Christopher Noble, Negotiating Owner-Architect Agreements: Theory and Practice (revised February 2011) Construction projects are usually complex undertakings with numerous participants, linked by a web of legally enforceable contracts. To standardize the process of drafting and negotiating these contracts, they are often based on forms published by professional and industry organizations like the American Institute of Architects (AIA). 1 The architect is a key participant in any building construction project, and a good, productive owner-architect relationship is critical to a project s success. That relationship can be helped, or hindered, by the process under which the owner-architect contract is negotiated and by the content of this contract. The contract negotiation process provides an opportunity to set the owner-architect relationship on a firm and productive course. Architects, owners, and their respective lawyers can take advantage of this opportunity, but only if they have a full appreciation of the issues involved in the negotiation, their interrelationships and their relative importance. Over the years, we have found it useful to divide the terms of an owner-architect agreement into three general categories, each with its own subcategories: Business Terms, Leverage Terms, and Liability Terms. 2 The Business Terms, by defining the Architect s expenses and its compensation or payment, have a direct impact on the Architect s profit or loss. The project description and the scope of Basic Services will dictate the expenses she must incur (for salaries, other benefits, and general office overhead, such as the cost of rent and computers) in order to complete the work. The compensation defined in the contract will dictate how much she is paid. The architect s goal is to assure that her compensation will equal or exceed her expenses, so that she will receive the desired profit on the project. The Leverage Terms in the contract allocate certain important rights and responsibilities between the parties, in situations when disputes may arise between them. Since most disputes are resolved by face-to-face negotiations, rather than in a courtroom or arbitration hearing, we call these leverage terms, because they will give one side or the other greater leverage in resolving a dispute in its favor. Liability Terms can expand or minimize a party s exposure to losses (often beyond the amount of compensation that would be owed) in the event of a claim or lawsuit. As with Leverage Terms, the Liability Terms can give one side or the other a stronger bargaining position in negotiating a dispute. 1 All references to specific contract forms in this paper refer to the 2007 editions of the AIA s Owner- Architect Agreement: the B101 (the standard form) and the B103 (for large or complex projects). 2 We are grateful to our colleague and mentor Carl M. Sapers, Esq. for his tutelage on these contractual matters.
The purpose of this taxonomy is to give architects and their lawyers a means of structuring and prioritizing the contract negotiation. Not all contractual terms are created equal. From the point of view of the architect, the highest priority is the balancing within the Business Terms of expenses and compensation. It is especially important that Basic Service expense be equaled or exceeded by Basic Service compensation, or the architect is virtually certain to lose money on the job, to the detriment of all concerned (including, in all probability, the owner). The next highest priority should be assigned to the Leverage Terms. Because the contract establishes the rules for an ongoing professional relationship, not an isolated commercial transaction, the Leverage Terms must be accepted by both parties as legitimate and fair. The architect should seek to achieve an appropriate range of responses to perceived transgressions but not at the risk of undermining the overall balance of the business terms. This leaves us with the Liability Terms, which are so often the subject of particularly energetic exchanges between the parties and their lawyers. Within this category, the priority is clear: the architect should pay greater attention to protecting her own assets and the assets of her firm than to protecting the assets of her insurer. It behooves both parties in a contract negotiation to educate themselves about what is insurable and what is not, and to structure their negotiation accordingly. I. BUSINESS TERMS -- provisions that determine the services that the architect must provide and the money that the owner is obligated to pay for them. A. Expense Terms. 1. Basic Expenses. These are the contract terms that describe the Basic Services that the parties expect the architect to provide in the normal, predictable course of events. a. Definition of project. This will establish the scope of the physical construction for which the architect will be providing services. A clear definition of the project may not be important if the fee is calculated on an hourly basis, and some ambiguity in the definition is acceptable if the fee is calculated on a percentage of construction cost basis. However, a clear project definition is extremely important if the fee is established at the outset as a lump sum. b. Scope of Basic Services. The description of the architect s Basic Services should include: (1) Phases of design, construction documentation, and other preconstruction services. (2) Professional disciplines involved (architecture, engineering, other consultants). (3) Drawings, specifications, and other deliverables to be produced by the Architect. 2
(4) Where services can be quantified (trips, meetings, bid packages, site visits, etc.), the number to be provided within the basic fee. (5) Description of construction phase services, if any. (6) Assumed time periods (phase by phase, if possible) during which services will be provided. 2. Contingent Expenses. These terms describe events and circumstances that may or may not occur in the normal course of the project, and/or that could require the architect to incur expenses that cannot be predicted in advance with reasonable accuracy. These terms include the following: B. Payment Terms. a. Description of Additional Services. These are tasks the architect may be required to perform that are not included as part of the Basic Services scope. Some changes may be pre-authorized without additional action by the Owner; others will require the Owner s prior written approval. b. Changes in project scope. This could involve a larger or different site, or more extensive or complex improvements. For instance, the owner may decide to renovate an existing building instead of constructing a new one, thus changing the nature and extent of the architect s services. c. Unforeseen project changes. These could be caused by a variety of reasons, such as a change of mind by the owner, the necessity of reducing construction cost, the discovery of unexpected site conditions, the adoption or amendment of applicable laws, or the need to satisfy the demands of interested citizens groups, public officials, etc. d. Changes in assumed time for performance of services. These could include sequence changes (fast track, etc.) suspensions and delays, extended approval times by the owner or others, and/or an extended construction period. 1. Basic Services Compensation. These terms describe the compensation that the architect will receive to cover Basic Services. a. Calculation of basic fee. Alternative methods include lump sum, percentage of construction cost, multiple of time card or hourly rate (with or without an upset), and cost plus a fee. b. Time of payment. There could be an advance payment, periodic payments on a fixed or percent complete basis, or payments upon delivery of documents or achievement of milestones. c. Reimbursable expenses. Certain costs, such as printing and travel, can be broken out and paid separately. Alternatively, they can be included in the basic fee in whole or in part (such as X trips, and/or X sets 3
