Manage Clients’ Expectations: Require Clients to Set Aside Appropriate Contingency Funds

by Michael Strogoff, AIA
Strogoff Consulting

Summary: Clients react to extra charges and cost overruns in different ways. One owner might willingly pay for services notoriginally included within an A/E team's scope, accept construction change ordersas part of the normal course of business, and dip into a reserve fund to pay for unexpected project costs such as higher financing costs or additional site acquisition costs. A different owner might balk at any additional fees regardless of the cause, seek reimbursement from the architect for every change order, and downsize the project to pay for unexpected project costs. The course an owner takes depends largely on whether the owner planned for the unexpected.

To reduce the likelihood of an owner balking at additional fees, filing unwarranted claims against your team or unnecessarily changing the project parameters late in the game, persuade the owner during your initial contract negotiations to include three different contingency funds: one for additional professional fees, one for construction changes, and one for unexpected project costs.

Allowance for additional professional fees
It is difficult to determine ahead of time the precise scope of every design professional's involvement, and it is unnecessarily expensive for an owner to negotiate fees that encompass every conceivable service that might be required. On the other hand, the need to negotiate additional fees for changes as they occur places a design professional in an uncomfortable position and often jeopardizes the relationship between the owner and design professional. Unfortunately, some owners cling to unrealistic expectations that, once a contract is signed, a design professional should provide whatever services are required. Some owners think, “You're the expert and I relied on your knowledge of which services should be required when we negotiated your fees.” Other owners are unwilling to approach other stakeholders on behalf of the design professional, while still others simply refuse to part with more money regardless of the cause.

A professional fees contingency also makes the design professional's task of obtaining additional fees for legitimate changes much easier and less confrontational

The best solution is to persuade the owner to carry a contingency fund specifically earmarked for paying additional fees. This gives the owner more flexibility to make changes without renegotiating or amending its contracts, such as revising the project scope, amending prior decisions, providing updated information, expanding the design professionals' services, or adding additional consultants. With institutional clients, it also eliminates the need for an owner to obtain formal approvals—a huge barrier for many project managers—since the funding has already been encumbered. Such a contingency also makes the design professional's task of obtaining additional fees for legitimate changes much easier and less confrontational.

Construction contingency fund
Every architect knows that the perfect set of drawings and specifications has yet to be produced. Not so with all owners, some of whom expect an error-free set of documents. Yet design professionals do little to dispel an owner's unrealistic set of expectations. In fact, most architects and engineers do just the opposite: they lead owners to believe that design professionals are so highly educated and skilled that mistakes are few and far between. Imagine an architect, in the middle of an interview, telling a prospective client that his documents will surely contain some errors and omissions, but probably no more than the average architect practicing in the same community.Persuading the owner to include a construction contingency fund is a far better way to educate an owner about the imperfect nature of an architect's or engineer's drawings and specifications

Persuading the owner to include a construction contingency fund in his or her project budget is a far better way to educate an owner about the imperfect nature of an architect's or engineer's drawings and specifications, and thereby reduce the likelihood of that owner seeking reimbursement. A construction contingency fund sets aside a portion of the owner's budget, either a specific dollar amount or a percentage of the budgeted construction costs, to pay for the costs associated with the imperfect nature of architecture and engineering services.

During your negotiations, talk to the owner about what he or she should expect with regard to the completeness of your design and the accuracy of your drawings. Tell your client that change orders during construction are inevitable and that most contractors expect additional money for every slight change, whether such changes result from errors, substitutions, unexpected site conditions, or owner-initiated changes. A client who understands that your team cannot achieve perfection, no matter how skilled or how high of a fee it is paid, is less likely to hold you responsible for the costs associated with your errors and omissions.

After candidly talking with your client, try incorporating a provision similar to this one into your owner-design professional agreements:

"The Owner and the Design Professional agree that certain increased costs and changes may be required because of possible omissions, ambiguities, or inconsistencies in the drawings and specifications prepared by the Consultant and, therefore, that the final construction cost of the Project may exceed the estimated construction cost. The Owner agrees to set aside a reserve in the amount of __ percent of the Project construction costs as a contingency to be used, as required, to pay for any such increased costs and changes."

Some attorneys advise design professionals to add a clause that prevents the owner from suing you for extra costs that fall within the contingency amount, such as:

"The Owner further agrees to make no claim by way of direct or third-party action against the Design Professional or its subconsultants with respect to any increased costs within the contingency because of such changes or because of any claims made by the Contractor relating to such changes."

Beware: this clause could also work against you. By creating a threshold below which the client cannot recover its costs, you might actually encourage the client to pursue reimbursement from you when that threshold is crossed. Make sure your client understands that a contingency fund is meant to cover some changes, not every conceivable one.

Project contingency fund
Beyond additional professional fees and construction change orders, owners might well budget for other unexpected costs. Among the most common project changes that add to an owner's budget woes: schedule delays, changes in agency requirements, programmatic changes, owner-initiated design changes, unknown site conditions, unexpected construction cost escalation, and added financing costs.

Again, educate each owner during contract discussions about these potential costs. Suggest ways to help prevent these costly changes. Some examples:

• Make sure the owner's schedule is realistic and allows adequate time to meet with approving agencies during the early design phases
• Incorporate a comprehensive programming effort
• Negotiate fees for building a model or producing three-dimensional renderings to make sure the owner understands the design before proceeding into the production phases
• Insist on current site surveys and soils reports
• Include a professional cost estimator on your team
• Suggest that the owner either lock in financing terms or include a separate allowance for added costs.
  

When advising an owner to incorporate each of these contingencies—one for additional professional fees, one for construction change orders, and one for other unexpected project costs—reinforce that, in the final analysis, the owner will receive a better product and avoid needless headaches and legal wrangling. And, by the way, all of this makes clients much easier to manage.

© 2007, Strogoff Consulting. Reprinted with permission