and record) who is responsible for the design, who owns the model, and how it is to be used, the AIA has developed several form documents: C106TM-2007, Digital Data Licensing Agreement: to be signed by the transmitting and receiving parties, which, respectively, could be the architect and owner, or architect and contractor. This document provides space to set forth the limitations for use of any transmitted electronic data. E201TM-2007, Digital Data Protocol Exhibit: to be attached as an exhibit to a con- tract, such as the owner-architect agreement. While this document can relate to BIM, its "Project Protocol Table" also sets forth format requirements and permit- ted uses for all sorts of other electronic project data, ranging across each of the project phases. E202TM-2008, Building Information Modeling Protocol Exhibit: to be attached as an exhibit to a contract, such as the owner-architect agreement. Ownership of the BIM is defined, and an elaborate table sets forth the permitted uses of the model at each level of design (LOD). These documents do not directly address this singularly important point: that only the 2D copies that are generated from the BIM by the architect, in PDF and paper form, con- stitute the legal construction documents. It remains an unfortunate aspect of computer and software technology that: • Not everyone's computer will display the same model in the same way—inadver- tently showing data that should have been turned off, or not showing data that had unintentionally become hidden. • Inconsistent printing adds to the problem, with different machines producing unin- tended line weights and fonts that affect both legibility and interpretation of con- tent. • Placing an editable drawing into the hands of another to modify and print without the author's knowledge is an invitation to nefarious use. Until these problems can be overcome more efficiently with technology, the architect should maintain control over their own document printing and production process as a way of managing the risks. Clarifying restrictions regarding these and other unauthorized uses of the BIM should be added to the final form(s) before execution. BIM and the Standard of Care BIM intends the overlay of the engineering trades and the architecture. But this doesn't happen automatically. Overlay requires participation of the engineers who, in general, have not adopted BIM as quickly as have architects. Before architects employed the overlay process to all the design disciplines, several of the large construction firms instituted the practice of building their own models, accurately redrawing in all the components of the architecture and engineering. Analysis of their model enabled them to identify and eliminate a number of coordination problems during the shop drawing process, before components were fabricated and installed, thereby substantially reduc- ing construction change orders—saving both time and money. As more architects are awakened by these benefits, they have good cause to get serious about using BIM technology. But before architects can benefit from BIM as an integration and coordination tool, they must learn the 3D software used to generate the model and also master other software add-ons that generate the clash-detection reports. Until both the drawing and analysis/reporting functions are employed, archi- tects will merely be using a complex 3D drawing tool to make 2D drawings—thereby missing many of the benefits that BIM can provide. BIM is already helping architects to squeeze out errors before they are built, which translates into a necessarily higher level of design performance afforded to their cli- ents—meaning the standard of care is changing. Firms not using or underutilizing BIM on other than small projects are therefore in danger of falling below the standard of care. INTEGRATED PROJECT DELIVERY (IPD) A recent study by the AIA confirmed that many architects that are interested in doing an IPD project have wildly varying views of what IPD is and means. Some do understand it, of course, but to many, IPD means essentially just "collaborating" with others. IPD is not just an enhancement to the standard method of practice—it requires significant mind changes on the part of all participants. Architects must educate them- selves and their clients about IPD. Uneducated clients are dangerous, and unmet client expectations will engender claims. As of 2012, those engaged in "pure" IPD have been few. A review of professional liability companies indicates that less than a handful of project policies have been writ- ten for IPD projects. And these projects are not contractually alike. The in-place agree- ments differ in form, and in legal terms and conditions. Clearly those adopting IPD are sailing into uncharted waters. On the other hand, there have been more than a few projects employing an "IPD- lite" project delivery method—what the AIA calls a transitional IPD approach. The goal of these arrangements has been to seize on the perceived benefits of IPD—fostering collaboration, teaming—while preserving the traditional lines of responsibility and lia- bility. Accordingly, the types of insurance policies covering the parties involved in IPD- lite have been the same as those encountered in traditional design-bid-build projects. Several new agreement forms have been developed by the AIA for both the transi- tional IPD model as well as several types of pure IPD structures. These agreements set forth in detail the roles and responsibilities of the team members, and establish the legal rules to govern these relationships as well as manage disputes. IPD: A Look at the Money Pure IPD agreements are distinguished from other agreements in their "share the love and share the pain" clauses. For example, contingencies are established to provide financial incentive to be shared among the project participants. However, when the contingency is exhausted, project participants must make up the difference up to a certain limit, typically a percentage of their profit. The amount of profit at risk is highly negotiable, impacting each of the team members. The contingency fund is administered by the core team comprised of representa- tives from the primary project participants, including owner, architect, contractor, and key consultants or subcontractors. The core team uses the fund to pay for change orders that involve design coordination issues (including errors), or unanticipated schedule and procurement issues. The core team contingency can be allocated and used without finger pointing or determination of fault. Unspent core team contingency is split among the project participants. The percentage split is highly negotiable. Certain claims between the IPD core team members may be waived or limited by agreement. Others may be turned over to the internal dispute resolution process, the focus of which is to resolve matters short of litigation. In addition to this internally managed contingency fund, the owner maintains a separate and distinct contingency to cover scope increases and unforeseen conditions not the fault of the core team. Insurability Issues Related to IPD There is an apparent disconnect between the principles governing professional liability insurance and the IPD multiparty agreement terms and conditions. Professional PART 4: CONTRACTS AND AGREEMENTS 1028 Risk Management insurance is triggered on fault, that is, a finding of negligence on the part of the archi- tect. Agreeing to pay a part of the design project's profit per an IPD Agreement, includ- ing coverage of errors, is not triggered on fault or negligence; it is a contractual requirement. In addition, when, by agreement, architects consent to pay a portion of their profit, this payment will not count towards the satisfaction of the deductible required by pro- fessional liability insurance, unless some other arrangement is made with the under- writer. Difficulties abound here, since fault would have to be found in each instance. From the underwriter's perspective, legislating an easy drawdown of the deductible (compatible with IPD) into the policy will likely cause the premium to skyrocket. Can professional liability insurance and IPD live together? This is yet to be deter- mined, but some carriers are now offering IPD project-specific policies for very large projects. These policies permit the drawdown of the architect's profits to cover internal claims through a process called rectification, changing the deductible to something called self-insured retention (SIR). Unfortunately, the few project IPD policies written thus far have proven to be costly, and the price should not be expected to come down until a claims history is established. Architects should review any such IPD project policy terms and exclusions carefully to fully understand what is and is not covered, as well as the triggers to accessing coverage. What to Do with IPD? So, what should a firm do if the opportunity for an IPD project presents itself? How should it be approached? Cautiously. As of 2012, there just is not much actual experience out there—a few tales of suc- cess, no tales of woe, no litigation, no established legal precedents. It is reasonable to assume in a claim situation that traditional lines of responsibility and liability will emerge, absent clear changes to those traditions in the executed agree- ments. One should be wary of accepting any such changes. Associated risks would likely only be overcome with project IPD insurance and a clear limitation of liability equal to policy limits. To parties new to IPD it makes sense to begin with the transitional model, or some similar form of IPD-lite. Extra effort will be required to research and negotiate the many aspects that are different in the agreement form, and to consult with insurance providers in order to maintain the proper risk management strategies. Likewise, seek- ing involvement of appropriate legal counsel will carry extra costs—but wisdom isn't free. Those firms that have embraced IPD with success have adopted contractual lan- guage to waive claims among the participants. This leaves only an exposure to claims from third parties. Insurance is available to cover such losses. CONCLUSION To an ever-changing profession, sustainability, BIM, and IPD are at the forefront of the forces bringing in unknown risk. How new types of claims from these three forces will materialize cannot yet be fully known. Given this situation, appropriate mitigation measures are also difficult to predict. Nevertheless, the tools and cautionary awareness suggested in this article can help practitioners meet the challenges of these emerging practices. There is a long way to go, but the changes thus far suggest there is hope for the future—finding a way to manage new risk.

Chapter 16 Negotiations and Contracts

CHAPTER 16 Risk Management 16.1 Risk Management Strategies Peter Gifford Longley, AIA, CSI CCS, LEED AP Being in the business of architecture means taking risks. But any good endeavor, like the privilege of practicing architecture, is worthy of some risk. The best approach is to know the risks, and then know how to manage them. HOW DOES THE ARCHITECT MANAGE RISK? The word "risk" derives from the archaic Italian word riscare, which means "run into danger," or to imperil, endanger, or jeopardize. All choices in life entail some risk; for example, play and risk injury, or pass and risk boredom. When a decision is made to risk one thing or another, security lies only in managing the risk. There are four classic strategies, all used by prudent firms to manage risk. These are manifested in the practice of architecture as shown in Table 16.1. Identifying Sources of Risk Some aspects of the practice of architecture are, by nature, more likely to create unmanageable risk—risk of claims that place a firm's reputation, even its existence, in jeopardy. Professional liability insurance companies track actual claims by category, frequency, and cost. These data are used to determine premiums—costly for customers servicing areas of greater risk, and less so for those where risks are low. Peter Longley is an architect with more than 35 years of experience. He has developed and authored firm standards for documentation and quality control. As director of operations for Tsoi/Kobus & Associates, he is responsible for the firm's risk management and quality assurance/quality control practices. TABLE 16.1 Strategies to Manage Risk Avoid Risk Transfer Risk Assume Risk Control Risk Marketing selects project types that fit with prior experience, working for clients with excellent reputations. Contracts transfer risk appropriately to the client, or downward to a consultant. Insurance transfers risk to a business financial partner. Accept appropriate work, but maintain enough cash to responsibly satisfy insurance deductibles. Adopt best practices, and educate staff. Seek good counsel to prevent or reduce losses when claims emerge. 40% 35% 30% 25% 20% 15% 10% 5% 0% Negotiation and Contracts Client Selection Project Team Capabilities Communication Top 4 Non-Technical Risk Drivers Percentage of Claims Affected 39% 2001 2012 23% 24% 25% 27% 13% 6% 16% 990 Risk Management Measured liability losses, organized by category, form a quantifiable basis for decoding areas of greatest risk. Professional liability insurance provider XLGroup identifies nine such categories in its Risk Drivers research: 1. Communication 2. Project team capabilities 3. Client selection 4. Negotiation and contracts 5. Budget control 6. Schedule control 7. Loss prevention issues 8. Construction phase services 9. Billing procedures XL Group's Risk Drivers research reveals that one or more of areas 1 through 4, shown in Figure 16.1, were present in 93 percent of all claims. Therefore, a focus on these four areas will address most causes of risk to architects—to determine best prac- tices to avoid, to transfer, or to control risk...reasoning, alternatively, which risk is reasonable to assume. The four greatest areas of risk that architects face are examined below, with poten- tially effective means to manage each of them also discussed. The order is to build to a key risk factor. NO. 4: NEGOTIATION AND CONTRACTS Claims almost always appear in a legal form, targeted directly at the failure of the architect to comply with some term of their design services agreement—the document that set forth the responsibilities now in dispute. (See Figure 16.2.) Not surprisingly, Risk Drivers data provided by The Design Professional unit of XL Group FIGURE 16.1 Chart Depicting the Four Greatest Areas of Claims PART 4: CONTRACTS AND AGREEMENTS Negotiation and Contract Issues No separate contingency fund set aside 5% Other 8% Lack of mediation clause 6% Unclear or inappropriate scope of services 38% Contruction phase services not in contract or not fulfiled 8% Did not formally evaluate project risks 16% Contract: - Not firms own -Not industry std. - Not reviewed by counsel 2% Contract not in place before work started 12% Deal breakers in contract 3% Field staff didn't have/understand contract 2% Client-generated agreement, not reviewed by senior mgmt. 1% Risk Drivers data provided by The Design Professional unit of XL FIGURE 16.2 Chart Depicting Negotiation and Contracts Claims by Type the contract is the first piece of paper consulted when a claim comes to light. Designers frantically examine it to learn if the claim has any basis in reality. Copies are requested by attorneys and insurance companies. Everyone scours it for the magic words that prove their perspective, supporting or refuting the claim. Long before the claim emerged, times were happier. At the beginning of the proj- ect everyone is excited about getting started. Still, the project is, after all, a business deal—a contract—a fee paid for services rendered. Central to both the client's and architect's mind are the large matters: the project description, the site, the program, the schedule, the budget. Next come the means to get there: the team, the consultants, the services needed, what's included, what's not, and the fees. Finally come the terms and conditions: all the legal fine print governing everything mentioned, and then some. The main characters typically lose interest at this point—the prime reason projects often begin without a contract in place. They turn over the business of sorting out the details to other people. These main characters are the same ones who frantically reach for the contact (if it was ever executed) once the claim notice arrives. They need to see what was previ- ously agreed. That day's conclusion will likely be determined by how well the agree- ment was negotiated. Deal Makers and Deal Breakers From the architect's perspective, the key issues in agreements are profitability and insurability. Simply put, if a profit can't be made with the deal as stated, the commission shouldn't be accepted. Likewise, agreeing to take on responsibilities excluded by a firm's professional liability insurance policy could leave the firm uninsured when a claim emerges. Either issue can put a firm out of business. Both present unmanageable risk. Both are deal breakers. Negotiation is the time to identify and remove deal breakers. If they can't be removed, some way must be found to offset the risk—something that would instead be a deal maker. Finding the deal makers are theoretically possible (e.g., a large enough fee can compensate for increased risk), but require willpower and skill to negotiate. ▶ Negotiating Agreement (15.3) discusses negotiation as a skill that can be learned and mastered. Below are noteworthy deal makers and deal breakers. ▶ Architects and the Law (5.1) further discusses the standard of care in architecture practice. Textbook definition of standard of care: Rendering services with the ordinary degree of skill and care that would be used by other reasonably competent practitioners of the same discipline under similar circumstances, taking into consideration the contemporary state of the art and geographic idiosyncrasies. ▶ Owner-Generated Agreements (17.3) covers a systematic approach to evaluating terms in agreement provided by owners. MARKETING MATERIALS: SINGING OUR PRAISES A professional carefully negotiates an agreement and then, unwittingly, attaches the proposal to it—too lazy to retype the scope. There, lurking in the proposal, are the promises of performing among the best in the nation or region at one thing or another. Plaintiffs' attorneys can take those promises to the bank. 992 Risk Management Working Without an Agreement Working without an agreement is an unmanageable risk. If a claim emerges before the contract is executed, there are no clear rules for settlement. The party due something may have to walk away without anything, perhaps