Solid risk management can make or break a project - and it all starts with what contracts you draft or sign. To ensure successful outcomes, craft an agreement that goes beyond just using the standard form; consider adding details to anticipate unexpected detours.
This article will cover 10 areas of your contract that could use some revamping:
Standard of Care
Scope of Services
Project Outline
Build Phase
Project Owner Responsibilities
Indemnification
Dispute Resolution
Termination
Limit of Liability
Waiver of Consequential Damages
Read on for more tips to help set your design firm up for success!
Standard of Care:
What is The Standard of Care for design professionals?
The standard of care for architects and engineers is the level of skill and care that a reasonably competent professional in the same field would use under similar circumstances. The standard of care includes adhering to professional codes of ethics and complying with all relevant laws and regulations.
This would involve designing safe, functional, and compliant with building codes and zoning laws while also considering the aesthetic and environmental impact of the design. In terms of engineering, this would involve designing systems and structures that are safe, efficient, and meet the intended purpose.
Why should you care?
As a professional, you're responsible for providing a service that meets the levels of quality and cares usually expected in your area. Establishing a Standard of Care clause within your agreements is vital to set expectations with clients from the start properly - not only will it help protect yourself against unexpected expenses or conflicts, but it also allows both parties to establish clear ground rules throughout each engagement.
Such an agreement should outline essential components, such as confirming services meet all applicable standards while noting there are no implied warranties surrounding these offerings at any point during their provision. It should be noted that expressed warranties or guarantees are excluded from most, if not all, Professional Liability Policies for design firms.
When signing another party's agreement, you will want to have this on your radar since contracts might have buzzwords that aren't so obvious. Your Professional Liability insurance carrier may be able to assist here if you need a second pair of eyes.
Scope of Services
What is your scope of services?
Perhaps you've sent an email to your client with a blurb of what they should expect. Well, you probably already know what your scope of services is. Specificity is key. If you had to review your contract of assistance in your agreement, do they actually nail down precisely what you've agreed to with your client?
Let's pretend that design firms don't operate this way and get a better idea of how this should look in a contract.
Why should you care?
A well-defined scope of services is crucial for achieving a successful and profitable project outcome. It's noteworthy, thattthat your range of services outlines both the deliverables and the schedule of the To be specific, your content should include the following:
Clear identification of the services that will be performed as part of the negotiated fee (essential services)
A list of additional services that can be provided at an extra cost
Services that will not be provided as part of the agreement
Services that will be performed by other sub-consultants. A clear scope of services will ensure that all parties understand what is expected. To avoid any confusion or misunderstandings that could arise during the project. This can happen when you coordinate sub-consultants who are being hired directly through the project owner.
Project Outline
A Breakdown of your Project Description:
Your contract must contain as much detail as you and your client have available when you initially establish your agreement. Comprehensive insight into the aim and expanse of the assignment enables cohesive exchange between the two involved parties.
This will avoid ambiguity or confusion from either side of the table from the moment the arrangement is contracted through to its completion.
A robust knowledge base of what is expected avoids potentially flawed assumptions being made about project obligations initially established or future outputs throughout.
Creating an apt channel for clear communication before, during, and after initial contract execution has concluded. Promoting a faultless understanding between parties promotes trust in shared ventures.
Here are some ideas to create a clear project description in your contract:
Program: At the foundation of every successful project, there must be a comprehensive understanding of the program requirements, which outlines what is needed for the outcome.
Owner project requirements: Comprehensive technical knowledge and owner project requirements enable the project team to combine all elements into a cohesive plan that achieves current objectives.
Project Team members: Expert collaboration and consultation amongst the project team are essential to drive the successful implementation of strategies that reflect budgetary guidelines and timely delivery preparation.
Construction Delivery Method: Delivering quality outcomes requires skill in planning methodology through the innovative application of prearranged construction delivery methods.
Budget: Appropriate budget allocation for cost-effective processes is integral to ensure successful results within limitations.
Schedule: Project success depends on clear timelines with precise mapping of scheduled components throughout the duration. Close monitoring needs to enable real-time tracking changes where adjustments might be required.
Build Phase
Your design comes to life - Now what?
During the construction process, your creative designs come to life with the help of skilled laborers pressing hard to meet deadlines. But as things get real and work progresses, potential claims often start cropping up as your professional liability exposure increases.
