Why Contracts Matter: How A&E Firms Can Reduce Risk with Strong Agreements

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Hello, my name is Tim Corbett. Today’s webinar is titled Contracts: You Get What You Negotiate.

This material is copyright. We are not providing any legal advice.  Please consult with appropriate advisors to address your individual circumstances or state requirements.

SmartRisk. We focus on improving, improving overall performance and profitability through firm specific risk management solutions, and was selected as a top 10 risk management firm by CIO Agenda.

Webinar Agenda

• Purpose of a Contract Agreement
• Where A&E Firms get into Trouble
• Contract Preparation & Negotiating Tips

Purpose of a Professional Service Agreement

The overall purpose of a contract agreement is the allocation of responsibilities and of the risk when performing services.

This establishes and confirms a mutual understanding in writing, and then it defines the overall scope of services and establishes the clarity of the relationships between parties.

That’s the biggest reason for your professional service agreement. Everybody agrees as to what’s going to be done, how, and then what you’re going to be getting paid for.

When we’re looking at actions taken against design firms, architects and engineers, you’re establishing a duty. You owe legal responsibility and obligation to your client. A contract agreement establishes that duty. When you breach that and you fail to perform that duty and that failure, and that breach causes harm and creates damage.

What we want to do is establish your contract agreement. It needs to be clarified exactly what you will be doing, what you won’t be doing, and then who’s taking on the responsibilities for that.

It’s very important your contract agreement, it really helps you. It protects you if there is any cause of damage or identified that there’s damages that you’ve caused related to the services that you provided on the project.

When we looked at surveys in the industry, different insurance carriers and then 20 law firms, they’ve identified 82% of design firms are taking on more risk.

SmartRisk Surveys

One of the main reasons is accepting unfavorable contract terms and conditions. When we start looking at it in a major cause of claims and litigation, when they start looking at it, there are really two times when a contract is being reviewed.

That is initially when you’re identifying projects and the services that you’re going to be offering. The second time is when there’s problems on a project. Later, they want to pull out that agreement and try to identify who’s responsible.

Where A&E Firms Get into Trouble

Where firms really get into trouble is contractual liability when you’re taking on more responsibility, duties and risk of others outside of the overall responsibility of your firm and the breach of the contract. Whether the contract language that you’re stating, there are conflicting laws and regulations placing you, your firm when rendering services on that project in a very vulnerable position. Or there’s requirements that have been accepted and they are above and beyond the insurance coverage. There is no negligent-based coverage, which your professional liability insurance provides you with coverage that is consistent with your services and the standard of care. There’s no language limiting liability.

You don’t want to have unlimited liability and contract agreements. When you’re looking at limitational liability provisions, that’s a very important, uh, provision within your contract.

Without these contractual protections, your firm is really placed at a risky position and reducing the chance of a summary judgment, which we’ll discuss later.

When we’re looking at owner drafted contracts and just saying that you just accept an owner drafted contracts, and a lot of times they include unfavorable language.

It’s when you’re looking to compromise good risk management to bring in work and just saying, well, you know, what are the real chances of us getting pulled into a claim? Well, we’re looking at one out of every four firms from an industry perspective will have a claim filed against them.

This is terribly dangerous and tempting, but the overall risk and exposure for your firm has increased, and there’s changes in the economy and increased in claims and litigation.

Good risk management is always essential. What is the type of language that should be accepted? Which one should you be pushing back on? It’s very important to know where those unfavorable provisions are and what you really want to try to accept.

From a knowledge, from a problematic provision in insurability, what we do is these are the key provisions that we find, whether it’s increasing the standard of care, some type of warranty and guarantee on your project and services will be completed without any defects and errors or first in class.

Those are types of language that will get you into trouble and they’ll be filing a claim against you. Those are really uninsurable provisions or these hold harmless agreements that clients are trying to push on design firms, including a duty to defend.

It’s not a negligent-based cause and other persons should be legally responsible, your insurance policy is a contract with your insurance carrier. They’re gonna be providing insurance coverage and they’re going to defend you consistent with that contract and contract language. If you end up accepting language that is outside the terms of conditions of your policy, those are going to be potentially uninsurable and it’ll be an out-of-pocket expense for you as a design firm. You have to making sure that you’re not, from a contractual standpoint, you’re not accepting language that’s uninsurable.

