Another Fine Mess: The Onerous Contract, Part I

by James B. Atkins, FAIA, and Grant A. Simpson, FAIA

The primary objective in contracting for professional services is to negotiate a fair agreement with provisions that are reasonable and in accordance with acceptable practice standards. AIA standard forms of agreement are available to guide us in this effort. Other available resources are your insurance agent and a legal counsel with experience in representing architects. Your insurance agent can assist you in finding appropriate legal representation when needed. Mindful of the risks so prevalent in our business, we do our best to negotiate a contract that will protect us and allow us to serve our client appropriately while providing an adequate fee for the time spent.

However, there are times when we encounter clients with requirements that go beyond our reasonable abilities and limitations. Their contract demands exceed the level of service that we feel is within acceptable professional limits. We reach that point in the negotiation process where our better judgment tells us that we should walk away; where the risk appears to be disproportionate to the reward. We come to the conclusion that the client’s proposed terms are so onerous that the deal is just not worth doing.

That is, until other considerations enter the picture. Perceived rewards entice us to venture into the rocky realms of increased risk. We know better, but the temptation is great. Perhaps it is an opportunity to enter a new market or earn the business of a national client who can bring us continuing work. It may be as simple as just needing the work to keep our people busy. We wipe the perspiration from our foreheads and take a deep breath as we sign on the dotted line. We shake hands with the client and head back to the office hoping for the best, wondering what we can do to manage this “fine mess” that we have knowingly brought upon ourselves.

This article will touch on the options available for risk management when we are faced with unreasonable demands or if we have already agreed to a tough contract. Since risk management is about balancing the risk with the reward, there are times when increased risks may appear to be worth the chance. These options may not be cure-alls, but taking positive and responsive actions is far better than doing nothing at all.

The contractual playing field
The chances we take when contracting for services can be treacherous, and the AIA has provided us with documents that offer much protection. AIA documents have been available for more than 100 years, and they have proved to be reliable industry standards of practice. The AIA aggressively manages the document content, constantly monitoring the way the documents are used and responding with appropriate revisions.

For example, when case law was established through a ruling in the court declaring that supervision was an activity that exceeded the reasonable expectation of the architect’s duties during construction, the more appropriate term, observation, was employed to make contractual requirements more acceptable. When the architect’s authority to stop the work was viewed as an action with unbalanced risk implications, it was removed from the documents.

When AIA documents are used, they can provide reasonable protection for the design professional. It is when more stringent and onerous conditions are introduced that the architect’s risks can rise above the rewards consistent with market-driven fees.

Both public and private entities occasionally present take-it-or-leave-it contracts that impose a higher standard of care than is normally required of a design professional. Public clients usually control large amounts of work; we must endure their contracts if we want the job. Also, private owners with a national and worldwide presence often force contract conditions with unyielding parameters.

Unreasonable requirements, such as payment for betterment, or value added, as well as absolute defense indemnities for any and all claims, should be considered to be deal-killing conditions in contract negotiations. Unfortunately, on occasion, these are accepted by architects in service contracts because of a lack of awareness or due to perceived necessity. As a result, design professionals sometimes take a chance in the hopes of a successful outcome.

Dangerous liaisons
Although many onerous contractual requirements may appear to be somewhat benign, they could have more serious implications. For example, inspecting the work connotes a more thorough review and determination of conformance. Also, a certification of payment application backup documentation goes well beyond the requirement to be “generally familiar with the work” in that it requires a knowledge of the work that only the contractor typically has.

Some contract requirements are more obvious and threaten with more certainty, offering the unscrupulous owner a basis for filing claims against the design professional. For example, requirements such as certifying work conformance can make the architect responsible for the completeness and accuracy of the work. Producing 100-percent complete documents carries an obligation that cannot be fulfilled under the design professional’s ordinary powers. Also, guaranteeing the design will not exceed a maximum limit of cost of construction can cause architects to become an uncompensated funding source for the owner, and can cause them to redesign until the project is within the budget. This can be an open-ended liability.

Nevertheless, these requirements are frequently demanded in contract negotiations, and they should not be agreed to unless the reward is worth the risk to be taken.

Protective actions
Although you may have agreed to an onerous contract condition, it does not mean that you must acquiesce. There are alternatives that can be undertaken to mitigate and manage difficult requirements. They may not provide complete resolution, but they will at least improve your chances of success.

It is important to note that a formal change order is not the only alternative for changing the course of a contract. Changes can be effected in the form of oral agreements and written understandings.