even having to pay. In the case of the architect, that means real trouble. The effects of working without an agreement are many. Foremost concerns include: • Difficulty in getting paid, or getting paid all that the architect believes it is entitled to be paid • Claims of architect responsibility for any and all things not the firm's fault—such as the client's consultants' negligent services, the presence of hazardous waste on-site, inaccuracy of client's budget, changes in the code, bad construction safety, poor performance of the builder • Claims of architect responsibility for broader scope than may have been intended or understood by the architect • Claims of the architect causing delay due to a lack of written schedule, or definition of the schedule approval or amendment process Most architects would probably never work with just a handshake, wink, or nod. But exchanging draft agreements that never get signed has the same net effect—no written agreement. There are too many skilled attorneys and different-minded judges that would dismiss those unsigned pieces of paper, regardless of arguments about pay- ments made ("course of conduct"). Architects need to get the agreement negotiated and signed before issuing documents for use by the client or the builder. Once the work product is delivered, the architect loses the leverage necessary to get the client to the signing table. Heightened Standard of Care The standard of care is the basis against which architects are measured to determine whether they are performing to a level of legal competence. The standard of care does not require performing services perfectly. Rather, when errors and omissions occur, they are judged against a standard consistent with the work of other architects doing similar projects. Errors and omissions that fall short of this "norm" constitute a failure to meet the standard of care, amounting to legal negligence. The key to the concept is that there is a norm—and the norm is not perfection. The standard of care flows from a concept in English law that recognizes that pro- fessional services—from doctors, lawyers, architects, and engineers—are rendered based upon learned opinion. Such professional opinions are provided by gifted human beings who have plied their trade over time, developing varied pathways to success. There isn't always a single solution. To determine whether an architect has been negligent, performance will be mea- sured against what architects would typically have done in the same situation. The problem with nearly all client-developed agreements is that they seek to pre- scribe a standard for care that is higher than the norm. Problematic words abound that define the architect's enhanced performance level, including "best," "better," "high," and "higher." These words are red flags and should be stricken not only from agree- ments but also from marketing materials and proposals. What is the problem with being contractually required to perform at a higher standard of care? Professional liability insurance does not cover such a higher perfor- mance level. Architects are insured against acting negligently in performing their ser- vices. Beyond that, they are on their own. How does establishing a higher standard lead to claims? When architects are required to be near-perfect, the client will expect them to pay for every problem on the plans, everything missed, every mistake that the typical architect would be forgiven. Everything. PART 4: CONTRACTS AND AGREEMENTS THE LIABILITY BUCKET Sophisticated clients may try to come up with ways to quantify or measure the standard of care. One such attempt is to express the barrier in terms of construction change orders. For example, any amount of error and omission (E&O) change orders in excess of, say, 1.5 percent means that the standard of care has been breached. So each time an E&O change order is classified, it is dumped into a "liability bucket." When the amount in the bucket rises to the established rim, in this case 1.5 percent, the architect pays for the rest that spills over. The liability bucket is a noble idea. It has its basis in facts, as expert witnesses often quote normal change order percentages, such amounts varying by project size, complexity, new or renovated construction types, and the like. This seems like a fair and reasonable way to establish expectations of performance. Doesn't it? The problem is that there is no statutory or judicial percentage threshold for an across-the-board definition for the standard of care. None. The standard of care must be argued before the finder of fact (arbitrator, judge, or jury) and legally established for each element in every claim. Plaintiff's experts opine as to how bad the services in question were, how the mistakes were so egregious that, regardless of change order amount, "no other competent architect would have made that mistake." Then after hearing the charges, defendant's experts explain why everything that happened on the job was no different from any other project. In the end, the decision by the finder of fact will boil down to how convincing the arguments were, considering the credentials of the opposing experts—it's the proverbial "battle of the experts." The fact remains: There is no clear legal definition of a breach of the standard of care. Therefore, there is a problem in trying to establish a contractual measuring stick for the standard of care. Doing so removes the insurance company's ability to argue against claims that breach the contractual standard, but might arguably not have breached the standard of care. That is why underwriters specifically exclude "contractual breaches" from coverage. Check the firm's policy. The liability bucket may be uninsurable. Thankfully, most clients will accept pushback on this negotiation issue and will agree to take out the words "best" and "highest." As businesspeople, they understand the limits of insurance. They also recognize that if the policy does not cover their claim, the only other assets the architect has are used desks and computers—which don't amount to much. Indemnities Almost every client-furnished agreement comes with a professional services indemnity provision—most are hor- ribly written. The AIA has addressed client demands for such contractual indemnities in the major 2007 versions of the AIA's standard architectural services agreement forms. The AIA's language was reviewed by professional liability insurance carriers and determined to be insurable under typical professional liability insurance policies. The principle of the professional services indemnity is that the architect ought to reimburse the client for claims brought against them by a third party—claims arising from the architect's negligence. Indemnities of other types actually benefit the architect: • Client indemnity to the architect for claims arising from the presence of hazardous materials on the job site • Client indemnity to the architect for claims from the client's misuse of the architect's drawings • Mutual indemnities between the architect and consul- tants, making each party legally responsible for their own mistakes and not for the mistakes of the other Problems with professional services indemnities occur when they become too broad, holding the architect respon- sible for performance beyond professional liability insur- ance policy coverage. Common examples include: • Indemnifying persons or entities not a party to the agreement • Indemnifying the client from their own mistakes • Indemnifying for errors and omissions not rising to the level of legal negligence • Defending the client against third-party claims— providing legal defense—prior to legally establishing negligence Overbroad indemnities provide unmanageable risk. Therefore, read every proposed indemnity carefully. Use the AIA version (e.g., AIA Document B101TM-2007, section 8.4) as a good model. Always seek legal advice before agreeing to the client's version of an indemnity clause. Construction Means and Methods The architect designs the finished project. How it gets built, the "means and methods" to get there, are determined by the builder. Construction means and methods ought not, and generally are not, the responsibility of the architect. Means and methods claims examples include excavation cave-ins, scaffolding fail- ures, and crane collapses. Fortunately such claims are rare, but the result is almost ▶ The AIA Documents Program (17.5) details the range of AIA contract documents that capture and convey the expectations, relationships, responsibilities, and rules that bring parties together for the design and construction of buildings. always tragic, with property damage, personal injuries and death involving workers and members of the general public. These accidents turn into media events, with plaintiff awards that amount to tens of millions. AIA standard agreements have effectively managed this issue for decades, with carefully considered language in the architectural services agreements and the general conditions for the contract for construction. Take advantage of this language in AIA agreements—language tested in the courts. Guarantees and Certifications Architects are often asked to guarantee or certify the quality or completeness of their design. There is real danger here. The only guarantee that the law typically requires, and that professional liability insurance policies cover, is a guarantee to perform to the standard of care. Beyond this, guarantees and certifications are excluded from coverage. The words guarantee and warranty should either be stricken from the agreement, or at least used properly—for example, "Architect makes no guarantee of performance." Other terms take on the same meaning—"ensure," "assure," "insure," "confirm," "verify," "thorough," "any," all," and even "100% complete." Each may be placed in a context requiring that the architect perform at a level of perfection—to provide any and everything needed at the architect's expense. Certifications are far more common than guarantees, and cannot realistically be avoided. Building officials and jurisdictions require certifications stating that drawings have been prepared per code, or, after construction, that the project was completed per plans and specs. Other common certifications are requested by project financiers, banks, and lending institutions—all requesting the same thing: that architects promise that they didn't make any mistakes. There is a simple solution to any certification. Remember the standard of care— that the architect is a professional who exercises judgment. An architect should only certify "in my professional opinion" or "to the best of my knowledge, information, and belief." The contract should give the architect the ability to review and reasonably limit certifications before signing them. Do not certify perfect performance. Proper Scope Badly written scopes of services lead to claims and lost revenue. Unclear scopes can make architects responsible for the performance of someone not under their direct control. Overbroad scopes rob architects of the ability to invoice for extra services. Bad scopes can ruin a firm, damaging its relationship with the client. Good scopes of services set forth with precision the services the architect will provide, and exclude those they won't. Spend time getting it right. Review it with the client and other members of the team; include the junior staff that will work on the project. Getting the words right will clarify everyone's expectations and may eliminate later disputes. Administration of the Contract for Construction During the construction phase, the task for the architect is to "administer the contract for construction" between the owner and builder—various services that collectively are commonly referred to as "CA." These CA tasks include field observations, review of contractor's payment applications, answering contractors' questions about the drawings and specifications, review of contractors' submittals, review and approval of change orders, issuing revised documents for changes, and inspecting for substantial completion. Clients sometimes want to save on professional design fees by eliminating CA services. They reason that after the construction documents have been prepared, that the architect is done with design. But "design" is not done until the project is built. Changes occur during construc- tion, brought about by contractor substitutions, products and systems purchased off of ▶ Defining Project Services (15.1) further discusses the centrality of scope definition to effective agreements for professional design services. ▶ Construction Phase Services (10.9) covers the architect's evaluation and reporting of the progress and quality of the work and its conformance to the design intent expressed in the contract documents. PART 4: CONTRACTS AND AGREEMENTS 994 Risk Management performance specifications, unanticipated field conditions, modifications to accom- modate construction means and methods, owner changes, and errors and omissions. Plans are never perfect, nor are they "complete." With these change forces at work, the architect must continue to protect the cli- ent's core interest—the design. In protecting the design, architects also protect their own reputation and liability. Costs from fixing systems not properly integrated, not meeting code, or not functioning could become a basis for claims. Professional liability insurance providers recognize a rise in claims among firms that do not provide CA services—because the architect is not around to correct their documents or to defend them, to interpret and explain them, to preempt or minimize costly construction mistakes. Some underwriters will not insure firms that take on com- missions for construction that does not include CA services. Limitation of Liability Without a limitation of liability (LOL), there is "no limit" to an architect's liability. If a professional liability insurance policy has a per-claim limit of $10 million, a firm is not protected for any claim in excess of that limit. A $20 million claim, if enforced, could put a firm out of business. Uninsured loss is an unmanageable risk. A limitation of liability is an agreement not to seek damages in excess of a pre-established and agreed-upon amount. To be legal, the limit must provide fair payout in relation to the value of the services; unreasonably low LOLs have been struck down by courts. An enforceable LOL can be an effective way to manage risk. Most underwriters offer a break in premiums if all the insured's projects, or at least a significant percentage of them, have an LOL. What is a reasonable value for an LOL? Some advise that it should equal the compensation received on the proj- ect. But that can amount to a big number, exceeding policy limits. A reasonable target is to set the LOL at the "pro- ceeds of available insurance." Doing so will ensure that the firm never has to pay out of pocket, even if the annual policy limit (aggregate) has been eroded by claims on other projects. [Note: Savvy clients may require that eroded limits be replaced with the pur- chase of add-on coverage. Even so, that is a better deal than no LOL.] Significantly, LOLs should apply to the full sum of any and all claims on the proj- ect. Otherwise, the LOL may not do what it is supposed to do—set a limit on liability. Making Better Agreements Establish Standard In-House Practices There are firms with no standard approach to developing, executing, and maintaining design services agreements. Almost anyone can authorize work and sign contracts, committing the firm to situations of unmanageable risk. Consider these tips to address this risk: • Appoint a single person or, for larger firms, a team of individuals, to review and negotiate all contract terms and conditions. People who review contracts all the time know what to look for, acquiring the skills to effectively negotiate with difficult clients and attorneys. It takes years of training and experience to develop these skills. Consider hiring someone with a legal background or a licensed attorney to perform this role. Contracts legally obligate a firm and should be reviewed and approved by select firm members only. ▶ Insurance Coverage for Business and Professional Liability (16.2) covers the terminology and necessary considerations and alternatives when selecting insurance for one's firm. LIMITING THE LIABILITY OF A CONSULTANT Jay S. Gregory, Esq., founding partner of the Boston office of LeClairRyan, PC, tells the story of an architect he represented who had unwittingly agreed to certain fine print in the contract of a structural engineering consultant. When the structural design of the project turned out to be defective, resulting in repairs totaling several million dollars, his client turned to the engineer to make good. The engineer immediately produced the contract and turned to the fine print, which stated a limitation of liability in the amount of $100,000. The engineer freely admitted guilt—"Here, I'll get my checkbook and write you a check for one hundred thousand." The architect, holder of the prime agreement with the client, was responsible for the rest of the damages— damages arguably not his fault. • As part of the review process, the project manager (PM) should review their own contracts. They will manage the project and ought to play a role in shaping what the contract says. However, the PM should not be the only person reviewing the contract. • Provide access to signed agreements for review by the entire project team. • Save electronic copies of every agreement with the electronic project records. Also save a copy in a general office directory of the firm's contracts. When a problem emerges on a project, perhaps several years after the records have been archived, there will be a dash to find the contract. Make it readily available on that day. Get Professional Support If there is a claim, a firm will need support from an attorney, but attorneys can also help avoid a claim before it happens. Attorneys specialize in areas of legal expertise; contract law is one such specialty, and construction contracts a subset within it. There are attor- neys that work with owners, builders, or design firms. Finally, there are attorneys that specialize in developing agreement text, and others that are called in to resolve dis- putes. At times, help may be needed from both of these subspecialties. To find the right attorney, ask other architects in the area or a professional liability insurer for recommendations, or attend seminars in risk management conducted by attorneys to get a glimpse of what they know. Take time to make the right choice. Architects should select an attorney with relevant experience, clients, and references. A qualified attorney