schinnerer’s expanded contract guide part i – contract law and professional liability 1.1...

Schinnerer’s Expanded

Contr act Guide

A Resource Tool from Schinnerer and CNA

for Complex Projects

Schinnerer’s Expanded Contract Guide for Complex Projects is one of the many risk management toolsavailable to design professionals insured in the professional liability program administered for CNA by VictorO. Schinnerer & Company, Inc. More publications, resources, and online tools are available to Schinnerer andCNA policyholders at our website, www.PlanetRiskManagement.com

Schinnerer and CNA have developed a unique range of professional liability coverages and risk managementservices to assist professional service firms of all sizes respond to the needs of their clients and provideservices in a manner that meets their particular practice management goals.

For more information about the Schinnerer and CNA programs, please contact your independent insurancebroker, or call Victor O. Schinnerer & Company, Inc. at 301/961-9800, email us [email protected] or visit our website at www.Schinnerer.com.

Throughout this publication, we reference the consensus documents of The American Institute of Architects(AIA) and the Engineers Joint Contract Documents Committee (EJCDC). These documents are copyrighted bythe AIA and EJCDC, respectively, and may not be reproduced or excerpted from in any way without expresswritten permission of the AIA or EJCDC. To order AIA documents, visit the AIA’s website at www.aia.org or call800/365-2724. To order EJCDC documents, visit their publisher’s website, the National Society ofProfessional Engineers (NSPE), at www.nspe.org or call 800/417-0348.

This publication was created and is distributed by Victor O. Schinnerer & Company, Inc. Policyholders in theSchinnerer and CNA programs are granted a nonexclusive license to reproduce this publication in whole or inpart for any internal educational purpose and to reproduce the subject issue pages for the education ofpolicyholder clients and their legal and insurance advisors. Except for the license granted to eachpolicyholder, no other license or right shall be deemed granted to reproduce this publication, store any part ofthis publication in an electronic retrieval system, or transmit any part of this publication in any form or by anymeans without prior written permission of Victor O. Schinnerer & Company, Inc. For more information, contactPaul Riccardi, publications manager of construction industry group, at the Schinnerer offices.

Copyright 2009 Victor O. Schinnerer & Company, Inc.Two Wisconsin Circle, Chevy Chase, Maryland 20815-7022

Voice: 301/961-9800 ● Fax: 301/951-5444 ● Email: [email protected]: www.Schinnerer.com or www.PlanetRiskManagement.com

Preface

Part I – Contract Law and Professional Liability1.1 Introduction1.2 Essential Elements of a Contract1.2.1 Mutual Assent 1.2.2 Consideration1.2.3 Legal Capacity to Contract1.2.4 Legally Permissable Objective1.3 Express and Implied Contracts1.4 Prime Contracts and Subcontracts1.5 Contract Terms1.6 Contract Interpretation1.7 Waiver1.8 Contract Modification1.9 Contract Discharge1.10 Professional Liability1.10.1 Liability in Contract1.10.2 Liability in Tort1.10.3 Misrepresentation1.11 Liability for Employees, Consultants, and Joint Venturers1.12 Types of Damages1.13 Defenses to Liability Claims1.13.1 Statutes of Limitations and Statutes of Repose1.13.2 Comparative Negligence and Contributory Negligence1.13.3 Immunity1.13.4 Betterment1.13.5 Waiver and Estoppel1.14 Effect of Form of Business Entity of Liability1.14.1 Sole Proprietorships1.14.2 Partnerships and Joint Ventures1.14.3 Corporations1.14.4 Limited Liability Companies and Limited Liability Partnerships1.15 Summary

Part II – The Professional Services Contract2.1 Introduction2.2 Content of Professional Services Contracts2.2.1 Introductory Provisions2.2.2 The Body2.2.3 Concluding Clause and Attachments2.3 Types of Professional Services Contracts2.3.1 Letter Agreements2.3.2 Purchase Orders2.3.3 Standard Form Agreements2.3.4 Modified Standard Agreement Forms2.3.5 Custom Agreements

TABLE OF CONTENTS

2.4 Project-Specific Terms2.4.1 Project Description/Definition 2.4.2 Scope of Services2.4.3 Schedule and Time for Performance2.4.4 Terms and Timing of Payment2.5 General Condition Terms2.5.1 Standard of Care2.5.2 Compliance with Laws2.5.3 Schedules, Budgets, and Estimates or Opinions of Cost2.5.4 Intellectual Property2.5.5 Copyright 2.5.6 Confidentiality 2.5.7 Indemnity Provisions 2.5.8 Limitations of Liability2.5.9 Insurance Requirements2.5.10 Suspension and Termination of Services for Non-Payment2.5.11 Dispute Resolution2.5.12 No Third-Party Beneficiaries2.5.13 Liquidated Damages Provisions2.5.14 Contingent Consent to Assignment2.5.15 Cost Recovery and Safe Harbor Provisions2.5.16 Prevailing Party Provisions2.5.17 Severability2.5.18 Survival2.5.19 Applicable Law2.6 Coordination of Prime Contracts and Subcontracts2.7 Performing Services Without a Written Agreement2.8 Summary

Part III – Large Firm Specific Risk Management3.1 Introduction3.2 Need for Consistency Across Different Offices3.3 Contractual Issues related to Specific Professional Services3.3.1 Interiors Design3.3.2 Landscape Architecture3.3.3 Land Surveying3.3.4 Construction Management3.3.5 Environmental Remediation3.3.6 Sustainable Design3.3.7 Facilities Management/Operation & Maintenance3.3.8 Commissioning3.3.9 Condominium Design3.4 Contractual Issues Related to Specific Project Delivery Methods3.4.1 Fast Track3.4.2 Design Build3.5 Contractual Issues Related to Scope of Services Issues3.5.1 Verification of Client-Supplied Information or Services3.5.2 Coordination of Client’s Separate Consultants3.5.3 Obligations to Lenders or Other Third Parties3.5.4 Design Phase-Only Services 3.5.5 Peer Review or Plan Review Services

3.6 Federal Work3.6.1 Federal Acquisition Regulations3.6.2 Multiple Award Schedule Contracts 3.7 International Work3.7.1 Authorization to Practice/Licensing3.7.2 Standard Contracts3.7.3 Dispute Resolution3.7.4 Payment Provisions3.7.5 Taxes3.7.6 Codes3.7.7 Legal Systems and Standards of Care3.8 Emerging Issues3.8.1 Building Information Modeling 3.8.2 Project Websites3.8.3 Integrated Project Delivery3.8.4 Digital Files 3.8.5 Patent Issues

Part IV – Pre-Contract Risk Management4.1 Introduction4.2 Evaluation of the Prospective Client4.2.1 Financial Capability4.2.2 Risk Aversion of the Prospective Client4.2.3 Composition of the Client4.2.4 Client Expectations4.2.5 Third Parties Relying on the Services 4.2.6 Prior Experience with the Prospective Client 4.3 Evaluation of the Prospective Project4.3.1 Project Characteristics4.3.2 Site-Specific Issues4.3.3 Services to Be Performed or Furnished4.4 Evaluation of the Prospective Contract4.4.1 Basic Contract Issues 4.4.2 Third-Party Risk Transfer/Insurance4.4.3 Subcontract Issues4.5 Contract Negotiation4.5.1 Proposal-Phase Communications4.5.2 Preparation for Negotiation4.5.3 The Negotiation Process4.6 Summary

Exhibit A – Pre-Contract Risk Management Checklist

Exhibit B – Terms and Conditions Review Guide

PREFACE

Large design firms face particular liability risks in the marketplace. They have a higherprofile, are involved in more complex projects, and are generally recognized in their

communities as being successful entities. Large firms typically have a diverse practicewith different services and a multitude of different project delivery vehicles offered. All ofthese present unique risks—risks that large design firms have often asked us to address ina risk management publication. This publication, Schinnerer’s Expanded Contract Guidefor Complex Projects, is our response to this need. We have used our highly acclaimedManaging Risk Through Contract Language publication as a starting platform for thispublication, expanding the content and adding sections that address the specific risks oflarge design firms. This publication has been designed to serve as an essential riskmanagement guide to the contracting process and can also be used as a resource for anin-depth treatment of certain subject matter.

Design and construction projects involve a high degree of contracting (i.e.,outsourcing) under conditions of high uncertainty. The result is often a complex andconfusing web of business and legal relationships among a cast of project players thatincludes project owners, developers, design professionals, contractors, subcontractors, andmaterial and equipment suppliers, along with a supporting cast of lenders, insurancecompanies, and lawyers. All of these relationships create the need to sort out and allocatethe respective roles and responsibilities of all of the participants in a coordinated andeffective fashion while somehow addressing the uncertainties inherent in the design andconstruction process. Failure in this regard is a significant source of friction and disputes,and ultimately neccesitates the use of some outside entity to resolve problems—often atgreat expense to the various parties.

Notwithstanding the availability of well-drafted families of coordinated standardcontract forms, such as those published by The American Institute of Architects (AIA) andthe Engineers Joint Contract Documents Committee (EJCDC), many of the parties’contracts are poorly coordinated, not only one to another but internally as well.Nevertheless, their contracts are promises that the law will enforce.

Of course, a further complication to the contracting and project delivery process is thefact that the opinions, reports, and construction documents prepared by designprofessionals can never include all information, specify all details, or anticipate allcontingencies. As a consequence, effective pre-contract risk management must not onlyevaluate the pros and cons of specific contract forms or terms but also the capacity andwillingness of the various parties to work together, collaboratively and in good faith, to

5Victor O. Schinnerer & Company, Inc.

bring about a satisfactory project outcome. Accordingly, this edition of Schinnerer’sExpanded Contract Guide for Complex Projects has been divided into four parts to providedesign professionals with a reasonably comprehensive but practical understanding ofcontract law, professional liability, contract types, contract terms, and pre-contract riskmanagement.

Part I — Contract Law and Professional Liability

Part I provides an overview of contract terminology and contract law, a discussion ofhow liability arises in contract and in tort, a discussion of some common defenses toprofessional liability claims, and a summary of the implications of a design professional’sor client’s form of business organization on liability exposure.

Part II — The Professional Services Contract

Part II provides an overview and discussion of the various types of contracts andcontract terms, project-specific and general, commonly used in professional servicescontracts.

Part III — Large Firm Specific Contract Management

Part III provides a review of the particular issues a large firm is likely to face such asthe need for consistency across different offices, contractual issues related to specificprofessional services, specific project delivery methods and scope of service issues,working for the federal government, and international projects. Guidance on emergingissues such building information modeling, project websites, integrated project delivery,digital files and patent issues is provided.

Part IV — Pre-Contract Risk Management

Part IV addresses and categorizes the various issues that determine whether the riskassociated with the client, project, and project contract is reasonable and controllable.

Throughout the presentation of this material, where appropriate, reference is made toprovisions contained in the standard agreement forms published by the EJCDC and AIA.In particular, the following documents are extensively cited:

● AIA Document B101-2007, Standard Form of Agreement Between Owner andArchitect (formerly B151-1997)

● EJCDC E-500, Standard Form of Agreement Between Owner and Engineer forProfessional Services, 2008 Edition

Schinnerer’s Expanded Contract Guide6

The reader is encouraged to become familiar with these industry standard forms andreview them in conjunction with the use of this publication.

Finally, a note is appropriate on the need to obtain appropriate professional advicewhen negotiating a professional services contract. Lawyers and insurance professionals arenot qualified to provide design services. Equally, design professionals should not assumethat they can provide legal or insurance advice either for their own use or for that of theirclient. Therefore, we strongly recommend that appropriate legal and insurance advice beobtained when negotiating any binding document, including your professional servicescontract.

Part I – Contract Law Part I – Contract Law and Professional Liabilityand Professional Liability

I1.1 Introduction

Contract law is the legal framework within which parties may create their own rightsand duties by agreement. This framework affords significant freedom to the

contracting parties to determine the terms of their agreement and provides the partieswith legal remedies for breach of their agreement so that the commercial efficiency ofcontracting is enhanced.

A contract is an agreement between two or more parties creating obligations that areenforceable or otherwise recognizable at law. Accordingly, the content of contractsbetween design professionals and their clients is often closely negotiated and is intendedto record their expectations and constitute the ground rules for their relationship untileach party’s contractual undertaking is discharged. The contracting process, therefore, canbe viewed as the first phase of project delivery and the resulting contract can be viewed asthe foundation for each phase of service that follows.

This section provides a broad overview of the principles of contract law andprofessional liability. While general in nature, the information provided will help the designprofessional understand the importance of contracts in structuring commercialrelationships and in providing remedies when contracting parties fail to fulfill theirobligations to one another or when others are injured as a consequence of their acts orfailures to act.

1.2 Essential Elements of a Contract

There are four essential elements that are required for a contract to be legally valid:mutual assent, consideration, legal capacity to contract, and a legally permissibleobjective. Each of these is briefly described in the following sections.

1.2.1 Mutual AssentMutual assent is present when two or more parties have agreed to something. This

usually happens when one party makes an offer that is accepted by the other party. Forexample, a design professional’s proposal, submitted in response to a client’s request forproposal (RFP), is usually an offer that the client may accept to bind the professional. Inlegal terms, an offer creates the power in the offeree (the one to whom the offer wasmade) to form a contract by accepting the offer.

Usually, an offer must be accepted exactly as offered. A response, therefore, is ofteneither a complete acceptance or a complete rejection of the offer. Frequently, however, a“rejection” may simply contain differing terms from the offer. In that case, the response is

8 Schinnerer’s Expanded Contract Guide


called a counteroffer. The party who originally made the offer has the power to accept orreject the counteroffer. Obviously, this dialogue frequently occurs in contract negotiations.

As a rule, an offer may be withdrawn at any time prior to acceptance by the other party.Sometimes offers are withdrawn according to their own terms (e.g., they are stated to beopen for only 30 days) or simply due to the passage of a “reasonable” amount of time.This is to prevent old offers that were never formally rejected from being accepted at aninappropriate time. To avoid uncertainty, it is generally a good policy to place a time limitfor acceptance of the offer in the offer itself.

1.2.2 ConsiderationConsideration is that goal, motive, or benefit that leads the parties to enter into the

contract. It involves a bargained-for exchange of something of legal value. For the designprofessional, consideration is usually money. A promise to give a gift, however, is generallyunenforceable because the term “gift” implies that there is no exchange of something oflegal value. One party gives, the other receives, and no exchange is involved.

Legal value, however, is not necessarily the same as commercial value. One party couldagree to pay one dollar for a residence that had been appraised at $300,000. The singledollar would be valid consideration for the contract because it has legal value, even thoughthe commercial value of the house is much greater.

Alternatively, parties can supply the necessary consideration to a contract byperforming some act that they are under no legal obligation to perform or by ceasing someactivity in which they are legally entitled to engage. Promises are also good consideration.A contract in which one party promises to perform services in exchange for the otherparty’s promise to pay is supported by valid consideration.

1.2.3 Legal Capacity to ContractEach party to a contract must have the legal capacity to contract. Generally, that means

that the parties must be of legal age (which varies from state to state) and reasonably ableto understand the nature of what they are doing (e.g., not intoxicated or mentallyincapacitated).

Legal capacity is not often a problem area with design and construction contracts.When it is an issue, the problem is usually to determine whether an individual orcorporation was authorized to perform the services covered by the contract or whether thecorporate officer or representative signing was properly empowered to sign such a contracton behalf of the corporation.

Since all states require that architects, engineers, and many other design professionalsbe licensed in the state before practicing there, a design professional who is not properlylicensed may be denied access to the courts in the state to enforce a contract if thatshould ever be necessary. Therefore, to the extent that an unenforceable contract is nocontract at all, proper state licensure is also a component of a party’s legal capacity tocontract.

1.2.4 Legally Permissable ObjectiveA legally permissible objective is anything that is not contrary to a statute; that is,

those laws enacted by local, state, or federal governments, or the common law, which isthe general law developed over the years through court decisions. A contract that requireseither party to perform an illegal act is unenforceable.

1.3 Express and Implied Contracts

Once made, a valid contract can be categorized as either express or implied. A contractis implied when a promise can be inferred from the conduct of the parties rather thanfrom their express words. For example, if a client failed to execute and return a proposedcontract to a design professional, but subsequently made one or more progress paymentsthat were due to the design professional in accordance with the terms of the contract, thelaw would probably infer the existence of a contract.

Express contracts arise when the parties write or speak the elements to which theyhave mutually assented. Contracts in the design and construction industry are usuallyexpress contracts. Not all express contracts are in writing, however. Oral contracts areexpress contracts and are, generally, legally enforceable. Some contracts, however, mustbe in writing to be enforceable. The laws that impose such a requirement are commonlyreferred to as “statutes of frauds.” Four types of contracts are generally required to be inwriting. They include:

● Those in which one party agrees to assume responsibility for the debts of anotherparty;

● Those in which an executor (one charged with carrying out the last will andtestament of another) promises to pay the deceased’s debts out of his own (theexecutor’s own) funds;

● Those for the sale of land or any interest in land; and ● Those that cannot be performed within one year.

In addition to the above requirements, at least one state (California) requires that allcontracts for architectural services or engineering services be in writing. In the absence ofsuch requirements, however, there are no business or risk management advantages to oralcontracts. An obvious problem with oral contracts is that their existence and terms aredifficult to prove. Although parties may have the best of intentions, people move on toother assignments, and memories often fade. Even though a contract need not be inwriting to be enforceable, executing written contracts is good policy and offers manybenefits. A written contract provides objective, documented evidence of the agreement,unlike an oral contract, in which the terms are left to the subjective and possibly biasedrecollection of each party. Having contracts in writing provides an opportunity for each


party to review those terms and make certain they are comfortable with their undertakingsand obligations. In the event that a dispute cannot be resolved directly between theparties, a written contract provides a basis upon which some third party (e.g., judge orarbitrator) may resolve the dispute.

1.4 Prime Contracts and Subcontracts

Design and construction projects typically involve one or more tiers or hierarchies ofcontracts and contracting parties. For example, the contract between the project ownerand design professional or project owner and contractor is referred to as a prime contract.The design professional may then be referred to as a prime design professional and thecontractor as a prime contractor (or general contractor).

These “primes” may then subcontract certain portions of the services or work throughsubcontracts to independent consultants or subcontractors. The “subs” may, in turn,further subcontract the services or work to sub-subcontractors and so forth. While projectowners typically seek to avoid contractual relationships with the prime professional’sconsultants and prime contractor’s subcontractors, the prime contracts often include flow-down provisions designed to incorporate the terms and conditions of the prime contractinto the terms and conditions of the lower tier subcontracts.

Due to the potential for conflicts over inconsistencies between prime contracts andsubcontracts, one prominent author has referred to subcontracting as the “Achilles’ heel”of the design and construction process (see Sweet on Construction Law, 1997, 346). Thispotential for conflict points to the need for a comprehensive set of coordinated projectcontracts, such as the standard forms published by the AIA and EJCDC. These and otherfamilies of standard industry agreement forms are further described in Part II and many ofthe provisions contained in the AIA and EJCDC agreement forms are cited throughout thispublication.

1.5 Contract Terms

In general, a contract term is any provision forming a part of the contract. Not allcontract terms, however, are stated expressly. Terms that are not expressly stated by theparties, but are assumed to exist by the courts, are referred to as implied terms. Forexample, the law generally assumes a duty among parties to a contract to act in good faithand perform the contract fairly. This so-called “covenant of good faith and fair dealing” isviewed as so fundamental to the parties’ contractual undertaking that it need not benegotiated or expressed in the contract. Similarly, if not otherwise expressed, additionalterms typically implied in a contract for design professional services include the designprofessional’s obligation to: (1) perform services with reasonable skill, care, and diligence;(2) perform services in accordance with applicable law; and (3) perform services in areasonable time.

Victor O. Schinnerer & Company, Inc. 11

Other terms may be made a part of the parties’ contractual obligations throughincorporation by reference provisions. As discussed above, the terms of a prime contractmay be incorporated by reference and thus flowed-down into a subcontract agreement.Similarly, regulations, statutes, schedules, insurance, and other requirements may beincorporated by reference into a prime contract or subcontract. To avoid ambiguity,however, it is often preferable to incorporate the specific provisions that the parties intendto govern in the event of a dispute rather than to simply reference an entire prime contractor other lengthy document for incorporation.

1.6 Contract Interpretation

Contract interpretation is the process by which the courts or others determine whatterms are implied in order to fill gaps or resolve conflicts in incomplete or imperfectlycoordinated contracts. Courts will not look outside the contract to deliver terms of anagreement unless there is a gap or ambiguity in the contract itself. In interpreting thecontract, courts (or, in some instances, arbitrators or design professionals acting as initialinterpreters) try to respond to a gap by filling it with an objectively reasonable term or withtheir best understanding as to what the parties would have wished had they negotiated theterm and expressed it in the contract. In other circumstances, rules of precedencereflecting industry practice are applied. The following are some of the basic rules used toaid in interpretation:

● The contract should be interpreted as a whole in order to give reasonable, lawful,and effective meaning to all of the terms.

● In the event of a conflict, negotiated terms take precedence over standard terms or“boilerplate” language.

● Specific terms govern over general terms. (For example, unless the contract providesotherwise: special conditions take precedence over general conditions; specificationstake precedence over drawings; and large-scale details take precedence over smaller-scale drawings.)

● Unless a different intention is expressed, general words are given their commonlyaccepted meaning and technical terms are given their normal technical meaning.

● Express terms, course of dealings, and trade usage are weighted in that order.● Ambiguous terms (i.e., those susceptible to more than one reasonable meaning) are

generally interpreted against the interests of the drafter.

1.7 Waiver

In some instances, one or both of the parties to a contract will waive a right that wouldotherwise be assumed to exist and that would be an implied term of the parties’ contract.


Waiver is defined as a party’s voluntary relinquishment of a known right and may beexpress (in writing or orally) or, in some instances, inferred from circumstances.

Written contracts frequently include express waiver provisions such as those waivingthe right to file a mechanic’s lien, waiving the right to a jury trial, or waiving the right toconsequential damages. (See, AIA Document B101-2007, § 8.1.3 and EJCDC E-500,2008 Edition, § 6.10.E.) Such waivers are part of the parties’ contractual exchange and,unless contrary to law, are enforceable.

Similarly, written contracts frequently include express “no waiver” provisions. Theseessentially state that the failure of either party to insist on the performance of the otherparty in a given instance will not be construed as a waiver with respect to any futureperformance. (See, EJCDC E-500, 2008 Edition, § 6.11.D.)

1.8 Contract Modification

A contract modification is any change that adds or deletes elements to the contract butleaves the general purpose intact. As a general rule, once made, a contract can bemodified or changed orally or in writing. To avoid the problems associated with oralcontracts as described in 1.3, most written contracts contain a provision prohibiting oralmodification such as, “This agreement may be amended only by written instrumentexecuted by both parties.” (See, also, AIA Document B101-2007, § 13.1 and EJCDC E-500, 2008 Edition, § 8.02.A.)

There are essentially two types of contract modifications or changes: a bilateralmodification and a unilateral modification. As the names suggest, a bilateral modificationis agreed to by both parties, whereas a unilateral modification may be ordered at thediscretion of one of the parties.

An unusual feature of construction contracts is that they typically afford the projectowner the right to unilaterally change the contract, provided that the change does notconstitute a cardinal change (a change so substantial that the contractor’s performanceconstitutes a new undertaking). The project owner’s insistence on such a change would bea breach of the original contract.

1.9 Contract Discharge

Contract discharge means that the legal duty of one or both of the parties has beenterminated. Most contracts are discharged when each party has performed to thesatisfaction of the other party. Of course, a contract may be discharged, modified, orreplaced if the parties so agree. A contract may also be discharged if it becomesimpossible to perform due to circumstances or events beyond the control of the parties(e.g., the death or incapacity of one of the parties) or by operation of law (e.g., thebankruptcy of one of the parties).


Finally, in the event of a material breach of the contract by one party, the non-breaching party is generally excused from performing and can sue to recover damages. Notevery material breach, however, results in immediate contract termination. Many contractsinclude an “opportunity to cure” provision providing the defaulting party with anopportunity to cure or correct the default within a certain amount of time following theother party’s written notice to cure. (See, EJCDC E-500, 2008 Edition, § 6.05.B.1.c.)

1.10 Professional Liability

According to Black’s Law Dictionary (Abridged Sixth Edition, 1991), when one has aliability, that person or entity is legally “responsible for a possible or actual loss, penalty,evil, expense, or burden.” Black’s also says that one who is liable is “bound in law andjustice to do something which may be enforced by action.” For our purposes here, we willcombine some frequently used concepts of liability into an informal working definition:

Professional liability consists of those obligations that are or will be legallyenforceable and that arise out of the design professional’s performance of, orfailure to perform, professional services.

Experience teaches that professional liability claims against design professionals areusually based in contract or in tort. The following sections briefly explore those sources ofliability and how they potentially overlap.

1.10.1 Liability in ContractBecause contracts are promises that the law will enforce, it follows that the person or

business entity to which the promise was made will be entitled to enforce the promise.When a valid contract is not performed substantially according to its terms, it is said tohave been breached. Note that the failure must be substantial. Not every minor or merelytechnical deviation from the terms of a contract is considered to be a breach of contract.But if there is a substantial, unexcused deviation or failure to perform according to theterms of the contract, the breaching party will be liable under the law for that breach.

Sometimes, it is possible for someone who is not a party to a contract to sue for breachof that contract. This can happen when a contract was specifically intended to benefit athird party. Accordingly, those parties are called third-party beneficiaries and may haverights to sue under the contract. To avoid claims by third parties who are not specificallyintended to benefit from the contract, contracting parties often include a “no third-partybeneficiaries” provision in their contracts. (See, AIA Document B101-2007, § 10.5 andEJCDC E-500, 2008 Edition, § 6.07.C.)

Finally, a party may be subrogated to the position of a contracting party, such as aninsurer who has paid a claim or loss under its insurance policy. Unless the policy or


contract of insurance provides for the waiver of this right, the concept of subrogationallows the insurer to “stand in the shoes” of its insured in pursuing recovery againstresponsible third parties. (See, Professional Liability and Pollution Incident LiabilityInsurance Policy, Member Companies of CNA Insurance, 2005, § VI.D, Subrogation,which reads, in part, “We hereby waive subrogation rights against your client to the extentthat you had a written agreement to waive such rights prior to a claim or circumstance.”)In response to the likelihood of subrogation actions by insurers, many design andconstruction contracts include “waiver of subrogation” provisions. (See, AIA DocumentB101-2007, § 8.1.2 and EJCDC E-500, 2008 Edition, § 6.04.E.)

Third-party plaintiffs or claimants who are not third-party beneficiaries of the contractor who are not subrogated to the position of a contracting party are generally left toremedies available in tort.

1.10.2 Liability in TortTorts are civil wrongs, i.e., violations of the personal, business, or property interests of

private citizens. When the interests of individuals or business entities are violated, theymay sue the responsible party in court to remedy the injury.

Unlike contracts, where the parties to the contract are known, the number of peopleand entities to whom design professionals may be liable in tort is indefinite. Designprofessionals can expect to be liable under tort law to anyone to whom they owed a duty toact with reasonable professional skill and care, that is, non-negligently. This standard isreferred to as the negligence standard or, alternatively, the professional standard of care.

Clearly, this standard can expand the express obligations assumed under a particularcontract. Courts look to the terms of the contract as well as statutes, codes, standards,and other sources to determine the scope of the design professional’s undertaking. Theyalso consider whether the specific circumstances of that undertaking suggest that it wasreasonably foreseeable that a given claimant would be injured if the design professionaldid not act with due skill and care. If a court is convinced that the design professionalshould have been able to foresee that specific persons or classes of persons would beinjured if there was substandard performance of professional services, then the designprofessional will probably be liable to those persons if such harm occurs.

When the criteria mentioned above are applied in actual situations, clients, membersof the public who use or come in contact with construction projects, contractors,subcontractors, construction laborers, lenders, insurers, sureties, and others may beincluded in the list of those to whom the design professional might be liable. As aconsequence, design professionals must develop the ability to assess the likelihood thatsomeone could be harmed by their actions or inaction and should take steps to prevent ormitigate potential harm.


1.10.3 MisrepresentationIn recent years, misrepresentation, “an untrue statement of

fact. . . or false representation” (Black’s Law Dictionary, Abridged Sixth Edition, 1991)has become an increasingly important source of liability for design professionals. Incontract law, a misrepresentation is any erroneous statement of fact made by one partythat has the effect of inducing the other party into the contract. Generally, the effect ofsuch misrepresentation is to make the contract voidable at the election of the representee,i.e., the party who relied on the representation. (See, also, 2.2.2 for a brief discussion onthe “language of representation.”)

Similarly, the tort of negligent misrepresentation would be a viable claim for a third-party plaintiff who relied, to its detriment, on erroneous information or a misrepresentationprovided by a design professional in association with the services performed on behalf ofthe client. An example would be the claim of a lender who, in extending a loan to thedesign professional’s client, relied to its detriment on erroneous information provided bythe design professional.

To mitigate exposure to claims of negligent misrepresentation, design professionals areurged to describe any representation as a professional opinion limited to and based uponthe design professional’s scope of services. Also, while a statement of opinion willgenerally not be construed as a statement of fact, a court is more likely to construe suchan opinion as a statement of fact if the representor claims special knowledge or expertise.Accordingly, design professionals should not only qualify representations as professionalopinions, but they should avoid any characterization of their professional opinions as“expert opinions” unless the opinion is based on facts within the professional’s knowledgeand control.

