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Class slides for Contracts for Design Professionals – Module 2

Contracts for Design Professionals – Module 2 of 9 modules. Discussion of the following contract clauses: Cost Estimates, Bid Overruns, Damages, Waiver of Consequential Damages, Dispute Resolution, Arbitration, Electronic Documents, and Electronic Model Elements.  After viewing this course, please contact Julie Holland for AIA Continuing Education credit.

Video Transcript

Hello. This is J. Kent Holland. It’s my pleasure to present this course on contracts for design professionals. The specific clauses that we will discuss in this particular module of the course will be shown on the next slide. Throughout the presentation, I will be using slides to include examples of the contract language that we’re discussing. With that brief introduction, let’s jump right into the clauses.

Construction Cost Estimate

Let’s talk now about cost estimates. Design professionals are being required by clients to essentially guarantee that there will be no costs exceeding the construction cost estimate. An example of a clause like that is one that reads something like this: “The design professional shall provide the owner with a project budget estimate. And if the costs of construction exceed the estimate, the design professional shall redesign the project as necessary to meet the owner’s project budget requirements at no additional costs to the owner.”

Note that the design professional is required by this clause to redesign the project for free even if it wasn’t negligent. Now, language similar to that is actually found in the AIA B101 document. And the thinking apparently was that this will be sort of a cap on the design professional or the architects of liability for cost overruns is to do the redesign, but to have no liability for the construction changes or for any other problems associated with that by the owner. So in exchange for redesigning, the architect basically caps this liability.

Now my concern is that there’s so many things that create cost overruns. There’s steel escalation cost, all kinds of supply and vendor escalation cost. You don’t know what the bid environment is going to be. You do your very best meeting the standard of care when estimating the cost and designing the project to meet a budget. But ultimately, you don’t have total control over what that cost is going to be when the contractors come in and begin performance. Even as performance begins, change orders start coming in, and these again, for reasons beyond the control of the design professional could cause the cost to exceed the original budget. The redesign cost could be very significant. And this could absolutely ruin some of the smaller firms that have to do this type of redesign. And even a large firm doing major redesign, why would you do that for free? So my preference is to change the clause to say that you’re not going to redesign for free.

Now, I have another example of an onerous contract clause. I’m going to put that up here on the program so you can see it. But basically this one says, “In the event that the lowest responsive bid exceeds the fixed limit of construction cost, the design professional, if directed by the owner, shall redesign the project with the assistance of the construction manager in order to bring the project within budget.” And it says, “The design professional shall not be entitled to additional compensation for this redesign or any services required for the rebidding of the project.”

Now, my solution again is to revise that above clause so that the redesign is only going to be for free if it resulted due to the negligent performance of the design professional. So, for example, insert language like what I’m showing in the red insert in this slide whereas the clause says, “In the event the lowest responsive bid exceeds a fixed limit of construction cost, the design professional…” and I’m going to say, “As a result of the design professional’s negligence, then the design professional, if directed by the owner, shall redesign the project.” So in other words, we’re going to insert the negligence terminology right into the clause and that should solve it.

EJCDC has a very nice explanation or a clause for dealing with this, what is an opinion of probable cost. I’m not going to read through the slide, but I’m going to put it up here on the screen so you can look at that for a moment.

Damages

Move on now to the damages provisions in the contract. Beware of liquidated damages, LD clauses, because LDs might be excluded from coverage because they may be deemed to be based on a warranty of the schedule. And the warranty exclusion of the insurance policy would say there’s no coverage for warranting perfection or even a schedule, the timeliness of the schedule.

It might also be deemed to be a contractual promise, contractual liability. And so, again, if it’s not damaged, it would be awarded by a Court of Common law. It’s not covered under the policy. So for that reason, beware of liquidated damages.

Now, I’m not going to go into great length on LDs because there is certainly a difference of opinion. It may be possible that where the parties truly cannot determine at the outset of a project what the damages might be from noncompliance or from negligence, and they agree to set something that they deem to be reasonable based on currently existing knowledge as of the date that the project contract is negotiated, then a court would look at that and probably rule that it’s not really a penalty, but rather it was the party’s best estimate/guesstimate of what the damages would be and that it’s intended in fact by the courts to be used in exactly that type of a situation where the parties can’t really determine what the damages will be, so they use an LD clause.

Well, if that’s the situation – then if the court would award those damages, they very well may be covered by insurance. That is sort of an unknown. There’s just a lot of ifs involved in that. So I wouldn’t want to make a definitive statement, but I would just caution you, be aware that if there’s no LD clause in your contract, be aware of it, try to negotiate it out if you can.

Waiver of consequential damages is an excellent clause. In the EJCDC contract, there is a mutual waiver and it states, “To the fullest extent permitted by law, the owner and the engineer waive against each other and the others, employees, officers, directors, members, agents, insurers, partners, and design professionals, any and all claims for entitlement to special, incidental, indirect or consequential damages arising out of, resulting from, or in any way related to the project.” It’s an absolute waiver of consequential damages. Those types of waivers are upheld by courts in most of the jurisdictions. The AIA has a similar waiver. I’m just going to put it up here in just a moment so you can read through that on your own. But it’s a good mutual waiver of consequential damages, right from the AIA B101 contract.