can help with the review of contracts, or perhaps just with dif- ficult agreement clauses. Some architects use outside counsel to negotiate contract terms—speaking attorney to attorney to the one representing the other party. While this is an extra expense, it could avoid a far more costly contract claim later that stems from improper review. In addition to paid attorney consultation, many insurance providers offer contract reviews. These reviews best address matters of insurance and insurability. Using both outside insurance and legal counsels will combine to make the contracts best suited to preserve the interests of the firm. Use Standard Agreement Forms Most professional liability insurance carriers offer discounts to their clients that use standard agreement forms, such as AIA documents. AIA forms have been tested by the courts. In addition, clients recognize and respect these forms, making the negotiation process with these as a starting point much easier. Standardized forms can be used "as is," but it is more typical that they be modified beyond project particulars and changes to common services, to include technical edits to the legal terms and conditions in response to the advice of legal and insurance advisers. One way to use outside legal and insurance counsel is in the development of a suite of standard agreement forms customized for use by the firm. These documents may seldom be adopted as is by the client, but they will be very useful as a reference to a firm's preferred language. There will be many times when client's counsel is pushing for certain text in the client's standard form. In that situation, an architect can transmit the firm's preferred paragraph for consideration—a good negotiation strategy. There are several key customized agreement forms to have on hand: • Full services agreements of the types most frequently used. • Small or limited-scope agreements: Short-form terms and conditions for projects where there is no construction involved, such as feasibility studies, programming, and planning services. • Notice to proceed: Brief letter agreement used to get a project going until the final agreement is executed. Such notices include limited items to agree on quickly: def- inition of limited scope and payment, intent to execute the final agreement, and rules to terminate or extend. • Consultant agreements: These should always be tied to the terms and conditions of the prime agreement between the architecture firm and the client. Never sign the consultant's proposal—and avoid attaching it to a consultant's agreement form— where its terms and conditions might conflict. • Common exhibits: Rate schedules, reimbursable expenses schedules, sample invoices, standard scopes of services for each type of consultant regularly hired, consultant standards. NO. 3: SELECTING THE CLIENT The third most frequent source of claims comes from client selection. (See Figure 16.3.) It is the client that most frequently sues the architect for failing to fulfill their duty. A client who is unsophisticated, or short on the cash needed to fund the project, or has a record of litigation, or is completely unknown to the architect, is one to avoid. Know the Firm's Expertise—Know the Market An architect that keeps designing the same thing, over and over again, necessarily develops an expertise in that one thing. The purest example of this is the prototype building. Examples include box stores and fast-food outlets. Each successful franchise solves a series of problems very effectively—established brand recognition, optimal layout for both customer service and product preparation, predictable construction cost and schedule, and significant reduction in errors and omissions. These prove a simple principle—if an architect were given the opportunity to design a project just like their last one, they would likely expect to do a better job. We see that specialization helps mitigate risk, while establishing a record of accomplishment. Sophisticated clients want to select firms that have successfully designed and com- pleted projects similar to theirs. Such is their means of managing risk. Know the Client Before beginning to work with a client, an architect should know them. Are they an experienced developer, having previously done projects like the one proposed? Can they afford the project? Do they have a reputation for negotiating fairly? Do they have a long list of architects they have hired—and if so, who? What is their track record for paying? Do they have a history of litigation? No formal review of client 4% Client behind in fee payments 7% Other 3% Client in poor financial condition 17% Client has history of claims/ litigation 21% Client Selection Issues Contractor selection 4% Client not receptive to ADR 1% Client inexperienced in design issues 43% Risk Drivers data provided by The Design Professional unit of XL Group FIGURE 16.3 Chart Depicting Client Selection Claims by Type ONE GOOD LAWSUIT DESERVES ANOTHER A design firm completed a commission for a major institution and received popular recognition for a job well done. The client was happy. There was good publicity. Awards were given. But not everyone on the team was satisfied. Several years after the project was completed, three of the major trades filed suit over change orders that were long denied and never paid—three separate suits in three different jurisdictions. Whom did they sue? The architect. The subs each lost money on their contracts, primarily because there were unanticipated changes to the schedule that led to labor overruns. Despite these facts, the basis of the suits alleged that the plans were incomplete and uncoordinated, leading to their losses. This basis quickly faced an important legal obstacle: the architect, a third party to the construction contract, does not have a legal duty to save the builder's subcontractors from economic loss due to defective plans. Only the owner, through the general contractor, has this legal duty. But the builder did not want to sue his client to aid his subcontractors—the same client he wanted to work for again in the future. The subs didn't want to sue the builder for the same reason. At this point in the claim, summary judgment, with dismissal of the claims against the architect, seemed possible. Ensuing legal discovery exposed the faults of all team members—not surprisingly, no one had been perfect. Meanwhile, both the general contractor and owner, neither a defendant in the suits, watched with interest from the sidelines. Both suspected that at any time, they could get pulled into the fray. In the end, the owner and builder, the ones with legal agreements relevant to the claims, succumbed to pressure to do right by the subcontractors. Both volunteered to participate in mediation and settlement with the parties. The architect settled for six figures, about one-tenth of the stated claim value. The owner also kicked in seven figures. The parties agreed to settle, ending what could have been a much costlier trip to court, where anything could have happened. There is no justice in settlement—only conclusion. The lesson that the architect learned was this: People to whom you owe no legal "duty" can sue—and they may obtain something for their effort, even in claims lacking merit. ▶ Project Delivery Methods (9.1) provides an overview of the available models for project delivery. 998 Risk Management Hard bid is the so-called traditional method, or design-bid-build method (DBB). Under this option, the architect (design team) completes the plans and specifications (construction documents) and puts them out to bid. Regardless of the many options for selecting bidders, the bottom-line goal of the bidder is to get low and win. Hard Bid The more that is known about a potential new client, the better equipped a firm will be to make a proper deci- sion. Seeing the potential pitfalls and negotiating with these in mind helps avoid a bad client relationship. This information is often available in the community of archi- tects or from the firm's insurance agent. Condominium Projects Condominium projects begin with a client, the developer. But the moment that the developer sells the first unit, there is a new client—an owner of the design product. With each unit sold, the architect acquires another new client—one whom they didn't select and have no relation- ship with, and who might have unreasonable expectations. As a result, condo projects are notorious for claims. Professional liability insurance companies will charge sub- stantial premiums for covering this project type. Repeat Clients Are Like Gold Surveys of architectural firms across America indicate that most current clients are repeat clients. The repeat client rate can vary between 60 and 85 percent, and for a few firms, be even higher. There are two messages in these data: (1) It's very hard to break in with a new client who has previously worked with another architect, and (2) clients and their designers, after they've worked together, gener- ally like and trust each other. Respect is key to these rela- tionships. Where there is respect and clear expectations, there is a reduction in claims. Get the Right Builder A good builder can make a project a big success. Likewise, a bad builder—one that causes delays, can't follow the plans, or charges extra for everything—can make a project into a financial disaster, and not just for the owner. When a builder fails to perform well, everyone pays in one way or another. To the extent that architects have a voice in the decision, they should help their client choose a builder that is well organized, understands and respects the architect's role, and appreciates the value of all of the relationships involved. Impact of the Project Delivery Method How the project is contracted for construction is known as the delivery method. Some of the most common alterna- tives are explained below, with an eye toward identifying risk. PART 4: CONTRACTS AND AGREEMENTS On the surface, the hard-bid scenario sounds like it should be the best approach for reducing claims. The design process is linear, flowing uninterrupted from schematics, through design development, and then finishing with construction documents—sug- gesting no impediment to completing and coordinating the documents before they are put out to bid. The true difficulty is that no set of documents is ever fully complete or perfectly coordinated. This fact plays right into the hand of a skilled estimator—one that is looking for any advantage it can find over the competition. In the bid situation, the goal is to get low—quality in construction is not a priority for those that plan to win. Missing information in the bid documents affords opportunity to achieve the low bid. The real payday comes later, after award, when the seed of missing information yields a harvest in change orders. Mounting change orders—uncontrolled project costs—puts undue strain on the owner-architect relationship. Claims histories show that there are more claims by percentage of type of project delivery method on DBB projects than any of the other project delivery types. Negotiated Contracts Negotiated contracts are said to produce the best quality for the lowest price. In this option, the owner interviews and selects the builder independent of a bid pro- cess. Qualifications may include the cost of the builder's services, but more impor- tant drivers will be reputation for quality, on-time delivery, and effective cost management. Negotiated contracts come in a variety of forms. The builder might take on a purely advisory role (construction manager, adviser) with all of the "subs" under separate contracts direct with the owner; or the builder may build the project with their own forces and subcontractors. The cost model may be in the form of reim- bursement for all costs plus a fee, a fixed fee, or a guaranteed maximum price (GMP). Regardless of the many combined options, negotiating a contract with a good, qualified builder is most apt to bring the best results, and produce the lowest risk to all involved. Fast-Track Fast-track construction involves phasing of design activities to overlap the construction process—construction commences in one phase before design is complete for the next. Under this option, a series of "bid packages" are organized and scheduled. Throughout the fast-track process, the biggest (highest-cost) decisions are made first, the smallest (lowest-cost) decisions last. The risk in the process is that decisions are always made and implemented without complete information, and may later need to be changed at some expense. This risk is an outfall of the owner's decision to speed the construction process. The need for speed, over quality and first cost, is the owner's choice—and the owner ought to weigh the decision care- fully. Architects should attempt to highlight this point in the contract. At minimum there should be a record of discussion with the client regarding the increased risk of change orders. Managing this risk is mostly about clarifying expectations in advance. AIA Document B103TM-2007 contains good cautionary language for the fast-track method. Other Project Delivery Methods A number of other delivery methods are available, including contractor-led design- build (CLDB), architect-led design-build (ALDB), construction management (CM), and integrated project delivery (IPD). In each of these, the traditional roles of the architect, builder, and owner are modified to some degree, creating the potential for increased risk. In each case, understanding and clearly limiting the responsibilities of the architect, while maintaining insurability, is one way to keep the risk model from crumbling into disarray. ▶ Bidding and Negotiation (10.8) discusses the processes involved in selecting a contractor. ▶ For further discussion of these fast-growing project delivery methods, see Contractor-Led Design-Build (9.4); Architect-Led Design-Build (9.5); and the accompanying backgrounder, Architect-Led Design-Build and Architect as CM for Small Firms and Small Projects. The Architect's Role in Construction Manager- Constructor Project Delivery (9.2), Integrated Project Delivery Overview (9.3), and Project Team Agreements (17.2) cover further dimensions of project delivery. Public vs. Private Clients There are many opportunities to compete for public design contracts. However, public contracts offer significant problems over private client relationships: • Terms and conditions are often one-sided against the architect, with little or no room for negotiation. • Profitmarginsaretight.Thepartiesthatfundtheprojecthavetoanswertotheir taxpaying constituents. • The press often has a field day with public projects, magnifying and misstating problems that leak out—sometimes without fact checking, and without understand- ing the construction or design trades. • Public officials owe more to their constituents than they owe to the design team. This can make it hard to establish a normal designer-client relationship. • Public officials come and go. After an election, an architect could be working for a person who previously opposed the project. Any of these issues can increase risk on public projects. Understand the risks and figure out how best to manage them. Establish a Reasonable Fee Examine a client's expectations and degree of sophistication and take into account the real level of risk inherent in the project. Then formulate the processes needed to pre- vent anticipated problems. After quantifying these processes, determine the real cost of taking the commission. Add profit to that figure to establish a fee. If the client con- sents to that sum, then, and only then, will it be known that the project constitutes a manageable risk. NO. 2: PROJECT TEAM CAPABILITIES The second most frequent source of claims comes from the risk category known as project team capabilities. (See Figure 16.4.) Dominating this category are claims aris- ing from the use of inexperienced staff. Coming in a close second and third are similar issues—inexperienced staff on site, and an inexperienced PM. To proactively help avoid 1000 Risk Management Risk Drivers data provided by The Design Professional unit of XL Group FIGURE 16.4 Chart Depicting Project Team Capability Claims by Type PART 4: CONTRACTS AND AGREEMENTS these kinds of claims, hire or train qualified staff and, as much as possible, have the most qualified people working on each project and each phase of the project. This includes a thoughtful division of labor, taking advantage of the lower billing rates of less- experienced staff for tasks that are appropriate to their skill level. A successful work plan requires enough senior level experience to balance the inexperience of youth. Managing this risk, while turning a profit, requires finding the right mixture of less- experienced interns and experienced architects. Use of Technology In the "old days," when drawings were prepared by hand, the plans were almost always drawn by the most senior staff. The plans required more depth of experience; more things had to be known to draw them properly—the program, the structural grid, the clearances for a toilet, what the walls are made of (how thick), the code, what's going on overhead, how to label, how to dimension. The details, on the other hand, were far more one-dimensional. With a small amount of coaching, and reference to prior proj- ects' working drawings as examples, an intern could in short order be equipped to become productive at drawing the details. Thus interns began their drawing careers with exciting tasks like door schedules and toilet room details. In the current day, drawings are prepared entirely on the computer—increasingly in 3D. The older experts are often less computer-savvy, becoming hands-off. The new generation, however, uses the computer with great familiarity, but lacks expertise in design and construction—they don't know what to draw. Neither can operate effec- tively entirely on their own. This can create a significant risk. Both generations need the skill that the other possesses. Below is a series of ways to manage the multigenerational approach: • Train senior level staff to draw again—on the computer, to become hands-on in the building information model being created in the computer. There are things in the model that cannot be seen on a print. Senior staff need to be able to see them. • Train junior level staff to know what they should draw, and why. • Manage the generational differences. Break down barriers between old and young so they can communicate effectively, respecting the different but needed value each brings to the team. • Foster mentoring. Senior staff possesses a wealth of experience to share with the next generation. Some will share, but only if asked. Effective