1.11 Liability for Employees, Consultants, and Joint Venturers

Design professionals are, of course, liable for their own personal actions. They are alsoliable for the actions of others under specific circumstances. Those professionals who areemployers are liable for the actions or failures to act of their employees, if such activitywas within the normal course of the employee’s duties on behalf of the firm. This kind ofvicarious liability (liability incurred via another person) is imposed due to the doctrine ofrespondeat superior. Loosely translated from the Latin, this means that the “master”should respond for the actions of the “servants.”

Design professionals are also liable for the professional acts and omissions of theconsultants that they hire or those for whom the design professional takes responsibilityby contract. As discussed in 1.4, the prime design professional normally contracts toprovide a certain scope of services, some of which are then subcontracted to independentconsultants. If these consultants breach their contracts, that failure might cause theprime to be in breach of the prime contract and become liable to the client. Similarly,actions of the consultants may injure others to whom the prime might also be liable.


Finally, design professionals are liable for the acts and omissions of their partners andjoint venturers. A joint venture is essentially a partnership, but only for a specific, andusually limited, purpose. Although partnership agreements and joint venture agreementsusually allocate responsibility and liability between the parties (it may be 50/50, 60/40, orsome other combination), that allocation is internal only. To the rest of the world, thepartners or joint venturers are, in essence, co-promisers and are “jointly and severally”liable. That means an injured party may recover the full scope of damages awarded by thetrier of fact (e.g., court, arbitration panel) from either party or from both parties in anycombination.

1.12 Types of Damages

There are essentially three categories of damages for which design professionals maybe liable: 1) direct damages; 2) consequential damages; and 3) statutory damages.

Direct damages generally consist either of bodily injury to, or wrongful death of, aperson or damage to property. The damages must be a direct result of the proscribedactions or a failure to act. Consequential damages do not directly or immediately resultfrom particular actions or a failure to act—they depend on intervening circumstances.Nevertheless, they must be a reasonably foreseeable result of an activity. They can includeeconomic losses, such as lost profit. Direct damages and consequential damages, togetherreferred to as compensatory or actual damages, are intended to fully compensate aninjured party for the injury sustained. They are not intended to compensate an injuredparty for more than its actual loss. Statutory damages are those that are prescribed bylanguage in a statute. Statutory damages may be awarded regardless of whether a partyactually suffers damages.

The damages for which an injured party can recover depend on the theory of liability onwhich the claim is based. Obviously, statutory damages are created by specific laws. Forexample, it is possible to recover statutory damages for violating the copyright of anotherperson or business entity. If copyrighted material is improperly copied, the author willoften be able to recover damages specified by law, whether or not there were any actual,provable damages caused by the copying.

Consequential damages are most closely associated with tort law. The public policyobjective behind much of tort law is to promote public safety and to allocate fairly thecosts of physical injuries and property damage among the parties who caused thedamages.

When a negligent action or failure to act by a design professional results in the bodilyinjury or death of a person, the law is clear that victims may sue the design professional,regardless of whether there was a contract between them. Until approximately 40 yearsago, the general rule under the economic loss doctrine was that one party could not sueanother unless the two were parties to a contract (called privity of contract). Today, with


some significant exceptions, privity of contract is not required for a person or businessentity to sue a design professional for negligence. The same is true if the designprofessional’s negligence causes damages to the property of a person or business entity.Regardless of whether the parties had a contractual relationship, the design professionalwill be liable under tort law for such damages if found to be responsible.

The goal of contract law, on the other hand, is to promote commercial marketefficiency. That is done in part by assuring parties that the risks and rewards, benefits andburdens that they negotiate in contracts will be respected and enforced. In other words,the parties allocate risks and rewards in their contracts, and the courts should protecttheir economic expectations. One manifestation of this policy is that consequentialdamages are not usually available for breach of contract. For a party to recover suchdamages for breach of contract, the wronged party would have to prove that the breachingparty actually knew that such damages would occur as a result of the breach of contract.

The law of torts and the law of contracts, and the public policies underlying them,potentially overlap when so-called economic losses occur. Some courts have adopted aneconomic loss rule to preserve the distinctions between contract and tort remedies.Generally, this rule provides that a party may not sue in tort for economic losses unless ithas a contractual relationship with the party being sued.

For example, a contractor who believes that a design professional under contract to theclient performed construction contract administration services negligently and thereby putthe contractor through unnecessary expense may want to sue the design professional foralleged losses. In states with the economic loss rule, the contractor would not bepermitted to do so. That is because the contractor has no contractual relationship with thedesign professional and there is no bodily injury or property damage involved, only loss ofmoney, i.e., an economic loss. If the contractor were allowed to sue the designprofessional in tort for such damages, it would disrupt the allocation of risk that theclient, design professional, and contractor had negotiated in their contracts and couldallow the contractor to achieve a better result than it had otherwise been able to negotiate.

1.13 Defenses to Liability Claims

A number of defenses are available to design professionals faced with professionalliability claims, one or all of which may be applicable in any given case. A brief discussionof several of the more common defenses follows.

1.13.1 Statutes of Limitations and Statutes of ReposeStatutes of limitations and statutes of repose have been enacted in most states. A

statute of limitations generally provides that once a legal claim accrues to a party, thatparty has a specific period of time in which to sue. Accrual of a claim is usually that pointwhere a party has reasonable notice of the facts that would justify legal action against


someone for damages. It can be difficult to determine exactly when the period begins torun, and the number of years allowed varies from state to state and from legal theory tolegal theory. For example, in many states a breach of contract claim must be made withinsix years of the date of the breach. A claim for negligence, however, may only be availablefor three years from the date of discovery.

A statute of repose is similar to a statute of limitations, but its time period begins torun upon the occurrence of some event, not necessarily a party’s notice of the factsconstituting a claim. Generally, under a statute of repose, all claims for negligence in thedesign and construction of an improvement to real property must be made within aspecified period of years following the date the improvement was placed into service (thedate of substantial completion), regardless of when such negligence was first discovered.Such statutes recognize that once a project has been completed for a certain span ofyears, factors such as maintenance, occupancy and usage, and other reasons suggest thatit is unfair to continue to subject design and construction entities to claims for problemswith the facility. (For state-specific statutes, see NSPE’s State-By-State Summary ofLiability Laws Affecting the Practice of Engineering, National Society of ProfessionalEngineers, 2009, www.nspe.org.)

Some standard agreement forms attempt to add some certainty to this area of the lawby providing a positive trigger to the running of the statutory period, whatever it might be.(See, EJCDC E-500, 2008 Edition, § 6.11.E.) Alternatively, they may impose a limit on itsduration. (See, AIA Document B101-2007, § 8.1.1.) Parties to a contract can, withinreason, negotiate a shorter or longer period for making claims than provided in the law. Forexample, a client and design professional could agree that all claims by either partyagainst the other must be made within three years from the date of substantial completionof the project. (Statistically, following substantial completion of a facility or otherimprovement to real estate, the majority of any claims filed against design professionalsoccur within three years, and almost all such claims are filed within six years.)

1.13.2 Comparative Negligence and Contributory NegligenceComparative negligence is an alternative, in some respects, to the idea of joint and

several liability among joint tortfeasors (two or more parties liable in tort for the sameinjury). For those states that use comparative negligence, the relative amount of eachparty’s negligence is measured as a percentage of the damages incurred by the injuredparty. For example, if both the construction contractor and the design professional jointlycause an injury to the project owner or a third party, they could be held jointly andseverally liable. That means that the design professional might have to pay all of theinjured party’s damages even if only one percent at fault. In states that use comparativenegligence concepts, if the design professional is found to be only one percent liable, thenhe or she would only have to pay one percent of the damages, regardless of whether or notthe injured party could recover the other 99 percent from the contractor. Clearly, this is amore equitable result from the perspective of the design professional.


Contributory negligence occurs when the party making the claim is partly responsiblefor its own injury or damages. When this concept applies, the damages that the injuredparty can recover are reduced by the percentage of that party’s own negligence. If theinjured party’s contributory negligence is substantial, recovery may be barred entirely. Forexample, in some states that use contributory negligence, injured parties must be lessthan 50 percent negligent or they cannot recover at all. Because of the potentialharshness of such a result, the majority of states have replaced contributory negligenceacts or doctrines with comparative negligence.

1.13.3 ImmunityA design professional may enjoy immunity or be protected from claims under certain

circumstances. When the design professional acts as an agent of the client, effectivelyacting as the client, there is often immunity from claims. The basis of this immunity isthat the design professional is a substitute for the client and any liability is the client’sand not that of the design professional. An example of this would be a situation where thedesign professional acts on behalf of a client during the bidding period and causes one ofthe bidders to be improperly precluded or puts them to unjustified expense. If the bidderrecovers from the client (the principal), the design professional (the agent) will generallybe immune from a separate suit from the bidder.

Another situation in which a design professional may be immune from suit is when thedesign professional renders a decision in good faith when acting as an arbitrator ordecider of disputes between the project owner and contractor. This immunity isspecifically provided for in the standard form agreements of the AIA and EJCDC. It is alsocalled for in the Construction Industry Rules of the American Arbitration Association withrespect to its construction arbitrators. Immunity of this nature, often referred to as quasi-judicial immunity, is necessary if the design professional is to perform services properlywithout fear of suit for defamation or interference with business relationships.

1.13 BettermentBetterment occurs when an injured party is compensated for more than its loss.

Although it may be appropriate for a design professional to be financially responsible fordamages caused by its negligent acts or omissions, the responsibility does not extend toimproving the project or the client’s economic position compared to what it would havebeen if no such error or omission had occurred. For example, assume that an architectnegligently omitted a requirement for railings in a stairwell of a public building.Accordingly, they were not part of the contractor’s construction price. When the omissionis discovered, assume that the contractor will be given a change order for the cost ofadding the missing handrails. If the client could recover from the architect for the full costof the handrails, there would be betterment. The client would have received for free what


it would have had to pay for if no error had been made. On the other hand, if the cost ofthe railings and associated labor increased from what they were at the time of bidding, orif remedial work was required in connection with the installation of the handrails, then itwould be appropriate for the architect to be responsible for such additional costs since theclient would never have incurred the costs but for the negligent error or omission.

1.13.5 Waiver and EstoppelWaiver, as described in 1.7, is the voluntary and intentional giving up of a known right.

For example, if a client knowingly agrees to accept less than full performance from acontractor, that would be a waiver of the right to enforce full compliance. That waivermight be made expressly in words or in writing, or it might be implied from thecircumstances. Often, waivers are the result of negotiations in the settlement of claims.

Estoppel is similar to waiver, but with the following principal difference: waiver onlyrequires action by one party while estoppel requires action by both parties. In essence,estoppel operates to stop someone from doing something that they would otherwise havethe right to do. The reason both parties must be involved is that it requires the first partyto take action on which the second party relies to its detriment. For example, if anengineer’s client tells the engineer that he need not visit the site on a particular day, whichthe engineer would have otherwise done, the client will be estopped from suing theengineer for not observing construction activity that would otherwise have been observed.Estoppel is based on equity and fairness principles and can be a valuable defense in anumber of situations.

1.14 Effect of Form of Business Entity on Liability

Design professionals and their clients organize their businesses in a variety of differentlegal forms, including sole proprietorships, partnerships, corporations, and limited liabilitycompanies or limited liability partnerships. Each form has somewhat different implicationsfor general business liability and professional liability risk management. Designprofessionals should consider these implications when establishing their practices andwhen contracting with their clients.

A note on pre-contract risk management is appropriate before proceeding further.Regardless of the form of a client’s business organization, the design professional shouldrecognize that professional services contracting results in a commercial transaction inwhich the design professional effectively extends credit to the client for periods oftenexceeding 90 days. Accordingly, credit checks of the client should be considered.Alternatively, if the client is a governmental entity, the design professional should verifythat money has been appropriated to pay for the contemplated professional services.


1.14.1 Sole ProprietorshipsSole proprietorships are businesses owned by one person. There may or may not be any

employees (there may be just a sole practitioner). There is no legal distinction betweenthe business and personal assets of the sole proprietor. If the proprietor becomes liable fordamages due to either business or professional activities, all of the proprietor’s personalassets are potentially available to satisfy the judgment. Note that only the assets of theproprietor are available. If assets are placed in trust for the benefit of children, forexample, or are titled in the spouse’s name, then they usually are not the proprietor’sproperty and are not available to creditors. Such transfers should be made as an integralpart of long-range estate planning, with appropriate advice of an attorney experienced inestate planning and succession issues.

1.14.2 Partnerships and Joint VenturesPartnerships are formed when two or more people agree to undertake business

activities together. All partners are jointly and severally liable for obligations of thepartnership. Generally, all personal property of the partners is potentially available tosatisfy judgments against the partnership. In that sense, the situation is similar to thatfaced by sole proprietors. The main difference is that not only can one’s own acts orfailures to act place all personal assets at risk, but one’s partner’s acts conducted infurtherance of the partnership business can also do so.

As noted in 1.11, a joint venture is a form of partnership which is created for a singlepurpose. For example, two unrelated design professional firms who wish to form apartnership to perform services on a particular project would traditionally form a jointventure. Similarly, a design professional firm and a contractor could form a joint venturein connection with a design-build project. As with a general partnership, however, eachparty is fully liable for the joint venture and the other’s acts and omissions. The control ofthe joint venture and allocation of risk and reward is usually addressed in a joint ventureagreement. Both the AIA and EJCDC publish standard form joint venture agreements.(See, AIA C801-1993 and EJCDC E-580, 2005 Edition.) A limited liability partnership(LLP), as discussed below, is a recent alternative to a joint venture.

1.14.3 CorporationsCorporations are legal entities in and of themselves. That means that they are legally

distinct from the people who own and run them. Two typical types of corporations areprofessional corporations and business corporations. Professional corporations (sometimescalled professional associations) are those in which all shares of ownership (or a minimumpercentage) in the corporation must be held by licensed professionals in the appropriateprofession. For example, generally, in a professional architectural corporation, all shares ofstock must be owned by licensed architects. Some states require the use of this type ofcorporation for those that provide professional services to the public.


On the other hand, a business corporation can be owned by non-licensed persons.General business corporations are not allowed by all states to provide professional services.Even when they are so permitted, there is usually a requirement that at least a majority ofthe shares of ownership be owned by licensed design professionals. Both professionalcorporations and business corporations can be either “C” or “S” corporations. These areInternal Revenue Code designations and have to do with the tax status of the corporationand shareholders. They have no effect on the liability exposure of the corporation.

In general, the owners of corporations are not personally liable for acts or failures to actby the corporation. They only stand to lose the value of the stock that they own in thecorporation if a large claim or liability affects its worth. If the insurance and assets of thecorporation are not adequate to satisfy its obligations, claimants generally have no right topursue the personal assets of the individual shareholders. This shield from personalliability is only available for general business liabilities, however, not for professionalliability. Since only individuals are tested and licensed to practice as design professionals,those licensed individuals cannot escape liability for their personal actions or failures toact. A corporation may provide some increased protection compared to a partnership,however, because the actions of one shareholder do not place the personal assets of other,non-involved, shareholders at risk, as is the case with a partnership.

1.14.4 Limited Liability Companies and Limited Liability PartnershipsLimited liability companies and limited liability partnerships are fairly recent statutory

creations in which the personal liability of the members or partners can be reduced whilestill maintaining some of the advantages of a general partnership, such as flow-through taxtreatment.

A limited liability company (LLC) is a business entity that provides all members withprotection from personal liability for company debts while allowing them to participate inmanagement and control of the company. The personal liability shield of an LLC is broad,but as is the case with a corporate entity, an LLC will not shield individuals from liabilitycaused by their own tortious action (negligence, professional malpractice). An LLC will,however, protect the other members of the LLC from liabilities caused by anothermember’s tortious actions.

A limited liability partnership (LLP) is a general partnership in which partners areafforded protection from certain types of partnership liabilities. The types of liabilitiesfrom which an LLP partner is protected vary greatly from state to state, but generally LLPpartners are not liable for the tortious actions (negligence, professional malpractice) ofother partners. An LLP partner is not, however, protected from his own tortious actions orfrom other types of partnership liabilities. Unlike an LLC, an LLP may not protect a partnerfrom personal liability for some debts of the partnership, such as those caused by a breachof contract.


1.15 Summary

To summarize the foregoing, design professionals should understand the following:

● Contract law allows contracting parties to create their own rights and duties byagreement and affords the parties legal remedies for breach. The essential elementsof a valid contract are: (1) mutual assent; (2) consideration; (3) legal capacity tocontract; and (4) legally permissable objective.

● Legally enforceable contracts may be written or oral, although it is always a goodpolicy to execute a written agreement. Both written and oral contracts are calledexpress contracts. When a contract can be inferred from the conduct of the parties,it is called an implied contract. Contract terms can also be express or implied.Implied contract terms are assumed to exist under the law, even though they are notspelled out within the contract.

● Contract modifications or changes usually require the consent of both parties. Anunusual feature of construction contracts, however, is that they often allow theproject owner to change the contract unilaterally, provided that the change is not acardinal change, i.e., one so substantial as to constitute a new undertaking.

● Design professionals typically face two types of liability, liability in contract andliability in tort. When a party substantially fails to perform a contractual obligation,that party is considered to be in breach of the contract and will be liable for thatbreach. In contrast, torts are civil wrongs—that is, they involve violations of thepersonal, business, or property interests of private citizens. Thus, liability in tort ismuch more open-ended than liability in contract. Design professionals are liable notonly for their own actions, but under some circumstances for those of theiremployees, consultants, and joint venturers.

● Design professionals may be held liable for three different types of damages: (1)direct damages; (2) consequential damages; and (3) statutory damages.Consequential damages are most often associated with tort law. Some states haveadopted the economic loss rule, which does not allow a party to sue in tort foreconomic losses unless it has a contractual relationship with the party being sued.The purpose is to preserve the sanctity of contractual negotiations and agreements.

● Common defenses to liability claims against design professionals include statutes oflimitations and statutes of repose, comparative negligence and contributorynegligence, immunity, betterment, waiver, and estoppel.

● Different forms of business organization affect the liability exposure of designprofessionals and their clients. Professional liability is always personal, and there isno shield to liability for personal professional negligence. Nor is there any shieldfrom business or professional liability for sole proprietors and partners in apartnership for damages that result from business and professional activities. In


corporations, stockholders may have a shield to liability that results from anotherstockholder’s actions or failures to act that do not involve them personally. Limitedliability companies (LLCs) and limited liability partnerships (LLPs) are fairly recentstatutory creations in which the personal liability of the members or partners can bereduced while still maintaining some of the advantages of a general partnership.


Part II – Part II – The ProfessionalThe ProfessionalServices ContractServices Contract

II

2.1 Introduction

It is often helpful to think of the professional services contract as an inventory andexplanation of rights, responsibilities, and procedures. Through their contract, the

parties can state the goals and expectations they have of each other and of third parties.They can allocate rights and responsibilities, risks and rewards. They can establishprocedures for dealing with conditions that may change during the performance of theircontractual duties. And, they can mitigate the impact of disputes by establishing disputeresolution provisions that are both timely and fair. Such a contract can allow performanceto unfold over time without placing either party at the whims of the other.

This section discusses the contracting practices, contract types, and contract termscommonly used in the procurement of design professional services. A broad familiaritywith contracting practices and language is often critical to the design professional’s abilityto negotiate a fair and equitable contract that is consistent with project requirements andavailable compensation. That familiarity, along with an understanding of the coverageafforded by the design professional’s professional liability insurance policy, is crucial toidentifying inappropriate and uninsurable contract terms, such as express warranties andbroad indemnity obligations.

Most clients in need of design professional services have certain expectations that mayor may not be realistic. For example, a client may expect and desire to contractuallyrequire one or more of the following outcomes:

● A design that is timely and cost-effective and that respects the client’s budgetarylimitations, without compromising any client-requested features;

● Bid and construction documents that accurately and completely reflect all projectcomponents and details without the need for clarifications or changes;

● Minimal risk exposure from unanticipated or unforeseen conditions that may serve todisappoint the client’s expectations about the time or costs required for delivery ofthe project;

● A competent, qualified contractor who possesses a positive attitude, will refrain fromasserting claims for extras, and will construct the project strictly in accordance withthe requirements of the contract documents; and

● A design professional who will ensure that the client’s performance expectations ofthe contractor will be fulfilled.


But design and construction projects exist in the real world rather than an ideal one,and in many instances the problems that disappoint the client’s expectations are causedby events or circumstances outside the control of the design professional.

The design professional, of course, cannot eliminate all the risk in the design andconstruction process. Design professionals can, however, inform the client about commonsources of risk and about risk management techniques available to reduce the probabilityand severity of a risk event and, beyond that, the need to provide for uncertaintiesaffecting the cost of the project through the establishment of appropriate contingencyreserves.

Unquestionably, the preferred approach to unrealistic client expectations is for thedesign professional to be proactive in the client education process and to develop terms inthe client-design professional agreement (and client-contractor agreement) that reflect afair and realistic allocation of obligations and responsibilities among the parties.Sometimes, rather than confronting the issue through an educational process, the designprofessional accedes to the client’s unreasonable demands by signing a contract withunfair terms or agrees to deliver a level of performance that far exceeds the fee charged,the professional standard of care, or the scope of professional services reasonablyexpected. Typically, these accommodations are prompted by an effort to obtain the client’sbusiness or to please the client. Invariably, these accommodations simply avoid or deferthe problems underlying the client’s unrealistic expectations.

Often, some of the more hotly contested points of contract negotiation involvesituations in which a solution exists that is in the mutual best interest of both parties. Forexample, a client may seek to impose onerous or broad-form indemnification obligationson a design professional while, at the same time, requiring that the design professionalmaintain professional liability insurance to protect the client in the event of a claim. Inresponse, the design professional may successfully negotiate appropriate modifications tothe broad-form indemnification to make the indemnification obligation insurable and,hence, consistent with the client’s insurance requirements. This can be accomplished byexplaining to the client that the modifications are required to maximize the applicabilityand availability of insurance coverage that the client also requires and wants in the eventof a claim. As discussed in section four negotiation need not be an adversarial process ifthe parties focus on interests rather than positions. Negotiation of the client-designprofessional contract offers an early and unique opportunity to address a broad range ofissues and foster the development of realistic client expectations.

While referencing the project-specific and general condition terms of the standard formagreements published by The American Institute of Architects (AIA) and the EngineersJoint Contract Documents Committee (EJCDC), this section also includes numeroussample contract provisions that design professionals will find useful in two respects: forcomparing the proposed language submitted by prospective clients to what we consider tobe generally equitable language presented in these sample provisions and for developing


terms and conditions to incorporate into professional services agreements, particularlyletter agreements incorporating terms and conditions documents.

Many of these sample provisions are included in Schinnerer’s Terms and ConditionsReview Guide, attached to this publication as Appendix B and available as a downloadfrom Schinnerer’s website at www.PlanetRiskManagement.com.

2.2 Content of Professional Services Contracts

Experience suggests that written contracts include certain basic elements. These aredescribed below. The similar elements reflected in so-called letter agreements areaddressed in 2.3.1.

2.2.1 Introductory ProvisionsThe introductory provisions typically include the title of the contract (e.g.,

“AGREEMENT BETWEEN OWNER AND CONSULTANT”) and an introductory clause thatidentifies the date of the agreement, the parties to the agreement, the project name andlocation, and, in some instances, a brief project description. Some contracts also includeone or more recitals (often beginning with the word “Whereas”) following the introductoryclause.

As a general rule, the date in the introductory clause should be the only date given inthe contract so there is no confusion as to when the contract takes effect. This assures aclear baseline against which to identify any subsequent changes in the project’srequirements.

Also, the identification of the parties in the introductory clause should include eachparty’s full legal-entity name, its jurisdiction of organization, and define the entity type.The identification of each party and the project is usually followed by a shortened namefor each, in parentheses, making each shortened name a defined term. A sampleintroductory clause follows:

This Agreement is dated August 4, 2008 (“Effective Date”), and is betweenSKY-MART STORES, INC., a Delaware corporation (“Owner”), and RISK READYDESIGN LLC, a Florida limited liability company (“Consultant”) for Parking LotRenovations and Expansion, Store #47, Gainesville, Florida (“Project”).

When recitals are included as part of the introductory provisions, they often describethe purpose of the contract and provide background information that helps to introducethe specific provisions that the parties are agreeing to. Sometimes the project is identifiedand defined in the recitals. If the contract is a subcontract, a recital may be used toidentify the prime contract, the parties to the prime contract, and date of the primecontract. The last recital is typically used to introduce the body of the contract (e.g., “Theparties therefore agree as follows”).


While courts generally regard any recitals as subordinate to the body of the contract,they do consider recitals when interpreting the contract and determining the intent of theparties. Thus, recitals should be carefully reviewed for both accuracy and relevance to theparties’ agreement.

2.2.2 The BodyThe body of the contract addresses what the parties are specifically agreeing to. It may

include a list of definitions, project-specific terms, and general condition terms, the latteroften referred to as “boilerplate.”

Defined terms that occur throughout the contract are often placed in a definition sectionat the beginning or end of the body of the contract so that they do not clutter up the text.(See, e.g., EJCDC E-500, 2008 Edition, Article 7.) While many of the terms delineated inthe definition section may be generally familiar, the specific definitions may have animportant effect on the parties’ undertakings and obligations. Design and constructionprojects typically involve a complex system of individual contracts—design andconstruction, prime and sub. From a practical standpoint, the terms of each contract musttake account of the terms of the other contracts since the efforts of the various projectparticipants are generally interdependent.

Accordingly, defined terms should be thoroughly coordinated across all projectcontracts. To facilitate this effort, both the AIA and EJCDC owner-design professionalagreement forms specify that the general conditions documents to be used as a part of anyconstruction contracts shall be the respective AIA or EJCDC standard general conditionsform. (See, e.g., AIA Document B101-2007, § 3.6.1.1 and EJCDC E-500, 2008 Edition,§ 6.01.G.) In addition and as further described in 2.6, the AIA and EJCDC publish designprofessional−consultant contract forms that are coordinated with their respectiveowner−design professional forms as well as their respective general conditions documents.

The contracting issues commonly addressed in project-specific and general conditionterms are discussed in 2.4 through 2.6. In addition to those contracting issues, however,design professionals should become attuned to the specific categories of languageemployed in contracts and their implications to the performance and undertakings of thecontracting parties. Categories of language used in contracts are comprehensivelyaddressed in A Manual of Style for Contract Drafting, by Kenneth A. Adams (American BarAssociation, 2004, Chapter 3). The principal categories of language addressed by Mr.Adams include the following:

Language of RepresentationA representation is an express or implied statement of fact by one party to induce or

otherwise influence the other party to enter into the contract. In many contracts, a list ofsuch statements—covering existing or future circumstances or events—comes under theheading “Representations and Warranties.” Warranties, like representations, are


assurances of some fact upon which the other party may rely. In general, any statement offact not within the knowledge or control of the representing party should be avoided.Moreover, virtually all professional liability insurance policies specifically exclude expresswarranties, however labeled, from coverage. (See 1.10.3 for a brief discussion on therelated topic of “misrepresentation.”)

Language of PerformanceThis type of language indicates that the actions described are taking place at the time

of the signing of the contract; consequently, language of performance is in the presenttense. This type of language should not employ the passive voice as it is important to beunequivocal about who is taking the action. The word “hereby” is often used in thelanguage of performance to indicate that the action takes place by virtue of that provision.The following is an example of language of performance: “Owner hereby retains andengages Consultant to perform the services described in this Agreement.”

Language of ObligationThis type of language is used to state the obligations of the parties to the agreement.

In legal language, the word “shall” is used to indicate “has a duty to,” while the word“will” is usually reserved to indicate future actions. Sometimes the word “must” issubstituted for “shall,” however, “must” means “is required to,” which does not alwaysexpress that the subject has a duty.

Language of DiscretionIn contrast to language of obligation, this type of language indicates that the party can

decide whether or not to take the action; that is, the action is within the party’s discretion.The most commonly used word to express discretion is “may.” In legal terms, it issometimes said that “shall” is mandatory and “may” is permissive. Also, the word “may”can be used to indicate that some action is possible. Generally, the difference in meaningis obvious from the context. The following is an example of language of discretion within acontract: “Either party may terminate this agreement upon thirty days’ prior written noticeto the other party.”

Sometimes the word “may” is used with the word “only” to limit the actions overwhich the subject has discretion. For example, the above statement could be changed toread: “Either party may only terminate this agreement upon thirty days’ prior writtennotice to the other party.” This makes it clear that the discretion is limited to thisparticular circumstance.

Language of ConditionThe language of condition is used in contracts to express a duty that is triggered by the

occurrence of an uncertain future event. Until that event happens, the duty does not exist.So if the event does not occur, the obligator is not in breach of contract because there is


no duty until that event happens. Conditions agreed to by the parties are called express.Sometimes the court will fill in a condition, in which case it is said to be implied.

The language used to express condition is familiar to all of us. Generally, it takes theform of a subordinate clause that begins with “if,” “when,” “on condition that,” “subjectto,” or other such words. This part of the statement contains the condition that, whenfulfilled, will cause the duty to exist. The second part of the sentence, sometimes calledthe consequent, contains the duty itself. Often the consequent contains the verb “must.”An example of the language of condition is found in the Section VI, Conditions, ParagraphB.1 of the CNA Professional Liability and Pollution Incident Liability Insurance Policy(2005) as follows:

If there is a Claim, you must. . .promptly notify us in writing. This notice must begiven to us within the policy year in which the claim was made or within 60 daysafter its expiration or termination.