Contract Objective

Your contract objectives, you know, you want to be very specific, absolutely clear of what you, what you want and will agree to related to the roles or responsibilities of each of the parties. It’s not just you and your responsibility and what services you’ll be providing. What are the things that the owner, client or other parties are going to be responsible for because so often you’re relying on information and services of others to complete your services.

You wanted to obtain an outcome where all parties feel that a fair and balanced agreement has been reached. If somebody walks away and they feel like they’ve been treated unfairly, or they’re accepting a really unbalanced agreement, people end up, when you’re looking at the providing your services, you may end up being, you might take some shortcuts going, well, we’re really not getting the fee that we really need to be profitable. You’ll cut some corners and then you’ll increase risk and exposures and a chances of a claim.

Unfair Contract

When we’re looking at unfair, we just party feels like they’ve been treated unfairly, forced into accepting a contract provision that’s going to be impacting the overall relationship. Decisions and influencing potentially the services that are being provided. Maybe that peer review that’s going be extra hours, no, we’re not going to be doing that, and then it’s going to impact, potentially impact the performance on the project. It’s always in the best interest of all parties to make sure that you’re obtaining a fair contract agreement.

Example of Unfair Impact

A firm fee reduced to unacceptable levels to be profitable. They may use fewer or less experienced and costly staff in assigning an inexperienced project manager. All of that will increase risk and exposure one to the firm and then also to the client and to the project. It will impact the overall quality of services, performance, client satisfaction, and increasing risk really for all parties.

Again, it’s a very good example of making sure that we’re obtaining a fair balance agreement.

Desire to Win the Risk

Don’t let the desire to win or obtain that work. Uh, a concern of losing cause, accepting unfavorable risk and exposures. You never want to put your firm at a higher risk by accepting terms and conditions just to actually win and win the project. Sometimes the best decision is to let a project go and let somebody else accept that risk and exposure.

Underestimating services, whatever the staff requirements, schedule for completing services effectively and very specific schedule and responsibilities. All those issues underestimating and not putting in the requirements. And then that schedule all those things just for the do desire to win, increases your exposure. It only creates higher risk and difficulty to successfully completing a project and making a profit. We’re all providing a service at a certain fee to make profit. If you end up losing money on those projects, then in the long term, that’s going to be an undesirable situation.

Contract Negotiation Tips

When we’re looking at negotiating tips, we always want to thrive for a win-win situation for all parties. You know, demonstrate there’s an understanding of the client’s needs. We understand what your objective is, what your expectations are for that project. We understand that here are the services that we’re going to be providing. But demonstrating that first and what their overall needs are is very important.

Understand that the scope of services in detail and the relationship to fee and schedule. All of those things based on what the overall expectations are, what the objectives are, what the needs are, and then how your services align with those needs of the client.

Then make sure that you have the decision makers for both parties. You don’t want to be talking with one person, well, I need to go talk to so-and-so to get an approval for that. Making sure that you get both parties that can make decisions at the negotiating table. It really helps because things continue to get lost in translation. If you need to understand exactly what the objectives and the expectations are of the client, making sure you’re talking with that decision maker. Then the decision maker for your firm is to, who can make decisions? Yes, we can do that. No, we can’t really do this, or we can provide this, add an additional fee or service. So somebody that’s there, it’s going to really help in the negotiating if you have the decision makers at the table.

Deal Breakers

These are, as I mentioned earlier, the uninsurable provisions. Inappropriate certifications. They’re type of stating that you’re certifying your services and they’re providing certain types of warranties and guarantees this increase of standard of care best in class or client favored indemnity provisions.

Those are all, a lot of times in how they’re wording is our deal breakers and just saying, listen, I’m sorry, but these are uninsurable and we really can’t accept these because if that happens, we’re putting our firm at risk and we just want to find a balanced agreement that something that we can accept and it’s going to be an insurable.

Uninsurable provisions that are not deleted or changed. My recommendation is always to state, well listen, this isn’t something that we can accept, and you know, we’d like to be able to work with you, but I’m sorry this is not a provision that is acceptable to us.

Standard of Care

Here’s an example of standard of care. You wanna make sure that it’s limited to the ordinary skill care judgment of a firm like yours. The discipline and the services that you’re offering within the industry.

Removing language that will state all services required are necessary for a project that you’ll end up sneaking that kind of language in and later on that you can turn around and point to it and oh, you’re supposed to be providing all services necessary. We want to make sure that you clearly define scope and then you’re going to be providing services consistent with this standard. Delete services that describe such as highest, best superior, or we are a specialist.