mentoring happens when mentor and mentee both see the value. Both must be motivated to make it happen. • Hire and maintain a good mixture of staff at the various levels. Firms should invest in training staff of all ages in the proper use of technology. Staff Continuity on Projects People come and go for a variety of reasons. Whatever the cause, their departure cre- ates a void in the knowledge base of the project team—the perfect opportunity for unresolved issues to fall through the cracks. Take these steps whenever someone leaves: • Obtain a written "to do" list from the person leaving, documenting unfinished items and design decisions yet to be made. • Get commitments from remaining team members to pick up and close out the loose ends that result with the departure. • When appropriate, bring in the right replacement. If the position vacated was senior, the client may want to interview or review qualifications of the replacement; obtaining client approval might even be a contractual obligation. Regardless, make the client aware in a timely fashion of the change. Demonstrate intent to fulfill contractual commitments. ▶ Professional Development and Mentoring (8.4) discusses the training, mentoring, and appraisal programs that can support a firm's strategic plan. Office Standards Standards exist for good reasons. They portray the signature of a firm, its image, its attitude. They establish a quick solution to a problem, avoid reinventing the wheel, and save money in the process. They also exist as a repository of firm knowledge, a refer- ence in how to avoid failures in quality. Standards are indeed great, but only when they are used. Firms can now host their quality plans online—available for reference by every employee as their home page. These online documents set forth the firm's policies and procedures for how to do almost everything—providing instant access to checklists, templates, and forms. They can provide handy links to resources, such as online build- ing codes, industry standards, an electronic library of past project drawings and speci- fications, image databases used for marketing, case studies, white papers, and lessons learned. Company intranets and online quality plans have become essential tools for today's architecture firms. These require significant investment of time and money, both to develop and then to maintain. But this investment is returned many times over by improving quality and reducing risk. NO. 1: COMMUNICATION The most frequently cited cause of claims is poor communication. (See Figure 16.5.) More than half of communication complaints arise out of a lack of procedures to iden- tify conflicts, errors, and omissions. Secondarily prevalent are the problems that hap- pen when people don't follow procedures that are in place. For the project to proceed without problems, people must communicate effectively. Peer Reviews: Quality Assurance/Quality Control (QA/QC) One sure way to prevent mistakes is to check the work—the benefit best characterized in the carpenters' saying, "measure twice, cut once." On any given project there are hundreds, even thousands of decisions that have to be communicated. Any decisions not made by the design team will be made by 1002 Risk Management Risk Drivers data provided by The Design Professional unit of XL Group FIGURE 16.5 Chart Depicting Communication Claims by Type PART 4: CONTRACTS AND AGREEMENTS someone else, and the architect may not like that decision or its impact on the project. This situation is less likely when a system is employed for managing or controlling quality. Here are several practical ways to manage quality: • Self-checking: Each team member must be responsible for the quality of their own work. They know their piece of the project better than anyone else. They can use checklists from the company standards, or a list developed by their immediate supervisor. Either way, expectations and communications need to be clear. • In-house third-party review: A "fresh set of eyes"—experienced eyes—can be a big help. Third-party reviews ought to occur at the conclusion of every major project phase, before deliverables are issued. Project leaders should see written proof that the reviews have occurred before they issue the documents. • Peer reviews: Some jurisdictions require independent, outside consultant "peer" reviews before they will issue a building permit—at least for some critical portions of the work. For projects with which a firm does not possess significant prior expe- rience, or when working with a new consultant, it might be prudent to have a peer review. Some institutional clients may even require it. Small firms can greatly ben- efit from a peer review. • Building information models: BIM can take advantage of electronic checking, employing clash-detection software. These software add-ons produce reports that still have to be reviewed by humans to determine which clashes are real and which are incidental. Nonetheless, the thoroughness of the reports is a remarkable benefit. Remember the simple goal of checking: to identify and correct a mistake before it becomes too expensive to fix. Checking, regardless of which tool or method is employed, helps members of a project team learn to communicate better—to provide better design. Know the Contract Nothing is as disappointing as a failure to meet expectations. Clients readily become dissatisfied because the architect didn't do things the way they had expected. Likewise, many project leaders become dissatisfied because the members of the team didn't complete tasks as they expected. Why does this happen? Bad communication. One simple way to address this concern is to review the services agreement—the written expectations—with everyone. Sit down with the client and go over the scope of work. Show examples of the deliverables that will be produced. Listen to the client. Their preferences might alter the standard approach. Likewise, review the agreement with the team at the beginning of the project. At appropriate times, pull out a copy of the agreement to confirm the written rules— expectations—for key deliverables. It is always better to discuss matters and review a change of strategy or approach in advance. The alternative, which is to make assumptions, often results in disappointment. Conduct Proper Meetings Meetings should never happen just because they're on the calendar. Meetings should be organized to complete a set of distinct decisions along the road to finishing the project. Each meeting deserves attention to the advanced development of an agenda, planning who should be there, and the topic of necessary decisions. The written outcome of meetings is the minutes. Minutes need not be lengthy. They just need to record date and location, attendees, a summary of each item dis- cussed, decisions made, and identification of action items, assigning who is responsible for each. The key in this record is decisions. ▶ For more information on peer reviews, see Construction Drawings (10.6). The architect is often the one responsible for preparing and issuing minutes during the design phase. Once construction commences, this responsibility often shifts to the builder. Regardless of formal responsibility, it is essential that the architect take written notes of some form at every meeting. Minutes issued by other parties should be reviewed promptly. If there is any disagreement, write and send a record of comments or correc- tions right away. In the ebb and flow of the project, often spanning several years, the minutes repre- sent a key record of who said what, what they knew, and when they knew it—docu- menting the involvement of people no longer around or available for comment. These become the means to affirm prior decisions, dissolve disagreements, or to resolve claims. Document Control Every paper document issued by the architect needs several points of identifying infor- mation: the author, who it is being issued to, the date issued, and, in the case of contract documents, a reference number. Documents that are revised and reissued, such as drawings, need a revision date. Last, copies of each document issued must be saved in the project record. In resolving disputes, the resolution hinges on who knew what and when they knew it. For example, change orders arise over information added or subtracted from the contract documents. Reference to copies of the documents of the two dates in question, before and after the change, will support or disprove the claim. Practice throughout the entire construction industry is moving toward a paperless exchange of information. E-mail is used to transmit documents of modest size. The courts now accept electronic records as a means of storing data for use in litigation. The benefit of this decision saves significant money on printing and delivery. In addi- tion, re-access to the data is improved, since many document storage systems are data- bases that can be electronically searched. Regardless of the system in place, access to important project records must be preserved long after the project has been completed—until the statute of limi- tations or repose (if any) precludes litigation. If project records are saved remotely during the life of the project, obtain a copy for safekeeping. If appropriate, convert the files into an electronic format that will still be recoverable by computer sys- tems toward the end of the potential litigation period—some 6, 10, or 15 years from now. Warning Signs of a Claim When someone has made a mistake, the human tendency is to hide. This is true in all relationships, including that between architect and client. Sooner or later mistakes will come out. Though difficult, it's always better to face one's own mistakes head-on—to tell the client about a problem before they hear about it from someone else. That, at least, gives the architect some measure of control. See It First Many claims begin with the architect being among the first to know of a problem. If they aren't among the first, it's likely because they're not listening or paying attention to what is going on. The discovery of an error often begins with denial. After this comes the realization that the problem needs to be fixed. Start with fact checking. Speak to the people involved with the situation; find out everything about it. Check out the timing on the issue; who knew or did what, and when. At the same time, formulate what has to change to resolve the matter. Is a change really needed? A partial change? What are the options? What is the cost? How would the schedule be impacted? ▶ Information Management and Services (5.12) further covers today's robust information management practices and technology-based information services. ▶ Dispute Management and Resolution (16.4) covers strategic and effective use of mediation, arbitration, and litigation. PART 4: CONTRACTS AND AGREEMENTS 1004 Risk Management Any serious mistake can damage the relationship with the client. If a claim could erupt, call in outside legal and insurance counsels for advice. Don't wait for the claim letter from the client's attorney. After the problem and its implications are understood, and good advice received from insurance providers or legal counsel, the next step is to tell the client. How to Preserve the Client Relationship It is important to be open with clients. At the same time, this is a business relationship, based on a contract. If the architect believes they are at fault, they should resist the first tendency to admit fault. First seek the advice of outside counsel, before taking respon- sibility for a repair. On examination, the facts could well prove the architect caused the problem. But that doesn't necessarily mean the architect has a legal obligation to fix it. Remember the standard of care. There may also be contractual or legal bases for excusing compli- ance with the standard of care (e.g., a force majeure clause). The law does not require the architect to be perfect, and hopefully the contract does not require perfection either. Do not offer to remedy the situation without approval from the insurer. Profes- sional liability insurance policies exclude from coverage situations in which they are not involved in authorizing a settlement. CONCLUSION The practice of architecture involves risk—risk that has the potential to strike directly at the ability of the professional to remain in business. Much risk can be avoided or transferred by simply being savvy, making good contracts, and getting good advice, then following through on it. The balance of the risk stems from being human, being fallible—architects do make mistakes. Architects need to man- age this risk. Errors and omissions are never planned, and many could have been avoided. Reducing human error requires nothing less than hard work, a commitment to excellence, and getting serious about improving the process by which services are rendered. A firm that is disinterested in risk management "processes" may feel invin- cible, but it is wise to beware. When risk isn't being carefully watched, claims will rear their ugly heads. BACKGROUNDER RISK IN DESIGN Mary Johnston, FAIA, and Ray Johnston, AIA Although it is difficult for architects to take creative risks, their embracing of innovation and experimentation can pro- vide answers to design challenges. Strategies for calculated risk-taking involve developing fresh attitudes toward pro- gram, materials, and collaboration and can allow archi- tects to make bold design moves while solving practical problems. Mary Johnston and Ray Johnston, AIA, founded Johnston Architects in 1991. For over 20 years they have designed projects that have received local and national recogni- tion. Mary and Ray Johnston hold master's degrees in architecture from the University of Washington College of Built Environments and continue their association with the college as frequent studio reviewers. It is difficult for architects to take creative risks. The exe- cution of the work is ever more complex, and the conse- quences of failure, whether material or functional or aesthetic, are severe. The added responsibility of not only using dwindling resources wisely but reversing degradation and depletion of the environment causes anxiety. But the embrace of risk and an experimental, even rebellious way of thinking about design can help resolve rather than inflame that anxiety. To take risks is to be optimistic, and optimism in design is exactly what is required in this era of doubt and instability. NO RISK MEANS STANDING STILL The forces working against risk-taking are both internal and external. The internal fears that designers have include the suspicion that risk and pragmatism are antithetical. Architects struggle between the desire to surprise and provoke and the desire to provide serviceable buildings. It takes a conceptual leap and some courage to believe that something untested and innovative can also be practical. Also, there is comfort in the known and it is tempting to think that what worked last time will surely work again. These internal apprehensions join with external forces of orthodoxy and constraint operating outside of the design pro- cess. With rare exceptions, clients prefer predictability. Pro- grams can be strict and inflexible, and the shadow cast by a tight budget is long. Codes, regulations, and design guide- lines encourage the status quo, and LEED checklists reward even the most mundane structures. Restraints, both self- imposed and imposed from the outside, are hard to resist, but if architects pay for taking risks, the penalty for standing still can be even greater. STRATEGIC RISK-TAKING It is clear that standing still is not an option, and that we can- not afford what Charles Moore, in his 1990 essay "Triple Threat Heritage," calls the "luxury of fixity." Moore says, "What our new architecture can't do is allow itself that luxury of immobility. It has always to be ready to move, to change, to be different from what it has been before." Although Moore was writing almost 20 years before Ste- ven Holl, in Holl's book Urbanisms: Working with Doubt he channels the same vision of design as a dynamic system. Holl writes, "Instead of simple and clear programs we engage contingent and diverse programs. Instead of precision and perfection we work with intermittent, crossbred systems, and combined methods." In other words, working with doubt is normal. The ideas of complexity and forward motion suggest some strategies for calculated risk-taking in design. One tac- tic is to turn oppositions into collaborations. Pragmatism becomes the ally of innovation when logic guides the search for solutions. It is brave to cast off assumptions and mine the logic of a problem, especially when the new logic seems to defy conventional logic. If architects don't work with simple and clear programs, as Holl says, how can they use "contin- gent and diverse programs" to produce thrilling new places? The Seattle Public Library designed by Rem Koolhaas and his firm OMA is an example of the application of fresh logic on a seemingly strict program. Koolhaas analyzed the trends in library circulation, the demographics of the city, and the bones of the Dewey decimal system to turn the traditional library program inside out. The result is an entirely new way of experiencing a library, and yet the design grew out of that exploration of data. The "architecture" is the consequence of the logic train. Another technique for subverting expectations is allow- ing and encouraging the transformation and manipulation of space by the user over time. Letting architecture be less of a spectator sport can produce spaces that delight and surprise. Although it takes some trust to design a building that can be easily altered by its users in practical as well as playful ways, the risk is offset by the likelihood that such spaces will be well-loved and cared for. The inventive and unexpected use of materials is part of the risk-takers toolbox as well. At the beginning of his career Frank Gehry used cheap and commonplace materials like chain-link fencing in unconventional applications to define and enliven his buildings. Samuel Mockbee and his students at the Rural Studio, out in front of the trend toward using recycled and repurposed materials, scavenged carpet tiles to make walls and old car windshields to make a surprisingly ethereal church roof. A last strategy for creative and calculated risk-taking is collaboration. Great architecture comes out of an open pro- cess that encourages an exchange of ideas that build on one another. It is a traditional and organic way of practicing and is sometimes overlooked as the powerful innovative tool that it is. THE NEXT GENERATION OF RISK-TAKERS A common complaint among instructors in design schools is that most students are risk averse. They produce with deriva- tive solutions for fear of ridicule or having a portfolio that will be frowned on by prospective employers. But if students can- not learn to be bold in school, they surely will not be bold in the real working world. It is up to instructors and practitioners who mentor and critique student work to encourage and reward original and even defiant thinking. This is where inno- vations will come from and this is how architecture will be not just relevant but essential. Students themselv