In most cases, the antecedent or subordinate clause will precede the main clause,although this is not always the case. Often the words “provided that” or “as long as” areused to express conditions when the subordinate clause comes at the end of a sentence.

Sometimes the word “unless” is used as a sort of double-negative to express condition.For example, “no payment shall be made, unless the design professional submits writtenproof of substantial completion of services described in this contract.”

Nearly any event can be a condition as long as it occurs before the existence of thecontract and is not a certain event (such as the passage of time). When we speak ofconditions here, we are talking about what is sometimes called a “condition precedent” asopposed to a “condition subsequent.” While a condition precedent triggers a duty, acondition subsequent terminates a duty that already exists. The event upon which the dutyis conditioned may be one that is within the control of the obligator (services completed tosatisfaction of the client), the obligee (furnishing proof of loss), a third party (financing),or no one at all (damages as the result of a fire).

Language of ProhibitionThis type of language indicates that the parties are prohibited from taking some

particular action. “Shall not” and “must not” are the usual ways of indicating prohibition.“Shall not” means “has a duty not to,” while “must not” means “is required not to.”

Using “may not” is not a good choice since it could have several different meaningsand thus is ambiguous. Sometimes a prohibition is indicated by an exception to thelanguage of discretion; for example, the example used above could be changed to read:“Either party may terminate this agreement; except that neither party shall do so withoutgiving thirty days’ prior written notice to the other party.”


2.2.3 Concluding Clause and AttachmentsThe body of the contract is followed by a concluding clause, signature spaces, and any

attached exhibits or schedules that are referenced in the body of the contract. Aconcluding clause consistent with the sample introductory clause provided in 2.2.1 wouldread as follows:

The parties have signed this Agreement on the date first stated above.

SKY-MART STORES, INC.By: ______________________Name:

Title:RISK READY DESIGN, LLC

By: ______________________Name:Title:

In general, exhibits are stand-alone documents (e.g., the client’s program, the designprofessional’s proposal, or a copy of the prime agreement). Exhibits can be numbered (1,2, 3) or lettered (A, B, C) consecutively.

Schedules typically consist of information that is part of the agreement but has beenlocated separately for convenience (e.g., hourly pay rates for various classes ofemployees). Schedules can be numbered or lettered consecutively or identified by thecontract section to which they relate (e.g., 2.2.3 Schedule).

2.3 Types of Professional Services Contracts

Written professional services agreements generally fall into one of the followingcategories: letter agreements, purchase orders, standard form agreements, modifiedstandard form agreements, or custom agreements.

2.3.1 Letter Agreements Some clients and design professionals prefer to use letter-form agreements rather than

more formal types. Letter-form agreements are often suitable when the project is smallwith a well-defined, relatively routine scope of services.

Letter agreements typically include the following elements: the sender’s address, therecipient’s address, the date, the salutation, an introductory sentence, the substantiveterms (project-specific and general conditions), a closing sentence, the sender’s signature,


and the recipient’s signature. Like any other written agreement, the letter agreementshould be signed by both parties to show mutual assent to the terms stated in the letter.

The letter itself should address project-specific information and terms, such as thespecific scope of services, client obligations, and compensation—including amount, basis,and schedule of payment. It should also include an identification of additional servicesoffered to the client and any provisions relating to schedule or time for performance ofservices.

2.3.2 Purchase Orders Some clients use purchase orders to procure all goods and services. In these cases, a

client may enter into a base agreement with the design professional that generally definesthe standard terms of the agreement and then issue purchase orders to the designprofessional for project-specific assignments. If the client uses the same purchase-orderforms for all procurements (for example, hiring a construction contractor, retaining adesign professional, or purchasing goods or equipment), the form will probably containprovisions that are not appropriate for use in the procurement of design professionalservices. Sometimes clients are inflexible about changing or deleting these inappropriateprovisions. Ideally, these provisions should be addressed in the contracting process, andmodifications should be made to reflect the procurement that is the subject of theagreement. For example, in the procurement of goods or construction work, it is customaryand generally appropriate for a client to require express warranties and performanceguarantees. The same is not true for professional services, which are usually governed by aprofessional standard of care or negligence standard, rather than an express warranty orproduct liability standard.

Also, when a client uses purchase orders in conjunction with a base agreement toprocure project-specific services, care must be taken to make certain that the purchaseorder contains accurate, complete project-specific information, including scope ofservices, terms, as well as the method, amount, and timing of payment.

2.3.3 Standard Form Agreements Various construction industry associations have developed standard forms of agreement

for adaptation and use as professional services contracts. Associations publishingextensive families of documents that address various methods of project delivery includethe AIA, the EJCDC, and, most recently, ConsensusDOCS, a coalition of approximately 20trade organizations led by the Associated General Contractors of America (AGC). Otherassociations publish documents applicable to specific methods of project deliveryincluding the Construction Management Association of America (CMAA) and the Design-Build Institute of America (DBIA). Still other associations publish discipline-specificcontract forms such as the Council of American Structural Engineers (CASE) and theAmerican Society of Landscape Architects (ASLA). Some of the common characteristics ofthese industry standard form agreements follow:


● Generally reflect prevailing customs, practice, and experience.● Provide a framework for the agreement between the parties.● Drafted for broad applicability—must be adapted to project-specific circumstances

and requirements.● Internally coordinated and consistent.● Periodically updated.● Reflect the perspective of the drafting organization.● Influence the drafting of custom agreements.

As noted in the preface to this publication, whenever appropriate to the presentation ofthe material, reference is made primarily to provisions contained in the standarddocuments published by the AIA and EJCDC. We focus on the AIA and EJCDC documentsbecause they are the industry’s principal design professional-driven contract documentprograms.

The AIA Documents ProgramThe AIA was founded in 1857 and is the nation’s leading membership association for

architects. It began publishing contract documents in 1888. Today, the AIA documentsprogram has expanded to include over 100 contract and administrative forms coveringvarious methods of project delivery. AIA documents are used on a broad range of buildingprojects, ranging from modest residential construction to major commercial,governmental, and institutional work. It is likely that well over half of all design andconstruction projects in the United States utilize a slightly or substantially modified formof an AIA document.

The most important AIA form, for the purposes of this publication, is AIA DocumentB101-2007, Standard Form of Agreement Between Owner and Architect (referred toherein as AIA B101-2007). This is the AIA’s “flagship” owner-architect agreement.Extensive information concerning the AIA documents program, including formdescriptions, purchasing information, and commentaries on individual AIA documents, isavailable at www.aia.org.

The EJCDC Documents ProgramEJCDC was founded in 1975 as a successor to a documents program founded by the

Professional Engineers in Private Practice division of the National Society of ProfessionalEngineers (NSPE/PEPP) in 1963. EJCDC is now a joint venture of NSPE, the AmericanCouncil of Engineering Companies (ACEC), the American Society of Civil Engineers(ASCE), and the Associated General Contractors of America (AGC). EJCDC documents areused on various engineered projects such as roads, bridges, airports, industrial plants, andwater, wastewater, and solid waste facilities.


The most important EJCDC form—for the purposes of this publication—is EJCDC E-500, Standard Form of Agreement Between Owner and Engineer for Professional Services,2008 Edition (referred to herein as EJCDC E-500, 2008 Edition). This is EJCDC’sprincipal owner-engineer agreement form. Document descriptions, commentaries andpurchasing information are available at www.ejcdc.org and at the websites of each EJCDCsponsor organization.

At scheduled intervals or in response to industry needs, the AIA and EJCDC standardform documents are amended through an extensive review process, and new editions arepublished. According to the “drafting principles” published by the AIA (2005), standardcontract documents should strive for balance and fairness by:

● Conforming to common law and statutory precepts adopted in the majority ofjurisdictions;

● Seeking industry consensus among all parties whose interests may be significantlyimpacted by individual documents; and

● Allocating risks and responsibilities to:◆ The party best able to control them;◆ To the party best able to protect against unexpected

cost, or◆ To the client, when no other party can control the risk or prevent the loss.

Due to their widespread use, many of the more important provisions of the AIA andEJCDC documents have been interpreted by courts, and much of the court precedentreflecting those interpretations has been published. This establishes a level of confidencethat these provisions have a settled meaning and application.

2.3.4 Modified Standard Agreement FormsOften, the client or the design professional will require amendments or addenda to

standard form agreements. Generally, these changes are intended to address project-specific issues and may also address issues that may not be included in standard formagreements. In preparing these amendments or addenda, it is important to use terms andphraseology consistent with the terms of the standard form agreements. A particularlyhelpful guide to the amendment process is AIA Document B503-2007, Guide forAmendments to AIA Architect Agreements.

It is also important to recognize that the scope of modifications to some standardagreement forms is often so extensive that the resulting form has few of the positivecharacteristics ascribed to standard agreement forms above, in 2.3.3. Accordingly, from arisk management perspective, a line-by-line review is generally appropriate.


2.3.5 Custom Agreements Some projects or clients may require the preparation and use of custom or so-called

“manuscript agreements” because of the unique nature of the project. More often, customdocuments are proposed because they are specifically designed with the purpose offavoring the interests of the drafting party. No matter what considerations drive thedevelopment and use of a custom agreement, it is important that the design professionalnot lose sight of the need to include certain project-specific and general-condition termsin those agreements (see discussion below). In reviewing a custom agreement, it is oftenuseful to start by comparing the proposed agreement against the standard AIA or EJCDCagreement forms referenced above.

As a general matter, design professionals should avoid the temptation to develop andpropose the use of agreements that are particularly one-sided to the design professional orthat unfairly allocate risk or shift responsibility away from the design professional. Theseattempts to shift risk unfairly are likely to prompt a like response from the designprofessional’s client, that is, the proposal of an equally one-sided contract from thestandpoint of the client.

2.4 Project-Specific Terms

As the name suggests, project-specific terms are those terms that pertain to the projectthat is the subject of the agreement. These include terms that describe: the project, thedesign professional’s scope of services, the schedule and time for performance, and theterms and timing of payment. Each of these project-specific terms are described in moredetail below.

2.4.1 Project Description/DefinitionDesign and construction projects are complex endeavors. Technically, the client’s

objectives and priorities must be defined and clearly articulated within the context andconstraints of the project environment. The EJCDC and AIA have long attempted toaddress the need to define the project and the project environment by including provisionsin their standard contract forms that require the client to provide “full information,” i.e., aprogram, schedule, budget, procurement or delivery method, and other informationnecessary to proceed with the project. (See, e.g., AIA B101-2007, Exhibit—InitialInformation.)

In addition, under the AIA and EJCDC documents, the design professional has a dutyto respond to the initial information provided and advise the client of apparent conflicts orthe need for additional information or consultant services (see AIA B101-2007, § 3.2.2and EJCDC E-500, 2008 Edition, Exhibit A, §§ A1.01.A.1 and A1.01A.2). A provisioncontained in AIA B101-2007 requires that the architect’s preliminary evaluation of theclient’s program, schedule, and budget shall include a discussion of “the feasibility ofincorporating environmentally responsive design approaches” (§ 3.2.3).


Summarized below are some of the categories of requirements and information thatshould be evaluated by the design professional in defining the project.

Client’s Program, Schedule, and BudgetThe term program is commonly used to describe the client’s qualitative and

quantitative requirements for the project. Specifically, AIA B101-2007 describes theprogram as “the Owner’s objectives, schedule, constraints and criteria, including spacerequirements and relationships, flexibility, expandability, special equipment, systems andsite requirements” (§ 5.1). Similarly, EJCDC E-500, 2008 Edition, describes the programas the “Owner’s requirements for the Project, including design objectives and constraints,space, capacity and performance requirements, flexibility, and expandability, and anybudgetary limitations...” (Exhibit B, § B2.01.A). Accordingly, the program should becomposed with sufficient detail to afford effective decision support throughout theplanning and design process. If circumstances change or refinements are made, theprogram should be revised accordingly, again with the client’s written approval.

Information on Existing ConditionsInformation provided by surveyors, geotechnical engineers, and others forms what is

essentially a database for the design professional to use in planning and designing theproject. A high-quality database can significantly reduce the level of uncertainty andvariability associated with the project’s cost and schedule. A low-quality database will havethe opposite effect. Under the EJCDC and AIA standard agreement forms, the services ofsurveyors, geotechnical engineers, and other specialists reasonably needed for the projectare to be provided by the client, and the design professional has the right to rely on theresulting information. Of course, if the design professional firm possesses the in-houseexpertise to perform some or all of the necessary specialty services, the AIA or EJCDCagreement forms can be modified to include those as services of the design professional.

Applicable Laws and RegulationsDesign professionals are required to identify, become familiar with, and design in

accordance with those laws, statutes, codes, ordinances, and regulations that areapplicable to the project. (See, e.g., AIA B101-2007, § 3.2.1 and EJCDC E-500, 2008Edition, §§ 6.01E and 7.01.A.16.)

Client’s Design Criteria and StandardsMany clients with ongoing construction programs have developed design criteria that

must be used by the design professionals they hire when designing new facilities orimprovements. Some clients also insist on their own standard design details andspecifications in the design and construction of their facilities. In many cases, thesedesign criteria and standards exceed the minimum requirements of the applicable codesand regulations. Nevertheless, the design professional should inquire early about the


existence of such design criteria and standards so they can be smoothly integrated intothe planning and design of the project. The design professional is not, however, relieved ofhis normal duties of skill and care simply because a client provides, or even insists on, theuse of specific details, design standards, or criteria.

2.4.2 Scope of ServicesA primary purpose of the professional services contract is to clearly delineate the scope

of services undertaken. In doing so, the contract defines the relationship between thedesign professional and the client as well as each party’s relationship to other projectstakeholders, such as contractors, permitting agencies, and insurance companies. And, asdiscussed in 1.10.2, the scope of services is relevant to actions in contract and tortbetween the parties as well as to third parties. Accordingly, great care should be taken indelineating the scope of services. A good approach is to divide the services into fourcategories:

● Basic services—those that are included.● Additional services—those that will be provided at additional cost when

authorized.● Expressly disclaimed services—those that are not included and for which

responsibility is expressly disclaimed.● Client responsibilities—those that will be provided by the client at no cost to the

design professional and upon which the design professional can reasonably rely.

Basic ServicesFrom a business and risk management perspective, the design professional’s basic

scope of services should be defined with reasonable precision within the contract. A well-defined scope provides the first or primary line of defense to certain client and third-partyclaims. Conversely, a poorly or inadequately drafted service scope may significantly impairthe defensibility of these claims or, at a minimum, render the defense of the claimssignificantly more problematic and costly. Also, a clear, precise definition of scope isessential for business and payment purposes. An ambiguous or non-specific definition maylead to an obligation to perform more services than contemplated or to a dispute with theclient.

One way to organize and clarify basic service obligations is by grouping them accordingto specific phases of project delivery. For example, Article 3 of AIA B101-2007 definesthe architect’s basic services under the following phases of service: schematic design,design development, construction documents, bidding or negotiation, and construction.Similarly, EJCDC E-500, 2008 Edition, Exhibit A, Part 1, defines the engineer’s basicservices under the following phases of service: study and report, preliminary design, finaldesign, bidding or negotiation, and construction. Each AIA and EJCDC phase of service isthen further broken down into phase-specific tasks.


When using a standard form that contains a detailed description of the basic serviceobligations by phase or type of service, the design professional should make sure that anyservices the parties have agreed to delete are stricken and that their deletion has beendocumented.

Additional ServicesOften, it is advisable to list, in the contract, those additional services that are not

included in the scope of basic services, but which the design professional is willing toperform for additional compensation. (See, e.g., AIA B101-2007, Article 4 and EJCDC E-500, 2008 Edition, Exhibit A, Part 2.) The list, at a minimum, clarifies the basic servicesdefinition by specifying what is not included, thereby reducing the risk of disputes withclients over the nature or extent of the basic services obligations. If a design professionalrecommends that any of the additional services be performed, the recommendation shouldbe made in writing. Authorization to perform these services should be obtained in writingand signed by an authorized representative of the client. The authorization should includethe terms of compensation if they are generally undefined in the agreement.

Expressly Disclaimed ServicesDesign professionals should be particularly careful to contractually limit their services

and responsibilities in connection with the construction means, methods, techniques, andsafety provisions of the contractor. (See, e.g., AIA B101-2007, § 3.6.1.2 and EJCDC E-500, 2008 Edition, § 6.01.H. and Exhibit A, Part 1, § A.1.05.A.7.b.)

Sample provision: If this Agreement provides for any construction phaseservices by Consultant, it is understood that the Contractor, not Consultant, isresponsible for the construction of the project, and that Consultant is notresponsible for the acts or omissions of any contractor, subcontractor, ormaterial supplier; for safety precautions, programs, or enforcement; or forconstruction means, methods, techniques, sequences, and proceduresemployed by the Contractor.

Another common example of expressly disclaimed services concerns services andresponsibilities related to hazardous materials or toxic substances. (See, e.g., AIA B101-2007, § 10.6 and EJCDC E-500, 2008 Edition, § 6.09.D.)

Sample provision: It is acknowledged by both parties that Consultant’s scope ofservices does not include any services related to the presence at the site ofasbestos, PCBs, petroleum, hazardous waste, or radioactive materials. Clientacknowledges that Consultant is performing professional services for Client andConsultant is not and shall not be required to become an “arranger,” “operator,”


“generator,” or “transporter” of hazardous substances, as defined in theComprehensive Environmental Response, Compensation, and Liability Act of1990 (CERCLA).

Finally, it is common for clients to request the assistance of the design professional inobtaining permits and approvals for their projects. However, in the professional servicescontract it is important to distinguish between assisting the client in meeting itsobligation to obtain permits and approvals, and committing to actually obtain suchpermits and approvals. (See, e.g., AIA B101-2007, § 3.1.6 and EJCDC E-500, 2008Edition, Exhibit A, Part 1, § A.1.03.A.2.) The following sample provision addresses theneed to clarify these responsibilities:

Sample provision: Consultant shall provide technical criteria, writtendescriptions, and design data for Client’s use in filing applications for permitsfrom or approvals of governmental authorities having jurisdiction to review orapprove the final design of the Project and assist Client in consultations withappropriate authorities.

Client’s ResponsibilitiesCertainly, one of the most important client responsibilities is the obligation to

compensate the design professional in a timely manner for the performance of the designprofessional’s services. Clients have many other important obligations, however. Theseobligations should generally include the following:

● Providing complete information regarding the project requirements and program;● Establishing and periodically updating an overall budget for the project;● Designating a client representative authorized to act on the client’s behalf;● Furnishing survey and site information;● Filing applications for permits from or approvals of governmental authorities having

jurisdiction;● Engaging certain specialized consulting, testing, legal, accounting, and insurance

consulting services; and● Timely payment for services rendered and reimbursable expenses incurred.

The scope and nature of a client’s responsibilities may vary according to therequirements of a particular project. Any such project-specific obligation should bespelled out clearly in the contract. (See, e.g., AIA B101-2007, Article 5 and EJCDC E-500, 2008 Edition, Article 2 and Exhibit B.) A provision that may be appropriate forinclusion in a terms-and-conditions document attached to a letter agreement follows:


Sample provision: Client shall designate in writing a person to act as itsrepresentative with respect to Consultant’s services; provide all criteria and fullinformation as to Client’s requirements for the Project; place at Consultant’sdisposal all available information pertinent to the Project and Project site;provide or arrange for legal access and make all provisions for Consultant toenter any site where services are to be performed; and give prompt writtennotice to Consultant whenever Client observes or otherwise becomes aware ofany development that affects the scope or timing of Consultant’s services.Consultant shall be entitled to rely upon the information, services, andinstructions provided by Client and Client’s representative.

2.4.3 Schedule and Time for PerformanceProject requirements regarding the schedule or time for performance of services are

also project-specific. In the absence of a specific schedule or time requirements, courtsusually find that the contract implies a “reasonable” period of time. (See, e.g., AIA B101-2007, § 2.2 and EJCDC E-500, 2008 Edition, § 3.02.)

Before making a commitment to perform services in accordance with a specificschedule or other time requirements, the design professional should be satisfied that anyrequirements are reasonable and grant the design professional the ability to control andachieve compliance with them. For example, the design professional’s ability to meet aschedule may depend on the performance of review by the client, a governmental agency,or a third party, none of which are within the exclusive control of the design professional.In these cases, the design professional should qualify any specific schedule obligationsaccordingly.

The client needs to understand that the design professional should not be heldaccountable for damages caused by delays that arise from circumstances or events beyondthe design professional’s reasonable control. Such circumstances are normally addressedby including a force majeure provision in the professional services contract. Force majeuremeans a superior or irresistible force. A narrow force majeure provision limited only tonamed events (i.e., acts of God, war, strikes) should be avoided. An example of a forcemajeure provision appropriate to a professional services contract follows:

Sample provision: Consultant shall not be deemed in default of this Agreementto the extent that any delay or failure in the performance of Consultant’sobligations results from any cause beyond its reasonable control and without itsnegligence.

Many clients attempt to force specific time limitations on design professionals or toimpose late-performance penalties. Of course, timing issues are very important to clients,but schedules must be reasonable and adjustable to account for events beyond the design


professional’s control. Arbitrary attention to interim deadlines may only translate intoincreased adjustments later, and “time is of the essence” clauses could convert any delayinto a material breach of contract that might justify termination by the client. Clientsshould understand the necessary balance between a schedule and the exercise of soundprofessional judgment.

2.4.4 Terms and Timing of PaymentThe design professional’s compensation, of course, should be set forth in the contract.

The AIA and EJCDC contract forms each provide for various methods of compensation—cost plus a fixed fee, lump sum, and fixed billing rates—and provide for reimbursableexpenses. (See, e.g., AIA B101-2007, Article 11 and EJCDC E-500, 2008 Edition, §2.01.B and Exhibit C.) Lump sum design professional contracts are often based on apercentage of construction costs. From a risk management perspective, because of theuncertainty associated with the performance of design professional services, lump sumcontracts are quite risky. It is important to include an adequate contingency allowance inlump sum contracts.

Sample provision: Unless otherwise provided for in writing, Consultant shall becompensated for its services at its standard rates and shall be reimbursed forcosts and expenses (at a multiplier of ____) reasonably incurred in theperformance of services. Consultant shall submit monthly invoices that are dueand payable upon receipt. On amounts not paid within 30 days of invoice date,Client shall pay interest from invoice date until payment is received at a rate of__% per month. If Client disagrees with any portion of an invoice, it shall notifyConsultant within 21 days of receipt of the invoice, and shall pay the portion notin dispute.

2.5 General Condition Terms

A number of general condition provisions are typically included in agreements betweenthe design professional and client, irrespective of project-specific requirements. Thefollowing are particularly important from a risk management perspective.

2.5.1 Standard of CareThe term “standard of care” refers to the standard against which the design

professional’s performance of services will be measured. There are a number of differentstandards that may be applicable: the common law or professional negligence standard,breach of contract, and strict liability or liability without fault.


Common Law Standard of CareGenerally, under the common law, the standard of care for a professional consists of

the duty to use the same degree of skill and care as other similarly situated professionalsunder the same or similar circumstances.

Contractual Standard of CareThe standard of care applicable to the design professional may also be defined by the

express terms of the contract. (See, e.g., AIA B101-2007, § 2.2 and EJCDC E-500, 2008Edition, § 6.01.A.) In cases involving negligent performance of a contract, under either aclaim of negligence or of breach of contract, the duties of the design professional areprimarily defined by the written contract between the design professional and the client.An appropriate standard of care provision follows:

Sample provision: The standard of care for all professional services performedor furnished by Consultant under this Agreement will be the care and skill usedby members of Consultant’s profession practicing under similar circumstancesat the same time and in the same locality. Consultant makes no warranties,express or implied, under this Agreement or otherwise, in connection withConsultant’s services.

In some instances, clients may want to impose a higher standard of care throughexpress provisions in the contract. Professional liability insurance policies, however,usually provide coverage solely for claims arising out of negligent acts, errors, or omissionsin the performance of professional services. These policies generally exclude coverage forclaims based upon express warranties or guarantees, or other contractual provisions thatimpose a standard of care that exceeds the common law negligence standard, e.g.,performance in accordance with “highest” professional standards.

Contractual liability exclusions are common to many insurance policies. They aredesigned to preclude coverage for liability exposures contractually assumed by apolicyholder that would not otherwise apply under the common law. Without suchexclusions, the risk taken by the insurer could be expanded without notice and without acorresponding increase in premium. For example, the following contractual liabilityexclusion is found in Section IV, Exclusions, Paragraph B of the CNA Professional Liabilityand Pollution Incident Liability Insurance Policy (2005):

[We will not defend or pay under this Policy for a claim] arising out of: 1. Your alleged liability under any oral or written contract or agreement,

including but not limited to express warranties or guarantees; or 2. The liability of others you assume under any oral or written contract or

agreement. However, this exclusion shall not apply to your liability that existsin the absence of such contract or agreement.


The last sentence in the above CNA exclusion means that the exclusion does not applyif the policyholder would have been subject to liability under common law principles ineffect in the applicable jurisdiction in the absence of any particular contract language.

Many clients, however, want to include provisions that suggest a higher standard. Theymay do so intentionally or unintentionally, but design professionals must be alert tostatements in a proposed contract that modify the common law (and insurable) standardof care. For example, language requiring performance in accordance with the “highest”standards of the profession or requiring that a project be “fit for its intended purpose”goes beyond the normal negligence standard.

Similarly, design professionals should avoid agreeing to common superlatives such as“all,” “complete,” “finest,” or “most economical.” These words tend to raise the standardof care and create unrealistic expectations in the client. Surprisingly, even someprovisions included in standard agreement forms, such as the following ConsensusDOCSexcerpt (see ConsensusDOCS 240-2007, § 3.2.5), appears to raise the standard of careand create unrealistic expectations:

ConsensusDOCS provision: The Construction Documents shall completelydescribe all work necessary to bid and construct the Project.

As a practical matter, no set of construction documents will completely or accuratelyreflect every element of the design. In fact, the professional standard of carecontemplates that some degree of imperfection will exist in those documents and somedetails are more appropriately developed during the construction process, often inassociation with the contractor’s development of shop drawings and other submittals. Inaddition, during construction, the contractor is likely to have questions about the designintent or information provided in the contract documents, and a reasonable number ofthese types of questions or requests for information (RFIs) should be expected. (See AIADocument B101-2007, § 3.6.4.4 and EJCDC E-500, 2008 Edition, Exhibit A, § A1.05.A.9.)

Strict LiabilityStrict liability is liability without fault. To date, strict liability concepts have generally

only been applied to manufacturers of products and to those who engage in activitiesconsidered inherently dangerous, such as transporting hazardous materials. Designprofessionals, however, should be particularly wary of using or accepting terms such as“representation” or “warranty” or “guarantee” in contracts or other documents uponwhich a client or third party could claim reliance. These terms do not merely raise thestandard of care to a higher level, they may effectively impose strict liability (See also1.10.3 and 2.2.2).


2.5.2 Representations, Warranties, and CertificationsRepresentations or warranties have been a staple in contracts between clients and

contractors for well over a century. More recently, it has become increasingly common forclients to request representations or warranties of their design professionals similar to thefollowing:

Consultant [represents] [warrants] that, when constructed in accordance withthe Construction Documents furnished under this Agreement, the Project willcomply with all applicable law including: (1) the Americans with Disabilities Act,42 U.S.C. Section 12101 et seq. (“ADA”); (2) the related Federal regulations,including without limitation, the Accessibility Guidelines and Standards forAccessible Design found at C.F.R. Part 36, Appendix A (collectively, “ADAAG”);and (3) all national, state and local building, life safety and similar codes towhich a facility similar to the Project is subject.

These absolute assurances can impose liability on the design professional even thoughservices were performed in accordance with normal professional skill and care, and inspite of the fact that the listed requirements may be subject to various and possiblycontradictory interpretations.

Similarly, clients often include certification requirements in professional servicescontracts. An unqualified certification—one not qualified as a professional opinion or tothe best of the design professional’s knowledge and belief—can be construed as astatement of fact. In general, however, the scope of the design professional’s services andother limitations result in knowledge that falls short of the certainty of an absolute fact.Without such certainty, all certifications should be appropriately qualified.

Other project stakeholders may request representations or certifications from thedesign professional as well. Lenders, for example, often ask the design professional torepresent or certify that there are sufficient funds left in the contract sum, after paymentof current amounts to the contractor, to complete the work. Since the design professionaldid not generate the contract sum, did not generate the schedule of values, is not incontrol of the construction work, and generally can have very little idea of the financialimpact of the default of the contractor, this kind of certification should rarely, if ever, begiven.

As a practical matter, the greatest source of risk for design professionals fromrepresentations, warranties, and certifications is the self-imposed risk of acceptinginappropriate language that takes away the protections courts afford to designprofessionals as providers of professional services. (See additional discussion concerningrepresentations at 1.10.3 and 2.2.2.)


2.5.3 Compliance with LawsAs discussed in 2.4.1, design professionals are required to identify, become familiar

with, and design in accordance with the laws, statutes, codes, ordinances, and regulationsapplicable to the project. The standard for compliance with laws, however, is anotherinstance where the usual standard of care is frequently modified. For example, someclients propose contract language similar to the following:

Sample unreasonable provision: The Plans and Specifications will comply withall applicable federal, state, and municipal laws, rules, regulations andordinances of every nature and description, including without limitation, zoning,building, disabled access, fire, health and sanitary codes and ordinances, andsubdivision control and environmental laws, rules and regulations, includingwithout limitation, the Federal Clean Air Act, as amended, and the FederalClean Water Act, as amended and state laws and regulations consistent with therequirements of such Acts, and the Project, if constructed in accordance withthe said Plans and Specifications, will likewise comply.