Though risks can sometimes seem intimidating, with correctly contracted services including surveys, site assessments, and proposal evaluations based on industry standards. This brings much-needed clarity and is indispensable to safeguarding against surprises down the line.
Knowing that a thorough professional analysis has been conducted often helps allay misgivings concerning the construction completed so far or yet to be started. So good construction phase services must always be procured for desired results, and problems that may arise later in the process can be successfully managed.
How do we manage or mitigate our risk via contract when we approach the build phase of the project?
Site Observations: Architects, engineers, and other relevant stakeholders must clearly define the amount of attention they will need to pay to a project. At which frequency must they return focus and concentration? How often is an informed opinion desired to keep projects on track with institutional goals and objectives.? Expectations such as these need to be met to complete projects successfully. Being able to predict observations along the journey or timeline is essential when it comes to managing stakeholders' expectations. Once this frequency and quantity threshold has been determined upon, it needs to be documented and agreed upon by all involved parties so that everyone understands precisely how progress toward the result would look.
Expectations for submittals and RFIs: It is important to establish a reasonable timeline for when progress should be reported. A well-planned timeline should automate processes, and reduce guesswork and communication gaps during the implementation stage, enabling smoother operations throughout the contract's duration. Requests for information should be answered within architect/engineer contracts. Having things such as submittals, RFIs, and timeline updates carefully written into a contract can help prevent delays that decrease the overall efficiency of a project and fulfills tasks that would otherwise need to be monitored by stakeholders constantly. This can help keep projects closer to their deadlines while holding each party accountable for work completion.
Means and methods of construction and Job site Safety: There should be a transparent section in your agreement that disclaims your design firm's responsibility for means and methods of construction and job site safety. We all know this is an area of a contract that we're sure to include in some way. A clear outline of this in your agreement when rolling out the build phase is obvious, but we've seen agreements before that don't have this language in there at all. If you're a design firm being hired by another design professional or contractor, look out for language in the agreement that alludes to assuming liability for means methods of construction.
Hold Harmless Clause: As an architect or engineer, it is essential to include a self-executing hold-harmless clause in your agreement. This clause can be a safety net that will protect you should the situation arise that the client later cuts your construction phase services for any reason. With this protection, you can ensure that your interests are secure and will not be hampered due to financial setbacks or legal procedures in the customer's universe.
Project Owner's Responsibilities
Successful implementation of your scope depends entirely on the actions taken by the client. Agreements generated by owners typically elaborate precisely on which responsibilities design professionals must undertake. However, they simultaneously overlook their required actions.
Project information should be clearly communicated, including program, objectives, schedule, budget, and contingencies.
A designated representative with decision-making authority should be identified on the client's side. Prompt decision-making and approvals are necessary.
Services of consultants, such as Structural Engineers and others, hired directly by the client can be utilized with the understanding that the information provided can be relied upon.
Indemnification Clauses
What is an Indemnification in simple terms?
This is probably a term you've heard ad nauseam. Let's break this down in simple terms.
Indemnity clauses are an essential part of the contract because it helps make sure that the project is completed successfully and that the person who hired the architect is protected from any unexpected costs. Indemnification clauses are like a safety net for the person who hired the architect, so they don't have to pay for any problems that the architect or engineer caused. Suitable for the project owner, but what about the design professional?
What is an indemnification clause in a contract?
An indemnification clause or an indemnity agreement is a part of the contract that says the design professional will take responsibility for certain things that might go wrong during the project and will pay for any damages or losses that happen because of their mistakes.
Indemnification clauses are strategies to "Transfer Risk," a fancy term for passing the buck to another party. If something goes wrong, the design professional is held responsible for fixing it and paying for any damages. This can be unfair for the design professional as it puts them at risk for things that are outside of their control.
As a design professional, you want to avoid agreeing to contracts that have this clause and should make a diligent effort to have it removed.
What does it mean to indemnify someone?
An example of indemnity for a design firm would be if an the A/E supervises the construction of a building, and it is later discovered that the building does not comply with local building codes or regulations. In this case, the design firm may be held liable for any damages or losses that result from the non-compliance, such as fines, penalties, or additional construction costs to bring the building up to code.
What is an indemnity clause example?