Chapter 17

CHAPTER 17 Agreements and AIA Document Program 17.1 Agreements with Owners Alan B. Stover, Esq., AIA The architect's agreement with the client should reflect the goals and expectations of both parties and establish the conditions under which services will be rendered. Other Handbook articles deal with defining the scope of a project and the pro- fessional services it will require, the compensation that is needed to support the needed level of services, and techniques for negotiating agreements. The importance of managing risk in an architecture practice is reviewed in Chapter 16, Risk Management. All of these concerns come together in the contract that the architect enters into with the client. The AIA has traditionally used the term "agreement" in the titles of its profes- sional services contracts and for the "front-end" document in a construction contract (the owner-contractor agreement form) that establishes the scope, time for comple- tion, and method of payment, separate from the general terms and conditions of the contract. However, there is no special legal significance to AIA's choice of terminology Alan Stover, an architect and practicing attorney, directed the AIA Contract Documents pro- gram during the 1970s and later served as the AIA's General Counsel. He is the principal author of The American Institute of Architects Official Guide to the 2007 AIA Contract Documents (Wiley, 2009). 1040 PART 4: CONTRACTS AND AGREEMENTS in the titles of its documents. An executed professional services agreement form is, in fact, a contract. PREREQUISITES FOR, AND BASIC TERMS OF, A LEGAL CONTRACT In order for a business relationship to be recognized as a contract enforceable by law, it must meet some basic tests, and the terms of the contract must be sufficiently clear that the performance required of the parties can be determined. Legal Prerequisites Mutual Agreement: A "Meeting of the Minds" There must be a mutual agreement between the parties as to the essential terms of the contract. This agreement is normally reached through the process of offer and accep- tance, and results in a "meeting of the minds." The negotiation process may involve many offers and counteroffers before the terms of the contract are settled on. Until both parties have agreed upon the identical terms, there is no agreement. Any terms raised during negotiations that have not been agreed upon do not become a part of the contract. Consideration A contract does not legally exist unless there is an exchange of values—what lawyers call "consideration." This is what distinguishes a contract from a gift. Each party must give something of legal value to the other: either a benefit conferred on the other, or a detriment incurred. Mutual promises are recognized as having legal value. In the nor- mal situation, the architect promises to provide services, and the client promises to pay the architect's compensation. Past consideration or a preexisting obligation does not qualify as consideration. An agreement made by a client that the client will pay the architect's past-due invoices in exchange for some additional services would "fail for lack of consideration"—even if the architect expressly agreed to the arrangement. Capacity Capacity is the legal ability of the parties to enter into a contract. While classic issues of age, mental incapacity, and incapacity due to the influence of drugs or alcohol rarely arise in contracts for architectural services, conviction of a felony may put someone under a disability, particularly in contracting with the federal, state, or local government. The Consolidated Appropriations Act of 2012 prohibits certain federal agencies from contracting with any corporation that has been convicted of a felony within the past 24 months. Companies can be debarred or suspended by government agencies for fraud, waste, mismanagement, or even for being delinquent in their tax payments. Legal Purpose If the underlying purpose of the contract is illegal, or if the contract requires the per- formance of an illegal act, the contract is void from the outset. This could come into play if the architect has agreed to provide services for a project in a state or jurisdiction in which the architect is not licensed. The courts will not facilitate the performance of an illegal act by enforcing the contract, and the unlicensed architect could be left with- out legal recourse to collect any unpaid fees. Contractual Intent The parties to a contract must have the mutual intent of entering into a binding legal agreement on the terms specified. This mutual intent may not be present because of a mutual mistake of fact, or where there has been the misrepresentation of a material fact or outright fraud, or because of the use of undue influence, or physical or eco- nomic duress. There is a difference between hard bargaining and economic duress. An architect may enter into an economically disadvantageous contract because the economy is bad and there are no other commissions to be had. The client who takes advantage of the architect's financial distress may be a sharp operator, but is not putting the architect under economic duress. Necessity for a Writing Only certain types of contracts are required to be in writing under what is called the Statute of Frauds, and this only affects the enforceability, not the underlying validity, of a contract. Examples include contracts for an interest in real estate (including the sale or lease of property), contracts that by their terms cannot be performed within a year, financial guarantees, and contracts between merchants under the Uniform Com- mercial Code for goods valued at $500 or more. Of particular interest to design profes- sionals, under the copyright laws any transfer of an interest in a copyright (such as the copyright in a set of drawings that the architect has prepared) must be in writing. Ownership of the drawings, even in an electronic form, is separate and distinct from the architect's ownership of the copyright that is embodied in them. Thus, a transfer of the drawings to another party such as the client does not result in a transfer of the copyright: That must be covered by a specific written agreement. Essential Terms, Express and Implied The terms of an agreement must be sufficiently definite in order for it to rise to the level of a contract. Essential terms include the subject matter of the contract such as the services to be performed, the time for performance, and the price to be paid for those services. In the absence of any of these terms, the contract may "fail for indefi- niteness," severely limiting the remedies that an architect might have. Services to Be Provided Is it enough for an architect to agree simply to design a client's house and still have an enforceable contract? Probably not, given the complexity of modern design and con- struction. In order to provide the necessary specificity, it will be important to describe the project, including such things as its location, building and construction type, approximate size or capacity, quality, and estimated cost. Services may be intangible in nature and abstract in their definition, and even when they are described in some detail, it is important to also define the deliverables that will result. In doing so, the architect should be careful to make it clear that the architect is providing and the client is pur- chasing services, not drawings. Since 1865, the AIA has taken care to define drawings as "instruments of service." Compensation Compensation is an essential term of any contract. Without it, the contract can "fail for indefiniteness." There are limited circumstances in which a court may supply a missing term of such importance. If the agreement is silent on the subject of compensation, a court may be able to sup- ply an implied term of "reasonable compensation." What is reasonable might be measured by the price that a client has previously paid the architect for similar services, or by what the architect normally charges for such services, or by what architects in the community normally charge or are paid for similar services. Obviously, it is better to have a specific agreement than to have to rely on others to determine what one deserves to be paid. Time of Performance The time of performance is an essential term of any agreement. If the time term is not specified, courts may sometimes find that there is an implied agreement that PART 4: CONTRACTS AND AGREEMENTS 1042 Agreements and AIA Document Program performance (such as when payments are due) will take place within a "reasonable time." The timing of architectural services often depends on external factors over which the architect has no control, particularly the time required for the periodic client approvals needed for the architect to proceed and building code review and approval of the construction documents. While it may not be practicable to include a schedule in the contract, a provision addressing the time for the performance and completion of the architect's services should be a part of every contract. The architect must be careful that any provisions on time of performance take into account delays caused by the cli- ent and external factors. Express Terms Express terms of a contract are those that have been specifically agreed upon, whether verbally or in writing. Courts generally require that certain undertakings be express, such as an agreement to indemnify another party. An architect may tell the client during negotiations that schematic design studies will be completed within 60 days. If the agreement is not in writing, the 60-day com- mitment is nevertheless an express term of the agreement. However, when and if the agreement is reduced to writing, it is important that all terms be included in the written contract, which generally supersedes any prior oral or written understand- ings or agreements. Most courts will not allow such "extrinsic" evidence to vary or add to the terms of a written agreement that appears to be complete and unambigu- ous on its face. The terms of the contract will be interpreted based on the reasonable meaning of the words that were used by the parties, or by common usage in their line of business, or by the conduct or course of dealing of the parties themselves. If the architect agrees to design a commercial retail space in a shopping center as a "vanilla shell" and agrees to produce a "permit-ready set" of drawings, these terms will have meanings that can be defined with fair certainty. Difficulties arise when commonly used words such as "estimate" and "inspection" have special meanings of which the client may not be aware. Implied Terms and the Architect's Standard of Care Implied terms in a contract are not specifically mentioned and have to be inferred. They include terms that are a necessary consequence of what the parties have under- taken to do. For example, under the professional standard of care, the architect has a duty under the building code to comply with the design requirements of that code, and it can be implied in a contract for architectural services that the architect will fulfill that duty. Whether the violation of a building code provision related to design is considered to be evidence of negligence in itself (negligence "per se") or merely as evidence of negligence varies among jurisdictions. While the architect's contract specifies what the architect will do, the manner in which the architect's services are performed is generally determined by the professional standard of care. Architectural agreements have historically been silent on the archi- tect's responsibility for code compliance and for the adequacy of its construction docu- ments. It went without saying that the architect was obligated to fulfill these responsibilities under the architect's professional standard of care. A few cases have held that architects impliedly warrant that their services have been performed in accor- dance with the professional standard of care. Since the 1970s, more sophisticated owners have insisted on including express terms in the architect's contract. Some of these terms have the effect of imposing a higher standard of care, and must be scrutinized carefully because they may go beyond what is covered under the architect's professional liability insurance. The current AIA agreement forms address clients' desire for more specificity by including a statement of a standard of care that is consistent with the law. TYPES OF AGREEMENT Agreements between architects and their clients can take many forms. Oral Agreements Oral or "handshake" agreements should be avoided except for the simplest, shortest, and least costly undertakings on behalf of a known and trusted client. While they may fulfill the legal necessities of a contract, oral agreements usually leave too many things unsaid: Movie mogul Samuel Goldwyn is reputed to have said that "verbal agreements aren't worth the paper they are written on." Some state laws—particularly consumer protection laws—require that certain types of agreement be in writing. This can extend to agreements for architectural design services. The biggest problem with verbal agreements is proving what terms were actually agreed upon. By the time a misunderstanding develops into a legal dispute, the parties may have vastly different recollections of what was agreed to—such as whether there was an understanding that the building would not exceed a certain cost. When the architect is put in the position of working under a verbal contract, even if it is based upon a detailed proposal or contract form that the client has neglected to sign and return, it will serve the architect to confirm the terms of any verbal agreement in writ- ing as soon as possible, and before beginning performance. Letter Agreements Letter agreements are sometimes used to confirm a prior informal verbal agreement, perhaps with the addition of a few terms not previously discussed. They may fulfill the legal necessities of a contract if they cover (1) the services to be provided, (2) the price to be paid, and (3) the time of performance, and provide for the client to return a signed copy confirming the client's acceptance. Like oral agreements, however, letter agreements often leave out too many things, and if the client does not coun- tersign with its acceptance, the letter may not prove the terms that were actually agreed upon. One variation on the letter agreement is the detailed proposal letter that an archi- tect may submit to a client. This approach is commonplace in all types and sizes of firms. Architects' proposal letters typically describe the project, the scope of services, and the proposed compensation, all in some detail, but all too often omit many of the "boilerplate" terms and conditions such as are found in the standard AIA agreement forms. To remedy that omission, a proposal should incorporate by reference or attach an AIA form or other terms and conditions document. If a client responds to the architect's proposal with any change in the terms, this is legally considered to be a rejection of the architect's proposal and a counteroffer. This exchange of offers and counteroffers may continue for several rounds before a final agreement is reached. The architect should take care to see that all of the terms of the agreement are restated in the final exchange. If a letter agreement is subsequently replaced with a formal written contract, the contract's "integration clause" should note that it specifically supersedes the prior letter agreement. This will avoid having two potentially inconsistent contracts operating simultaneously. What if a client responds to a proposal by asking the architect to proceed with the services as outlined, but without making a firm commitment to the price or other terms or returning a countersigned copy? If the proposal (or an attached AIA agreement form) is never signed by the client, the oral authorization to proceed may be the only contract there is, and it will be subject to all of the same difficulties encountered with oral agreements. The written proposal or AIA form will only be evidence of what the agreement is, not definitive proof. One way to address the possibility that a client may not countersign and return the written proposal is to provide in the proposal for the manner in which it may be accepted by the client: in effect, by creating a "self-executing" proposal. The architect could do so (with the assistance of an attorney) by including a statement in the proposal that the terms of the proposal (and/or the attached AIA agreement form) can be accepted by the client's giving authorization for the architect to proceed with the ser- vices described in the proposal. AIA's Owner-Architect Agreement for a Residential or Small Commercial Project, AIA Document B105TM-2007, has been designed as a substitute for a simple letter agreement on smaller projects. Formal Written Contracts Formal written contracts identify the parties to the contract, describe the scope of the project and services to be provided, the architect's compensation, and the time of per- formance, and indicate the parties' acceptance by their written signatures. They often include additional terms and conditions. Contracting parties should take pains to see that their written contract is a com- plete expression of their agreement. Any conditions or contingencies should be spelled out in the written contract. When a contract is in writing and appears to be complete and unambiguous on its face, the courts are reluctant to look beyond the written words. Standard AIA Contracts Standard AIA forms of agreement for architectural services were first introduced in 1917. Today, the AIA publishes many different forms of owner-architect agreement. Although these "B-series" documents share many of the same provisions, each addresses a particular range of circumstances. The various architectural services agreement forms are found in coordinated families of documents. AIA's standard forms of agreement are based on general principles of law prevailing in the United States. However, variations in state and local laws may affect the form and substance of agreements, particularly consumer protection laws that may affect