On the face of it, this may not seem to be objectionable since design professionals arerequired to design in accordance with applicable law. This provision, however, requiresuninsurable perfection, and does not recognize that many of the items referred to are ormay be internally inconsistent, contradict one another, or be so arcane that the typicaldesign professional would not, in the exercise of reasonable skill and care, know how tocomply. Further, all such rules and regulations are subject to the interpretation anddiscretion of local enforcement officials, among others. As a practical matter, nothing onthis topic needs to be said in the professional services contract since the common lawdemands non-negligent performance, i.e., that the design professional shall use due care,skill, and diligence to comply with applicable codes and standards.

2.5.4 Schedules, Budgets, and Estimates or Opinions of CostWhile a client may have specific schedule and budget objectives and a concept for the

project when the client-design professional agreement is signed, it is likely that manyprogram aspirations will be balanced with program, budget, and schedule realities afterthe agreement is signed. Because the design professional’s design will be based upon hisunderstanding of these requirements, the program, schedule, and budget should bememorialized in writing. In that regard, the program should be spelled out in sufficientdetail to afford effective decision support throughout the planning and design process. Ifcircumstances change or refinements are made, the program should be revisedaccordingly, again with the client’s written approval.


The client’s budget for the cost of the work is a particularly important parameter in AIAB101-2007 (and many custom agreements) because, implicitly, it is a fixed constructioncost limit that the design professional must design to (§ 6.1 and Exhibit A—InitialInformation, § A.1.3). If the client’s budget for the cost of the work is exceeded by thelowest bona fide bid or negotiated proposal, and if required by the client, the architect isobligated to modify the documents to bring the cost of the work within the client’s budget.This redesign effort is at no additional cost to the client (§ 6.7). Under EJCDC E-500,2008 Edition, Exhibit F, if a construction cost limit has been established and is thenexceeded, the engineer is also obligated to modify the documents to bring the constructioncost within the agreed-to limits. The engineer, however, is compensated at cost withoutprofit. Under both agreement forms, the design professional’s modification of thedocuments, under the terms provided, is the client’s sole remedy against the designprofessional.

As a practical matter, it is important for the client to understand that cost estimatesare only as accurate as the information on which they are based, and the designprofessional should make clear to the client the limitations of his estimates. (See, e.g.,AIA B101-2007, § 6.2 and EJCDC E-500, 2008 Edition, § 5.01.) The “preliminaryestimates” or “opinions of probable cost” prepared by design professionals under the AIAand EJCDC agreement forms, respectively, are generally predicated on conceptualestimating techniques, not detailed quantitative techniques. If detailed estimates aredesired, the design professional can be engaged to provide them, with the assistance of acost consultant if the design professional is not otherwise qualified. Alternatively, theclient can engage an independent cost consultant directly. (See, e.g., AIA B101-2007, § 4.1.11 and EJCDC E-500, 2008 Edition, Exhibit B, § B2.01.K.)

The bottom line is that schedules, budgets, and estimates or opinions of probable costreflect the design professional’s professional judgment, based on available information.They should not be construed as warranties or guarantees. The following sample provisionreflects this reality:

Sample provision: Any schedules or completion dates, budgets, or estimates ofcost prepared by Consultant represent Consultant’s professional judgmentbased on its experience and available information. Since neither Consultant norClient has control over the cost of labor, materials, or equipment, or contractor’smethods of determining prices, or over competitive bidding or marketconditions, Consultant cannot and does not warrant or represent that actualschedules, budgets or completion dates or actual costs will not vary fromschedules or completion dates, budgets, or estimates of cost prepared byConsultant or proposed, established, or approved by Client.


2.5.5 Copyright Copyright is a form of protection provided to authors of “original works of authorship”

fixed in a tangible medium such as a book, song, computer program, architectural orengineering drawing, or building. The Copyright Act generally gives the owner of acopyright the exclusive right to reproduce the copyrighted work and to prepare derivativeworks. Copyright law protects the original expression of an idea, and design firms need tobe aware how their professional service agreements allocate the ownership of copyrightedmaterial. Both the AIA and the EJCDC documents define design drawings as instrumentsof service, and under their provisions the design professional retains ownership ofcopyright. Transfer of the ownership or licensing the use of physical objects does notautomatically transfer the copyright in the design professional’s documents or instrumentsof service. The design professional should not, however, transfer the copyright becausethat may severely restrict future use of details, specifications, and other aspects of theinstruments of service. A good solution, which balances the interests of the client anddesign professional, is for the design professional to retain the copyright and to licensethe client to make use of the instruments of service in specific ways that satisfy theclient’s needs without prejudice to the interests of the design professional. (See, e.g., AIAB101-2007, Article 7 and EJCDC E-500, 2008 Edition, § 6.03.)

Sample provision: All documents prepared or furnished by Consultant pursuantto this Agreement are instruments of Consultant’s professional service, andConsultant shall retain an ownership and property interest therein. Consultantgrants Client a license to use instruments of Consultant’s professional servicesfor the purpose of constructing, occupying, and maintaining the Project. Reuseor modification of any such documents by Client, without Consultant’s writtenpermission, shall be at Client’s sole risk and Client agrees to indemnify and holdConsultant harmless from all claims, damages, and expenses, includingattorney’s fees, arising out of such reuse by Client or by others acting throughClient.

However, client-drafted contracts routinely transfer ownership of the drawings and thecopyright to the client. If the copyright of the drawings is being transferred, at a minimumthe design firm should require that:

● The client acknowledges the documents are project-specific and are not intended forreuse on other projects;

● Any reuse by the client without the involvement of the design firm will be at theclient’s sole risk;

● The client agrees to defend, indemnify and hold the design firm harmless from anyclaims brought against the design firm arising out of the reuse; and

● The design firm has the right to reuse standard details of the contract documents.


Another area of concern is the inadvertent infringement of somebody else’s copyright.For design professionals this often comes into play when asked to provide services basedon another professional’s earlier drawings or to complete services started by another designprofessional. This can be handled by requiring the client to show ownership of thecopyright or to indicate authorization to use the prior design professional’s instruments ofservice.

2.5.6 ConfidentialityDesign professionals frequently receive confidential information from their clients that

is necessary to perform their services. Sometimes, information of this nature mayconstitute a “rade secret. In most states, the common law protects clients from thedisclosure of designated trade secrets, confidential information, or proprietary information.In addition, clients will often require that an express confidentiality provision be includedin the professional services contract or, alternatively, will request that the designprofessional sign a separate confidentiality agreement. Clients have many reasons for thisdesired confidentiality. Disclosure of the information could adversely affect the proposedacquisition or sale of property, place the client at a competitive disadvantage, or subjectthe client to various statutory or common law liabilities for site cleanup or personal injury.

Design professionals, however, may be required by law or professional responsibilityrules to disclose certain information to regulatory authorities. For example, whileperforming services, the design professional may learn that a soil sample indicates that asite contains hazardous waste. A licensed professional’s public health and safetyobligation generally requires that this information be disclosed to protect innocent thirdparties from potential injury or to comply with federal and state statutory and regulatoryreporting requirements.

Accordingly, confidentiality provisions in contracts should include exceptions fordisclosure required by legal or ethical obligations. An example of a provision thatrecognizes the client’s rights to confidentiality while acknowledging the designprofessional’s disclosure responsibilities follows:

Sample provision: Consultant shall maintain the confidentiality of the Projectinformation including but not limited to the nature of the Project, the location ofany sites under consideration or selected sites, together with any otherinformation supplied to Consultant by Client and designated by Client to beconfidential or proprietary, except (1) when such confidential informationbecomes generally known to the public through no fault of Consultant or (2)when disclosure is required pursuant to applicable governmental regulations orwith an order of a court of competent jurisdiction.


If the client requests the execution of a separate confidentiality agreement, the above-referenced exceptions for disclosure should be included. In addition, the designprofessional should take care to be sure that the separate confidentiality contract iscoordinated with the terms of the professional services contract and does not includeconflicting terms. In particular, the design professional should be certain that the separateconfidentiality agreement does not include express warranties or guarantees or alter theownership and use-of-documents provision or choice-of-laws provision contained in theprofessional services contract.

2.5.7 Indemnity ProvisionsIndemnity provisions are intended to allocate risk or liability among parties. Typically,

that allocation is designed to shift liability to the party who is thought to be more activelyinvolved in services or events giving rise to liability. In the context of client-designprofessional agreements, a client may seek indemnity from a design professional forliability or risk resulting from the negligence or other wrongdoing of the designprofessional in the performance or furnishing of services.

Client-proposed indemnity provisions, however, often demand more of the designprofessional than the law would otherwise require. As a basic proposition, designprofessionals should not accept risk unfairly allocated to them, that is, risk that they areunable to control. Client-drafted indemnity provisions often exceed the limited contractualliability coverage afforded by the professional liability policy and, unless the scope ornature of the indemnity obligation is contrary to public policy, courts will generally enforcethe provision as a matter of contract law. An example of such a provision follows:

“Problematic” indemnity and defense provision: To the fullest extent permittedby law, Consultant shall [1] defend, indemnify, and hold harmless [2] Client, allsubsidiaries, divisions, partners, parent and affiliated companies of Client, andall such parties’ representatives, partners, members, designees, officers,directors, shareholders, employees, agents, successors and assigns, and anylender of Client with an interest in the Project [3] from and against any and allclaims, demands, actions, causes of action, suits, liabilities, losses, obligations,damages, judgments, fines, penalties, costs and expenses (including, withoutlimitation, attorneys’ fees, disbursements and court costs, and all otherprofessional, expert, or consultants’ fees and costs incurred as a result of suchclaims or in enforcing this indemnity provision) of every kind and naturewhatsoever [4] arising from or in connection with (i) any breach or default byConsultant under this Agreement, or (ii) any error, omission, or negligent act orwillful misconduct of Consultant, its principals, directors, officers, employees,contractors, subcontractors, consultants, representatives, agents or any otherparties directly or indirectly employed by any of foregoing or reasonably under


the control of any of the foregoing or for whose acts any of the foregoing may beliable in the performance or non-performance of the services performed orprovided by such parties in connection with or related to the Project.

While indemnification and insurance coverage questions are often jurisdiction-specificand fact-specific, the broad indemnification and defense provision above demonstratesseveral of the key pitfalls encountered by design professionals in client-proposedprovisions. These pitfalls are discussed below and keyed to the bracketed numberscontained in the above sample provision.

[1] “Defend, indemnify, and hold harmless. . .”Many indemnity provisions, such as the sample above, include language by which the

indemnitor (consultant) agrees to “defend, indemnify, and hold harmless” the indemnitees(client, et al.). While “indemnify” and “hold harmless” are often viewed as synonyms, theduty to defend is generally viewed as a distinct and separate responsibility. To furtherassure this interpretation, some indemnity provisions are drafted to include a separateparagraph similar to the following: “The duty to defend under this Section ___ isindependent and separate from the duty to indemnify, and the duty to defend existsregardless of any ultimate liability of Consultant or Client or any other indemnitee.” Whilethis added paragraph is not always present or necessary, it accurately reflects the pitfall inaccepting the inclusion of an express defense obligation. Unless a duty to defend isimplied under common law, the design professional’s assumption of that duty will besubject to the contractual liability exclusion of the professional liability insurance policy.

Accordingly, the obligation to defend should be deleted. That leaves the frequently-used phrase “indemnify and hold harmless.” But if these two terms are viewed assynonyms, why are both necessary? Of course, one could argue nuances of meaningbetween “indemnify” and “hold harmless.” For example, it has been argued that “holdharmless” is a broader term that implies a defense obligation. That argument should beavoided by deleting “hold harmless” and leaving “indemnify” to define the scope of theindemnitor’s obligation.

[2] “Client, all subsidiaries, divisions. . .any lender. . .”Client-drafted indemnity provisions often include a long list of indemnitees whose

connection with the client or the project is remote and may not ordinarily be entitled toindemnity under common law, i.e., in the absence of the contract. Beyond naming theclient, a reasonable list of indemnitees could include, but generally should be limited to,the client’s officers, directors, partners, employees, and representatives. If some thirdparty is damaged, such as a lender, that party is free to pursue its own legal remedies.


[3] “Any and all claims, demands. . .expenses, including, without limitation,attorneys’ fees. . .”

Having deleted the express defense and hold harmless obligations as described above,many of the terms included in this long list have no applicability to the indemnitor’s(consultant’s) indemnity obligation because they do not relate to damages sustained andfor which indemnity is owed. Also, while attorneys’ fees may be construed as damages insome jurisdictions, they are not recoverable as damages in all jurisdictions. (See, also,discussion under 2.5.16 concerning “Prevailing Party Provisions.”) Accordingly, the longsource list contained in client-drafted indemnity provisions should generally be reduced toread: “From and against losses, damages, and judgments arising from claims by thirdparties, including reasonable attorneys’ fees and expenses recoverable under applicablelaw.”

[4] “Arising from or in connection with (i) any breach. . .by Consultant under thisAgreement, or (ii) any error, omission, or negligent act of Consultant, itsprincipals. . .”

The scope of the consultant’s indemnity obligation as described in the above sample isbroader than the contractual liability coverage afforded by the professional liability (PL)insurance policy because it is not predicated solely on damages caused by theconsultant’s negligence in performing or furnishing professional services. First, thedescription, “arising from or in connection with,” is a more expansive description ofcausal connection than the common law test of proximate cause, i.e., “caused by or dueto.” Note, also, that while the phrase “error, omission or negligent act” includes theadjective “negligent,” its placement only modifies the word “act,” meaning that non-negligent errors and omissions are included within the scope of the indemnity obligation.This problem is remedied by rearranging the phrase so that “negligent” modifies act,error, and omission (i.e., “negligent act, error, or omission). Further, under the PL policy,coverage for breach of contract is limited to the extent that the breach is due to theconsultant’s negligence. Similarly, coverage for willful misconduct is limited to the extentsuch conduct constitutes negligence in the performance or furnishing of professionalservices. Willful misconduct that constitutes dishonest, fraudulent, malicious, or criminalconduct is expressly excluded from coverage. Finally, the above provision includes a longlist of parties for whom the consultant is liable, including those “directly or indirectly”employed or “reasonably under the control” of any of the parties described. This long,overreaching list should be reduced to read: “. . .Consultant or Consultant’s officers,directors, members, partners, agents, employees, or subconsultants in the performance ofservices under this Agreement.”

Ideally, indemnity obligations should be restricted to the adjudicated negligence of thedesign professional and should be drafted in a manner consistent with the coverageafforded under the design professional’s professional liability insurance policy. A sampleindemnity provision consistent with this proposition follows:


Sample provision: To the fullest extent permitted by law, Consultant shallindemnify Client, its officers, directors, partners, employees, andrepresentatives, from and against losses, damages, and judgments arising fromclaims by third parties, including reasonable attorneys’ fees and expensesrecoverable under applicable law, but only to the extent they are found to becaused by a negligent act, error, or omission of Consultant or Consultant’sofficers, directors, members, partners, agents, employees, or subconsultants inthe performance of services under this Agreement.

Clients rarely propose mutual or cross indemnity provisions wherein the designprofessional indemnifies the client and the client indemnifies the design professional. Thegeneral rationale for clients insisting on a unilateral contractual indemnity provision is thatthe design professional (or contractor) is directly involved in the activity of design (orconstruction) and should take responsibility for claims and shield those whose involvementis passive. In addition, many municipalities and governmental entities are barred fromassuming contractual indemnity obligations as a matter of law or policy. Nevertheless,mutual indemnity provisions are often viewed by design professionals as more reasonablethan a unilateral indemnity provision in favor of the client (or in favor of the primeprofessional under a subcontract). A sample mutual indemnity provision consistent withcommon law principles follows:

Sample provision: To the fullest extent permitted by law, Client and Consultanteach agree to indemnify the other party and the other party’s officers, directors,partners, employees, and representatives, from and against losses, damages,and judgments arising from claims by third parties, including reasonableattorneys’ fees and expenses recoverable under applicable law, but only to theextent they are found to be caused by a negligent act, error, or omission of theindemnifying party or any of the indemnifying party’s officers, directors,members, partners, agents, employees, or subconsultants in the performance ofservices under this Agreement. If claims, losses, damages, and judgments arefound to be caused by the joint or concurrent negligence of Client andConsultant, they shall be borne by each party in proportion to its negligence.

The interpretation and enforceability of indemnity provisions depends upon thejurisdiction, statutes, and case law. There are significant differences on how differentjurisdictions interpret and enforce indemnity provisions. Accordingly, it is essential toconsult with knowledgeable legal counsel when reviewing or drafting indemnity provisions.

Finally, even if an indemnification provision is enforceable in a particular jurisdiction,the indemnification is only as valuable as the worth of the indemnitor. As discussed inPart IV of this publication, the design professional should determine, prior to entering into


a contract, whether the indemnitor is capable of actually indemnifying the designprofessional if necessary.

2.5.8 Limitations of LiabilityA limitation of liability provision is one under which a design professional and a client

contractually agree to limit the liability exposure of the design professional to: (1) aspecified dollar amount; (2) available insurance proceeds; or (3) direct damages, typicallythrough a waiver of consequential damages. Probably the most “saleable” limitation ofliability provision is one based upon available insurance proceeds. (See, e.g., the abovealternatives as styled in EJCDC E-500, 2008 Edition, Exhibit I.)

Courts have held that the intent to limit the liability must be clearly spelled out in thecontract and must be “clear” and “unambiguous.” To determine whether a limitation ofliability provision should be enforced, the courts may examine the contract for suchfactors as the clearness of the language, the intent of the parties, equality of bargainingpower and ability to negotiate between the parties, and the conspicuousness and potentialunconscionability (i.e., unreasonably detrimental to the interest of a contracting party) ofthe provision.

Moreover, a limitation of liability provision is not a “silver bullet.” First, the provisionwill not generally protect the design professional from liability arising out of intentional,reckless, or grossly negligent conduct. Second, the provision is only effective against theclient, not third parties. Third, some states look at limitation of liability provisions asanother form of indemnification for negligence and will not enforce them. A samplelimitation of liability clause follows:

Sample provision: To the fullest extent permitted by law, Client agrees that thetotal liability, in the aggregate, of Consultant and Consultant’s officers, directors,members, partners, agents, employees, and subconsultants, to the Client, itssubsidiary and/or affiliated companies and their respective officers, directors,employees, agents and anyone claiming by, through, or under Client for anyand all injuries, claims, losses, expenses, or damages whatsoever arising out of,resulting from or in any way relating to Consultant’s services, this Agreement orany Addenda, from any cause or causes, shall be limited to [the availableproceeds of insurance coverage] [$_______ or the total amount ofcompensation received by Consultant, whichever is greater].

The design professional should consult with an attorney about the validity andenforceability of a limitation of liability provision in the applicable jurisdiction. Properterminology and adequate documentation of contract negotiations may be critical to theenforceability of the provision.


2.5.9 Insurance RequirementsProfessional services contracts typically include an insurance section that defines

requirements for various types of insurance including commercial general liability, workers’compensation and employer’s liability, automobile liability, and professional liability. (See,e.g., AIA B101-2007, § 2.5 and EJCDC E-500, 2008 Edition, § 6.04 and Exhibit G, §G.6.04.)

Certificates of insurance, evidencing the existence and terms of coverage, are usuallyrequired prior to the commencement of services under a professional services contract.Waiver of subrogation provisions are also commonly included in professional servicescontracts. In general, the purpose of these provisions is to waive claims among the client,design professional, contractor, and their respective insurers in a subrogated capacity tothe extent that the loss or damage forming the basis of those claims has beencompensated by insurance. Waiver of subrogation provisions, therefore, serve the valuablepurpose of ensuring finality for claims compensated by insurance, at least between certainproject participants.

When drafting or modifying contractual insurance requirements, the advice ofinsurance counsel or a broker familiar with design professional services and availablecoverages should be obtained so that the insurance requirements will be consistent withindustry terminology and uninsured sources of risk can be identified for contractualassignment to or management by one of the parties. A sample provision addressingprofessional liability coverage follows:

Sample provision: Consultant shall obtain and maintain a policy of professionalliability insurance (with prior acts coverage sufficient to cover the servicesperformed under this Agreement) with policy limits in an amount of not lessthan $____________ per claim/$_____________ aggregate. Such insurance willbe renewed so as to provide continuous coverage during the term of thisAgreement and for a period of at least twelve (12) months following thecompletion of Consultant’s professional services under the Agreement. Coverageshall not be canceled or reduced in limits by endorsement until at least 30 daysprior written notice is given to Client or cancelled for nonpayment of premiumuntil at least 10 days prior written notice is given to Client.

Clients will often insist on specific contract provisions related to the design professional’sprofessional liability insurance coverage. In order to avoid problematic insurancerequirements in a contract, it must be recognized that professional liability insurance isnormally written on an aggregate limits basis, on a claims-made form, and for an insured’spractice and not for a specific project. When insurance requirements are not consistentwith the nature or availability of the coverage, they create problems for both parties. These


problems typically fall into four categories: naming the client as an additional insured,claims-made versus occurrence coverage, contractual liability coverage, and certificateand notice requirements.

Naming a Client as an Additional Insured Clients often confuse the indemnity character of the professional liability policy with

first-party coverage, such as personal automobile coverage, and sometimes ask to be anadditional named insured. The theory is that being an additional named insured providesdefense coverage and would be advantageous in a personal injury lawsuit. Naming theclient as an additional insured, however, cannot be accomplished on a professionalliability policy since the client is not providing professional services. In addition, becauseof the wording of the policy, if the client were a named insured, it could never collectunder the policy if harmed because the policy pays on behalf of the named insured andnot to the named insured.

Claims-Made versus Occurrence Coverage Often, per occurrence coverage is demanded even though virtually all professional

liability insurance policies are written on a claims-made, aggregate limits basis and areintended to provide coverage for certain claims first made during the policy term. Incontrast with claims-made policies, policies written on an occurrence basis typically coverclaims arising out of occurrences that took place within the policy term, regardless ofwhen the claim is made. Most commercial general liability policies are written on anoccurrence basis, but virtually no professional liability policies are written on this basis.While referring to coverages as being “per occurrence” does not modify the fundamentalcoverage of a professional liability insurance policy, the use of the term is incorrect andmisrepresents the coverage afforded by the policy and should be corrected to read “perclaim and in the aggregate.”

Contractual Liability Coverage Some clients ask their design professionals to provide contractual liability insurance as

part of the coverage provided by the professional liability policy. This requirement iscommonly written as follows:

Consultant shall maintain at least the following Professional Liability insurancewith a company satisfactory to Client, including contractual liability insuranceagainst the liability assumed in Paragraph X, Indemnification. . .

Contractual liability concerns liability assumed by contract. Clients probably ask forcontractual liability coverage from their design professionals because such coverage isavailable, generally as an endorsement, under a contractor’s commercial general liability(CGL) policy. The broad contractual liability coverage available under a contractor’s CGL


policy is not available under the professional liability policy, and the policy cannot beendorsed to provide such coverage. Nevertheless, professional liability policies, includingthe CNA policy, automatically include a limited form of contractual liability coverage, i.e.,to the extent any contractual liability is predicated on the insured’s negligence in theperformance of professional services.

Certificate and Notice Requirements In their concern that the insurance continues in force, clients sometimes attempt to

impose notice requirements as holders of a certificate of insurance. For example, a clientmay require that the policy be endorsed to provide for the following notice requirements:

No policy shall be cancelled, non-renewed, or materially changed without thirty(30) days prior written notice to Client.

Notice of cancellation or nonrenewal of a policy can be given because such an actionon the part of the insurer can trigger the required notice automatically. On the other hand,a term such as “materially changed” is ambiguous and, as a consequence, a term withwhich it is administratively impossible for the insurer to comply. A “material change”could occur for various reasons, such as: the growth of the firm and the resulting increasein services covered by the policy, establishment of a claim reserve, incurrence of a claimexpense or payment of a claim. Accordingly, “reduced in limits by endorsement” issuggested as an alternative to “materially changed” because the required notice can beautomatically triggered and because it normally addresses the client’s primary concern—that the insured won’t drop their limits without telling the client.

With regard to any required advance written notice period, 30 days is generally normalexcept in the event of cancellation for nonpayment of premium. Most states only require10 days notice of cancellation for nonpayment.

2.5.10 Suspension and Termination of Services for Non-PaymentIf the client fails to make timely payments for services, the design professional may

have the right to suspend performance of services or to pursue the legal remedy oftermination of the contract. Termination is a drastic step that has important legalconsequences and potential liability associated with it, and should be pursued only aftercareful consideration and discussion with legal counsel. In no event, however, should adesign professional terminate an agreement without first providing at least thecontractually mandated advanced written notice to the client so that the client has areasonable opportunity to avert the impending termination by curing the default within thenotice period.

Suspension of services for nonpayment is a less drastic step than termination. Asdistinct from termination, suspension of services merely stops the performance of serviceswhile the nonpayment or other default that forms the basis of the suspension continues.


As with termination, suspension should be preceded by at least the contractuallymandated advance written notice to allow the client an opportunity to cure the default.Professional services contracts should clearly deal with the parties’ rights to suspend orterminate the contract. (See, e.g., AIA B101-2007, Article 9 and EJCDC E-500, 2008Edition, § 6.05.)

Sample provision: Client may terminate this Agreement with seven (7) days’prior written notice to Consultant for convenience or cause. Consultant mayterminate this Agreement for cause with seven (7) days’ prior written notice toClient. Failure of Client to make payments when due shall be cause fortermination or, at the option of Consultant, suspension of services under thisAgreement until Consultant has been paid all amounts due.

2.5.11 Dispute ResolutionContracting parties normally anticipate the possibility of disputes or claims and

include in their agreement some provision for dispute resolution, often involving severalsteps. For example, if direct negotiation between the parties fails to resolve a dispute, theagreement may provide for mediation or an alternative nonbinding “jobsite” process, suchas standing neutral or dispute review board. If these nonbinding processes fail to resolvethe dispute, the contract will designate one of two adjudicative dispute resolutionprocesses—arbitration or litigation. Generally, if the contract is silent or fails to designatearbitration, litigation will be the default dispute resolution process. (See, e.g., AIA B101-2007, § 2.2 and EJCDC E-500, 2008 Edition, § 3.02.)

Mediation is a non-binding process in which an impartial mediator actively assists theparties in identifying and clarifying issues of concern and in designing and agreeing tosolutions for those issues. Mediation is a condition precedent to arbitration or litigationunder AIA B101-2007, § 8.2.1 and is an option for selection under the 2008 Edition ofEJCDC E-500, Exhibit H, § H.6.08. In recent years, mediation has become thepredominant method of dispute resolution for design professionals because it is generallycost effective and, perhaps equally important, is generally far less destructive to thedesign professional’s business relationships than arbitration or litigation. The followingsample language is intended to make mediation a condition precedent to arbitration orlitigation:

Sample provision: Client and Consultant agree that they shall first submit anyand all unsettled claims, counterclaims, disputes, and other matters in questionbetween them, arising out of or relating to this Agreement to mediation inaccordance with the Construction Industry Mediation Rules of the AmericanArbitration Association effective as of the date of this agreement.


Unlike mediation, which is a consensual dispute-resolution process, both arbitrationand litigation are adjudicative dispute-resolution processes designed to result in a finaland binding determination of the dispute. Generally, in the absence of a specificagreement to arbitrate, litigation will be the final and binding dispute-resolutionmechanism.

The perceived advantages of arbitration include less formality, less legal expense, andmore expeditious resolution. Arbitration, however, lacks some of the procedural and legalsafeguards afforded by litigation. Thus, substituting arbitration for litigation involves trade-offs. For this reason, some design professionals who include an arbitration provision intheir agreements place a dollar limitation on the size of claims subject to arbitration. (See,e.g., AIA B503-2007, 9—Dollar Limitation on Arbitration and EJCDC E-500, 2008Edition, Exhibit H, § H.6.08.C.2.)

2.5.12 No Third-Party BeneficiariesObviously, a disappointed client can sue the design professional with whom it has a

contract. However, suits have been brought by contractors or other third parties not incontractual privity with the design professional. Such a third party may contend that it hasa “third-party beneficiary” right in the contract as discussed in 1.10.1. These third partieswill claim to have relied upon the design professional’s services (e.g., opinions, reports,surveys, plans and specifications). For example:

● A contractor may claim additional costs or delays due to alleged errors and omissionsin the plan, specifications, orreports prepared by the design professional.

● Another consultant or the client’s lender may claim damages because it relied uponstatements, opinions, drawings, or reports in its performance of services or inadvancing loan monies.

● A future purchaser of the property may claim damages resulting from reliance uponinformation contained in the design professional’s opinions or reports in deciding topurchase the property.

● Employees of a contractor, subcontractor, or even the government may claim thatthey have been injured as a result of the design professional’s services. Workers’compensation laws limit recovery by employees from their employer. Thus, individualemployees often seek damages against the design professional based on the theorythat the design professional negligently breached its duty to provide jobsite safetyservices or alert workers to potential dangers. A citizen may bring a claim upon thesame theory.

To mitigate this exposure, contracts typically include “no third-party beneficiary”provisions. (See, e.g., AIA Document B101-2007, § 10.5 and EJCDC E-500, 2008Edition, § 6.07.C.) A sample provision follows.


Sample provision: Nothing contained in this Agreement shall be construed tocreate, impose, or give rise to any duty owed by Client or Consultant to anyother individual or entity. Consultant’s services under this Agreement are for thesole use and benefit of Client and may not be used or relied upon by any otherindividual or entity without the express written approval of Client andConsultant.