The architect shall indemnify, defend, and hold harmless the Owner from and against any claims, demands, suits, or judgments, including reasonable attorneys' fees and costs, arising out of the architect's negligent acts or omissions in the performance of services under this agreement.
You can try to negotiate the terms of the indemnification clause to be more specific and narrow it down to only your mistakes, limit your liability to a certain amount, or include a cap on your liability.
Overall, indemnification clauses can be a source of potential liability for design professionals, and it's essential to understand the implications and make a diligent effort to have them removed or modified in your agreements.
What if my client doesn't want to remove the indemnity clause?
We have some ideas that may mitigate the risk you take in theory. One way to go about this is to only say that you will take responsibility for the client and the people who work for them, not others who might be working on the project.
Another way is to ensure that you will only take responsibility for things you did wrong and that the amount you have to pay is fair and makes sense. It's also important to not say that you must help the client fix things if something goes wrong.
It's better to say that you can pay for a lawyer if it's needed and it's allowed by the law. It is important to have legal advice before signing any contract or negotiating the terms of the indemnification clause.
Should I agree to an indemnification clause?
Ultimately, whether or not to agree to an indemnification clause is a decision that should be based on a careful evaluation of your specific circumstances, the terms of the clause, and the potential risks involved.
Indemnification clauses can shift a significant risk to the party being indemnified and result in large losses if something goes wrong. However, they can also provide a measure of protection and certainty for both parties in case of a dispute or lawsuit. This is why indemnification clauses are added to contracts.
Before agreeing to an indemnification clause, it's essential to review the terms of the clause and consult with a lawyer who specializes in contracts and indemnification clauses. They can help advise you on the potential risks and whether the clause is fair and reasonable.
Consider negotiating the terms of the clause to protect yourself better and limit your potential liability. This may include determining the scope of the indemnification, capping the amount of damages you will be responsible for, or excluding certain types of damages from the indemnification.
Limitation of Liability Clause
What is a Limitation of Liability clause?
A limit of liability clause, also known as a liability cap, is a provision in a contract that limits the number of damages that one party can recover from the other party in case of a breach of contract or other legal claims. This clause is commonly used in contracts involving professional services, such as architectural or engineering services, to limit the exposure of the professional to potential liability.
The limit of liability clause typically specifies a maximum amount of damages that the design professional will be responsible for, regardless of the damages incurred. This can be a fixed dollar amount or a percentage of the total contract value. The clause may also exclude certain types of damages, such as consequential damages or lost profits, from the calculation of the liability cap.
Why do I need a Limit of Liability clause in my contract?
The purpose of a limit of liability clause is to provide a measure of predictability and certainty for both parties in terms of potential financial exposure. This helps mitigate the risk of large and unpredictable damages awards in the event of a dispute or lawsuit. For the professional, it helps to limit the potential financial exposure and can provide protection against protect significant, unexpected damages awards.
For the client, it provides a measure of protection against significant, unexpected damages awards and also provides a sense of predictability and certainty with respect to the professional's potential liability.
Premium Credit in your Errors & Omissions Insurance
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Limit of Liability clauses are often subject to legal challenges and can be void in some jurisdictions. As mentioned, it is essential to have legal advice before including such clauses in a contract and to review the laws of the jurisdiction where the work will be performed.
Dispute Resolution
Problems, issues, and disputes are a real danger when completing projects. You must communicate with your client about these matters and document the approach used for handling them. A solid dispute resolution strategy allows for quicker resolution of any issues or claims, thus preventing delays in project completion. It's preferable to have specific processes described in the contract to address disputes, rather than waiting for decisions by the court should disagreements occur down the line.
Ensuring proactive care of potential conflicts can alleviate extra unwanted stress so that projects can efficiently be completed on time or ahead of schedule.
Both parties should meet to discuss resolving issues early on. It's better to be proactive than reactive.
If your discussion to find a solution fails, you have your contract with your client to fall back on. Your agreement should specify that formal mediation would be the next step to resolve. This can be an effective way to mitigate legal costs.
If both discussion and formal mediation fail, your agreement should outline and direct the parties involved to a "binding dispute resolution" such as litigation.
Termination
What's your plan if you have to "fire" a client?
You can stop working if a client does not pay fees or does not do their oblige to their side of the agreement. But this should not be done without a clear notification process in the contract agreement first. The client must also agree to pay for work already done and agree to an adjustment in schedule and fees before work resumes.