contracts with residential clients. The architect should be aware of the laws in every jurisdiction in which the architect practices. Variation in both statutory and case law among jurisdictions is one reason why architects should consult an attorney about using, completing, or modifying a standard form. There are many advantages of using AIA standard forms, for both parties: • The forms describe the services typically provided by the architect in some detail, and in terms that have been widely used in the industry; they also describe the cli- ent's responsibilities. • AIA forms cover the situations, conditions, and contingencies that are most fre- quently encountered, such as the need for additional services, what happens when the building as designed will cost more than was originally anticipated, and the client's rights to use the work product of the architect. • They describe not only the extent, but many of the limitations of the architect's services, responsibilities, and authority, so as to avoid major misunderstandings. • AIA agreement forms are carefully coordinated with other contracts and forms that will be used on the project. • Great care is taken to see that the forms are objectively reasonable and fair, and that they will be legally enforceable by all parties. The documents have a long history of acceptance by the courts. Some clients may express a reluctance to use a standard printed form for fear that it may be one-sided in favor of the architect. The best way to overcome such a fear will be to engage the prospective client in a review of the specific terms of the agreement to identify any provisions that are of particular concern. SPECIAL CONSIDERATIONS Any agreement for architectural services will need to take into account some special considerations, including the following. Nature of the Owner, Their Capabilities, and Successors Individual Clients Individual clients building for themselves or a small business (as opposed to business entities or institutional clients with building programs) rarely have much experience with architects or building construction, and so may have expectations that differ from normal industry practice. For instance, a client may need to understand that an archi- tect expects to be paid for its services whether or not the client decides to proceed with construction. It is extremely important that an agreement be reached regarding any construction cost limitations. "Design creep" can easily take the construction cost of a project beyond what the client expected to spend, and the architect must be prepared to keep rein on the client's expectations. Likewise, the client will need to understand that "schedule creep" must be controlled, as it can delay a project beyond the antici- pated construction commencement or completion date. Individuals sometimes mix their business and personal affairs. If there is a business use involved, the individual may own the business outright or be part of a business entity such as a partnership. It is important to determine whether the client is the individual or the business entity. Care must also be taken when dealing with married couples or partners in civil unions. A client's spouse or domestic partner may not be bound by an agreement entered into solely by the client. Most projects involve improvements to real property. In order for the architect to secure its lien rights (if available), the architect should check to see that the client is in fact the sole legal owner of the property. Individual clients building for their own use may fall under the protection of cer- tain state and local consumer protection, new-home, or home-improvement laws and regulations. AIA Document B105TM-2007 is a form of agreement that may be appropriate for small residential projects. Small Businesses Small businesses may take many different forms, from individual proprietorships to partnerships, limited liability corporations, and business corporations. A business may be "trading as" or "doing business as" using another name. Some of these forms of business will give the individual limited liability for the debts and obligations of the business. It is important for the architect to know exactly who the client is, and to determine the client's fiscal responsibility. The architect should also check the state corporations or franchise tax office to determine that the business has a legal existence and is in good standing with the state. AIA Document B104TM-2007 is a form of agreement that may be appropriate for small to midsize projects that are of limited scope and complexity. Corporate Clients Corporations, limited partnerships, limited liability companies, and other business enti- ties such as real estate investment trusts operate through individuals, but not all corporate or entity employees have the authority to make binding commitments. It is important to know the capacity of the individual(s) with whom one is dealing. Unless that individual is the corporate president or CEO with clear authority to commit the organization, the architect should determine just what the individual's authority is. It is not uncommon for the owner's project manager, to whom the architect reports, to be employed by an entity different from that with which the architect has contracted (making the individual an agent of the client). It is far better for the architect to be able to rely on actual authority, stated in the contract, than on the apparent authority of an agent of the client. In addition, the architect should also determine what relationship the client corpora- tion has to the real property that is to be improved. The actual owner of the property may be a "shell" corporation with no unencumbered assets; it could be a wholly owned subsidiary; or a separate corporation controlled by or under common control by the cli- ent. The client may want the contract to be with one entity, but have the architect report to people in another company. These corporate interrelationships need to be sorted out. Most corporate projects are constructed for the company's own use and occupancy for an indefinite time into the future. Thus, the company may be more interested in sustainable design, the comfort and convenience of its employees, higher quality of construction, increased energy efficiency, and longer-term savings in operating costs than in a lower initial cost of construction. A corporate client may also offer the archi- tect an opportunity to provide extensive additional services, such as interior design. AIA Documents B101TM-2007 and B103TM-2007 are forms of agreement that may be appropriate for larger and more complex projects. Nonprofit Organizations and Institutional Clients Nonprofit organizations and institutional clients such as educational and health care institutions usually have a corporate organizational structure; however, they differ from business corporations in their outlook. Because these organizations are less oriented to making a profit than providing a service, the construction of a building may not be viewed as an investment that must have a measurable return. These organizations may be much more receptive to making expenditures for sustainable design and measures that require an extended amortization period. Many nonprofit organizations work on extremely tight budgets. They may expect their professional service providers to contribute part of their services or work at reduced rates. AIA Document B101TM-2007 may be an appropriate contract to use for typical institutional building projects. AIA Document B106TM-2010 has been developed for those situations in which an architect is performing services on a pro bono basis. A version of B101TM-2007 for use on sustainable projects, B101TM-2007 SP, is also avail- able, complementing other newly published AIA documents for sustainable projects. Public Sector Clients and Publicly Funded Clients Contracting with a public sector client differs in many respects from the private sector. Architects seeking to work for the public sector should first be aware of the selection procedures utilized by an agency. One paramount principle of government contracting is that an agency generally cannot legally contract for services without a specific legislative and/or budgetary authorization. Only certain designated officials have the authority to enter into con- tracts; contracts are invariably written, but often on an inflexible, non-negotiable gov- ernment form that may or may not be up to date or appropriate for architectural services. There are many rules and regulations that may be incorporated into a con- tract or that will apply independent of the contract, such as accounting rules that may affect the architect's entire practice. The architect is obligated to be aware of and comply with these regulations whether or not they have been brought to the archi- tect's attention. Government contracts can be extremely difficult to modify, such as to authorize the performance of or pay for additional services that may have been required of the archi- tect. Some public sector forms of contract have borrowed liberally from prior editions of AIA Contract Documents. Some AIA components have worked with public sector entities to develop adaptations of the AIA forms that meet their specific contracting requirements but remain consistent with current architectural practices, services, and expectations. ▶ See Owner-Generated Agreements (17.3) for further information about how to evaluate terms in such agreements. Contracts with clients whose funds are provided by public sources such as grants or loans will also involve restrictions and regulations with which the architect must be familiar. Users may consider the specialized scope of service forms in the B200 series of documents for defining the scope of services to be provided in a public sector contract. AIA Document B108TM-2010 has been designed for use on certain federally funded or federally insured building projects. Developers Contracting with a real estate developer is different in many respects from the average business client who is building on its own behalf. Professional developers are usually very familiar with the market for design services and construction. They often have a very definite idea of the services that they want, and how much they are willing to pay for them. While some developers have begun to see the value in having a LEED-cer- tified building, many speculative builders may still be driven by the desire for a project that has the lowest possible initial cost—and this includes their architectural services. Developers are among the client types who prefer to use their own form of contract, and the terms they seek to impose on the architect can be very one-sided. Many develop- ers and their attorneys now use the AIA Contract Documents software as a starting point for their agreements, so some of the language in a developer's agreement form may be familiar to the architect. However, the presence of familiar language may be deceptive, as the language changes may be subtle and the modifications (particularly deletions) may be extensive, substantially changing a document's legal effects. Engaging a knowledge- able attorney may be necessary in order to negotiate a contract with acceptable risks. Typically the owner of the property to be developed is a single-purpose entity that only exists on paper and has no other assets other than the property, which is already fully encumbered by a development or construction loan. It is important for the archi- tect to ascertain just what the relationship is between the developer and the client who signs the contract. Because the project may be highly leveraged and offer no source of financial recov- ery for the architect, it is important that during the course of the project, the architect keeps current with its billings and keeps the client current on its payments. Services that have not been billed or fees that are in arrears may be very difficult to collect if the developer or the project encounters financial problems. One consideration that should be kept in mind is that the project may be one such as a condominium apartment building that the client will be turning over to one or more new owners after it is completed. This may expose the architect to potential claims from many subsequent purchasers for alleged deficiencies in design and construction. AIA Documents B107TM-2010 and B109TM-2010 are forms of agreement that may be appropriate for use with developers of single-family residential projects and larger, mixed-use developments, respectively. In addition, AIA Document B509TM-2010 pro- vides supplementary conditions that may be used to modify B109 for use in residential condominium construction projects. Design-Build Companies Another class of client that the architect finds far different from others is the design- builder. In this situation, the architect no longer has a direct relationship with the ultimate client, and the architect may be working under a detailed set of design criteria developed by the owner or its bridging consultant. The architect's design decisions may be subject to a higher level of scrutiny for their impact on overall building costs. Deci- sions on finishes, materials, and equipment selection may be made by the design- builder rather than the architect. Finally, the architect may have a much diminished role in construction administration, perhaps limited to reviewing subcontractors' shop drawings, responding to requests for information (RFIs), and providing other services only on an as-needed basis. ▶ Contractor-Led Design-Build (9.4) further discusses arrangements in which the contractor holds the prime contract with the owner. PART 4: CONTRACTS AND AGREEMENTS 1048 Agreements and AIA Document Program Since the emergence of design-build in the 1980s, the AIA has promoted measures that help ensure that the architect will continue to have a meaningful and ethically proper role in the design-build process, even when serving as a consultant to a design- builder. AIA Document B143TM-2004 is a contract specifically designed for use between the design-builder and the architect. If the design-builder is not using AIA forms for its agreement with the owner, B143TM-2004 can be used as a reference to evaluate the form of agreement that the design-builder proposes that the architect use. Nature and Extent of the Architect's Undertaking The Baseline: "Full" Traditional Services A client that has a definite need, knows its requirements, and has a budget and the means to pay for a project is in a good position to enter into a contract such as AIA Documents B101TM-2007, B103TM-2007, or B109TM-2010, each of which will provide for a "full" scope of services that includes the traditional "Basic Services" plus "Addi- tional Services" that may range from programming and site selection through postoc- cupancy evaluation. The architect may be able to assemble a project team for the duration of the project and provide the services more efficiently than on a piecemeal basis. The higher degree of certainty in such a project may allow the architect to struc- ture a definitive compensation package. Feasibility and Design Studies A contract for preliminary services such as feasibility and conceptual design studies will be most appropriate when the client is not entirely sure of its needs, its desires, or its finances. These types of services may be more open-ended, and it may be most appropri- ate to charge for them on an hourly or similar basis. It may be appropriate to contract for such services under the terms and conditions of AIA Document B102TM-2007, with the scope of services found in B203TM-2007, the scope of services document for Site Evalua- tion and Planning. Another example is AIA Document B142TM-2004, the agreement form under which an architect will define the scope of a design-build project for the owner. Procurement and Construction Phase Services The architect who has an involvement in the bidding and negotiation phase is more likely to see that a construction contract incorporating AIA Document A201TM-2007 is used. The AIA general conditions includes provisions affecting the architect's inter- ests, such as notice of perceived errors or inconsistencies in the contract documents, insurance, indemnity, and waiver of subrogation provisions. Without any involvement during bidding, the architect will have no influence over the documentation that is used for the construction contract. The construction phase services of A201 are incorpo- rated by reference into AIA owner/architect agreements. If A201 is not used, the archi- tect's construction phase services written there establish a reasonable basis for the architect's compensation during the construction phase. Some owners, particularly those with ongoing building programs, have the knowl- edge, experience, and personnel to manage the bidding and construction process and to take on much of the contract administration by themselves. Other owners will have hired construction managers to manage construction procurement and administration. In such cases, the architect's role during procurement may be limited to advising on the acceptance of various alternates, and during construction, to reviewing and approv- ing submittals and making recommendations for (as opposed to certifying) payments to the contractor. See AIA Document B132TM-2009, the agreement form that has been designed for use on construction management projects. Unfortunately, there are also owners who lack construction procurement or admin- istration capabilities, but do not appreciate the value of an architect's services during construction. Architects who contract to provide design services only should consider obtaining legal advice to protect their interests, which may be affected by what may happen during the course of construction. The Architect as Subconsultant Architects are not always the lead on a project with a direct contract with the owner. When the architect is in a subsidiary position, such as a subconsultant to an engineer- ing firm on a project that has a high engineering component, the architect may not have a choice of which form of agreement to use. Because the architect will be assum- ing part of the prime consultant's responsibilities, and usually is subject to a "flow- down" of rights and responsibilities, it is important that the architect is provided with a copy of the prime consultant's agreement. Of particular importance will be any unusual allocations of risk in the prime agreement such as indemnity clauses, dispute resolution, and provisions requiring redesign in case of cost overruns. As a subconsultant, the architect will need to know who is responsible for coordi- nating the work of the architect with