2.5.13 Liquidated Damages ProvisionsLiquidated damages provisions have been common in client–contractor contracts for

many years. These provisions establish, in advance of contract performance, an amount ofdamages to be assessed in the event the project is delayed beyond the contractcompletion date. Such damages are normally enforceable if they bear a reasonablerelationship to the actual or anticipated damages contemplated by the parties when thecontract was made.

More recently, some unsophisticated clients, who view design professional services andconstruction work as similar, and more sophisticated clients, who may properly perceivethat the design professional substantially controls the progress of performing contracted-for services, seek to include liquidated damages provisions in their client–designprofessional contracts. In most instances, it is inappropriate for design professionals toaccept such provisions because they do not substantially control the completion ofcontracted-for services; for example, they do not control the client’s acceptance ofdeliverables, the permitting of projects, or contractors’ performance of work.

In instances where the design professional does substantially control the progress ofcontracted-for services, a salient caveat to accepting a liquidated damages provision is thecontractual liability exclusion contained in the design professional’s professional liabilityinsurance policy. Under the CNA policy’s contractual liability exclusion described in 5.4,if the liquidated damages exceed the actual damages suffered by the client as aconsequence of the design professional’s negligence in performing or failing to performprofessional services, the excessive damages will be excluded under the policy.

2.5.14 Contingent Consent to AssignmentClients sometimes request that a design professional agree to the collateral assignment

of the client-design professional agreement to some third party, typically the constructionlender. In the context of such a request, there are several considerations to bear in mind:

● The assignment should not alter the substantive and material terms of the client-design professional agreement, such as payment obligations and ownership and useof documents.

● The design professional should not be required to accept the assignment unless allof the client’s obligations have been fulfilled as of the date of the assignment.


● The assignee agrees to accept all of the past, present, and future obligations of theclient as defined in the client-design professional agreement, including curing of anythen-existing client defaults, such as non payment.

In some circumstances, a design professional may be required to give up ownership ofdocument rights as a condition of the assignment. The design professional should notaccept such a condition unless appropriate hold harmless and indemnification protectionis afforded to the design professional for any liability arising from changes or modificationsin the documents made without written authorization.

2.5.15 Cost Recovery and Safe Harbor ProvisionsNo set of construction documents can be expected to be absolutely perfect and

complete. In fact, certain modes of project delivery such as “fast-track” (see furtherdiscussion at 3.4.1) necessarily rely on change orders to alter and fine-tune the design asthe work progresses. Also, certain types of projects, such as facility renovations, requirechange orders to adapt the construction effort to existing conditions that may not beexposed or otherwise knowable until the commencement of the work.

Accordingly, many project owners set aside a contingency allowance in theirconstruction budgets, typically in the range of two to five percent as indicated by theproject’s complexity and other characteristics, to address likely change order costs. Whilechange order costs within such a range do not automatically mean that the designprofessional’s design and construction phase services satisfied the applicable standard ofcare, as a practical matter, the energy spent by a client in attempting to recover all changeorder costs, including those within a reasonable contingency allowance, can be thoroughlycounterproductive to the client–design professional relationship. To avoid this problem, a“safe harbor” provision can be included in the professional services agreement by whichthe client agrees not to pursue legal action against the design professional for changeorder costs that fall within the agreed-to percentage of construction costs. Since 1992,EJCDC has included a “safe harbor” provision as an option in its standard owner-engineeragreement forms (EJCDC E-500, 2008 Edition, Exhibit I, § I6.10.E.3). The EJCDC “safeharbor” provision includes:

● A recognition by the project owner that certain change orders may be required to beissued as the result, in whole or in part, of the imprecision, incompleteness, errors,omissions, ambiguities, or inconsistencies in the design documentation furnished bythe engineer.

● An agreement by the project owner not to sue or bring a claim directly or indirectlyagainst the engineer on the basis of professional negligence, breach of contract, orotherwise with respect to the costs of approved change orders, unless the costs ofsuch exceed a negotiated percentage of the construction cost.


● A contractual reaffirmation that any responsibility of the engineer for the costs ofchange orders in excess of the negotiated aggregate percentage is to be determinedon the basis of applicable contractual obligations and professional liability standardsand that nothing in the contract changes the professional liability standard fordetermining if the engineer is liable in excess of the percentage.

● The aggregate amount does not include costs that the project owner would haveincurred if the work covered by the change order had been included originally.

If a “safe harbor” provision other than the EJCDC provision is to be used, it isimportant to be sure that any responsibility for costs above the contingency will bedetermined on the basis of applicable contractual obligations and professional liabilitystandards. A well-drafted “safe harbor” for change order costs in a professional servicesagreement can allocate risk equitably while reducing the likelihood of counterproductivedisputes during construction.

Increasingly, however, some clients seek to recover costs claimed to be attributable toerrors, omissions, or other deficiencies in the services of their design professionalsthrough contractual cost recovery provisions that are not equitable or insurable. Suchprovisions are typically aimed at accelerating the process of identifying and resolving costrecovery claims by requiring that the design professional’s responsibility for the claim isdetermined during the course of project delivery. In some instances, the designprofessional’s responsibility is determined on a change-order-by-change-order basis. Thefollowing example of one city’s cost recovery provision demonstrates the potential dangersof such a provision:

Sample “dangerous” cost recovery provision: CITY shall maintain a record of allchange orders identified as design errors or omissions. It is specifically agreedthat any change to the work identified as an error or omission on the part ofCONSULTANT shall be considered to be an additional cost to CITY that wouldnot have been incurred in the absence of the error or omission. So long as thetotal change order costs for errors and omissions remain less than five percent(5%) of the total construction cost of the project, CITY shall not look toCONSULTANT and/or its insurer for reimbursement for errors and omissions.Should the sum exceed five percent (5%) of the total construction cost, CITYshall recover the full and total additional cost to CITY. To obtain such recovery,CITY shall deduct from CONSULTANT’s fee a sufficient amount ofCONSULTANT’s insurance deductible. Should additional costs incurred by CITYexceed CONSULTANT’s insurance deductible, CITY shall look to CONSULTANTand CONSULTANT’s insurer for the remaining amount of additional constructioncosts incurred by CITY. In executing this agreement, CONSULTANT agrees tothe reasonableness of these calculations and to CITY’s right to recover same as


stated above and CONSULTANT ensures that its insurer has been provided acopy of this provision. The recovery of additional costs to CITY under thisparagraph shall not limit or preclude recovery for other separate and/oradditional damages, which CITY may otherwise incur.

The above cost recovery provision does not exclude betterment and is not predicated onthe negligence of the consultant. Absent negligence, this provision is far broader than thelimited contractual liability coverage afforded by a professional liability insurance policy.(Betterment occurs when an injured party is compensated for more than its loss (see also1.13.4).) Although it may be appropriate for the consultant to be financially responsiblefor damages caused by its negligent acts or omissions, this should not extend to improvingthe project or the city’s economic position compared to what it would have been if no sucherror or omission had occurred.

Sample “corrected” cost recovery provision: The CITY recognizes and expectsthat certain Change Orders may be required to be issued as a result in whole orpart of imprecision, incompleteness, errors, omissions, ambiguities, orinconsistencies in the construction documents or other services furnished byCONSULTANT under this Agreement (“Covered Change Orders”). Accordingly,CITY agrees not to sue and otherwise to make no claim directly or indirectlyagainst CONSULTANT on the basis of professional negligence, breach ofcontract, or otherwise with respect to the costs of approved Covered ChangeOrders unless the costs of such approved Covered Change Orders exceed fivepercent (5%) of the total Contract Sum (as defined in the Contract forConstruction), and then only for an amount in excess of such percentage. Anyresponsibility of CONSULTANT for the costs of Covered Change Orders in excessof such percentage will be determined on the basis of applicable contractualobligations and professional liability standards. For the purposes of thisparagraph, the cost of Covered Change Orders will not include any costs thatCITY would have incurred if the Covered Change Order work had been includedoriginally without any imprecision, incompleteness, error, omission, ambiguity, orinconsistency in the construction documents and without any other error oromission of CONSULTANT related thereto. Nothing in this provision creates apresumption that, or changes the professional liability standard for determiningif, CONSULTANT is liable for the cost of Covered Change Orders in excess of thepercentage of the total Contract Sum stated above or for any other ChangeOrder. Wherever used in this paragraph, the term CONSULTANT includesCONSULTANT’s officers, directors, partners, employees, agents, andCONSULTANT’s subconsultants.


2.5.16 Prevailing Party ProvisionsMany design professionals feel that requiring the non-prevailing party to pay the

prevailing party’s attorneys’ fees and related expenses is fair and provides a “chillingeffect” on non-meritorious claims. Such provisions, however, can also serve to inhibit aweaker economic party—often the design professional—from asserting a meritoriousclaim, due to the uncertainty of the adjudicated outcome and fear of being heldresponsible for the stronger party’s investment in legal fees. Thus, a prevailing partyprovision can work to the detriment, rather than advantage, of a design professional.

Under the so-called “American Rule,” attorneys’ fees are not generally awardable tothe prevailing party in litigation unless the opponent acted in bad faith or the award ofattorneys’ fees is contractually authorized. Similarly, although the AAA rules allow anarbitrator to “grant any remedy or relief which is just and equitable and within the termsof the agreement of the parties,” state arbitration laws modeled on the Uniform ArbitrationAct follow the American Rule’s prohibition on the award of attorneys’ fees in the absenceof express contractual authorization. Virtually all professional liability insurance policies,however, contain coverage exclusions for liabilities assumed by contract and that wouldnot exist in the absence of the contract. Consequently, unless the controlling law supportsa prevailing party provision, such provisions should generally be avoided.

2.5.17 SeverabilityDepending on the facts or the provisions involved (e.g., the indemnification and

limitation of liability clauses), courts in various jurisdictions may find some clauses to bein violation of public policy or otherwise void and unenforceable. To protect the remainingcontract, however, the design professional should include a severability clause. Then, evenif a contract provision is considered unenforceable, the remaining provisions remain ineffect. An example of a severability clause follows:

Sample provision: If any of the provisions of this Agreement shall be finallydetermined to be invalid or unenforceable in whole or in part, the remainingprovisions hereof shall remain in full force and effect, and be binding upon theparties hereto. The parties agree to reform this Agreement to replace any suchinvalid or unenforceable provision with a valid and enforceable provision thatcomes as close as possible to the intention of the stricken provision.

The second sentence of the clause, in which the parties agree to reform the contract,protects the bargain or compromise that may have contributed to certain clauses. Forexample, if the design professional lowers the fee in exchange for inclusion of a provisionthat is subsequently determined to be unenforceable, the design professional will stillwant something in return for the reduced compensation. Thus, the replacement of theprovision with another similar provision is important to fill that gap.


2.5.18 SurvivalIt is important to ensure that the protective provisions (i.e., the limitation of liability,

the indemnification, dispute resolution, and the scope of services) remain in effect evenafter the contract is completed or terminated. This may be accomplished by using asurvival clause such as the following:

Sample provision: Articles ____ , ____ , and ____ shall survive the completionof the services under this Agreement and the termination of this Agreement forany cause.

2.5.19 Applicable LawThe design professional may negotiate with the client to determine what jurisdiction

applies in the event of a dispute. Though the design professional may want to choose thelaw of a state that is favorable or convenient to the design professional, such action alonecan lead to a dispute. Sometimes choice-of-law clauses are not upheld by the courts. Thebest practice, generally, is to state that the law of the place of the project is controlling.(See, e.g., AIA B101-2007, § 10.1 and EJCDC E-500, 2008 Edition, § 6.06.)

2.6 Coordination of Prime Contracts and Subcontracts

The agreements between the prime professional and each of his independentprofessional consultants should describe, in detail, the duties and responsibilities of theprime professional and independent consultant. Because virtually all design andconstruction projects involve multiple contracts they should be similarly constructed toavoid conflict and ambiguities. The EJCDC and AIA both publish families of documentsthat are integrated and coordinated. Thus AIA’s client-architect agreement form, AIAB101-2007, is coordinated with its architect-consultant agreement form, AIA DocumentC401-2007. Likewise, EJCDC E-500, 2008 Edition is coordinated with EJCDC E-570,2007 Edition.

Generally, these agreements require that the consultant provide services to the primeprofessional in the same manner as the prime professional is bound by the primeagreement to provide such services to the client. Also, a copy of the prime agreement (lesscompensation amounts) is usually attached and made a part of the agreement.

Among many points of coordination, the following are often not given sufficientattention:

● Design criteria and standards, including drawing or CADD file format requirements,etc.

● Schedule requirements.● Budget requirements and any contractually established construction cost limitations.


● The terms and timing of payment.● Submittal review and jobsite visits.● Use and ownership of documents.● Terms and provisions for termination.● Dispute resolution provisions.● Professional liability and other insurance requirements, including the furnishing of

certificates evidencing such coverage.● Limitation of liability provisions. (Generally, a prime should not accept a Limitation

of liability provision proposed by a consultant unless the client similarly limits theprime’s liability.)

2.7 Performing Services Without a Written Agreement

Financial and risk management considerations suggest that it is not a good policy toperform services in the absence of a written professional services agreement. It frequentlyhappens, however, that for one reason or another a firm decides to provide services priorto execution of a formal written agreement. Even then, a minimum record of thearrangements with the client would be appropriate. This can take the form of a so-called“commitment letter,” sometimes referred to as a letter of intent. The content may varysomewhat depending on the stage and content of prior communication with the client.

If the client has serious reservations about either the proposed scope of services or theproposed compensation, it would be wise to refrain from performing services until thesereservations can be addressed and resolved. On the other hand, if the scope of servicesand the basis of compensation have been proposed and essentially agreed upon, a letterauthorizing the design professional to begin with services on that basis for a limited periodof time could be executed, pending negotiation of the terms and conditions. If only a fewterms and conditions are in controversy, those might be expressly identified as open forfurther discussion while all others are deemed to apply to the services performed underthe letter.

If the proposal includes a scope of services but does not comprehensively addresscompensation, it may be possible to obtain authorization to proceed, with compensationto be based on time expended at the firm’s normal billing rates, at a multiple of salary, oron some other basis.

In either event, it is advisable to include a time limit for the authorization contained inthe commitment letter. That provides an incentive to negotiate and execute the formalagreement promptly. This period is normally only 30 days unless there is good reason toextend it. If no specific scope of services has ever been proposed, it may still be possibleto begin with compensation on a time-and-expense basis.


Sample commitment letter:[Date][Client contact’s name]

Sky-Mart Stores, Inc.1 Sky-Mart DriveWilmington, DE

Re: Parking Lot Renovations and Expansion, Store #47, Gainesville, Florida (theProject)

Dear [Client contact’s name]

This letter shall serve to confirm your request to Risk Ready Design LLC toproceed with the performance of the professional services outlined in ourproposal to you dated ___________ in connection with the captioned Project.

Pending negotiation and execution of a comprehensive agreement for suchservices, we would be pleased to commence performance thereof inaccordance with the compensation arrangements and the terms and conditionscontained in our ________________ proposal to you.

If this arrangement is acceptable to Sky-Mart Stores, Inc., please have anauthorized representative thereof indicate such agreement by signing anddating both copies of this letter and returning one copy to us for our files.

We look forward to working with you on what is sure to be an exciting project.

Sincerely,Risk Ready Design LLC________________________________________

Frank L. Wright, President

The provisions of this letter are agreed to and accepted by:

Sky-Mart Stores, Inc.By: ______________________________Title: ______________________________Date: ______________________________



2.8 Summary

Clear and concise contract terms can substantially reduce a design professional’sexposure to disputes, claims, and liability. Moreover, contracts are excellent devices forfacilitating communication and defining appropriate expectations among contractingparties.

During the development and negotiation of specific contract provisions, designprofessionals should recognize the need for certain essential terms and conditions, as wellas the need to avoid certain other provisions, such as warranties and broad indemnityobligations. Such provisions result in unreasonable and uninsurable exposures to liability.While contracts for specific projects may vary considerably, the following generalprinciples for structuring reasonable professional services agreements serve as a reliableguide:

● Determine who is in the best position to carry out responsibilities and assignresponsibilities accordingly. Shifting risk to a party incapable of managing the risk isboth unreasonable and unproductive.

● Assign responsibilities to those with the authority to fulfill them. Having theauthority to do what is necessary to satisfy a contractual obligation is a basicprinciple of contract formation.

● Assign each responsibility to only one party. Co-responsibility creates a situation inwhich neither party is fully responsible or accountable.

● Use provisions that create reasonable and realistic expectations. The use of absolutelanguage or superlatives in describing the performance of professional servicesenhances the probability of disappointed expectations, disputes, and liability.

Part III – Part III – Large Firm Large Firm Specific Risk ManagementSpecific Risk Management

3.1 Introduction

Some of the risks of being a large A/E firm are inherent to being a business entity of acertain size in the United States. Large firms have always been perceived as

successful entities, and successful entities have always been subject to a greater level ofscrutiny by society. Large firms are therefore more likely to be dragged into claims even ifit is clear that they have no responsibility for any alleged damages. A claimant is morelikely to file a claim against a large firm because they may think that firms of a certainsize have deeper pockets and are more likely to settle quickly.

That said, large firms should be aware that because of their size they are going to beconsidered sophisticated parties in any transaction. It is very unlikely that a court, wheninterpreting the intent of a particular disputed contract clause, will find that the firm wasnot a sophisticated enough legal party to be aware of any negative ramifications. Due tothis heightened risk, large A/E firms should pay particular attention to avoid vague orambiguous language in their professional services agreements, both in the generalconditions and the project specific portions where the scope of services is defined.

3.2 Need for Consistency Across Different Offices

Large firms typically have a large footprint in at least one region, and depending ontheir size, may have a nationwide presence. Large A/E firms have likely grown in one oftwo ways: with entrepreneurial members of the firm establishing a presence in a newlocation or acquiring firms in a new location to expand the firm’s capabilities andgeographic reach. A large firm always balances the need for standardization in its businessoperations across the firm while still maintaining the flexibility needed to serve clients in aparticular region who may have specific requirements. The long term success of firmsdepends in large part on how successfully they balance these needs.

From a risk management perspective, it is prudent to have similar practices in placeacross all offices. Client selection criteria, the typical scope of services in particularpractice areas, and an appetite for risk should all be fairly consistent firm wide. However,particular client needs and regional requirements often impose significant differences onthe way services are priced and delivered in different offices. These differences may, overtime, adversely impact internal risk management practices in specific regions, exposingthe firm to claims that would have been avoided if it adhered to firm-wide practice. It is

III


therefore important that firms make sure that their risk management practices areconsistent across the firm.

Large A/E firms should also be ready to adopt risk management policies and proceduresthat are specific to a particular area. For example, certain regions have higher regulatoryrequirements for particular practice areas. These higher regulatory requirements cansignificantly impact the risk profile of the practice area in this particular region. Withappropriate pre-project planning, the higher regulatory requirements can be identified,assessed, and handled. One risk management tool that a large A/E firm can use is todevelop contract language that limits the particular risk to the firm.

3.3 Contractual Issues Related to Specific Professional Services

Large firms often have a broad range of practices, but the depth of experience in someof the practices may be limited, sometimes to a few employees or just one office. Theability to offer a “one stop solution” to clients enhances a large firm’s opportunities andthe client will, at the very least, expect the same level of expertise from the large firm thatit would get from a smaller firm specializing in that practice area. It is important toactively examine all of the practices individually for risk management issues particular tothat practice area. Below are some issues from individual areas of practice.

3.3.1 Interiors DesignThe professional services of interior designers include the design for the layout of

interior spaces and specifications for certain portions of the furniture, furnishings, andequipment (FF&E). Interior designers are often asked to purchase furniture, furnishings,and equipment on behalf of their clients or to accept bids for FF&E as an agent of theclient, binding the client to the terms and conditions of the supplier’s bids. In both thesecases, the interior designer should be careful in defining their role and the scope of theirauthority.

Purchasing Furniture, Furnishings, and Equipment for ClientsThe procurement of FF&E can be part of the interior designer’s professional services;

however, procuring FF&E presents special risks. Interior designers need to be aware of thecoverage limits and exclusions of their professional liability policy. The CNA professionalliability policy for interior designers and other design professionals provides coverage forthe negligent performance of professional services. The CNA policy, however, also providesan exclusion for any claim “arising out of the sale or distribution of goods or products” bythe policyholder. Care must be taken in those situations in which the interior designer hasagreed to provide procurement of FF&E as part of the professional services provided to theclient. Such activity may fall within the exclusion of the professional liability policy.


In a situation where the interior designer is purchasing FF&E on behalf of the clientand such services are included in the professional services agreement, that activity willlikely be viewed as part of the professional services provided by the interior designer andthe policy will cover any claims that may arise out of the interior designer’s negligence.

Such activity can happen in one of two ways:

● When the interior designer procures the FF&E through vendors with which the clienthas established an account, and the client pays the vendor directly; or

● The funds for the purchase of the FF&E are incorporated into the fees forprofessional services.

A separate agreement that clearly articulates the agency relationship between the interiordesigner and client is advisable.

When the interior designer agrees to provide procurement of FF&E, such activity maybe viewed as the “sale and distribution of goods or products” and excluded from coverageunder the professional liability policy. This may be true even if the funds for procurementare not included in the fees for professional services but are instead paid for directly withfunds from the interior designer and are invoiced at a markup to the client. In thissituation, title to the FF&E actually passes to the interior designer, who keeps it for aperiod of time before title then passes to the client. Even though such activity may beexcluded from coverage under the professional liability policy, there may be coverageunder another policy, such as a general commercial liability policy. Interior designers whoengage in the sale or distribution of goods and products, commonly referred to as “puttinggoods or services in the stream of commerce,” should also recognize that such activity willbe governed by the Uniform Commercial Code and may include other risks, such asproduct liability. Consultation with legal counsel to draft an agreement to govern thisactivity is advised.

Accepting Bids for Furniture, Furnishings, and Equipment on Behalf of the ClientMuch like the selection of a FF&E vendor, the interior designer should remember that

acceptance of a bid or quote should be made by the client since the client will be boundby the terms, conditions, and bid or quote price. Interior designers who accept a bid orquote on the client’s behalf assume the risk that their client will not be satisfied with theclient’s resulting obligations. The interior designer, however, can provide a valuable serviceto the client by providing assistance in the evaluation of various bids and quotes that willaid their client in making an informed selection. Criteria to consider in evaluating bidsand quotes include:


● Review of the bid or quote’s adherence to requirements in the contract documents:since the interior designer has first-hand knowledge as to the FF&E requirements inthe contract documents, the interior designer can assist the client in evaluating thebid or quote’s adherence to those requirements.

● Review of alternates or substitutions: occasionally, bids or quotes will containalternates or substitutions as suggestions for reducing the overall price of the FF&E.Interior designers can assist their clients by evaluating the alternates or substitutionsas to their adherence to requirements in the original bid or quote documents.

● Review of differences in bids or quotes: despite the fact that vendors are biddingand quoting the same FF&E requirements in the contract documents, it is notuncommon for bids or quotes to vary widely. Interior designers can assist theirclients by conducting research into possible reasons for the variances. Variances maybe due to supply and demand of a particular item in the area of the vendor’sbusiness or vendor confusion as to the FF&E requirements of the contractdocuments.

The role of the interior designer in assisting the client in selecting a bid or quoteshould be that of providing the client with information, based on objective standards, thatmakes the client feel comfortable in making an informed decision. Remember that sincethe client will be bound by the terms of the bid and will enter into a contract with thevendor, the client is the appropriate party to formally accept the bid.

3.3.2 Landscape ArchitectureLandscape architects are tasked with balancing both the functional and aesthetic

features of the grounds. Firms offering landscape architecture should address thefollowing areas:

MaintenanceBecause inadequate maintenance can be devastating to lawns, plantings, and other

site improvements, a clear contractual provision similar to the following concerning theclient’s maintenance responsibility is important.

Sample provision: Client is responsible for the maintenance of all installed items,including but not limited to site furnishings, equipment, lawns, plantings,irrigation systems, and all work designed or specified under this Agreement.Maintenance shall be in accordance with good industry practice andmanufacturers’ or suppliers’ recommendations.

Modifications or ChangesClients are often actively involved in the appearance of grounds and are therefore likely

to make changes during the project. A reduction in the landscaping features is also an


area of the project that a client will look to if there is a need to cut costs. Since the scopeor schedule of the landscape architect’s services often changes during the course of theproject, it is important that the professional services agreement outlines procedures toaccommodate these changes.

Sample provision: In the event of a material change in Landscape Architect’sscope of services or Landscape Architect’s time or other condition for theperformance of services, through no fault of Landscape Architect, thecompensation due Landscape Architect and the time allowed for LandscapeArchitect’s performance shall be equitably adjusted. Any such change shall bein writing.

3.3.3 Land SurveyingFrom the determination of property boundaries and rights at inception of a project

through its final completion when as-built conditions have to be verified, land surveyorsare called upon to provide critical services.

CertificationsIncreasingly, surveyors are being asked to sign certifications, which, because of the

phrasing of the certification, result in unanticipated liability exposure. These certificationsinvolve possible uninsurable warranties and guarantees of conditions beyond thesurveyor’s knowledge or control. Because surveyors are routinely asked to signcertifications, a large firm should take steps to make sure that all of the surveyors areaware of the implications and that non-standard certifications are reviewed carefully. Tosummarize, certifications should be:

● Based on the contractual services;● Identified as to their purpose;● Indicated as being at a specific time and for a specific entity; and● Limited to a statement of facts directly known by the surveyor, or clearly identified

as an expression of the surveyor’s professional opinion, such as by including astatement that it is based on surveyor’s knowledge, information, and belief.

In the scope of work detailed in the contract between the surveyor and client, thereshould be an acknowledgment of the certification to be executed by the surveyor, and thatcertification should be described as the certification appearing in the ALTA/ACSMstandards. The surveyor is then in a solid position to deny executing the eleventh hourversion presented by an attorney for the bank, the title insurer, or the purchaser of theproperty. The professional services agreement should also make it clear that ultimately itis the surveyor who has to author the certification statement.


Indemnity ProvisionsSurveyors are often on the construction site providing staking services to establish

horizontal and vertical control points. Often, forms that are designed for contractor-subcontractor arrangements are used and these forms may contain onerous contractualindemnity provisions that shift risk from one party to another. Surveyors who provideconstruction site staking services should consider adding an indemnity provision from theclient similar to the following:

Sample provision: The Client shall hold harmless and indemnify Surveyor fromall losses, damages, costs and expenses which Surveyor may suffer or sustainwhich result from acts or omissions of any contractor, subcontractor, supplier, orany of their agents, employees or any other persons (except Surveyor’s ownemployees and agents) at the site or otherwise furnishing or performing any ofthe contractor’s work. Nothing contained in this paragraph, however, shall beconstrued to release Surveyor from liability for failure to properly perform dutiesand responsibilities assumed by Surveyor under this Agreement.

3.3.4 Construction ManagementThe typical construction manager provides services under direct agreement with the

client. Construction managers can have significant liability exposure for jobsite safety,construction means and methods, constructability, scheduling, and cost-related issues.

Defining the Client’s ResponsibilitiesBecause the construction manager acts as the client’s agent when performing the

construction management services, clear identification of the client’s responsibilities isimportant to make sure that the construction manager can provide services in a timelymanner.

Sample provision: So as not to delay the services of Construction Manager,Client shall designate in writing a person to act as its representative with respectto Construction Manager’s services; provide all criteria and full information as toClient’s requirements for the project; place at Construction Manager’s disposalall available information pertinent to the project and any site where services areto be performed; provide or arrange for legal access and make all provisions forConstruction Manager to enter any site where services are to be performed; andgive prompt written notice to Construction Manager whenever Client observes orotherwise becomes aware of any development that affects the scope or timing ofConstruction Manager’s services. Construction Manager shall be entitled to relyupon the information, services, and instructions provided by Client and Client’srepresentative.


Responsibility for Permits and ApprovalsIt is important to properly distinguish between assisting the client in meeting the

obligations to obtain permits and approvals and committing to actually obtain suchpermits and approvals.

Sample provision: Construction Manager shall assist Client in obtaining buildingand other permits for permanent improvements, except for those permitsrequired to be obtained directly by contractor. Client shall secure and pay fornecessary approvals, easements, rights of way, assessments, and fees requiredfor the construction, use, or occupancy of the project.

3.3.5 Environmental RemediationFirms offering environmental remediation services should be aware of the laws and

regulations because they both create the need for environmental services and imposesome unique liability exposures on those professionals who provide them.

Protecting the Client’s InformationA client may include a contract provision that requires an environmental practitioner to

maintain confidentiality regarding the nature of any information they develop or data theyobtain, when that information is related to a project. Such a provision may be acceptableand reasonable if the terms are not so broad as to restrict the rights and obligations of thepractitioner in providing professional services. Nothing in a professional servicesagreement should compromise a design professional’s ability to carry out professionalresponsibilities to the public.

Disclosing Information as the Client’s ResponsibilityThe client may have an affirmative obligation to disclose known information about the

site to its environmental practitioner. Furthermore, an environmental practitioner canrequire that the client investigate and provide information about the site by specificallycontracting for such disclosure. For example, EJCDC Document E-500, Exhibit B, 2008edition, includes this language:

Owner shall:A. Provide Engineer with all criteria and full information as to Owner’srequirements for the Project, including design objectives and constraints,space, capacity and performance requirements....

B. Furnish to Engineer any other available information pertinent to the Projectincluding reports and data relative to previous designs, or investigation at oradjacent to the Site.