Dispute Resolution

Question. Do we litigate or do we arbitrate? The new B101 employs a check box approach to select what binding dispute resolution form will be used. Now it used to be, under the AIA documents, that if the parties didn’t do anything then it was assumed that you would arbitrate. That was the default position. So if you didn’t check anything to the contrary, you were going to arbitrate. Now they completely reversed it so that typically you’re going to litigate it unless you choose affirmatively to arbitrate it. So just be aware of that. You need to take specific action if you intend to arbitrate.

One issue, whether you’re litigating or arbitrating, is that it’s important to be able to consolidate and join similar actions. In other words, you wouldn’t want the owner to be in litigation with the design professional, and then the design professional has to be in arbitration with its consultant. You need them all to be in court together or in arbitration together. So it’s important to make all of the dispute mechanisms of the prime and the subcontracts match up so that you’re using one forum to resolve all things that are related to each other.

So the new AIA language says, “Either party at its sole discretion may consolidate an arbitration, conducted under this agreement, with any other arbitration to which it is a party provided that the arbitration agreement governing the other arbitration permits consolidation, and the arbitrations to be consolidated substantially involve common questions of law or fact. And finally, the arbitrations employ materially similar procedural rules and methods for selecting the arbitrators.” So assuming you have those three things, then you can consolidate the arbitration pursuant to the AIA.

Another question that sometimes arises under dispute resolution clauses is who pays the attorney’s fees. Under the American law, the prevailing party pays its fees, the defending party that loses, if that’s what he does, pays its fees. Each party pays their own attorney’s fees. However, you change that by a prevailing party attorney’s fees clause.

So some of these clauses will simply say the prevailing party is entitled to recover its attorney’s fees and legal costs from the opposing party. I’ve seen some clauses that don’t make it mutual. They just say, “If we prevail against you, we get to recover our attorney’s fees.” So watch these clauses carefully.

Beware that if the design professional is required to pay the other party’s legal fees as a result of one of these clauses, then the contractual liability of the exclusion of the policy could very well bar the design professional’s recovery of the fees that it loses because those are not damages that would have been awarded at common law. They only occurred because of the contractual obligation by the prevailing party attorney’s fees clause to pay those costs. I put on the slide here an example clause for recovery of litigation costs. And I’m not going to read through that whole clause but you can read it on the slide here in just a moment.

Electronic Documents

Let’s talk now about electronic documents. The EJCDC document explains the problems with the use of electronic media and establishes responsibilities on the part of the owner who intends to use electronic media. The clause provides a pertinent part, “Because data stored in electronic media format can deteriorate or be modified – inadvertently or otherwise – without authorization of the data’s creator, the party receiving the electronic files agrees that it will perform acceptance tests or procedures within 60 days, after which the receiving party shall be deemed to have accepted the data, thus transferred. Any transmittal errors detected within the 60-day acceptance period will be corrected by the party delivering the electronic data.” And the clause, by the way, goes on from there and has a lot of really good information and insight onto electronic data issues.

Now, let’s look at the AIA. They have created a digital data protocol exhibit. And it’s the E201 attachment to the document and it is made a part of the agreement between the owner and the architect and it sets forth basic parameters for the reliance on electronic data. And the AIA has issued a protocol for reliance on the building information models. And that is the document called E202 and it is a 2008 document. And it sets forth levels of development to describe the level of completeness to which the model element is developed. Generally, the higher the level of development, the greater reliance is allowed to be placed on it. The idea of having these different levels of completeness is that you can go level one, two, three, four, five. And the first level is just very conceptual. Then you get all the way down to five which is very detailed. And each level entitles those using the model to greater reliance on it because it makes sense. There’s more detail into it.

The AIA document at section 4.1 says that, first of all, it identifies the level of development required for each model element at the end of each project phase and the model element author responsible for developing the model element to the level of development that was identified. And each model element author’s content is intended to be shared with subsequent model element authors and model users throughout the course of the project.

And then under section 4.1.2, it explains that it’s understood that while the content of a specific model element may include data that exceeds the required level of development identified in section 4.3 for a particular phase, the model users and the subsequent element authors may rely on the accuracy and completeness of a model element consistent only with the content required for the level of development that was identified.

And then AIA provides some legal type provision, saying at 4.1.3 as follows, “Any use of or reliance on a model element inconsistent with the LOD indicated in section 4.3 by subsequent model element authors or model users shall be at their sole risk and without liability to the model element author to the fullest extent permitted by law, subsequent model element authors and model users shall indemnify and defend the model element author from and against all claims arising from or related to the subsequent model element authors or the model user’s modification to or unauthorized use of the model element author’s content.”

Well, that probably sounds like a lot of words or a wordy way of saying that. But what it’s really doing is saying, look, use it for its intended purpose only. If you go beyond the intended purpose, then you have to indemnify and defend the author of that element and hold him harmless against any liability arising out of the misuse of their model elements that were apart of them all. I would say that is a reasonable requirement.

Thank you for joining me today. I hope you enjoyed this session that we did on risk management. And if you would like to contact me, I am putting a slide up here at the end that has my name, phone number, email address, and website information. Don’t hesitate to call me or contact me. And particularly if you would like continuing education credits, we’ll explain how that can be accomplished. Thanks, look forward to seeing you again.