that of the prime consultant, with other subcon- sultants, and with other prime consultants working for the owner. As a subconsultant, the payment provisions of the contract need to be examined carefully. Will the architect be paid promptly for its services when billed? Will payment be made within a reasonable time after the owner has paid the prime consultant ("pay when paid")? Or will the architect be expected to bear the risk of nonpayment by the client ("pay if paid")? The Architect as a Team Member "Teaming" is a popular term in marketing but is extremely vague in describing legal responsibilities. In some forms of project delivery, such as design-build and integrated project delivery (IPD), the architect may be assuming legal obligations that extend not only to the ultimate client or project owner, but also to other team members. For instance, as a partner in a joint venture, the architect may have fiduciary responsibilities to its partners that go beyond the duties one would have to a client or consultant. The Delivery Method The various construction delivery methods (i.e., conventional design-bid-build, cost- plus work, contracting with separate primes, fast-tracking or phased construction, con- struction management with a CM-adviser or CM-constructor, design-build, and integrated project delivery) will affect the design documentation that will be provided by the architect, as well as the scope and extent of the architect's construction phase services. If the client has determined what the delivery method will be at the time the owner-architect agreement is negotiated, that should be set forth in the written agree- ment, and appropriate modifications may need to be made in the architect's services and construction phase responsibilities. The architect's design and construction phase services, as described in AIA Docu- ment B101TM-2007, anticipates that the project will be procured and constructed in a conventional manner—a fixed-price contract with a single general contractor. This should be regarded not as a commitment by the client that it will use that process, but as the basis on which the architect prices its construction administration services. Review of alternative methods of delivery is a service that the architect provides under the standard AIA forms. If the owner determines that something other than a conven- tional delivery approach will be used, the architect will need to initiate a change in the agreement to reflect the approach chosen. For instance, if the owner intends to contract on a cost-plus basis, the architect may have substantially more construction administration work to do, particularly in reviewing the contractor's documentation of expenditures and calculating allowable overhead and profit. Similarly, if construction will proceed on the basis of a third- party professional construction manager managing multiple separate prime construc- tion contracts, the architect may be required to create multiple bid packages of construction documents for different trades. This may require substantially more effort than a single set of construction documents intended for a general contractor. PART 4: CONTRACTS AND AGREEMENTS 1050 Agreements and AIA Document Program In such a case the architect may also have more limited construction phase responsi- bilities. The terms of the owner-architect and owner-CM agreement will need to be coordinated closely. If the use of a cost-plus or multiple separate contracts can be anticipated at the time the contract for architectural services is entered into, or if the owner has preselected a contractor or construction manager with whom the architect will be working, these factors should be included in the agreement and appropriate forms selected and mod- ifications made. If it is known that the owner wants to include the services of a con- struction manager as adviser, the architect may want to start with the AIA's Construction Manager as Advisor forms. LEGAL AND RISK MANAGEMENT CONSIDERATIONS Risk Management and Allocation The professional services agreement is the primary vehicle for allocating risks between the client and architect. Some of the ways that this can be done are as follows. Architect's Disclaimers of Responsibility and Liability Sometimes it may be easy for a person to read too much into an undertaking described in a contract. Disclaimers are used in contracts to secure a mutual understanding of the limitations of the architect's authority and responsibility. For instance, the preparation of cost estimates by the architect is fundamentally different from a contractor's under- taking in pricing a project for bidding purposes, and yet the contractor may use the same term—"estimate." Perhaps the single most frequent cause of disputes between architects and their clients over the past 150 years (if not over centuries) arises when bids are received that far exceed the architect's estimates. The client may feel that the architect's services have been of no value, and refuses to make payment for the services rendered, especially when the project has to be abandoned or radically reduced in scope. In order to avoid misunderstandings, it is important that architects make it clear that they are not guaranteeing the cost of construction or warranting that costs will not exceed the architect's estimate. Beyond that, the agreement should address what hap- pens if bids exceed the client's budget or the architect's estimate. Clients and members of the public may have unrealistic expectations as to the extent of the architect's control over the contractor during the construction process, and the extent of the architect's responsibility for the acts or failures to act of the con- tractor and its subordinates. The architect's review of shop drawings and other submit- tals has a limited purpose. Likewise, the architect's certifications of a contractor's applications for payment may be misconstrued. These undertakings by the architect are limited by carefully worded disclaimers in the AIA owner-architect agreements and construction contract forms in order to distinguish between the responsibility of the actor (contractor) and the reviewer (architect). Limitations of Liability One method of risk allocation that has become increasingly common over the last 40 years is the contractual limitation of liability. Such a provision may be an agreement by the client to limit any claim against the architect to an amount not to exceed the archi- tect's fee or some other sum, or the amount of available insurance coverage. The pur- pose of such a limitation is to make it clear how much potential risk the architect is prepared to shoulder for the fee it is to receive. Such provisions are often upheld, particularly when it is demonstrated that the limitation is part of an overall risk man- agement agreement that the parties have reached. Because limitations of liability alter the normal legal consequences, courts scrutinize them carefully, and they may be sub- ject to state law requirements. Architects are well advised to seek legal assistance in drafting such a provision. The AIA has not elected to include limitation of liability clauses in its standard form agreements, but sample language can be found in AIA Document B503TM-2007, Guide for Amendments to AIA Owner-Architect Agreements.

Chapter 5

CHAPTER 5 Organizational Development 5.1 Architects and the Law Donald W. Doeg, Esq., PE, LEED AP Architects, like other professionals, render their services in a difficult and complex environment. In order to be successful, knowledge of the basic components of the legal requirements that govern their profession is essential. LEGAL OVERVIEW Architects, like many other professionals, are confronted with legal issues on a reg- ular basis and thus must have a basic understanding of the law in order to success- fully practice architecture in today's complex world. A wide spectrum of sources creates legal requirements that dictate standards under which an architect must practice. These sources include, but are not limited to: statutes passed by federal, state, or local legislative bodies under their constitutional authority; administrative rules and regulations; building codes and standards; local ordinances; obligations established by contract between two or more parties; and law established by prec- edent of prior interpretations by the courts and administrative agencies regarding these requirements. In order to meet the applicable standard of care (which will be discussed in more detail later in this section) it is the architect's obligation and duty to practice in Don Doeg is a principal at Updike, Kelly & Spellacy, P.C., in Hartford, Connecticut, and the chairman of the firm's Construction Law and Design Professional Law practice groups. His practice is devoted to assisting clients in all aspects and stages of construction projects, includ- ing resolution of any dispute that may arise. 168 PART 2: FIRM MANAGEMENT compliance with all applicable laws, codes, and regulations. While most of the existing construction related law will apply to architectural practice in some manner, there are laws and other legal obligations that may not be applicable to particular parties, such as the architect. For instance, certain OSHA obligations are directed to the means and methods by which a contractor performs its work on a project. Unless the architect specifically assumes some specific obligation through its contract, those obligations may not extend to the architect. In a very broad sense, issues of law impacting architects can be broken into two general categories: party disputes and administrative proceedings. Party disputes, the focus of this article, occur when problems arise on a project, such as delays, failures, or potential failures relating to the work performed, fee controversies, and a long list of other issues. Problems don't always result in disputes and disputes don't always result in legal action. However, it is important to understand that the outcome of many of those disputes will rest heavily on whether the parties have met their legal obligations. Administrative issues and proceedings also play a very significant role in an archi- tect's life. Administrative issues arise from regulations developed to implement civil statutes and other legal requirements, such as the area of professional licensing. Typi- cally, this area of the law is overseen by public officials charged with ensuring compli- ance with certain laws, standards, and regulations. Under their statutory authority, state registration boards, code officials, and other administrative agencies are given the power to develop, implement, and enforce regulations needed to do their jobs. Indi- viduals and entities subject to regulation typically have opportunities to seek variances or appeal decisions through administrative channels (e.g., zoning boards of appeal). When administrative avenues have been exhausted, it is possible to seek review of administrative decisions in the courts. COMMON CLAIMS AGAINST ARCHITECTS If formal disputes arise relating to construction projects, attorneys will articulate their clients' claims in the lawsuits based upon various legal theories. The two legal theories most often alleged in claims against architects are "negligence" and "breach of contract." Negligence Overview of Negligence The existence of negligence is often more difficult to determine than whether a breach of contract has occurred. Under the law, there are four components that must be proven in order to prevail when asserting a negligence claim. They are as follows: • Duty. The architect must owe a legal duty to the person making the claim. In other words, the architect has a legal obligation to do something or refrain from doing something. • Breach. The architect fails to perform the duty or does something that should not have been done. • Cause. The architect's breach of duty is the proximate cause of harm to the person making the claim. That is, was the claimant injured or harmed as a consequence of the act and/or omission of the architect without any intervening cause? • Damage. Actual harm or damage must have resulted from the breach. Standard of Care In claims against professionals, including architects, it is often difficult or impossible for a layperson to unilaterally determine the duty component of negligence as defined above. As such, the law has established that that duty is to meet a standard of reasonable care for the performance of the work. The standard of care for an architect is generally defined as what a reasonably prudent architect would do in the same general locale, in the same time frame, given the same or similar facts and circumstances. The architect's legal responsibilities to a client are examined in light of what reasonably prudent archi- tects would have known and done at the time services were performed. In order to prove whether the standard of care has been met in a particular instance, the courts in most states require expert witness testimony. That is, since a layperson judge or jury would not have the requisite knowledge to determine what a reasonably prudent architect would have done under similar circumstances, each of the parties must retain an expert witness to provide an opinion as to the applicable standard of care for the case (what should or should not have been done by the architect). The judge or jury is ultimately charged with applying the standard of care that they believe is most credible to the facts of the case and determining whether the architect acted appropri- ately. Despite the thoughts of some owners and/or their attorneys, the law does not require perfection from an architect based upon a typical standard of care scenario. If given enough time, an experienced third-party reviewer would likely find some glitches or inconsistencies on any set of architectural drawings currently in existence. However, the mere existence of a few minor glitches or inconsistencies within project documents does not mean that the author has failed to meet the prevailing standard of care. Despite the existence of alleged "flaws," another expert may well opine that the stan- dard of care has nonetheless been met. The outcome of these types of disputes is dependent upon the particular facts in each case. It should also be noted that since architecture is an integration of art and building science, in virtually all situations there is more than one way to design a project or even a portion of a project. The fact that another architect would have used different details or materials does not necessarily dictate a violation of the prevailing standard of care. The successful practice of architecture is based upon reasoned judgment and skill and the law recognizes that even if there is differentiation among various designs, it does not necessarily mean any of them were performed negligently. The standards of care applicable to a particular project can be modified by contract or conduct. The most frequent example of this practice is an attempt by owners to elevate the standard of care. Rather than applying the typical standard of care described above, some owners' contracts seek to require a standard of "best practices," "highest prevailing standards," or some other similar language that elevates the mandated stan- dard of care for those projects. Architects should be wary of such heightened standards for at least two reasons: (1) the new standard may not be adequately defined in the industry, which may lead to a great deal of subjectivity and debate if a conflict ever arises; and (2) such standards may not be insurable under many typical professional errors and omissions policies. Each of the components of the aforementioned definition of the professional standard of care can be subjective in nature. Depending on the specific issue at hand, courts have given some latitude to the "in the same general locale" component. For instance, it would not be prudent for an architect in the southern states to incorpo- rate a large factor for snow load on the roofs of their designs, and, similarly, archi- tects in the north central states may not have the same concerns about hurricane loads as their colleagues in the southeastern states. Yet in other instances, courts have held that knowledge about basic design concepts and/or certain building products (both good and bad) should be known by architects throughout the country. This nationwide knowledge can be applied in several manners by the courts. For instance, the level of knowledge of certain questionable materials may be consistent through- out the country (e.g., use of asbestos or the risks of fire-retardant plywood) regardless of the size or nature of the specific architectural practice. In other situations, archi- tects with certain building type specialties (e.g., large sports stadiums, large muse- ums, and major hospitals) may have a national practice and may be compared to other architects with the same specializations, even if their respective offices are many states away. PART 2: FIRM MANAGEMENT 170 Organizational Development The "in the same time frame" component has also been heavily litigated. In gen- eral, the applicable standard of care is the one in place at the time of the project, not the one in place at the time of the dispute, which can be years later. As such, experts who subsequently assert that the prevailing standard should have resulted in the use of materials or techniques that were unknown or in their formative stages at the time of the project are not persuasive with the courts. Last, but not least, the "same or similar circumstances" component must also be strongly considered. For instance, the owner's budget will significantly impact a project. The standard of care must be determined for an architect working within the same budget, and under the same constraints, as were encountered for the underlying project. Alternatively, the "same or similar circum- stances" also includes the type of project and the experience of the architect. That is, a small local architectural firm designing residences in a certain locale will not be held to the same standard as a national architectural firm that routinely designs large and complex facilities such as sports stadiums or health care facilities. Unfortunately, meet- ing the relevant standard of care may not be enough to protect an architect from litiga- tion. A lawsuit can be commenced by almost anyone, in most states even by a party with whom the architect had no contractual relationship. However, if an architect is mindful during the course of the project of the standard of care that must be met, it will go a long way toward both diminishing the chances of the commencement of litigation as well as providing good