C. ...furnish or otherwise make available such additional Project relatedinformation and data as is reasonably required to enable Engineer to completeits Basic and Additional Services...[including]....

5. Environmental assessments, audits, investigations, and impactstatements, and other relevant environmental or cultural studies as to theProject, the Site, and adjacent areas.

Disposing of Hazardous WasteArranging for the disposal, treatment, or transportation of hazardous substances may

assume significant liability exposure. To protect against this situation (unless it is withinthe scope of services and the risk is clearly understood), the environmental practitioner’sscope of services should not include any responsibility for specifying the means oftransportation, handling, or disposal of materials excavated from the site.

One danger that accompanies this responsibility is the role of the engineer on anenvironmental remediation site who serves as the agent of the client and signs transportmanifests on the client’s behalf. Without appropriate contractual protection, the engineermay be at risk for “arranger” liability. The risk, therefore, is extensive while the duty isonly ministerial. Clients should recognize that this risk is (and should remain) the risk ofthe client, even if the engineer is recognized under statutory law as an “arranger.” Clients,therefore, should authorize the engineer to serve as an agent for the limited purpose ofsigning the manifests, and they should protect the engineer in the same way that anyemployee of the client would be protected. Language that might accomplish this equitableallocation of responsibility is the following:

Sample Provision: It is acknowledged by both parties that Engineer’s scope ofservices includes acting as the agent of the Client for the purpose of authorizingthe transport of materials responsible for a Hazardous Environmental Condition.Client acknowledges that Engineer is performing such activities as a professionalservice for Client and that Engineer is not, and shall not be required to become,an “arranger,” “operator,” “generator,” or “transporter” of hazardoussubstances, as defined in the Comprehensive Environmental Response,Compensation, and Liability Act of 1990 (CERCLA). To the fullest extentpermitted by law, the Client shall defend, indemnify, and hold Engineerharmless from and against all claims, costs, losses, and damages (including butnot limited to all fees and charges of other professionals and all court orarbitration or other dispute resolution costs) arising out of or relating to thisProject, the Remediation or the site, except to the extent that such claims,costs, losses, or damages result from the sole negligence of the Engineer inperforming this function.


3.3.6 Sustainable DesignBroadly speaking, sustainable design imposes an obligation on the design professional

to design in an environmentally responsible manner so that present needs are met withoutcompromising the ability of future generations to meet their own needs. In the U.S.market the concept of sustainability is quantified by use of a rating system such asLeadership in Energy and Environmental Design® (LEED) or Green Globes™.Sustainability goals are also outlined in statutes or executive orders, and designprofessionals should be aware of these requirements as well as the prevailing standard ofcare for these types of projects and ethical obligations that professional societies haveplaced on their members. Close examination of all sustainable design contractualobligations is essential. The following areas are of special concern:

● A contractual commitment to obtain third-party certification: Third-partycertification is bestowed by a third party such as the United States Green BuildingCouncil (USGBC). In addition to design criteria, the actual completed facility has tobe evaluated to obtain the desired certification and a lot of these factors are outsidethe control of the design professional. Design professionals should make sure thattheir commitment is described as assisting the client to submit the appropriatedocumentation at various intervals of the project.

● Implied or express warranties: Third-party certification and sustainability projectsoften imply savings due to reduced energy and water use. Contracts should becarefully reviewed to avoid making implied or express warranties.

On any sustainable design project, firms should make sure that the contract they useproperly recognizes that the design professional is providing services that involveprofessional judgment.

3.3.7 Facilities Management / Operation and MaintenanceFacility owners are increasingly outsourcing their responsibilities to successfully

manage their assets as well as operate and maintain the facility. Owners often want tofocus on core business functions and increasingly recognize that a well-maintained facilityis likely to require smaller capital expenditures in the future. Thus, asset managementfunctions are being turned over to design firms that provide operation and maintenanceservices. The most important feature of facilities management/operation and maintenancecontracts is the description of the scope of services to be provided. Along with the scopeof services, the scope of the responsibility of the design firm has to be well-defined sothat both parties can clearly identify the role of each party. Since the owner’s personnelare in daily contact with the design firm’s personnel, clear communication channels haveto be spelled out.


Facility owners typically require that the design firm undertake inherently unsafeobligations to maintain the existing facility. Since this undertaking is for the owner’sbenefit, it is reasonable to require that the owner defend and indemnify the design firm forany claims that may arise from any of the unsafe conditions and obligations, unless thoseunsafe conditions and obligations are caused by the design firm’s negligence. Design firmsshould also seek indemnity obligations that indemnify the design firm for the presence,discharge, and release of contaminants of any kind. The Resource Conservation andRecovery Act (RCRA) provides regulation of hazardous waste from generation, throughtransportation and treatment, storage, disposal, and post-storage monitoring. Design firmsshould be aware of the requirements imposed by RCRA as they relate to the facility theyare planning on operating and maintaining for the client. RCRA violations can result incriminal or civil liability.

3.3.8 CommissioningCommissioning is the process of ensuring that a completed facility meets the intent of

the construction documents as well as the client’s and occupant’s needs. Depending onthe project complexity and project requirements, the scope of commissioning activitiescan vary greatly. For example, in recognition of the fact that properly installed systems anduser training are key for the client to realize any of the benefits of sustainable projects,commissioning procedures are part of the LEED point system. Clients are also increasinglyrequiring that commissioning activities start as early as the pre-design phase and that thecommissioning activities are comprehensive, involving system optimization and tuning inthe post-occupancy phase, facility operator training, and post-warranty follow up oninstalled systems.

Defining the scope of services in the contract is important when providingcommissioning services. Close attention should be paid to the scope of services and theresponsibility for certain activities such as testing between the contractor and thecommissioning agent. The other area of concern is in defining the commissioning servicesincluded in basic services as part of the expected iterative process of commissioning asthe contractor takes corrective action to achieve compliance. Use of a standard formdocument like the AIA B211—Standard Form of Architects Services: Commissioning,should help the parties properly define the scope of services.

3.3.9 Condominium DesignResidential or “habitability” projects generally, and condominium projects in particular,

have proven to be the worst project types from a professional liability claims perspective.When something goes wrong in the design or construction of a residential condominium,the flaw is likely repeated throughout all units. As a result, there are multiple claimantsinvolved, with damages aggregated across the condominium complex. A minor issue thatmay not have been pursued for one owner can be addressed in a class action suit, with the


legal bill shared among all claimants. The ability to share the effort and expense of filing aclaim or suit, along with the aggregate nature of the claim across all units, results in ahigher frequency and severity of claims.

Also, some condominium developers come into an area for one or two projects and withan eye singularly fixed on the bottom line. With few ties to the community, they disappearquickly after turning over the project to the condominium owners’ association. Whenproblems begin to surface, the design professional is the only one around. Exacerbatingthis problem is the fact that such developers often minimize the construction phaseservices traditionally provided by the design team. As a consequence, the design team isoften not sufficiently present during construction to observe whether the project is built insubstantial compliance with the requirements of the contract documents. The issues andrisk management implications arising from condominium claims are extensively addressedin a paper authored by G. William Quatman, FAIA, Esq., and published by the AIA Trust inApril 2006. These materials are available at no cost for download atwww.theAIAtrust.com/CondoCrises/index.htm.

Not surprisingly, condominium claims and other condominium-related problems havealso prompted many states and some municipalities to enact specific laws relating tocondominium development, sales, and common ownership association management.Design professionals involved in condominium projects must become thoroughly familiarwith such requirements. In addition, given the enhanced risk profile of condominiumprojects, the design professional should also consult legal counsel with expertise inapplicable state and local laws and on any legal constraints in the design professional’semployment of protective contract language to mitigate against the condominium claimsexposure.

In decades of dealing with the enormous risks involved in designing condominiums, no“bullet-proof” contract language can be claimed. With the caution that competent localcounsel should review all contractual language, however, design professionals involved incondominium and other residential projects should consider the use of contract provisionssimilar to the following:

Time Limitation on Client ClaimsEven though clients are not the source of many of the disastrous claims related to

condominiums, it may be worthwhile to limit the client’s options when bringing a claim.The use of AIA documents can help limit client claims. AIA documents include provisionsthat begin the applicable statute of limitations at the time of substantial completion. Thismeans that the design team, via the professional services contract, cuts the length ofexposure to client claims. Since most claims happen within a few years of substantialcompletion and are not cut off by the conversion of a statute of limitations into a statuteof repose, such a provision does not limit condo purchaser or other third party claims. Thefollowing language is similar to the AIA provision:


The applicable statute of limitations for causes of action between the parties tothis Agreement shall commence to run at the date of Substantial Completion ofthe Project.

Waiver of Client ClaimsA firm could also attempt to have a client voluntarily waive its right to bring a claim.

Sometimes, when such a waiver is made before a problem surfaces, the waiver is heldinvalid. Care should be taken to determine if the waiver could last longer than thecontractual relationship. Such a waiver, however, only affects those claims that could bebrought by the client; no limitation on third party claims is possible. A waiver provisionmight be worded as follows:

In return for Consultant providing professional services on this condominiumproject and to the fullest extent permitted by law, Client agrees that neitherConsultant nor its officers, directors, members, partners, agents, employees, orsubconsultants shall be jointly, severally, or individually liable to Client for anyclaims made by, through, or under Client except where it is determined that thecost, loss, or damage is solely caused by the negligence or willful misconduct ofConsultant.

Limitation of Design Firm LiabilityLimitation of liability provisions, where enforceable, only limit the liability of the design

professional to its client. Such provisions, however, do serve as a lower starting point forany settlement discussion or mediation (see also 2.5.7). In addition, they tend to put thedesign professional and client on “the same side of the table” when third party claims arebrought. Language similar to the following may be appropriate:

In recognition of the unmanageable risks to Consultant intrinsic in the Projectand to the fullest extent permitted by law, Client agrees that the total liability, inthe aggregate, of Consultant and Consultant’s officers, directors, members,partners, agents, employees, and subconsultants to the Client, its subsidiaryand/or affiliated companies and their respective officers, directors, employees,agents and anyone claiming by, through, or under Client for any and all injuries,claims, losses, expenses, or damages whatsoever arising out of, resulting fromor in any way relating to Consultant’s services, this Agreement or any Addenda,from any cause or causes, shall be limited to [the available proceeds ofinsurance coverage] [$_______ or the total amount of compensation received byConsultant, whichever is greater].


Defense and Indemnification of Third-Party ClaimsPromises by one party to defend another party or to pay on the other party’s behalf are

worthless if the party making the promise is no longer in existence; this is often the casewith condominium developers. The client is often a corporation with limited existence, soits promises effectively end when it goes out of business. Nevertheless, language such asthe following might be effective if the client is financially solvent and stays in business:

To the fullest extent permitted by law, Client agrees to defend, indemnify, andhold Consultant, its officers, directors, members, partners, agents, employees,or subconsultants, harmless from and against any and all claims brought by thepurchasers of condominium units, their successors or assigns, any associationrepresenting the interests of the individual owners, or any claim or allegationbrought by representatives of the condominium purchasers as a class. Clientfurther agrees that this indemnification obligation continues beyond thetermination of this Agreement until any applicable statute of repose precludesclaims.

Preparation and Transfer of Maintenance InstructionsCondominium claims often result from inadequate or improper maintenance of the

facility. The preparation of a maintenance manual and subsequent documentation of itsimplementation status can be helpful in mitigating claims due to neglected maintenancerather than negligent design. Language such as the following may be helpful:

Client agrees that the services of Consultant shall include the preparation of amaintenance manual for the project that outlines basic building and systemsmaintenance requirements. Client further agrees that this maintenance manualand a requirement for periodic inspections of the building and systems by acompetent party shall be included in the bylaws of the Common InterestOwnership Association and that such bylaws shall contain a waiver of claimsagainst Consultant for any failure by the Common Interest OwnershipAssociation to perform such inspection, to perform recommended maintenanceprocedures, or to correct any maintenance requirements that should have beenidentified during such inspections.

Escrow of Maintenance FundsDevelopers may be required to pay into a fund for use in correcting construction

defects or compensating for misrepresentation in quality. Such language might say thefollowing:


Client warrants to Consultant that upon completion of the project, a fund in theamount of _____ for the correction of any design or construction deficienciesshall be transferred to the Common Interest Ownership Association in exchangefor the commitment of the Common Interest Ownership Association to waive anyclaim against Consultant related to the design of the project.

Mediation of Client and Homeowner ClaimsMediation is usually a good first step to avoid major claims. Normally, condominium

owners and their associations have no requirement to seek a mediated solution to aproblem. Many condominium claims are driven by legal counsel seizing on minor issuesand leveraging them into costly adversarial proceedings. The mediation of a claim can helpto remove an attorney’s financial incentive to pursue litigation over minor problems.Forcing mediation into the bylaws might be possible with language such as the following:

Client and Consultant agree that any claim related to this Agreement or theservices provided under this Agreement shall be subject to mediation prior tothe initiation of any legal action. Client further agrees that this requirement ofthe mediation of claims shall be included in the bylaws of the Common InterestOwnership Association such that the Association and any member of theAssociation shall be required to first submit any claim against Consultant tomediation under the rules of the American Arbitration Association in effect atthe time of the claim.

Conversion of a Project into CondominiumsOccasionally during the design and construction of a rental apartment project, a client

may decide to change the use of the project from rental units to those available forpurchase. Even greater exposure to the design professional results when a completedproject is later converted into condominiums for sale. Although one defense against claimsresulting from such conversion is that the new use was not foreseeable, it might be moreeffective to negotiate with the client a proposed remedy should a project be converted intocondominiums after the design is completed. Such a provision might say the following:

Client agrees that the Project is and shall continue to be owned by Client, andthat if the Project’s ownership changes, Client shall waive any claim againstConsultant and defend Consultant against any claim from a future owner, andindemnify Consultant for any cost, loss, or damage to Consultant resulting fromany claim brought by any party against Consultant related to any change in useof Project. Client agrees that this obligation shall survive the termination of thisAgreement.


Of course, sound risk management is more than contract language. The most importantpre-contract risk management techniques for firms providing condo design services arenot significantly different from those applied to every project. Such techniques include:

● Client selection — Is the client a legally stable and financially sound developer withties to the community and a solid reputation for quality projects?

● Project characteristics — Is the project one that meets community approval, has areasonable timeline, and focuses on life cycle value?

● Appropriate scopes of services — Is the design team being asked to provideadequate design and construction phase services as are envisioned in a standardcontract published by The American Institute of Architects (AIA) or the EngineersJoint Contract Documents Committee (EJCDC)?

● Documentation of design decisions and construction observations — Are both thedeveloper and design team aware of the importance of well-documented decisionsand careful monitoring of the construction process?

● Quality management — Is the focus of the developer on creating a quality projectthat will be possible to maintain over the life cycle of the project?

Finally, a special note is appropriate here concerning exterior insulation and finishsystems (EIFS). EIFS are significantly associated with condominium and other residentialproject claims. EIFS are proprietary building systems that integrate a resinous exteriorcladding with a continuous layer of insulation, wrapped around the exterior of buildings.

The typical EIFS claim alleges that defective materials or installation caused moistureintrusion that resulted in property damage (wood rot) and bodily injury (exposure to“toxic” mold). It is often claimed that the only way to fix the problem is to reclad orreplace much, if not all, of the entire structure. The usual defendants are the EIFSinstaller, the developer/general contractor, and the EIFS manufacturer. As a consequence,EIFS exclusions may now be attached to the commercial general liability policies of anycontractor whose work could conceivably be tied to the infiltration of moisture.

The problem for Schinnerer and CNA-insured design professionals is that when there isa significant EIFS-related problem on a project and the contractor or other responsibleparty is uninsured, the plaintiff may look to an insured design professional as a “deeppockets” solution to their problem. Of course, insurance is not the most efficient way todeal with EIFS-related claims or other liability exposures. Proactive design professionalscan play an important role in mitigating the risk of EIFS-related claims. Following aresome basic guidelines that will go a long way toward reducing the likelihood of suchclaims:

● Insist on contracts that allow for performance of an adequate scope of both designand construction contract administration services.


● Decline contracts with unreasonable terms or indemnities.● Limit liability by contract on residential or limited-scope projects.● Get indemnity for design changes by client or others.● Disclose the limitations of EIFS and obtain written acknowledgment from clients.● Remember that EIFS problems begin with rainwater intrusion and leaks typically

associated with:◆ Windows, doors, or electrical outlets.◆ Roof flashings.◆ Deck flashings.◆ Deck attachments.◆ Below-grade installations.◆ Projections or vents.

● Focus on the root causes of rainwater intrusion and leaks, including:◆ Poor design and details.◆ Poor workmanship.◆ Failure to follow installation guidelines.◆ Inter-mixing of materials from different manufacturers.◆ Improper use of caulks or sealants.◆ Lack of building overhangs.◆ Insufficient project budget or schedule.

● Apply design and construction phase QA/QC practices systematically.

3.4 Contractual Issues Related to Specific Project Delivery Methods

Great care should be taken in delineating the scope of services and, in particular, thoseservices likely to expand the design professional’s exposure to claims or liability as aconsequence of the actions or inactions of others.

3.4.1 Fast-TrackFast-track projects contain inherent pressures that increase the likelihood of claims.

They are more likely to require clarifications and modifications to contract documents. Infast-track projects, design and construction activities are concurrent and constructionactually begins before plans and designs are fully complete. Changes should therefore bean expected part of the fast-track process.

Budgeting/Design ContingenciesIn a fast-track project the design professional is required to make design decisions

before all project information is available. These decisions may turn out to be inconsistentwith other aspects of the work or the client’s requirements (which may not have been fullydeveloped at the time the original decision was made), therefore causing additional costs


and delays to the project. Both the client and contractor should be aware of these risksand the contract for both the construction and the design services should beaccommodated by the use of contingency allowances.

Enhanced CollaborationEarly contractor participation and extensive communication between the client,

contractor, and design professional are key for successful completion of fast-trackprojects. Some of the key requirements for success in fast-track projects are jointdesigner-contractor review of design drawings, quick response times by all the parties(client, design professional, contractor) and the need for subsequent revisions to theestablished work plan due to changed conditions or new information. It is essential thatthe enhanced collaboration requirements be reflected in both the professional servicesagreements and the construction contracts.

As a consequence of the above-described disadvantages, fast-track construction oftenresults in an increased risk of claims and liability. The mitigation of this risk requiresrealistic client expectations, effective project management, and a willingness by eachproject participant to work together to find timely solutions. In addition, it is advisable toinclude language in the professional services contract that specifically acknowledges thebenefit and risk associated with fast-track scheduling. (See AIA Document B103-2007, § 5.3.1)

Sample provision: Client desires that Project be designed and constructed on afast-track basis, i.e., that construction commences prior to the completion of allrelevant Construction Documents. Client acknowledges that while the fast-trackprocess may provide benefits, such as earlier project occupancy, it also involvesadditional risk, including but not limited to the Client’s incurring of costs forConsultant to coordinate and redesign portions of Project affected by procuringor installing elements of Project prior to the completion of all relevantConstruction Documents and costs for Contractor to remove and replacepreviously installed Work. In consideration of the benefits to Client in employingthe fast-track process, and in recognition of the inherent risk associated withthe fast-track process to Consultant, and notwithstanding anything to thecontrary contained herein, Client agrees to waive all claims against Consultantfor design changes and modifications of portions of the work constructed,together with any associated delays, due to Client’s decision to employ the fast-track process.

3.4.2 Design-BuildIn a design-build project delivery method, an entity takes responsibility for the final

design and construction of a project. Some clients prefer the design-build approach


because a single entity is held accountable for both design and construction. For designfirms considering design-build work, one of the important considerations from a riskmanagement perspective is the role they will play in the design-build entity.

● Design firm as prime: A design firm may decide to be the prime, with responsibilityfor both design and construction. The firm can either subcontract the construction toa contractor or actually build the facility using its own resources. Design firmscontemplating this role should have a greater risk tolerance than typical design firmsbecause the risks that they encounter (such as job site safety, scheduling delays,equipment breakdowns, etc.) typically are not faced by design firms. Of course withgreater risk there is often the potential for greater rewards.

● Design firm and contractor as joint venturers: The design firm may enter into a jointventure with a contractor and together be responsible to the client for design andconstruction of the project. The joint venture agreement between the contractor andthe design firm assigns responsibility to each entity based on their respectiveexpertise.

● Design firm as sub to contractor: The contractor enters into a constructionrelationship with the client, taking responsibility for both design and contractor. Thecontractor then retains a design firm to provide traditional design services.

Each of the roles described above presents the design firm with different liabilityexposures. Design-build projects present additional liability exposures for design firms,and particular attention needs to be paid to the following areas:

● Indemnity Provisions: For design firms seeking to limit their traditional responsibilityfor design services, indemnity provisions from the contractor entity for liability notrelated to design services are a key risk management tool.

● Warranties and Guarantees: These are of special concern in design-build projectsbecause warranties and guarantees are standard practices for contractors. Howeverdesign firms should be aware that warranties and guarantees are specificallyexcluded from coverage by the professional liability policy and therefore there

Design firms should carefully examine the standard design-build form agreements thatare published by the EJCDC, AIA, Association of General Contractors, and the Design-Build Institute of America (DBIA) and tailor these agreement forms to project-specificrequirements.


3.5 Contractual Issues Related to Scope of Services Issues

3.5.1 Verification of Client-Supplied Information or ServicesSome clients seek to disclaim responsibility for the accuracy of the information they or

their independent consultants provide and may require the design professional to confirmor verify it. Following is a typical client-proposed clause designed to shift the risk ofdeficient information to the design professional:

Consultant shall review and confirm the accuracy of test results and otherinformation furnished to Consultant by or on behalf of Owner pursuant to thisParagraph…

Usually, it is unclear what the client thinks the design professional can or will do inresponse to such a requirement. As a practical matter, the probable effect is to make thedesign professional a guarantor of information provided by the owner. The only way toconfirm or verify the accuracy of the information sufficiently to justify assumingresponsibility for it is to replicate the services that produced it. Both the AIA and EJCDCdocuments treat this activity as an additional service or change in services for whichadditional compensation should be negotiated.

3.5.2 Coordination of Client’s Separate Consultants An emerging trend among some clients is to “un-bundle” the design process by hiring

a prime design professional and separately hiring some or all of the necessary designconsultants. The client’s objective is typically to obtain greater control over the design andconstruction costs associated with each discipline and save any mark-up applied by theprime design professional to each of its consultant’s fees. In some instances, the servicesof one or more of the design consultants may be procured by the client on a design-buildbasis from a contractor. According to AIA B101-2007, § 5.6, the client (i.e., owner) is to“coordinate the services of its own consultants with those services of the Architect.”Nevertheless, the client usually wants the prime design professional to “coordinate” theservices of the client’s separate design consultants.

For the prime design professional, this role poses significant risk. Some of the sourcesof this risk follow:

● The scope and limitations of the prime design professional’s “coordination”responsibility is not clearly addressed in the professional services contract;

● It is difficult to coordinate the services of consultants with whom one does not havea contract;

● There is no defined scope of authority, no control of the payments, and no ability todirect the consultants to perform or re-perform services necessary for coordination;and


● The prime professional’s coordination activities may increase the risk of liability forthe quality of the services provided by any “coordinated” firm.

In response to the demand for “coordination” services, AIA B503-2007, providesmodel language for amending the owner—architect agreement to mitigate the sources ofrisk described above.

3.5.3 Obligations to Lenders or Other Third Parties Lenders often ask the design professional to certify that there are sufficient funds left

in the contract sum, after payment of current amounts to the contractor, to complete thework. Since the design professional did not generate the contract sum, did not generatethe schedule of values, is not in control of the construction work, and generally may havevery little idea of the financial impact of the default of the contractor, this kind ofcertification should rarely, if ever, be given. In the event that the design professionalagrees to provide a certification, it should be limited to knowledge based on the designprofessional’s scope of services and appropriately qualified, e.g., to the best of the designprofessional’s knowledge and belief.

Similarly, the contractor’s surety will often ask the design professional to complete astatus report having to do with the percentage of work completed and the amount ofmoney paid and retained. Although these may seem harmless, the design professionalgenerally has no duty of completion to the surety. Doing so can only serve to shift the riskfrom the surety to the design professional in the event that the contractor defaults andthere is insufficient money remaining to complete the project. It is appropriate and shouldbe sufficient for the surety’s legitimate needs for the client to provide the surety withcopies of the contractor’s approved applications for payment.

3.5.4 Design Phase-Only Services Experience suggests that there is more risk of professional liability claims and disputes

if the design professional-of-record is not engaged to perform construction phase services,is engaged to perform a reduced scope of construction phase services, or if a separateentity altogether is engaged to perform construction phase services. Specifically, if thedesign professional is not performing construction administration services substantiallysimilar to those described in the AIA or EJCDC agreement forms, there are a number oflikely results.

First, the drawings and specifications prepared by the design professional might not beused as intended or substantially adhered to by the contractor. If problems subsequentlyoccur with construction, the design professional may be embroiled in allegations that thedocuments were negligently prepared. The design professional will have to conduct adefense without the benefit of having observed the construction. If the documents werenot properly followed, the design professional will generally not have any liability, but will


still have had to incur legal fees and expend the time and effort associated with defendingagainst the charges.

Second, there will be no opportunity before construction to find and correct possibleerrors or omissions in the construction documents. Clearly, correcting problems on paperis much cheaper, faster, and easier than correcting them with a jackhammer in the field.If the design professional is not involved with construction contract administration, thechance to avoid or mitigate the effects of any problems with the construction documentsis lost.

Third, if the design professional does not evaluate the work of the contractor as itprogresses, he or she loses the opportunity to have construction defects and deficienciescorrected before it is too late. Without this opportunity, the design professional will beforced to try to prove in subsequent litigation that the problem was the result ofconstruction deficiencies and not design. That may be possible, but the effort andexpense may well have been avoided in the first place if the design professional hadperformed usual construction contract administration services. Accordingly, if the designprofessional-of-record is providing limited or no construction phase services, a provisionshould be included in the contract that specifically allocates responsibility for suchservices to the client. (See, e.g., EJCDC E-500, 2008 Edition, § 6.02.A.)

Sample provision: If Consultant’s services under this Agreement do not includeProject observation, evaluation, or review of the Contractor’s performance, then(1) Consultant’s services under this Agreement are deemed to be complete nolater than [ ______________, 20__ ] [the end of the Bidding or NegotiationPhase]; (2) Consultant shall have no design or submittal review obligationsduring construction; (3) Client assumes all responsibility for the application andinterpretation of Consultant’s drawings, specifications, and all other constructiondocuments, construction observation, evaluation, and certification, and all othernecessary Construction Phase professional services; and (4) Client waives anyclaims against Consultant and Consultant’s directors, officers, partners,employees, and subconsultants that may be connected in any way thereto.

Alternatively, if the client requests that the performance of any or all contracted-forconstruction phase services cease or will not be required after contract execution, thechange should be memorialized in an addendum to the professional services contractindicating (1) the reduction in the scope of services and (2) the client’s acknowledgementthat it is willing to assume responsibility for this client-requested action. A sampleaddendum follows:

Sample addendum: This Addendum is made ____________, 20__, to thatcertain letter Agreement between ________________ (Client) and Risk ReadyDesign LLC (Consultant) dated _______, concerning


____________________________ (the Project), said Agreement beingincorporated herein by reference. The terms of this Addendum shall supersedeand supplant any and all contrary provisions or understandings contained insaid Agreement or otherwise concerning Consultant’s services.

Pursuant to Client’s directive requesting that Consultant cease furtherobservation and evaluation of the contractors’ performance, or any otherConstruction Contract Administration services, effective _____________, 20__,then (1) Consultant’s services under this Agreement are deemed to be completeno later than ______________, 20__; (2) Consultant shall have no design orsubmittal review obligations during construction; (3) Client assumes allresponsibility for the application and interpretation of Consultant’s drawings,specifications, and all other construction documents, construction observation,evaluation, and certification, and all other necessary Construction Phaseprofessional services; and (4) Client waives any claims against Consultant andConsultant’s directors, officers, partners, employees, and subconsultants thatmay be connected in any way thereto.

The parties have caused this Addendum to be executed by their duly authorizedrepresentatives as of the date set forth above. ____________________ ______________________ (Consultant) (Client)

By ___________________ By ___________________Name ________________ Name ________________Title __________________ Title __________________

3.5.5 Peer Review or Plan Review Services Over the past decade or so, sophisticated project owners have begun to increasingly

recognize the value of procuring independent peer reviewer services to access thelikelihood that the designs and design documents prepared by their design professionals-of-record will satisfy the project owner’s objectives for the project and are otherwise be inconformance with good professional practice. From the project owner’s perspective, it isimportant that the professionals performing the peer review are well qualified in terms ofeducation, training, and experience and are truly independent from the designprofessional-of-record.

From the perspective of the firm performing independent peer review services, it isimportant that: (1) the nature, purpose, scope, and limitations of the review be carefullydefined in the contract for peer review services; (2) review comments and responses be


clearly documented; (3) the peer reviewer not impose its design judgments or preferencesupon the project owner or design professional-of-record (otherwise the peer reviewer maybe construed to have assumed some responsibility for the design); and (4) the peerreviewer not, under any circumstances, seal or stamp the construction documentsprepared by the designer-of-record.

Accordingly, a provision similar to the following waiver may be appropriate for inclusionin the contract for peer review services.