Silent acknowledgment
There is the issue of silent acknowledgment. If you document a change in the conditions of your service agreement with your client in writing, and no response to the contrary is given in writing, the change may be determined to be enforceable and have credibility.

For example, your contract requires you to be present on the jobsite one day per week. You realize that the contractor only meets at the site on alternate Tuesdays, and visiting the site for two days every two weeks provides better service to the project. This represents an “average” of one day per week. You send a letter to the client advising of the change, and you receive no response. Months later, after the project is completed, the client complains that you did not provide the site visitation services defined in your contract. The client refuses to pay your final invoice and demands a refund to cover the services the client claims you did not provide. You forward the client a copy of the letter, noting the client’s failure to respond with an objection to the adjusted visitation schedule.

While this may not guarantee exoneration from the client’s accusation, nevertheless, it provides you with a reasonable position for rebuttal.

Alternatives to onerous contract requirements
Listed below are difficult contract requirements, and some general notions for how to deal with them. Next week’s AIArchitect Best Practices column will present suggestions and alternatives in more detail.

Inspections, not observations: There are only two inspections required of the architect by AIA documents during construction: at substantial completion and at final completion. If the contract wording requires you to “inspect” the work during each site visit, your obligation for determining if the work conforms to your design documents can be greatly increased over the normal standard of care.

Certifying the contractor’s work: Although the architect certifies the contractor’s application for payment, the normal standard of care for architectural design services does not include certifying the contractor’s work.

100-percent complete design documents: Do not affix the notation, “100-Percent Complete Documents,” or any other quantitative representation on your drawings. Instead, include descriptive notations, such as “Issued for Construction,” or “Issued for Schematic Design Review.”

Guaranteeing budget conformance: It is not reasonable for the architect to be made solely responsible for a project condition over which they do not have authority or control.

Review and approval of payment application backup: The architect is required in AIA Owner-Architect agreements to “determine in general if the Work ... when fully completed, will be in accordance with the Contract Documents.” This is not a requirement to check each and every detail in the contractor’s application for payment.

Unreasonable deadlines for submittal and RFI review: The design professional has both the right and the obligation to take the appropriate amount of time necessary to review submittals or answer questions.

Indemnities and hold-harmless agreements: These clauses offer a guaranteed protection that may be prohibited by the terms and conditions of your professional liability insurance policy.

Deletion of construction phase services: Owners sometimes ask architects to delete construction-phase services from their work. Because the architect typically contracts to issue a Certificate of Substantial Completion at the end of the project, it is difficult, if not impossible, for the architect to know if the project has been constructed substantially in accordance with the drawings and specifications if they have not visited the site and reviewed the work during construction.

We may not always succeed in negotiating a contract that is in complete alignment with our preferred services approach. Opportunities and rewards may sometimes lure us into treacherous contractual conditions. Our chosen “business decision” may be to agree to contract wording that places us at a higher risk than we typically accept. We may find ourselves in another fine mess that challenges us.

We must remember that although the ink may be dry, the opportunities for effective risk management remain. There are actions that can be taken to improve our exposure and possibly mitigate onerous requirements altogether. The important thing to keep in mind is never to give up. Many contingent actions can be taken throughout the project to improve your risk exposure and the chance for a successful project. Do not forget that a component of successful projects typically includes a satisfied client.

We must take risks if we are to do business, but opportunities for improvement will always persist. Stay on top of your negotiations and stay close to your clients. And if you find yourself in another onerous contract, take advantage of the opportunities and resources available for minimizing your risks and improving your chances for success.

And while you’re at it, be careful out there.

Copyright 2005 The American Institute of Architects. All rights reserved. Home Page


This article is the fifth in a series of monthly articles on risk management by Jim Atkins, FAIA, and Grant Simpson, FAIA. This series will continue next week in AIArchitect when the subject will be “Another Fine Mess: The Onerous Contract, Part II,” which will explain in more detail how to manage your way out of a bad contract after it has been signed.

Read the last month’s article, “Smoke, Mirrors, and Snake Oil: Risks in Marketing.”

Visit the AIA Risk Management Resource Center.

If you would like to ask Jim and Grant a risk or project management question or request them to address a particular topic, contact the AIA General Counsel’s office.

James B. Atkins, FAIA, is a principal with HKS Architects. He serves on the AIA Contract Documents Committee and the AIA Risk Management Committee. Grant A. Simpson, FAIA, manages project delivery for RTKL Associates. He serves on the AIA Practice Management Advisory Group.

This article is intended for general information purposes only and does not constitute legal advice. The reader should consult with legal counsel to determine how laws, suggestions, and illustrations apply to specific situations.

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