defenses to the architect if litigation does arise. Modifying the Standard of Care by the Architect's Actions Even though the law requires only reasonable and prudent behavior, an architect can expand or raise the standard of care. This may be done either consciously or inadver- tently. The standard of care can be altered in literally countless ways by the architect's actions, such as promising a specific project result (e.g., that the roof or basement will not leak); taking on the contractor's responsibilities (e.g., dictating means and methods or designing something that the contractor was required to do as part of a performance specification); or promising a specific supplier performance result (e.g., delivery of certain materials by a specific date). It is important to realize that raising the standard of care increases the architect's liability exposure by making the architect responsible for more than the professional standard requires. Sometimes design professionals—under pressure from clients or contractors or propelled by their own drive for perfection—raise the standard of care that will be applied to their services without intending to do so. Damages Damages for negligence claims are typically measured by the standard of the plaintiff being entitled to compensation to remedy the negligence of the architect. If the case were litigated or arbitrated, the judge, jury, or arbitrator would have to decide what that compensation would entail based upon the arguments set forth by the litigants. For instance, if litigation resulted in a finding that an architect improperly designed a set of stairs that did not meet the applicable building code and those stairs were subsequently constructed in accordance with those faulty plans, an owner may be entitled to the cost of removing the stairs and installing another set of stairs that met the applicable code. Breach of Contract Claims Overview of Breach of Contract Claims "Breach of contract" claims are relatively self-explanatory. Such claims are based upon an allegation that a specific duty or duties existed pursuant to a contract between two parties and one of those parties either failed to perform that duty or did not perform it properly. For instance, an owner/architect agreement may specifically require that the architect provide record drawings at the conclusion of the project. If the architect fails to do so, a breach of contract claim may ensue. The elements of a breach of contract action are the formation of an agreement, performance by one party, breach of the agreement by the other party and damages. To form a valid and binding contract there must be a mutual understanding of the terms that are definite and certain between the parties. Each must be found to have been based on an identical understanding by the parties and an agreement must be definite and certain as to its terms and requirements. Contractual Protections Logic dictates that the quality of the architect's contract will have a large impact on the potential claims and defenses against the architect. It is imperative that the architect spend time on each and every contract to understand and negotiate each of the clauses. Each and every contractual clause may prove to be either a significant defense available to the architect or a huge detriment. Owner/architect contracts can be either written or oral. Written contracts are pre- ferred by almost everyone in the design industry. Perhaps the largest benefit of a writ- ten contract is the fact that it preserves a written articulation of the agreement between the parties, including all critical components, which can be referenced if a subsequent dispute arises. Coming to a common understanding of the terms of the original agree- ment often proves very difficult if an oral agreement is in place and a dispute subse- quently arises. In addition, the applicable statutes of limitation may vary depending upon whether the contract was in written or oral form. It is important to recognize that written architectural contracts take many forms, depending upon the particular project and parties. The most common construction con- tracts in the industry are form contracts that are published by various construction indus- try groups, the industry standard being the AIA documents. The provisions included in these form contracts have been formulated over many years' use in the industry. While many parties opt to use the industry forms "as is," there are other situations in which one or both parties may seek to modify one or more of the provisions, sometimes signifi- cantly. In addition to the industry form contracts, there are many other types of contracts prepared by specific owners, design professionals, or others that also are used. The following are some key provisions that, if properly included in an architectural contract, will go a long way toward protecting the architect. The Absolutely Essential Terms: Whether an agreement is written on the back of a napkin or consists of a long-form agreement, it is absolutely critical that the agree- ment include a written summary of the project scope, the time frame in which it will be performed, and the fee agreement for the project. • The Project Scope: It is critical to describe the scope of work to be accomplished. In some instances, it is equally or even more critical to describe any exclusions (e.g., in some instances the architect does not plan to be involved in the construction admin- istration phase, but the owner may not comprehend that fact). • The Project Time Frame: Many disputes have occurred because the owner and archi- tect did not specifically discuss the time frame for the project and assumed vastly different parameters for the start and completion dates (and other critical mile- stones) of the work. • Project Fees: It is essential that the architect and owner agree on the type of payment (e.g., lump sum, hourly, not to exceed, etc.) and the time frames for the payment (e.g., monthly, one payment at end of project, percentage of project completion). Other Key Terms: The following are a few of the many contract terms that can have a significant impact on an architect's exposure should problems arise during the course of the project. These terms are but a few of the many critical contract provisions that may exist for a particular project: • Limitations of Liability Clauses: These clauses will limit claims by the owner against the architect to a certain amount (e.g., a set dollar limit or the balance of the PART 2: FIRM MANAGEMENT ▶ Defining Project Services (15.1) addresses the centrality of scope definition in developing effective agreements for professional design services. ▶ Services and Compensation (15.2) discusses the variables for architects to consider in setting compensation, as well as various methods of compensation and strategies for getting paid. 172 Organizational Development remaining insurance policy) should a dispute between the parties arise. These clauses have been enforced in many, but not all, states. • Mutual Waiver of Consequential Damages: This is a standard clause in many AIA form contracts, but is often stricken by owner's counsel. Consequential damages are those that are not direct damages, but only arise as a consequence of some act or omission. In the prior example, if an architect failed to design a set of stairs to code and they subsequently had to be replaced prior to a certificate of occupancy being granted, the cost to do the replacement work would be direct damages. The delay in the opening of the facility would be consequential damages and, if the waiver was part of the con- tract, the owner would not be able to collect damages of this type from the architect. • Indemnification Provisions: Many owners attempt to add indemnification clauses to the agreements with their architects, which, in essence, are a contractual require- ment that the architect reimburse the owner for damages caused by the architect's acts and/or omissions. It is absolutely critical that the architect confer with his/her insurance broker and/or attorney prior to agreeing to any such clause. Many of these clauses, as proposed, are so broad and onerous that they are not insurable by the architect's professional malpractice carrier and therefore put the architect at tremendous risk if the language is not modified. Changes in Scope of Service It is equally important that architects properly document any changes to their agree- ment with the owner during the course of the project. Almost every project is a very dynamic process, with changes occurring rapidly that impact the architect's scope of work and fee as well as the project schedule. Just as it is critical to properly document the agreement between the parties in the initial contract, it is equally important to document any subsequent changes during the course of the project. If a subsequent dispute arises, written change orders documenting any changes to the original agree- ment will be essential to allow a court to determine the agreement between the parties. It is essential that the architect documents these changes and brings them to the atten- tion of the owner. If possible, a formal change order should be prepared and signed by all parties. In some instances, it may be difficult to get the owner to sign off on a change order during the course of a project. In those instances, it is critical to nonetheless document the changes in writing and send it to the owner advising them that a change has been made to the contract scope/time frame/fee and outline those changes. That documentation will be very helpful in proving the changes were known and agreed upon should a subsequent dispute arise. Damages Damages for breach of contract claims are typically measured by the standard of the plaintiff being entitled to compensation that would put them back in the position they would have been in if the contract had not been breached. If the case were litigated or arbitrated, the judge, jury, or arbitrator would have to decide what that compensation would entail based upon the arguments set forth by the litigants. In the previous exam- ple regarding the failure to produce record drawings a judge, jury, or arbitrator may decide that the owner is entitled to the cost of having another design professional prepare those documents. Vicarious Liability In General Agency relationships are common in everyday practice. That is, one party acts on behalf of another relating to a particular project or task. However, certain obligations and liabilities arise out of these relationships. The world of construction is no different. For instance, an architect's employee acts as an agent of the architect on a project. A corporate officer acts as an agent of a corporation in signing an agreement for professional services. Partners are agents and, under the law, also principals for each other. That is, partners are agents when they act for other partners (principals) and principals when their other partners (as agents) act for them. Under an owner-architect agreement, the architect may have an agency relation- ship with the owner for certain designated activities. The central question in agency relationships is the scope of authority the agent has been granted to act on behalf of the principal. Thus, architects acting as agents of the owner need to know the limits of their authority in dealing with the contractor and other third parties. Firms will want every person who can be perceived as acting as the firm's agent to understand the lim- its of his or her agency authority. Staying within the limits of their authority is the best protection agents can give themselves and the principals they serve. For Consultants In many typical projects, the architect enters into a contract with the owner for all, or virtually all, of the design services for the project. The architect, in turn, retains consul- tants (typically engineers in various disciplines) to perform portions of the overall scope of design work. Consultants who perform professional services on behalf of architects under the terms of an architect/consultant agreement are independent consultants. In those situations, the consultant may sometimes act as an agent of the architect. While the law will hold these consultants to the standard of reasonable care appli- cable to their professional expertise, the architect may be found to have liability for the consultants should an issue arise during the course of a project. In essence, many courts have found that the architect was contracted to provide the entire scope of design services and therefore has liability if a problem arises. While the architect may likely have a claim against its consultant for indemnification in such instances, such a claim may not fully exonerate the architect for future claims by an owner if, in the interven- ing period, the consultant has become financially unable to take responsibility or the consultant's insurance coverage proves to be inadequate. In some instances the owner, not the architect, engages certain consultants and the architect's obligations with respect to those consultants may be limited. Typically, the architect has far more limited exposure relating to the acts and/or omissions of those consultants. In these types of situations, the terms of engagement should be clearly stated in writing. Architects usually are not responsible for project consultants hired directly by the owner unless the architect agrees to this responsibility in the owner-architect agree- ment or acts in a way that makes the architect responsible, such as signing a Certificate for Payment or a Certificate of Substantial Completion for the consultant's work. For Employees Similarly, the architectural firm is responsible for its employees during the course of a project. The Courts will generally hold the architectural firm itself responsible for the acts and/or omissions of each employee. A possible exception to this responsibility is if the employee clearly acts beyond its role and tasks required of it by the architectural firm. For instance, if, unknown to the architectural firm, the employee sells illegal drugs while on the job site, the architectural firm will likely not be culpable for those acts. Alternative Project Relationships The types of relationships between members of the construction community seem to constantly evolve and expand. In addition to the conventional owner, design team, and construction team relationship, a number of other alternative relationships are being employed in the industry. Two examples of these alternative relationships are contractor-led design-build and joint ventures. Contractor-Led Design-Build: In this variation of the conventional construction proj- ect delivery, the owner contracts with one entity, the contractor, to provide all design and construction services for the project. The architect typically subcontracts directly PART 2: FIRM MANAGEMENT ▶ Project Delivery Methods (9.1) presents an overview of available models for project delivery. 174 Organizational Development with the contractor to provide services for the project. While this type of arrangement may offer many advantages on certain types of projects, it also raises certain potential risks to the architect that do not exist with the more conventional project arrangement. For instance, the conventional construction project arrangement is set up, in part, to provide a layer of checks and balances that protect the owner. In such situations, the architect typically has certain obligations to identify problems relating to the contrac- tor's work and the contractor has similar obligations regarding the architect's work. These obligations may not exist, or at a minimum are severely compromised, in a design-build relationship. Many architects have been placed in very difficult situations when their client, the contractor, wishes to perform work in a way the architect may not agree with. The drafting of the agreements in these types of arrangements is criti- cal in order to protect the architect from these types of problems. Joint Ventures: It is common for the courts to consider the parties to a joint venture to be jointly and separately responsible for the actions of the joint venture. That is, if an injury occurs because of the negligence of either party to the joint venture, the joint venture can be sued collectively or the parties to the joint venture can be sued indi- vidually. Therefore, professional responsibility and liability should be carefully allocated in contractual agreements between the parties to a joint venture. Because many states qualify how and under what circumstances professional responsibility may be shifted to another party, legal advice should be sought when preparing such agreements. Third-Party Actions In addition to their obligations for damages to the party with whom they contract, architects can also be held liable for negligent acts, errors, or omissions that physically injure or damage third parties with whom the architect has no contractual relationship. These third parties include construction workers, passersby, and occupants or users of projects. The obligations to third parties stems from a variety of sources. In many states, statutes, regulations, and prevailing case law requires architects to safeguard life, health, public safety, and property and to promote the public welfare. In fact, many of those states use this obligation for licensed architects as one of the key considerations to justify the licensing and registration statutes themselves. Prior to 1956, the legal concept of privity barred third-party actions. Privity required the litigating parties to prove they had a direct contractual relationship with each other and that the injury occurred in the course of that relationship. Since that time, the courts in many states have, with regard to physical injury and in some cases property damage, extended the group of individuals to whom architects may owe duties to include third parties whom architects can reasonably foresee will depend on them to provide services in a non-negligent manner. However, the law differs from state to state regarding the issue of privity and it is important to get legal advice to determine the law that applies to each particular project. The types of potential third-party actions vary widely. For instance, a worker hurt on a construction site may opt to sue a wide range of entities involved in the project, including the architect, despite the fact that they had no direct contract with any of those entities. Alternatively, a visitor to the facility after completion may option to commence litigation against the architect, owner, or others if they are injured during their visit due to alleged design or construction defects.