of bid documents within the basic fee, with only the excess reimbursed separately). There may or may not be a cap on reimbursable expenses. 2. Contingent (Additional Services) Compensation. These terms provide funding for contingent expenses incurred by the architect for which payment is due under the contract, but the compensation is not included under Basic Services. a. Calculation of payment for Additional Services, e.g. multiple of direct salary, multiple of Direct Personnel Expense, hourly rates, markups on consultants additional services. b. Payment for suspension or delay, including demobilization, remobilization, extended construction phase services. c. Equitable adjustment in circumstances where hourly rates or other unit prices are inapplicable, such as a major change in the project, the services, or the time frame. d. Annual or other periodic adjustment of additional service rates and/or multiples. e. Payment for termination expenses on an actual or formula basis. In the Draft & Pay Friendly negotiation, the key expense terms to be negotiated are found on page 1 (project description) and in Article 4 (Basic v. Additional Services). The key payment terms are found in Articles 11 and 12. II. LEVERAGE TERMS -- provisions that give the parties the legal or contractual tools to assure that services and payments are furnished in a complete and timely manner, in accordance with the negotiated Business Terms. A. Restrictions on the owner s ability to use the architect s drawings and other documents in cases of non-payment or termination of the contract. B. The method chosen to resolve disputes between the parties. For example, the choice of litigation, which is likely to take longer to resolve than arbitration, will place greater pressure on the party who is suffering a cash flow problem because of a dispute over payments. (The 2007 editions of the AIA forms have abandoned the AIA s long-standing reliance on arbitration as the preferred form of final dispute resolution, in favor of a check-the-box system that allows the parties to select among arbitration, litigation in the courts, or a customized system of their own choosing.) C. Owner s rights of termination, suspension, acceleration, and backcharge. D. Governing law, forum selection, and similar clauses, which give tactical advantage to one or the other party in the event of a dispute. E. A restriction on assignment, which can be of particular use to the architect at the time of the construction loan closing, when the bank will require the architect s consent to a 4
collateral assignment of the contract as partial security for the loan. (The AIA forms permit the owner to assign the contract to an institutional lender, but only if the lender assumes the owner s duties and obligations.) F. Requirement that payment be made within a specific time following the date of invoice, failing which the architect may charge interest at a pre-agreed rate, and/or stop work or terminate. In the Draft & Pay Friendly negotiation, the key leverage terms to be negotiated are found in Article 7 and Section 11.9 (use of documents), Article 8 (dispute resolution), and Article 9 (grounds for terminating the contract, and expenses due the architect upon termination). III. LIABILITY TERMS -- provisions that determine, in part, when the architect or her insurer may have to pay money to the owner or others (as distinguished from expense terms that determine the extent to which the architect has to perform services for the owner). Liability terms can be subdivided into those that create or affect a risk that is covered by the architect s insurance, and those that create or affect a risk that is not covered by insurance. A third category of liability terms are those that limit the architect s or the owner s exposure to both insured and uninsured liability risks. A. Insured Liability Terms. 1. Standard of care: Implied or expressly stated requirement that services be performed in accordance with generally accepted standards of professional practice. The 2007 editions of the AIA form contain for the first time a standard of care clause. Previously these clauses had to be negotiated with the owner s counsel, or else were implied from court cases within the applicable jurisdiction. Note that insurers may view a contract that commits the architect to the highest or best standard of care as uninsurable. 2. Reliance: Right of the architect to rely on documents and information furnished by the owner. 3. Description of construction phase services. The construction phase service description in the AIA forms continue to be curiously wordy and extensive, largely because of provisions that have been inserted for the sole purpose of protecting the architect against claims from injured workers that mushroomed in the 1960 s and 70 s. The use of administration instead of supervision and the exclusion of responsibility for construction means, methods, sequences and techniques are examples of this language, which is helpful in case of claims, but the absence of which does not create an uninsured liability risk. 5
B. Possibly uninsured liability terms. (Note: different professional liability policies have different lists of excluded claims. The list of exclusions in the architect s current policy should be consulted as a guide, but remember that the insurance is written on a claims made basis, and a different insurer and/or policy form could be in place at the time that a coverage question arises.) 1. Time schedule commitments. 2. Warranties and guarantees (such as clauses in which the architect promises that the project as designed will be fit for its intended use, or that plans will comply with all laws, or that the contractor will comply with all of its obligations under the construction contract). 3. Unqualified certifications given to the owner or to third parties. 4. Assumption of the liability of the owner or others by indemnification or similar clauses. Most professional liability policies will permit the architect to grant the owner a limited indemnity, but only to the extent that the architect s negligence causes the owner to suffer losses. 5. Services relating to asbestos or hazardous materials (but it is important to check individual policies, which sometimes cover these areas). C. Limitations of Liability. The architect s liability to the owner can be limited to a specific dollar amount, and/or to amounts payable under applicable insurance coverage. Conversely, the owner may seek the limit the architect s recourse to claims against his real estate, so that the owner bears no personal risk. Either or both parties may agree waive claims of indirect or consequential damages against the other. The parties can establish a specific contractual time period within which claims must be made. They can (and usually do) agree to waive claims against one another to the extent covered by first-party property insurance. In the Draft & Pay Friendly negotiation, the key liability terms to be negotiated are found in Section 2.2, with cross-references to 3.4.1 and 3.6.2.1 (standard of care), and in Section 8.1.3 (waiver of consequential damages and limitations on liability). 6