Sample Peer Reviewer Design Liability Waiver: Owner agrees that PeerReviewer’s services under this Agreement are limited to performingindependent project peer review services in connection with Project DesignDocuments submitted to Peer Reviewer in connection with this Agreement andas described in Exhibit __ hereto. Owner further agrees that, with regard to PeerReviewer’s performance of independent project peer review services: (1) PeerReviewer is not acting in a manner so as to assume responsibility or liability, inwhole or in part, for all or any part of the project design or project designdocuments and (2) Owner agrees to make no claim and hereby waives, to thefullest extent permitted by law, any claim or cause of action of any natureagainst Peer Reviewer and Peer Reviewer’s officers, directors, employees, andconsultants, which may arise in any way out of Peer Reviewer’s services or anypeer-reviewed project design or design documents except to the extent that anyclaim or cause of action is found to be caused by the sole negligence or willfulmisconduct of Peer Reviewer in performing independent project peer reviewservices under this Agreement.

3.6 Federal Work

The federal government of the United States is a major purchaser of A/E services.Design firms doing federal work need to be aware of some of the key methods used byfederal agencies to identify the services it needs, and the particular method used by theagency to carry out the acquisition. The primary source of federal procurement informationand guidance is the Federal Acquisition Regulation (FAR), which consists of Parts 1-53 ofTitle 48 of the Code of Federal Regulations. It is available at www.Acquisition.gov/far. Mostgovernment agencies are required to comply with FAR. Design firms that provide servicesto a federal government agency should realize that the government agencies have tocomply with the solicitation provisions of FAR when they solicit bids for A/E services.

3.6.1 Federal Procurement ProcessThe federal acquisition process begins when an agency determines its requirements

and plans a method of purchase. If the agency’s contracting officer determines that the


appropriate method for procuring goods or services is a contract and the contract amountis totals more than $25,000, then the agency posts a solicitation on the Federal BusinessOpportunities (FedBizOpps) website, available at www.FedBizOpps.gov.

At a minimum, a solicitation identifies what an agency wants to buy, providesinstructions to would-be offerors, identifies the source selection method that will be usedto evaluate offers, and includes a deadline for the submission of bids or proposals.Agencies also may post solicitations on their own websites. Following the deadline forcompanies to submit their offers, agency personnel evaluate submissions using the sourceselection method and criteria described in the solicitation. Unless multiple suppliers orfirms are needed, such as for a supply schedule (see next section), the agency awards acontract to one firm.

When a government agency issues a contract or a proposal, it will specify a list of FARprovisions that apply to that contract. Part 52 of the FAR lists the solicitation provisionsand contract clauses and the specific provisions that need to be inserted into certain typesof contracts. For example, Part 36.609-2 places the responsibility for design errors ordeficiencies as follows:

36.609-2 Redesign responsibility for design errors or deficiencies. (a) Under architect-engineer contracts, contractors shall be required to makenecessary corrections at no cost to the Government when the designs,drawings, specifications, or other items or services furnished contain any errors,deficiencies, or inadequacies. If, in a given situation, the Government does notrequire a firm to correct such errors, the contracting officer shall include awritten statement of the reasons for that decision in the contract file. (b) The contracting officer shall insert the clause at 52.236-23, Responsibility ofthe Architect-Engineer Contractor, in fixed-price architect-engineer contracts.

Section 52.236-23 of the FAR then states the following:

52.236-23 -- Responsibility of the Architect-Engineer Contractor.As prescribed in 36.609-2(b), insert the following clause:Responsibility of the Architect-Engineer Contractor (Apr 1984)(a) The Contractor shall be responsible for the professional quality, technicalaccuracy, and the coordination of all designs, drawings, specifications, andother services furnished by the Contractor under this contract. The Contractorshall, without additional compensation, correct or revise any errors ordeficiencies in its designs, drawings, specifications, and other services.(b) Neither the Government’s review, approval or acceptance of, nor paymentfor, the services required under this contract shall be construed to operate as awaiver of any rights under this contract or of any cause of action arising out ofthe performance of this contract, and the Contractor shall be and remain liable


to the Government in accordance with applicable law for all damages to theGovernment caused by the Contractor’s negligent performance of any of theservices furnished under this contract.(c) The rights and remedies of the Government provided for under this contractare in addition to any other rights and remedies provided by law.(d) If the Contractor is comprised of more than one legal entity, each such entityshall be jointly and severally liable hereunder.

The federal agency contracting officer has to comply with federal acquisitionregulations. Even if a provision mandated by the FAR is not included, the courts have heldthat the contract will be interpreted as if the clause was part of the contract.

The federal procurement contract system is very structured. Although the terms andconditions of the federal contract are fairly rigid, design firms should have knowledgeablepersonnel examine all proposed federal work carefully. Firms pursuing federal work shouldbe adept in the following areas.

Antecedent AgreementsMany of the contracts issued by the U.S, Government are complex and long-range in

nature, requiring the participation of different firms. Two or more companies may enterinto preliminary agreements to successfully pursue federal work. These teamingagreements are widely used to enhance the qualifications and capabilities of the primecontractor by securing the participation of one or more subcontractors. The primecontractor typically commits to negotiate suitable contracts with the cooperatingcompanies if the prime contractor is awarded a contract. The teaming agreement may alsoconsist of a joint-venture agreement between different firms with different capabilities.

Design firms should carefully review these antecedent agreements when teaming withother entities. Typically, there is often a preliminary non-disclosure agreement permittingreview and frank discussion of proprietary information. This is often followed by a teamingarrangement of some sort. Firms should be adept at identifying the legal issues andfurthermore these agreements should be coordinated with the federal prime contract.

Subcontracting under Federal Prime ContractsCertain clauses of the federal prime contract are mandatory flow down provisions; the

FAR requires that all subcontracts incorporate these mandatory flow down clauses.Whether or not other clauses of the FAR should flow down to the subcontractor should bedetermined on the basis of risk allocation between the prime contractor and thesubcontractor. In depth knowledge of the pertinent provisions of the FAR is required.

3.6.2 Multiple Award Schedule ContractsIn the 1950’s the General Services Administration (GSA) proposed the Multiple Award

Schedule (MAS) program. The MAS program establishes long-term, government-wide


“indefinite delivery, indefinite quantity” contracts that are available for use by federalagencies worldwide. GSA awards and administers the MAS Program. Once a vendor isawarded a schedule contract by the GSA, then a federal agency may purchase suppliesand services from that vendor without additional competition. It is important to note thatthe federal agency still has to comply with the FAR which requires that the agency reviewat least three schedule price lists. It is important to remember that the GSA awardsmultiple contracts to different firms that offer similar services to avoid ad hoc, sole sourceawards. There are different schedules under which design firms may participate, the mostobvious being Professional Engineering Services (Schedule 871) and EnvironmentalServices (Schedule 899). For the most up-to-date information on GSA Schedules visitwww.gsa.gov.

GSA Schedule vendors must comply with the terms of the schedule contract itselfalong with the FAR (which is the source of most of the contract clauses that areincorporated into each schedule contract). The GSA publishes a supplement to the FARknown as the General Services Administration Acquisition Manual which is an additionalsource for vendor obligations that either add to or supplement the provisions of the FAR.GSA schedule providers need to develop the necessary expertise to successfully navigatethe procurement system.

Although federal work can be a lucrative practice for design firms, firms should developthe proper infrastructure and compliance programs before pursuing such work.Administering government contracts is a specific skill set that requires diligence anddiscipline. Design firms that work for the federal government have to create internalpolicies and procedures to demonstrate compliance with federal rules and regulations. Foradditional information on the MAS program, visit www.gsa.gov.

3.7 International Work

Design firms are increasingly seeking opportunities internationally, expanding intoforeign countries through a U.S.-based client or a client based in a different country.Diversifying revenue streams makes good business sense, however, design firms shouldplan carefully and educate themselves about doing design work abroad.

3.7.1 Authorization to Practice/LicensingBefore doing work in a foreign country, design firms must first determine whether they

are authorized to practice there. Firms generally have two options available to them: theycan either serve as a consultant to an indigenous design firm that takes full responsibilityfor the design, or the can obtain the necessary permits and authorization to perform designservices in the host country in their own right.

The International Union of Architects (www.UIA-Architectes.org) and the InternationalFederation of Consulting Engineers (FIDIC) (www.fidic.org) are associations that work to


maintain transparency in standards, licensing, and procurement procedures in membercountries.

3.7.2 Standard ContractsDesign professionals have to give some thought to the professional services agreement

they will execute with their client. FIDIC contracts are intended for use with internationalprojects. Design professionals should be aware of the FIDIC Client/Consultant ModelServices Agreement, more commonly known as the “White Book,” which is part of a familyof integrated standard contract documents. The AIA has also developed AIA DocumentB611-INT, a standard form of agreement between the client and consultant for projectslocated outside the U.S. AIA B611 is designed for use with a client who has selected aqualified local architect to serve as the architect-of-record under applicable law. The U.S.design firm provides consulting services to the client.

Design firms should closely examine any proposed contract and make sure that itproperly describes the parties’ roles and responsibilities. For more information on FIDICand AIA documents, go to www.fidic.org or www.aia.org/contractdocs/AIAS076711,respectively.

Guarantees and Warranties in International ContractsDesign firms must be concerned with contractual and professional liability. Frequently,

foreign contracts will contain clauses imposing a standard of care upon the firm which isnot insurable because the clauses require a standard of perfection, a warranty of service,or a guarantee of the result. The CNA professional liability insurance policy extendsfurther than most other policies in providing worldwide coverage for the contractualobligations of professional services agreements. But even with the broad CNA professionalliability coverage, guarantees and warranties are not within the scope of insurance. Theremay also be requirements that the design professional indemnify and hold the clientharmless from disasters or catastrophes, whether or not they are related to theperformance of the design professional’s services. The business risk of such a requirementis enormous and it does not fall within the scope of coverage of the CNA professionalliability policy.

3.7.3 Dispute ResolutionContracts often state the laws under which the contract is governed and where

disputes are resolved. Even if the forum selected for dispute resolution is a U.S. court,there may not be a viable way of bringing a foreign entity under the jurisdiction of a U.S.court or collecting on a judgment against the foreign entity. A U.S. firm may also have adifficult time enforcing contractual rights in a foreign court that may not be interested inruling against a local entity. A design firm has to make a determination whether it is in itsbest interest to seek remedies in U.S. or foreign courts.


Standard form agreements may specify international arbitration by an impartialtribunal. Generally, the law of the country in which the project is located applies. Designfirms should realize that an international arbitration award requires that the award beenforced against the client. Generally an international arbitration award can be enforcedagainst an entity if the country is a signatory to the Convention on the Recognition andEnforcement of Foreign Arbitral Awards (CREFAA). However, it can be difficult to enforcean arbitral award in a country that is not a signatory to CREFAA or does not have anothermechanism that recognizes the legitimacy of international arbitration awards.

3.7.4 Payment ProvisionsClear, precise payment terms that are tied to the scope of services are essential. Clarity

in both the scope of services and the payment terms helps to avoid potential disputes. Forexample, payment terms have to clearly identify which currency will be used for payment.Payment in currencies other than the U.S. dollar may expose the design firm tofluctuations in currency values, which, depending on the strength of the dollar at the timeof payment, may be an advantage or disadvantage for the firm that prices its fees in U.S.dollars. Particular attention should also be paid to payment procedures, especially whenpayments are made in the country where the project is located. The cost of setting upforeign bank accounts and arranging for transfer of the fees to the U.S. should be factoredin during the planning phase.

3.7.5 TaxesThe tax implications of working in a foreign country can be very complex. Compliance

with the host country’s tax laws is necessary, but so is compliance with U.S. tax laws andany tax treaties that the U.S. has entered into with the host country. The foreign country’stax code treatment of the design firm’s income and related deductable business expenseshas to be determined. It is important to seek the advice of qualified tax professionals toexamine the effect of contract provisions under both U.S. and host country laws.

3.7.6 CodesDesign projects in the United States and other developed countries are governed by

clearly defined regulatory codes that are regularly updated. In some countries in thedeveloping world, the applicable codes may be antiquated or non-existent. In thesesituations, the contract between the design firm and the client should be clear as to whatcodes will apply to the particular project. The applicable design standards should beclearly stated to avoid confusion, especially in countries where the regulatory environmentis not well established.


3.7.7 Legal Systems and Standards of CareWhen working in a foreign country, it is important to investigate the legal traditions

that differ from Anglo-American common law. In Europe, civil law governs transactions.Other countries may not have a well-developed body of commercial law as they transitionfrom communism or another form of government to capitalism. Also bear in mind that insome developing countries the laws may be in place, but there may not be a functioning,reliable legal system that allows parties to enforce their rights. Design firms shouldtherefore adapt their practice management and risk management practices to thegoverning legal system.

The two most widely used systems of law are Anglo-American common law and civillaw. The general principles of contracting and commercial transactions are similar in bothcivil and common law systems; both systems recognize the rights of parties to contractfreely. In regards to liability, both systems recognize that the design professional isresponsible for liability based on the negligent performance of professional services.Before signing a contract, a design firm should determine whether there are contractualrisks or liabilities imposed by law that are outside the scope of their professional liabilityinsurance policy.

In France and countries that derive part of their legal system from France, the ten-yeardecennial liability law provides that the design firm and contractor are liable for ten yearsfollowing completion of construction for the damage, in whole or in part, of a building dueto bad construction or defects of the soil. The client is not required to prove negligence—once damage has occurred, liability is imposed. Not only is decennial liability an absoluteexposure for ten years, but the building owner can recover during the first two years if anyaspect of the building is not suitable for its purpose. Under these laws, compliance withbuilding codes or accepted standards is not a defense.

Furthermore, in some countries this liability cannot be shifted to others by contract.The CNA professional liability insurance policy does not cover a decennial liabilityobligation that is established by absolute or strict liability. Decennial liability also exists inother countries where the French legal system served as a model. This includes much ofthe Middle East and even extends to scattered jurisdictions. In some jurisdictions such asPuerto Rico, the decennial liability concept has been transformed into more of a statute ofrepose rather than a strict liability law, while in many countries the absolute liability isseparate from liability based on negligence or breach of contract. A decennial liabilityprogram is usually based on the presumption of guilt and when charged, the party mustproceed to prove innocence. Defenses can include such things as vandalism, sabotage,and perhaps a failure to maintain.

Decennial liability imposes a duty of result (as opposed to the duty of care in commonlaw jurisdictions), essentially that the building must be fit for its purpose and that it mustperform accordingly. It is predicated on understanding the client’s wishes both for quality


and quantity and, unlike in the U.S., is enforced by public agencies rather than courts. InFrance, for example, public agencies still check for the qualifications of the participatingparties on a construction project before any contract is valid. Basically, the CNA policycovers other risks in a jurisdiction with decennial liability such as allegations of harmcaused by negligence or civil responsibility based on professional services, but it does notcover the guarantee of a result. It is likely that a special ten-year policy must be purchasedthrough an insurer approved by the government.

When working in a foreign country, it may be difficult to identify the applicable law ona given crucial topic. For some areas of practice, there may not be a law, or if there is sucha law, it may seem to change without notice arbitrarily. In code law traditions, strictliability may be imposed on designers and anyone else involved in the constructionprocess. Generally, the law of the country in which the project is located will govern,although this is changing as many international lenders are most comfortable with, andmay insist on, another body of law.

In some jurisdictions (e.g., France and Egypt), specific insurance for decennial liabilityis mandatory. In jurisdictions where this is the case, the insurance program is usuallymanaged by an independent design and supervision consultant who checks theengineering designs prior to construction and performs construction visits to make surethat the construction meets the required standards. The independent consultant has toapprove the finished facility before the decennial liability insurance policy becomeseffective. In jurisdictions where specific insurance for decennial liability is not mandatory,the risk is generally uninsured. In jurisdictions where decennial liability insurance is notmandatory, it is important for firms to assess decennial liability in their risk assessmentsand develop appropriate risk mitigation strategies.

3.8 Emerging Issues

Within the next few years, professional service firms will see significant changes in howthey practice. Many of these changes will be the result of new technologies in design andcommunications. And client demands for time and cost efficiencies within non-lineardesign and construction delivery systems will continue to push innovation. The use ofdigital tools can significantly increase the ability of firms to develop sophisticated designsolutions. Electronic communication systems ranging from email to project websites canfacilitate the sharing of information. Parametric modeling software can foster theintegration of design and construction and provide the client with a better understandingof the tradeoffs intrinsic in the design and construction process. But advances in the useof technology can also increase the exposure of firms to professional and business risksand these liability exposures may be beyond the coverage afforded by a commercialgeneral liability or professional liability insurance policy. Accordingly, the design firm’spolicy(s) may have to be endorsed, to provide additional coverage, or a separate technology


policy may have to be procured. For example, Schinnerer now offers a CNA program,Network Protection for Design Professionals, that covers many of the risks related to thepreparation of digital design documents or deliverables that are not covered by theprofessional liability policy. As always, appropriate legal and insurance counsel should beconsulted. Design firms should examine their professional service agreements carefully forany changes that clients propose when it comes to these risks.

3.8.1 Building Information ModelingA building information model is a digital representation of physical and functional

characteristics of a facility. Building information modeling (BIM) is intended to serve as ashared knowledge resource for information about a facility, forming a reliable basis fordecisions from inception onward. BIM represents a move from analog forms of design todigital design and construction. The model is meant to be used by the design team,contractor, and client. Although reference is often made to a building information model,in practice BIM is actually a set of models based in different software platforms that havethe ability to exchange digital information about a project.

It is fair to say that professional service agreements based on the paper as the primarymeans of information exchange should be reviewed carefully when using BIM. At the veryleast, the following items should be checked and appropriate language used to reflect theintent of the parties.

How will the model be used?At the outset the project participants should decide the purposes for which the model

will be used. This helps the project participants identify the needs of the model and ithelps to manage expectations. Since BIM is an emerging area, the purposes BIM varysignificantly in the industry.

Who will own the model?It is important to identify the clinet of the model clearly and to give model users the

appropriate license to use the model for project purposes.

A. Client owns the model Clients may require that they own information prepared forthem. Under this option, designers should reserve the ownership of their standarddetails and seek indemnification for the use of the model on other projects.

B. Design professional owns the model This approach is consistent with the standardEJCDC and AIA contract documents. The client, contractor, and others are licensedto use the model for project purposes.

C. All parties own their respective creations This approach requires extensive draftingof cross-licensing agreements between all parties.


What is the model’s contractual status?Traditionally, hardcopy drawings are the only contract documents. Although 2D

hardcopy drawings can be printed from the model, this means the loss of pertinent 3Dinformation and other project details. Therefore, the model is increasingly considered to beone of the contract documents. If the model is to be included as one of the contractdocuments, inconsistencies that may arise between 2D and modeled information shouldbe resolved by a specified order of precedence that determines which set of contractdocuments is the controlling set.

How will modeling requirements be specified?Currently, it is difficult to create a prescriptive BIM standard equivalent to a

comprehensive CAD standard. The differing levels of sophistication among different partiesand the different varieties of interacting BIM software products make it difficult to developa comprehensive BIM standard. Therefore, instead of developing a detailed prescriptivestandard, a performance standard that states the goal of the model can be specified. If aperformance standard is used, all parties should recognize that a post-contract effort isrequired to make sure that specific products developed for the project are integrated tomeet project goals.

How will the model be administered?When working with a building information model that is accessed by different parties,

it is important to clearly identify how the model is to be administered. The model needs tobe hosted securely and reliably. Furthermore, it is important to make sure that all partieswork from the latest version, with rights of access to different project areas controlled withappropriate audit trails to identify the source of any changes. These administrative tasksneed to be assigned clearly to the entity in the best position to manage the information.Beyond these administrative tasks, the authority to substantively change modelinginformation should rest only with the entity professionally responsible for that content. Anychanges to the structural system, for example, must be made with the concurrence of thestructural engineer. BIM protocols should therefore identify who has the hosting andadministrative responsibilities as well as which entity has the professional responsibilityfor substantive content.

3.8.2 Project WebsitesThe exchange of information between project participants is increasingly carried out

through project websites. The advantages of such a system are obvious: fast, reliableinformation exchange that apprises all of the participants of the pertinent issues. The useof project websites supports the as-needed publication of documents, allowing users toupdate documents for republication. It is important that version control and loggingfeatures be apparent. These project websites should also allow for work flow routing so


that users can define a specific path for replies, review, and approval of documents. Theproject website also allows project participants to examine open items that have not beenresolved, and if it is successfully tracked to the schedule, impacts of the delay on theprogress schedule.

To successfully manage the risks presented, professional services agreements will haveto address these new information exchange tools. Furthermore, there are potentialliabilities that come with the adoption of new technology that may not have beenaddressed in the traditional project delivery methods. For example, contract languageaddressing liability for loss of data from natural or created disasters, softwaremalfunctions should be considered. Ideally, contract language should address thenecessary steps to be taken to address the possible loss of intellectual property, andconfidentiality with the use of project websites.

Project website hosting generally involves liability exposures beyond the coverageafforded by a commercial general liability or professional liability insurance policy.Accordingly, the design firm’s policy(s) may have to be endorsed, to provide additionalcoverage, or a separate technology policy may have to be procured. For example,Schinnerer now offers a CNA program, Network Protection for Design Professionals thatcovers many of the risks related to the preparation of digital design documents ordeliverables that are not covered by the professional liability policy. As always, appropriatelegal and insurance counsel should be consulted.

3.8.3 Integrated Project DeliveryNumerous studies have documented sources of inefficiency and waste in the design

and construction process. The traditional project delivery methods encourage an approachthat is focused on individual entity success as opposed to the success of the entireproject. A collaborative approach to project delivery attempts to determine success basedon project outcome as opposed to individual goals. This new collaborative model has beenidentified as integrated project delivery (IPD). The AIA, in collaboration with the AIACalifornia Counsel, published Integrated Project Delivery: A Guide in November 2007.The Guide defined IPD as follows:

Integrated Project Delivery (IPD) is a project delivery approach that integratespeople, systems, business structures and practices into a process thatcollaboratively harnesses the talents and insights of all participants to optimizeproject results, increase value to the owner, reduce waste, and maximizeefficiency through all phases of design, fabrication, and construction.

With IPD, all key participants are involved in the project from an early stage until theproject is handed over to the client. Furthermore, IPD projects are intended to embraceopen communication, collaborative decision making, and a sharing of risks and rewards


based on a project’s success, instead of an entity’s individual performance. Whencontrasted with established project delivery methods like design-bid-build and design-build, IPD represents a cultural shift within the design and construction industry thatrealigns traditional roles and project goals. The AIA guide provides a road map for theimplementation of IPD and an outline of alternative business models that support thispractice shift.

IPD is an evolving project delivery method that may significantly alter the design andconstruction industry. It is expected that BIM will be a tool of IPD that allows early andeffective collaboration between the parties. In an effort to correctly reflect the new projectdelivery system, the AIA and the ConsensusDOCS entities have drafted agreements todescribe possible variations of the integrated project delivery method.

Separate Agreements with the ClientThe AIA has issued a set of documents that preserve separate contractual relationships

between the client and contractor and the client and design professional. Both theconstruction and design contracts share a common set of general conditions (A295-2008)that establish the services and relationships between the parties.

● AIA Document A195-2008, Standard Form of Agreement between Owner andContractor for Integrated Project Delivery

● AIA Document A195-2008, Exhibit A: Guaranteed Maximum Price Amendment● AIA Document A295-2008, General Conditions of the Contract for Integrated Project

Delivery● AIA Document B195-2008, Standard Form of Agreement between Owner and

Architect for Integrated Project Delivery

Tri-Partite AgreementThe ConsensusDOCS group is a consortium of associations representing clients,

contractors, subcontractors, and sureties led by the Association of General Contractors.The group’s approach to integrated project delivery is to have all three parties (projectclient, lead designer, and contractor) sign the same contract and create a core team. Theteam, which also may include key specialty contractors and consultants, will makeconsensus decisions based upon the best interests of the project. The project is directedby a management group comprising senior representatives of the three parties. Theprimary agreement published by ConsensusDOCS is ConsensusDOCS 300, Standard Formof Tri-Party Agreement for Collaborative Project Delivery (Owner-Designer-Constructor).

Special Purpose EntityThe AIA has issued a contract for an innovative business arrangement in which the

project owner, architect, and construction manager become members of a limited liabilitycompany and transact project-related business as one legal entity. AIA Document C195


establishes a separate project-specific entity that allows a more complete sharing of risksand rewards. Under this contractual arrangement, the limited liability company, governedby the three parties but always under the control of the project owner, carries out a projectwhile meeting mutually agreed-upon goals and target costs. The company is funded by theproject owner and, as an entity, contracts with the architect to design the project and theconstruction manager to coordinate construction. Other parties, such as designconsultants and specialty contractors, could be members of the company as well. Thedocument used in this arrangement is AIA Document C195-2008, Standard Form SinglePurpose Entity Agreement for Integrated Project Delivery.

Integrated project delivery is new to the industry, so design professionals shouldcarefully examine any proposed integrated project delivery system to properly evaluate thelegal and insurance risks involved. Please check www.PlanetRiskManagement.com for newdevelopments.

3.8.4 Digital FilesSince the advent of CADD files, the electronic transfer of project information has

typically been accompanied by conditions on the use of the information and disclaimerslimiting reliance on the information’s adequacy or accuracy. The use of extensivedisclaimers and reliance on hard copies—often on the assumption that such use wasnecessary to prevent professional liability claims—created a significant barrier to the rapidsharing of digital information. In 2007, the AIA published two new standard formdocuments that facilitate the transmission and effective use of digital data. These formsare expected to significantly change how design professionals interact with their clients,contractors, trade contractors, and suppliers. The new AIA documents are C106-2007,Digital Data Licensing Agreement, and E201-2007, Digital Data Protocol Exhibit.Together they allow parties to the design and construction process to share digital dataaccording to negotiated conventions on format and transmission and rules on appropriateuse.

The AIA Digital Data Protocol ExhibitE201-2007 is not an agreement and does not stand alone; rather, it is intended to be

an exhibit to an existing agreement for design services or construction. It can beincorporated by reference into agreements to establish the procedures for the transmissionor exchange of digital data on the project. While E201-2007 does not create a license touse digital data, it may be used to modify the license in the agreement into which it isincorporated. It includes a project protocol table that allows the parties to establishprotocols on the format of the data, the transmission method, and permitted uses for thetransfer and use of data by all parties on the project. E201-2007 applies to all partiesinvolved in a project because it requires the parties to incorporate the exhibit by referenceinto any other agreement for services or construction. By using the AIA contract


documents software, the protocol table can be customized to meet the needs of eachproject.

The AIA Digital Data Licensing AgreementIf a standard AIA owner-architect agreement or set of general conditions are used on a

project, it is not necessary to use C106-2007 as well since those documents establish thenecessary chain of licenses to make the use of design information available to all parties.C106-2007 can be used, however, when there is a need to send digital data to someonefor use on a project and no existing agreement with the person covers use of that data.

More information on these tools to enable digital practice is available atwww.AIA.org/documents.

3.8.5 Patent IssuesArticle 1, Section 8 of the United States Constitution guarantees authors and inventors

the exclusive right to their writings and discoveries for a limited of time. Copyright andpatent law emanate from this clause in the constitution and design firms should have aclear understanding of how copyright and patent law issues are addressed in theprofessional service agreements. Intellectual property is an intangible asset and designfirms must be able to protect their own assets and avoid infringing on the property rightsof others. When negotiating with clients about the intellectual property rights in the designfirm’s instruments of service, the design firm should try to retain ownership of theintellectual property and grant a license to the client to make use of the instruments ofservice in specific ways. Licensing allows the parties to define the client’s rights of use inregards to the intellectual property without the design firm giving up ownership rights. Thelicensing terms can be tailored to meet the specific needs of the client to make use of theinstruments of service without compromising the interests of the design firm. See Section2.5.5 for a discussion of copyright issues.

A patent is an exclusive right granted to an inventor for a limited time to exclude othersfrom making, using, offering for sale, or selling the invention in the United States orimporting the invention into the United States. The law requires that, for a patent to begranted, the invention has to be novel, useful, and non-obvious. Design professionals areincreasingly developing innovative solutions, especially in sustainable design and energyconservation techniques. Design firms should at least be aware that their solutions may bepatentable subject matter and take appropriate firm wide steps to protect their inventions.

Design firms should carefully review client drafted agreements for language that statesthat the client has joint ownership of patentable subject matter developed by the designfirm. Poorly drafted agreements may give the client ownership rights to patents where theclient did not make any inventive contribution. At the very least, design firms should insistthat a client’s joint ownership rights should be limited to matters in which the client madea substantive inventive contribution.



Patent infringement claims are costly and clients are increasingly seeking to protectthemselves from patent infringements claims by having the design firm indemnify theclient for patent infringement claims. Careful consideration should be given to anyindemnity language, and design firms should take steps to limit the scope of theindemnity obligation. It is important to remember that, ultimately, it is the client who isobtaining the benefit of the patent. However, it is reasonable to expect that the designfirm should take steps to avoid inadvertently infringing on a patent.

Although client drafted patent infringement indemnity clauses can seem daunting,there are several ways to limit the scope of a patent infringement indemnity clause.

● Limit indemnity obligation to claims that involve potential liability. Design firms canseek to trigger to the indemnity obligation to claims having at least a minimumamount of potential liability. This helps the design firm avoid involvement frivolousclaims.

● Avoid “Pay On Demand” Language Design firms should limit the obligation to makeindemnity payments until there is a finding by a court that there was infringement.Patent infringement claims and litigation take a long time to resolve, and theindemnity obligation should be triggered by a finding of actual infringement, notdemands based on an indemnity clause.