If work is terminated, there must be a discussion about what the client can and cannot do with the work that has been completed. Your agreement should have this outlined, below are a few boxes you can check off related to suspending or terminating your professional services agreement with your client:
Notification: Define a straightforward termination process in the contract to avoid misunderstandings and disputes. Include conditions, notice period and procedures for termination. This will help to minimize the potential for disputes or legal issues arising from termination.
Disclaim Liability: Exclude responsibility for delays and implement a fair adjustment to the schedule and fees upon the continuation of services.
Client's Rights: Outline the client's rights and limitations regarding the use of your services and materials in the event of termination.
Limit of Liability
What's a limit of liability clause?
Limitation of Liability clauses are used in Architect/Engineer agreements to define and limit the amount of financial responsibility for which the architect or engineer may be held liable in the event of a claim or lawsuit arising from the project.
These clauses are used to balance the risks and rewards of a project, by ensuring that the client, who benefits the most from the project, also shares a fair share of the risks.
Why do I need them in my agreement?
They are typically used to limit the architect or engineer's liability to a specific dollar amount or a percentage of the contract value, and to exclude certain types of damages, such as those resulting from intentional or fraudulent acts. Limit of liability clauses are also used to ensure that the architect or engineer's liability is reasonable and fair for both parties.
Limitation of Liability clauses are potentially enforceable in most states, so it's best you get your agreements reviewed by legal counsel. In the meantime, here are ideas to keep in mind when crafting this part of your agreement:
Clarity: It is essential to make the Limitation of Liability clauses in the contract clear and conspicuous. In certain jurisdictions, using capital letters and/or bold font may be required to emphasize these clauses.
Initials: When creating a contract, it may be beneficial to include a requirement for initials next to the Limitation of Liability clause to show that the clause was discussed and agreed upon somewhat.
Setting Limits: When setting the limit of liability, it is possible to consider the amount of insurance coverage required by the contract, which might be lower than the limits of your insurance policy.
This way, it takes into account the reduction of policy limits that might occur due to expenses or other claims. The limit of liability can be set as a fixed or a specific amount or as a percentage of the total fee, whichever is higher.
Waiver of Consequential Damages
What's a Waiver of Consequential Damages?
A Waiver of Consequential Damages is a provision in an architect and engineer's contract that limits or excludes the liability of the architect or engineer for certain types of damages that may result from a breach of contract. These types of damages are known as "consequential damages." They ca include lost profits, lost revenue, or other indirect damages that are a result of, but not directly caused by, the architect or engineer's failure to meet their standard of care.
Why should I have this in my agreement?
A waiver of consequential damages serves to limit the amount of damages that the architect or engineer may be liable for when performing their professional services. It is important to note that while some jurisdictions may allow such waivers, they may not be enforceable in all jurisdictions, and it is best to check with a legal professional. Below are some ways you can add this to your contract template:
Make sure the waiver of consequential damages is fair for both sides by having it apply to both you and your client, so neither of you can claim such damages against the other.
Consider having the waiver cover any possible disputes or claims that may come up in the contract, no matter what legal reasoning is used.
If you can't agree on a waiver, be ready to put in some effort to document all the reasons for delays during construction so that you don't get blamed for them.
To summarize, an effective risk management plan is a critical component for project success. Understanding the concept of standard of care and the scope of services included in the project is going to help establish a successful foundation for all associated tasks. They will help ensure that everyone involved can reach a satisfactory outcome and will help establish a successful foundation to the project. Thoughtful negotiations, agreements, and contracts should be taken into account to make sure all parties involved are rewarded in the most equitable way possible.
Legal items like indemnification, dispute resolution, termination, and many others should be discussed thoroughly and agreed upon beforehand to guarantee that both the Owner of the project and those providing services comprehend precisely what needs to be achieved. Taking these steps before beginning a construction or renovation project can set you on your path to attaining all-around blissful results.
A big part of having a solid risk management plan for your architecture or engineering firm involves working with an attorney who has a deep understanding of the industry. This is because the legal landscape of architecture and engineering is complex and constantly evolving. An attorney with specialized knowledge can help you navigate legal issues specific to your field. We advise that before making any revisions or additions to your contracts, you seek legal advice before putting the agreement in force.
Have questions about the current agreements you use? Feel free to email us @ info@hardcoverins.com.