And you know this, it looks, and a lot of times when you’re looking at the provision, remove at the satisfaction of the owner/client. Know a lot of times that can increase your overall standard of care and go, I’m not satisfied with that. We want to make sure that the language that we have is on the left here. You shall perform in a manner consistent with the degree in care, care and skill exercise by members of the same profession currently practicing. We want to, we want to make sure we have language like that.

Performance of Services

Delete any kind of warranties and guarantees include not responsible for the performance of others. You can have some additional language. You may be reliant upon the information that’s provided by the client and other consultants in the performance of services. Observation shall not constitute a warranty or guarantee. You want to have related to your performance that consistent with the standard of care and it will be rendered without any, any type of warranty or guaranteed express or implied. And you’re not responsible for the performance of others, including the contractor, which is very important.

Indemnity

The indemnity language, only the extent caused by the negligent and performance of services. We want to make sure that it’s going to be in proportionate share. This indemnity language is the most far reaching in the way of liability. You want to make sure that you’re very cautious in the language that’s accepted and only to the proportionate share of negligence, remove any kind of duty to defend. You can end up paying once it’s determined that you have a certain amount of negligence in proportionate share of your negligence and you may be able to reimburse a client for their defense costs, but there’s going to be no upfront defense costs and do not exceed the statute of limitations. Again, you agree that you’ll indemnify and hold the client harmless to the extent caused and only to the proportionate share of negligence.

We want to have make sure it’s a fair and balanced provision and once it’s been determined through legal proceedings that you have been negligent into this proportionate share. And you want to clarify there’s no upfront duty defend and no responsibility for those upfront defense cost.

Limitation of Liability

If you don’t have this, whether you have a 1 million, 2 million, 5 million limit of insurance, that does not limit your overall exposure to your firm. You have to have some type of language that’s going to be capping that liability. This is something that you want to agree with your client as to limiting your total liability.

Except there’s a certain sum related to possibly the overall benefit you get related to your fee that you obtain for providing those services. Or maybe one and a half times or some percentage times that. Or the maximum limit to the amount of insurance available at the time of a claim.

That’s the type of language. Because if we want to identify it’s going to be insurable, you want to have that capped off at your limit of liability. Total liability for any and all injuries, claims, losses, expenses related to the services under this agreement shall not exceed. Again, negotiate that. I always say that starting off with a, you know, to your fee and then negotiate above that. A lot of times firms will just put into the amount of professional liability insurance limits at the time of the claim. That’s the kind of language that a lot of firms end up using.

Consequential Damage

Consequential damage is a very important agreement because it’s a Pandora’s Box. A lot of times they’ll say increase of use or profit or income, and they’re related to not just you as the economic aspects of fixing your overall and maybe there’s an error or a mission and listen, all design documents, they’re not going to be perfect, but you can end up going back and correcting those at your dime.

When a client comes back to you, well, I can’t operate that building or open a business at a certain time, now you are going to be found negligent for that. For that loss of use and loss of profit or overall property value. But those are consequential damages, and we want to make sure that we have a mutual provision in there that neither party shall be liable to the other or make any claim. It’s not limited to the loss of use profit or property value and applies to any cause of action, including negligence. We want to make sure we have a mutual client and consultant waive consequential damages.

If we’re talking about preparing a confidential list, concessions that you may be able to delete from possibly your scope of services without compromising the project and their overall quality of the project. Making sure that you have that language, that is something that you can end up when you’re going in and negotiating. Okay, we can pull this out, we can pull that out if they’re looking at reducing your overall fee.

Never give a concession without getting something in return. All right, well we can end up pulling this out, but if we need to be putting in some, we need some additional time on the project or some other negotiating tip because you always want, if you’re going to be giving something away, making sure you try to get something in return.

Track the concessions because that can possibly create some leverage for you later on, whether you need it. Whether, okay, we’re going to be doing this well, we need to have you provide and accept our limitation of liability provision. We’re going to be lowering that. We’re taking on more risk and exposures. Making sure you’re tracking these concessions; it can really help you later on.

Concessions Goal

The overall concession goal, you know, before the meeting identify what’s the minimal acceptable level of services and what are your walkaway points. Those insurability provisions are a very good point. We said these are potentially deal breakers.