● Limit The Nature Of The Liability Or Loss It is reasonable to require the client totake steps to mitigate the amount of losses incurred and require that the obligationto indemnify not apply to the extent any loss would not have arisen if a voluntary actor omission on the part of the client could have reasonably avoided the loss. It isalso reasonable to require that any action on the part of the client that causesenhanced damages should be the responsibility of the client.

Timely Notification and Cooperation It is important to condition the patent indemnityobligation on timely notification and cooperation from the client any time the client hasbeen notified of any third party claim of patent infringement. Early involvement by thedesign firm in the settlement of claims and full cooperation of the client in any defense orsettlement of the claim may help minimize the patent infringement claims.

Part IV – Part IV – Pre-Contract Pre-Contract Risk ManagementRisk Management

4.1 Introduction

Most design professionals will acknowledge that they have never produced a perfectset of construction documents. Simply put, it is impossible to anticipate every

condition or contingency. This accounts for the changes clause in construction industrycontracts and the need for contract modifications or change orders to respond equitablyto changed conditions. Beyond the need for contractual mechanisms to accommodatechange, the design professional, design professional’s client, and other projectparticipants must have the capacity and willingness to work together to find timelysolutions.

A continuous process of collaborative problem solving has, historically, characterizedthe most successful projects. Accordingly, it is no surprise that design professionals with areputation within their peer and client communities for the quality of their services and fortheir collaborative problem solving skills are most sought after by sophisticated clientsundertaking complex or high-profile projects.

The overall purpose of pre-contract risk management is to determine whether the risksassociated with the client, project, and project contract are reasonable and controllable.At a minimum, this should be a structured “consciousness-raising” exercise. The generalcategories presented below should be considered when evaluating the sources of risk thatmay be associated with a given project. Since no two projects are alike, these generalcategories should be adapted to project-specific requirements. To facilitate this process,Schinnerer’s Pre-Contract Risk Management Checklist, is included as Appendix A to thispublication. For ease of adaptation to practice and project-specific requirements, thischecklist is also available to download from Schinnerer’s website at www.Schinnerer.com/risk-mgmt/Pages/Contract-review.aspx.

4.2 Evaluation of the Prospective Client

Risk is generated or influenced by the interplay of a variety of client, designprofessional, and project characteristics, as well as the environment in which the serviceswill be performed. Because clients can become claimants and plaintiffs, a designprofessional must be prepared to turn down the project based upon an objectiveevaluation of the client.

IV


When evaluating a potential client, the design professional should consider thefollowing:

● Financial capability;● Risk aversion;● Composition of the client group;● Expectations;● Parties relying on the design professional’s services;● Understanding of uncertainties; and● Prior client experience.

4.2.1 Financial CapabilityIn addition to the basic business risk of not being paid, an underfinanced client

presents other kinds of risk to the design professional. In commercial transactions, creditchecks and financial investigations in conjunction with sales are commonplace. After all,in most cases, design professionals effectively extend credit to clients when they begin toperform services. Factors to be considered when evaluating the financial capability of thepotential client include:

● Does the prospective client have sufficient resources to undertake the proposedproject and stand behind its contractual obligations?

● Is the prospective client prepared to support a quality design in terms of engineeringand construction, or is it looking for a quick and dirty solution?

● Does the prospective client appear to have a well-established or growing andprosperous business that suggests it will survive far into the future?

4.2.2 Risk Aversion of the Prospective ClientA risk-averse client may attempt to unfairly shift the risk of financial loss and liability to

other project participants, including the design professional. Also, some clients are morelitigious than others. It is possible for design professionals to investigate the court records intheir area or in the client’s home area to determine the incidence of litigation to which thepotential client was a party. When evaluating the prospective client’s risk aversion, considerfactors such as:

● Does the prospective client understand that some sources of risk are appropriatelyborne by the client?

● Has the client proposed harsh contractual liability provisions (indemnity, warranty,other) that are “non-negotiable”?

● What is the prospective client’s claims history?


4.2.3 Composition of the Client It is not uncommon for the client on a project to be a committee or group. To better

evaluate the risk a prospective client poses, it is important that the design professionalknow exactly the composition of the client group. A so-called “committee” client can haveseveral competing or ever-changing agendas, leading to conflicts and potential claims.Factors to be considered include:

● What are the interests of each party?● Is the group a legal entity with competence and authority to contract, and be sued,

if necessary?● Is there a clear leader and duly authorized representative of the group?● Is each member jointly and severally liable for the obligations of the group?● Does the client group have internal conflicts or competing interests?

4.2.4 Client ExpectationsHow a prospective client expresses its desired result may indicate how reasonable it

may be during the project. Unrealistic expectations often form the basis for dissatisfactionwith the project end result, which may very well lead to claims and liabilities.

The more a prospective client understands the uncertainty associated with design andconstruction, the lower the likelihood of client claims. Some clients are unlikely to betechnically knowledgeable about the design and construction process. The critical riskmanagement issue, however, is whether the client can understand or is willing torecognize uncertainty as a source of risk and is willing to commit the resources necessaryto manage the risk.

Issues to consider include:

● Are the prospective client’s budget expectations reasonable given the desired timeand performance goals?

● Does the prospective client understand that cost uncertainty, to varying degrees, isinherent in all design and construction projects?

● Are the client’s schedule expectations reasonable given the nature of the project?● Does the prospective client understand that schedule delays, varying with project

complexities and uncertainties, are inherent in design and construction projects?● Are the prospective client’s expectations as to results reasonable given the desired

time and cost goals?● Does the prospective client understand that the design professional cannot

effectively warrant or otherwise guarantee project outcomes?

If the answer to one or more of these questions is “no,” the design professional shoulddetermine whether the prospective client’s expectations can be made more realistic


through education and discussion. If not, the client should probably be avoided.Unfulfilled expectations are the major cause of claims against design professionals andcontractors.

4.2.5 Third Parties Relying on the ServicesAlthough the design professional may be retained by an individual client, other parties,

such as the client’s lender or prospective tenants, may rely on the design professional’sservices. Such reliance may give rise to claims on the project. It is therefore critical thatall parties that may be relying on the services be identified. Important issues to beevaluated include:

● Can these parties be identified?● Can their interests be identified?● Can their interests be addressed properly within the scope of services and budget

proposed?● Will the client assign its contractual rights in the design professional agreement to a

lender?● Will the lender require any additional contract terms or certifications? If so, what are

they, and are they acceptable?● What is the lender’s reputation for dealing with design professionals and other

construction professionals?

4.2.6 Prior Experience with the Prospective ClientAs a final issue, it is important to consider any previous experience the design

professional has had with the prospective client, keeping in mind that the client’s staff,objectives, and attitude toward risk may have evolved over time. Factors to considerinclude:

● What was the quality of the professional relationship with the client?● Did the client make timely decisions?● Were bills paid in a timely manner?● Were necessary additional services authorized in a timely manner?

The issues mentioned above are not exclusive. When evaluating a potential client, thedesign professional should obtain and consider as much relevant information as possible.Every piece of information gathered might expose sources of risk that must be addressed.Judgments about these factors are subjective, and the design professional should considerwhat levels of risk are appropriate and at what point it should refuse the project. In someareas it may be necessary to employ the services of an attorney to assist in identifying,evaluating, and appropriately responding to potential sources of risk.


4.3 Evaluation of the Prospective Project

The following general categories should be considered when evaluating sources of riskthat may be associated with a given project.

4.3.1 Project CharacteristicsThe quantity and quality of information available will vary from project to project, and

any conclusion will probably be subjective. The risk of inaccurate information provided bythe prospective client should be allocated appropriately in the contract. While it may notbe possible to obtain all relevant information due to schedule constraints, the designprofessional should attempt to investigate the following factors:

● Is the project program, budget, and schedule adequately defined?● Is the project type “high risk” (e.g., residential or mixed use condominiums,

complex renovations, large public use centers)?● Does the project involve highly complex or innovative design elements?● Are complex or innovative methods or sequences of construction necessary due to

complex design elements, fast-track or phased delivery requirements, or occupancyof the facility during construction?

● Are there scheduling issues that may result in liability exposures to third parties,such as meeting a sale or leasing deadline?

● Have the appropriateness and availability of special technologies or productsproposed for the project been adequately researched and tested?

4.3.2 Site-Specific Issues

● Are there geographic considerations or site constraints that may limit the availability,access, or staging of labor or materials?

● Are there known or suspected environmental issues on or adjacent to the site thatmay increase risk?

● Is there any perceived community opposition to the project?

4.3.3 Services to Be Performed or FurnishedOnce the parameters of a project have been determined, the required services and risks

associated with those services should be analyzed. Effective risk management requires arealistic assessment of the skills and abilities available to the design professional. If therequired experience and skill sets are unavailable to the design professional (eitherinternally or through consultants), it is wise for the project to be refused. Factors toconsider include:


● What types of service are needed—project planning, design, project/programmanagement, permitting, scheduling, inspection/evaluation of the work, submittalreview/coordination, expert witness testimony, or others?

● What are the sources of risk associated with the types of services needed?● Is the client asking about green design alternatives?● Are there any habitational design factors to consider?● Is the design professional being hired to perform design without construction phase

services?● Do any of the intended service outcomes (e.g., financing, permitting, or scheduled

completion) involve high uncertainty?

4.4 Evaluation of the Prospective Contract

As previously discussed, contracts allocate rights and responsibilities, risks andrewards. A well-drafted, equitable contract can help prevent disputes and establish aframework for the fair resolution of those that do occur. Accordingly, when evaluating thecontract, factors to consider include the following.

4.4.1 Basic Contract Issues● Are the parties (client and design professional) clearly identified with their legal

entity names?● Is the project clearly defined?● Is the design professional’s “part of the project” clearly defined?● Does the design professional’s scope of services not only describe what is included

but what is not included?● Are the expectations of the parties clearly articulated and reasonably integrated

(scope, budget, schedule)?● Is the design professional required to warrant or guarantee any deliverable or any

project outcome?● Does the contract require the design professional to “verify” client-furnished

information or services?● Is the design professional’s role during construction (if applicable) limited or non-

existent?● Is the design professional’s role during the bidding or negotiation phase and during

the construction phase coordinated with the bidding documents and the conditionsof the contract for construction?

● Does the contract include mechanisms to accommodate change (scope, budget, andschedule) equitably during the course of project delivery?

● Does the design professional have the right to suspend services in the event of theclient’s failure to make timely payments?


● Are the roles of key third parties (e.g., contractor, construction manager, separatedesign consultants, etc.) clearly defined?

● Is each risk allocated to the party in the best position to manage or control that risk?● Is the same responsibility assigned to more than one party?● Does the client solely control the method or substantive procedures for the

resolution of disputes?

4.4.2 Third-Party Risk Transfer/Insurance● Are the insurance coverages required of the design professional reasonable and

commercially available?● Will available insurance cover the indemnity obligations imposed on the design

professional?● Will the client and any key third parties (e.g., contractor, construction manager,

separate design professional) be appropriately insured? ● Will the design professional be named as an additional insured under the client’s

and contractor’s commercial general liability insurance (CGL) policies?● Will the design professional be named as an additional insured under the client’s or

contractor’s builder’s risk policy?● Do the applicable project contracts include mutual waivers of subrogation?● Is bonding required of the contractor?

4.4.3 Subcontract Issues

● Are pertinent portions of the applicable prime contract incorporated into thesubcontract?

● Are project budget provisions coordinated with subcontract budget provisions?● Are the subcontract terms of payment coordinated with the timing and method of

payment under the prime contract?● Are the dispute resolution provisions of the subcontract coordinated with those of

the prime contract?● Are the indemnity obligations of the subcontract coordinated with the prime

contract?● Is the termination provision contained in the subcontract keyed to the

subconsultant’s performance and coordinated with the termination provisioncontained in the prime agreement?

● Are the insurance requirements of the subcontract coordinated with those of theprime contract and otherwise appropriate with the liability exposures reflected in thesubconsultant’s scope of services?

● Are the ownership/use of documents provisions contained in the subcontractcoordinated with those contained in the prime contract?


● Are any limitation of liability provisions coordinated with those contained in theprime agreement?

While there is no formula by which to quantify the aggregate risk indicated by answersto the above questions, the experienced practitioner should develop a sense of the totalrisk exposure sufficient to make a “go/no go” decision.

4.5 Contract Negotiation

Risk, the probability of an unfavorable outcome, attends the undertaking of any projectfor any client. Once the design professional has evaluated the potential sources of riskassociated with the client, the project, and any proposed contract terms and conditions,the design professional can make an informed decision as to how and if to negotiate acontract for professional services.

4.5.1 Proposal-Phase CommunicationsA proposal to provide professional services is many things, not the least of which is a

road map for the project to come. The development of the proposal provides anopportunity to think about the project and how, when, and under what circumstancesservices will be performed. It is also the opening stage of contract negotiations. Therefore,it is an opportunity to address any known client terms and conditions that areobjectionable. (As discussed above, the design professional will have a fairly well-developed sense of client, project, and contract-specific sources of risk as a result of thepre-contract evaluation of the project and the prospective client.) If accepted by the client,the proposal may be considered the basis of the contract between the parties, and clientssometimes require the design professional’s proposal to be incorporated by reference orphysically attached to and made a part of the contract.

Accordingly, the design professional should be careful not to oversell the firm, thequality of services to be performed, or the results to be obtained from those services. Thedesire to distinguish one’s firm from the others competing for a project may result inpromises that cannot be met and expectations that cannot be fulfilled. Whether or notthese promises are made a part of the contract, clients tend to remember what they arepromised and are disappointed when the promises are unmet. It is generally better thatproposals begin to foster in the client a realistic sense of what is possible and begin theongoing task of managing and fulfilling the client’s expectations.

4.5.2 Preparation for NegotiationWebster’s Collegiate Dictionary defines negotiation as the process of “confer[ring] with

another so as to arrive at the settlement of some matter.” Negotiation, however, is not apurely standardized process, and it is often hard to know when and how to get started. The


use of a conceptual road map, such as provided in the book Getting to Yes (discussedbelow), can help to structure and guide the process. However the design professionalchooses to proceed, three salient characteristics of successful negotiations must berecognized and accommodated. First, negotiation is a consensual process. Success isdependent upon voluntary, good-faith efforts by all parties to reach a negotiatedagreement. Second, negotiation involves some adjustment in the desires of the partiesthat effectively addresses the issues in question. In the design and construction projectarena, this involves balancing the client’s program aspirations against budget andschedule realities. Finally, the new relationship must represent an overall improvement inposition for each party given their respective bargaining positions, i.e., each party mustperceive that they are better off with the deal than without it.

4.5.3 The Negotiation ProcessThere are two general approaches to negotiation. Often, these two approaches are both

used in a particular negotiation; however, one or the other usually predominates. The firstand perhaps most traditional approach is referred to as “positional bargaining” and ischaracterized by parties exaggerating their respective positions in order to meetsomewhere in between. Generally, positional bargaining favors the party with superiorleverage, whether that is based on time, money, or some psychological or other advantage,regardless of the relative merits of the parties’ positions. In some instances, one partyexaggerates its position solely to frustrate the negotiation process and stall for a timewhen its leverage will have increased.

The alternative to positional bargaining is “interest-based bargaining,” which is alsocommonly referred to as “principled negotiation.” This approach is described in a short,influential book by Roger Fisher, William Ury, and Bruce Patton of the Harvard NegotiationProject titled, Getting to Yes: Negotiating Agreement Without Giving In. The authorssuggest that parties not bargain over positions, but pursue four strategies that areapplicable to nearly every situation:

● “Separate the people from the problem.”● “Focus on interests, not positions.”● “Generate a variety of possibilities before deciding what to do.”● “Insist that the result be based on some objective standard.”

The first strategy is designed to help the participants think about the problemobjectively rather than reacting to it in an overly personal and emotional way. Often, theproblem in the minds of the participants becomes identified with the other party ratherthan with the situation at hand. Participants should be encouraged to see themselves asworking together toward a solution.


The second strategy is to understand and focus on the interests that are the basis ofthe participants’ stated positions rather than the positions themselves. Simply coming upwith a compromise between stated positions is unlikely to meet the requirements of theparticipants.

The third strategy deals with the process of actually devising a solution under difficultcircumstances. One should not look for the one correct course of action. That is mostlikely to lead to a mental road block. Instead of evaluating and discarding options one byone, a more productive and creative approach is to “brainstorm” or encourage a fairly freeflow of ideas for a certain period of time. Developing a number of widely divergent possiblesolutions means that you have a better chance of finding one that will suit all the parties.

The fourth strategy is to insist on objective criteria. This is especially important whenthe parties seem to have opposing interests. An objective standard means that parties donot win or lose by insisting on a particular position, but they both accede to an acceptedway of determining a fair solution. (Fisher, Ury, and Patton, 10-12)

Principled negotiation clearly requires more effort and creativity than positionalbargaining, but the results are far more satisfying to the parties, and they more oftenreinforce, rather than undermine, ongoing relationships.

4.6 Summary

Contract negotiation, supported by an objective evaluation of the client and the project,is the prime opportunity to communicate with the client. That communication shouldinclude a discussion of guiding principles in establishing contract language thatappropriately allocates risk and reward between the contracting parties.

Standard contract forms—such as the documents published by the AIA and EJCDC—attempt to establish contracted liability within common law standards of professional care,skill, and diligence. Unique or custom-drafted agreements may greatly enlarge the designprofessional’s liability exposure through the inclusion of contract provisions that exceednormal duties and responsibilities. Although there are an ever increasing number of AIAand EJCDC documents that address specific project delivery methods, no AIA, EJCDC, orother standard form document should be seen as suitable “off the shelf.” All standardform documents need to be tailored to the needs of each project.


Appendix A – Appendix A – Pre-ContractPre-ContractRisk Managment Risk Managment ChecklistChecklist

Pre-Contract Risk Management Checklist

1. Basic Dataa. Project Name:b. Project Location:c. Nature of Services to Be Provided:d. Prospective Client:e. Client Contact:f. Approximate Project Value in Billings:g. Approximate Project Timeline:h. Regulatory Agencies Involved:i. Other Significant 3rd Party Involvement (if any):

2. Checklist Preparation/Reviewa. Prepared By:b. Date(s) of Preparation:c. Individuals Contacted/Consulted:d. Documents Received:e. Reviewer(s):f. Date of Review:g. Review Comments (attach additional sheets as necessary):

3. Prospective Clienta. Is the client financially competent?b. Does the client wish to unrealistically transfer risk?c. Is the client a “committee” client?d. Is the client a legal entity that is authorized to enter into contracts and that can

be sued when it becomes necessary?e. Are the client’s expectations realistic?f. Does the client understand the uncertainties of time, cost, and outcome?g. Who besides the client may rely on the deliverables or services?h. What is the client’s principal objective in undertaking the project?i. Have we worked with this client in the past and, if so, was the quality of our

relationship satisfactory?

4. Prospective Projecta. Are the project program, budget, and schedule adequately defined?

A


b. Is the project type “high risk” (e.g., residential or mixed-use condominiums,complex renovations, large public use centers)?

c. Is the project complex from a design or construction perspective?d. Does the project location present any special risks?

e. Is this a Superfund site?

f. Will we be required to arrange for, store, or provide transportation of hazardous

substances?

g. Do we have the necessary skill sets to support the proposed project?

h. Have we selected qualified subconsultants?

5. Prospective Contract a. Whose contract form is being used—client’s or our’s?b. Are the parties (client and design professional) clearly identified with their legal

entity names?c. Are the following appropriately addressed?

(1) Standard of care

(2) Scope of services

(3) Client duty to cooperate

(4) Permit responsibility

(5) Design professional’s role duringconstruction (no responsibility formeans and methods or safety programsand procedures)

(6) Unilateral or mutual indemnity fornegligence

(7) Limitation of liability

(8) Force majeure


d. Are the following high-risk issues avoided?

(1) Problematic indemnity and defenseobligations

(2) Representations, warranties, andguarantees

(3) Unrealistic certification obligations

(4) Obligations to “verify” client-furnishedinformation or services

(9) Insurance

(10) Compensation method

(11) Right to suspend services in the eventof non-payment

(12) Prompt non-binding dispute resolution

(13) No third-party beneficiaries

(14) Severability

(15) Survival

(16) Applicable law


6. Retained Risk

Risk ID How will we manage it?


Appendix B – Appendix B – Terms and Terms and Conditions Review GuideConditions Review Guide


BTerms and Conditions Review Guide

Using this Risk Management ToolThis Terms and Conditions Review Guide provides CNA policyholders with a

comparison of acceptable language to assist them in reviewing language provided by aprospective client. The contractual provisions of the guide also serve as model provisionsfor policyholders that would like to incorporate clear, unambiguous language into theirprofessional services agreements.

The Terms and Conditions Review Guide is not a model contract. The commentary andmodel provisions are based on Schinnerer’s experience in loss prevention and on thegeneral scope of insurance coverage offered under the CNA policy. The information isoffered for professional liability risk management guidance. It is designed to inform designprofessionals about some of the terms and conditions issues to be considered whenreviewing or negotiating professional service agreements; it is not intended as legal orinsurance advice applicable to specific circumstances.

These model provisions do not replace the need for you to rely on local counsel for alegal review of the terms and conditions of contracts that you negotiate with yourprospective clients. The independent insurance broker who represents you can alsoprovide advice on the applicability of professional liability insurance to the exposures younegotiate when crafting a professional services agreement.

Please feel free to photocopy Schinnerer’s Terms and Conditions Review Guide for usein your office. Policyholders in the Schinnerer and CNA programs are granted anonexclusive license to reproduce this publication in whole or in part for any internaleducational purpose.

1. Standard of CareAccording to common law, a professional is required to act as competently as couldreasonably be expected of other professionals practicing under substantially similarcircumstances. The law does not require perfection, merely reasonable skill and care.

Sample provision: The standard of care for all professional services performedor furnished by Consultant under this Agreement will be the skill and care usedby members of Consultant’s profession practicing under similar circumstancesat the same time and in the same locality. Consultant makes no warranties,express or implied, under this Agreement or otherwise, in connection withConsultant’s services.


2. CompensationA schedule of compensation due the design professional should always be expresslyaddressed to avoid potential disputes.

Sample provision: For the scope of services stated in Attachment ____, Clientagrees to pay Consultant the compensation stated in Attachment ____ to thisAgreement. Consultant agrees to submit invoices monthly for services renderedin the manner and format stated in Attachment ____.

3. IndemnificationIndemnification provisions allocate risk and liability among parties. Typically, thatallocation is designed to shift liability to the party who is thought to be more activelyinvolved in activities or events giving rise to liability. In the context of professional serviceagreements, each party should be willing to be responsible for losses and claims arisingout of its negligence.

Sample provision: To the fullest extent permitted by law, Consultant shallindemnify Client, its officers, directors, partners, employees, andrepresentatives, from and against losses, damages, and judgments arising fromclaims by third parties, including reasonable attorneys’ fees and expensesrecoverable under applicable law, but only to the extent they are found to becaused by a negligent act, error, or omission of Consultant or Consultant’sofficers, directors, members, partners, agents, employees, or subconsultants inthe performance of services under this Agreement.

When a firm reviews a contractual indemnity provision it should consider making theobligation reciprocal. Mutual indemnity provisions are often viewed by designprofessionals as more reasonable than a unilateral indemnity provision in favor of theclient (or in favor of the prime professional under a subcontract). A sample mutualindemnity provision consistent with common law principles follows:

Sample provision: To the fullest extent permitted by law, Client and Consultanteach agree to indemnify the other party and the other party’s officers, directors,partners, employees, and representatives, from and against losses, damages,and judgments arising from claims by third parties, including reasonableattorneys’ fees and expenses recoverable under applicable law, but only to theextent they are found to be caused by a negligent act, error, or omission of theindemnifying party or any of the indemnifying party’s officers, directors,members, partners, agents, employees, or subconsultants in the performance of


services under this Agreement. If claims, losses, damages, and judgments arefound to be caused by the joint or concurrent negligence of Client andConsultant, they shall be borne by each party in proportion to its negligence.

4. Force MajeureCircumstances or events may occur that are outside the control of either party. Thisprovision states that neither party shall be liable for loss arising from any cause beyondits reasonable control.

Sample provision: Neither party shall be deemed in default of this Agreement tothe extent that any delay or failure in the performance of its obligations resultsfrom any cause beyond its reasonable control and without its negligence.

5. Dispute ResolutionClients and design professionals should anticipate the possibility of disputes or claimsand include in their agreements some provision for dispute resolution. Alternative disputeresolution through mediation is a non-binding process in which an impartial mediatoractively assists the parties in identifying and clarifying issues in dispute, and in designingand agreeing to solutions.

Sample provision: Client and Consultant agree that they shall first submit anyand all unsettled claims, counterclaims, disputes, and other matters in questionbetween them arising out of or relating to this Agreement to mediation inaccordance with the Construction Industry Mediation Rules of the AmericanArbitration Association, effective as of the date of this agreement.

6. Termination of ContractThe rights and obligations of the parties should be clearly expressed, including the rightto terminate the contract.

Sample provision: Client may terminate this Agreement with seven days priorwritten notice to Consultant for convenience or cause. Consultant may terminatethis Agreement for cause with seven days prior written notice to Client. Failureof Client to make payments when due shall be cause for suspension of servicesor, ultimately, termination, unless and until Consultant has been paid in full allamounts due for services, expenses and other related charges.

7. Hazardous Environmental ConditionsIf the design professional is not being engaged to perform services related to hazardous


environmental conditions, affirmative language should be included in the contract toexclude such services and exposures.

Sample provision: It is acknowledged by both parties that Consultant’s scope ofservices does not include any services related to the presence at the site ofasbestos, PCBs, petroleum, hazardous waste or radioactive materials. Clientacknowledges that Consultant is performing professional services for Client andConsultant is not and shall not be required to become an “arranger,” “operator,”“generator” or “transporter” of hazardous substances, as defined in theComprehensive Environmental Response, Compensation, and Liability Act of1990 (CERCLA).

8. Ownership of DocumentsDrawings, specifications, reports and other documents produced by design professionalsare instruments of their professional service, not products. Sometimes a client may insiston owning or having an unlimited license to use the instruments of service. If the designprofessional can identify the client’s specific needs for the instruments of service (e.g.,construction, occupancy and maintenance), a limited license can be granted by thedesign professional to satisfy those needs. However, if the client insists on owning orhaving an unlimited license, and the design professional is willing to acquiesce to thisdemand, the client should be required to hold harmless and indemnify the designprofessional for all liability, cost, and expenses incurred as a result of any modification oruse of the instruments of service without the design professional’s written authorization.

Sample provision: All documents prepared or furnished by Consultant pursuantto this Agreement are instruments of Consultant’s professional service, andConsultant shall retain an ownership and property interest therein. Consultantgrants Client a license to use instruments of Consultant’s professional service forthe purpose of constructing, occupying and maintaining the Project. Reuse ormodification of any such documents by Client, without Consultant’s writtenpermission, shall be at Client’s sole risk, and Client agrees to indemnify and holdConsultant harmless from all claims, damages and expenses, includingattorneys’ fees, arising out of such reuse by Client or by others acting throughClient.

9. Use of Electronic MediaTransferring information by electronic media is inherently risky. One way to reduce this riskis to state that a hard copy has control over any variances or changes that might beintroduced.


Sample provision: Copies of documents that may be relied upon by Client arelimited to the printed copies (also known as hard copies) that are signed orsealed by Consultant. Files in electronic media format or text, data, graphic orother types that are furnished by Consultant to Client are only for convenienceof Client. Any conclusion or information obtained or derived from suchelectronic files will be at the user’s sole risk. When transferring documents inelectronic media format, Consultant makes no representations as to long-termcompatibility, usability, or readability of documents resulting from the use ofsoftware application packages, operating systems or computer hardwarediffering from those in use by Consultant at the beginning of this assignment.

10. Construction Phase ServicesIf the agreement provides for any construction phase services by the design professional,the agreement should include express language that the contractor is solely responsiblefor the construction site and construction means, methods, techniques, sequences, andprocedures that it uses to perform the work.

Sample provision: If this Agreement provides for any construction phaseservices by Consultant, it is understood that the Contractor, not Consultant, isresponsible for the construction of the project, and that Consultant is notresponsible for the acts or omissions of any contractor, subcontractor ormaterial supplier; for safety precautions, programs or enforcement; or forconstruction means, methods, techniques, sequences and proceduresemployed by the Contractor.

11. Opinions of CostIt’s important to qualify the design professional’s opinions or estimates of cost as beingbased on experience and qualifications that represent the design professional’s bestjudgment, not a guarantee.

Sample provision: When included in Consultant’s scope of services, opinions orestimates of probable construction cost are prepared on the basis ofConsultant’s experience and qualifications and represent Consultant’s judgmentas a professional generally familiar with the industry. However, since Consultanthas no control over the cost of labor, materials, equipment or services furnishedby others, over contractor’s methods of determining prices, or over competitivebidding or market conditions, Consultant cannot and does not guarantee thatproposals, bids, or actual construction cost will not vary from Consultant’sopinions or estimates of probable construction cost.


Victor O. Schinnerer & Company Inc.Two Wisconsin Circle

Chevy Chase, MD 20815-7022Phone: 301/961-9800Fax: 301/951-5444

Email: [email protected]

www.PlanetRiskManagement.com

© 2009 by Victor O. Schinnerer & Company, Inc. Statements concerning leagal matters should be understood to be general observations based solely on our experience as risk consultants and may

not be relied upon as legal advice, which we are not authorized to provide. All such matters should be reviewed with a qualified advisor.