Concessions Objective

Concessions. The overall objective is to move the negotiations closer to a goal of reaching an agreement. Making sure that you just don’t let a concession go. Just manage those and manage those wisely and use them as leverage.

Unreasonable Demand

If there’s an unreasonable demand, the client makes that, whether it’s the, you know again, standard of care as a good example, you’re going to be first in class. I said no, I’m sorry, that’s an unreasonable demand. Don’t make a counteroffer. Just turn around, insist on a reduction or demand. We cannot accept that. That’s an uninsurable provision. The reason why it’s not just giving something back, it’s just saying, you know, we cannot accept it and move on. But the overall goal is to reach an agreement that is fair and beneficial for both parties. You can just say that’s an uninsurable provision and it’s not something that we can turn around and accept and put our firm at risk.

Negotiating Goal

A negotiating goal has to take on more risk, ensure there’s an adequate compensation. Okay, we’re going to be taking this on, but however the potential chances of litigation are increased so we want additional work. I mean additional compensation, additional pay for our services. What you want to be doing is looking at here are the risks and then here are the rewards. Obviously, the rewards are going to be in pay. Making sure you’re identifying, a risk reward evaluation early on.

Negotiating your overall goal is you don’t want to sacrifice your firm just for one project. And you’re placing them at a higher risk and negatively impact the quality of the overall project. Negotiation when you’re going in saying, listen, our overall objective is provide quality services for your project and have a successful project, but we don’t wanna be reducing our overall services because we’re being pushed back on overall our schedule or our fee. That’s going to impact the overall quality of the project.

Return on Concessions

When we’re looking at return on concessions, example when there’s going to be no construction observation, ownership, reuse of design documents, the binding arbitration, pay when paid, request to start services.

When we’re looking at that approach, contractual protections, it said you don’t want us to provide construction observation. Okay, fine. We wanna hold harmless language in there that any kind of evaluation interpretations of others of the design documents, we will not be held responsible or liable.

When we’re looking at binding arbitration or arbiter with at least 10 years of experience in the construction industry experience. Often, we have retired judges when we’re looking at finding arbitration and they have a lack of experience and we’ll end up, a lot of times you’ll say, well, I’ve lost when I should have won, I’ve won when I’ve should have lost is almost a toss of a dime.

If we’re looking at a binding arbitration, making sure that you place in there somebody that has experience in the construction industry. Related to timeframe, pay when paid timeframe, suspend, terminate services and payment due, and then possibly an interest rate. Interest rate. Often, we won’t get that additional pay, but we must have some type of language in there.

If you are completely reliant on the prime design firm in getting paid and they are not very well managed, you have to make sure that you have some type of language in there that will, you have the option of suspending or possibly terminating services after a certain time.

Have an escalation process related to payment and payment services. You agree upon proposal terms and conditions. Requested to start work without signed contract. Well, they’ve made that determination based on what? Your original contract terms and condition and proposal. And then they’ve started, and they’ve asked you to start work. You mention and respond to them saying, okay, we will be providing services consistent with a contract agreement, terms and condition of proposal that was delivered on this date.

Often the firm will come back later and go, okay, well here’s our contract. We’d like you to now agree to. I go, no, you’ve asked us to sign at this time. At least now you’re at a, you have some leverage into if they have some unacceptable provisions in that agreement that they’d like you to sign.

Closing Statements

Contracts, you really get what you negotiate. I said the goal is really what we want to do is make sure we obtain a fair and balanced agreement for all parties. I said outlines the plan, really the ground rules and the responsibilities of the parties. If there are any disputes that come up later, we want to make sure we limit our liability and damages that you, if there are problems that you will. And then a summary judgment. This helps you when you have a contractual agreement. It helps you obtain a, a summary of judgment.

This is a judge’s decision based on the facts and evidence without going to trial. If you have specific language that outlines, here’s what we were responsible for, here’s the limitation of liability provisions. When they end up trying to file a claim against you, it’s very important to have a contract in place in some language that’s going to support your position.

An opposing party if you’re presenting it, this summary judgment opposing party would lose due to the facts, the evidence example, due to the contract terms. This is what we agreed to judge. We should be getting a summary judgment and this party, if we end up spending all this time and effort and legal fees, they will lose anyway because of this contract agreement. It’s very important that if there are any issues later, you get language that is fair and balanced and hopefully in your favor.

Thank you very much. I appreciate your time. Take care. Have a great day.