Construction project abandonments on the rise

Construction projects across the country are being abandoned at an increasing rate. The abandonments are primarily fueled by cost-related matters as the design is completed and the impact of high interest rates is factored into the actual cost. Some abandonments may also be due to oversupply of space and slow demand in certain industry segments, such as private offices and life sciences sectors. Project abandonments are a significant problem in the private sector and are especially difficult for contractors who find it hard to manage workflows and keep their crews busy while also facing the risk of losing projects.

Historically, project abandonments have fueled increased claim frequencies against architects as developers try to recover their sunk costs from parties who are involved in their projects. Architects should maintain open communication with their clients so that they are aware of any adverse developments on their projects.

In the event of project abandonment, the architect should address the following three issues to terminate the agreement with the client.

1. Make sure that you will be paid for completed services

The more immediate concern when a project is delayed or abandoned is to make sure that you are equitably compensated for the services completed prior to project delay or abandonment. If the viability of the project has been compromised, it is essential that the architect take appropriate steps to protect the firm’s financial interests and ensure fair compensation for the work already done. If there are outstanding payments, you should review your agreement about your right to both suspend and terminate your services. If the professional services agreement does not address your right to suspend or terminate your services, then the firm has to negotiate an amendment to the agreement that addresses the changed nature of the project.

2. Documents are transferred at their level of completion

It is also important to address the status of the project documents. In exchange for payment in full, the architect will typically agree to transfer the documents at their level of completion. It is important to clearly identify whether the architect is transferring to the client the right to use the plans and specifications (a license) or ownership of the design and deliverables. The contract should be clear that any changes to the documents subsequent to the transfer are at the sole risk of the party making the changes. The client should also be informed that if the project is restarted, it will be necessary to redesign the project to meet newly applicable codes or regulations and to make accommodations for any changes in the availability of materials and products.

3. Include a release from any claims and an indemnification in the termination agreement

An indemnification clause will protect the architectural firm from meritless claims if the client or a related entity tries to restart the abandoned project. The architect should also seek indemnity from the client for claims from any subsequent design professionals, contractors, or other project team members who are involved in restarting the project. This will protect the architect from any future claims related to the abandoned project and provide a level of financial security.

It is essential that competent legal counsel draft any proposed termination agreement. The contract language example below is for risk management information and is not legal advice. Your legal counsel can adapt the following language:

The decision to terminate the services of [FIRM] on the project before design and construction phase services required by the original contract could be rendered means that [FIRM] cannot be in responsible charge of the complete professional services for the project. Upon final payment to [FIRM] for professional fees and termination expenses and reimbursables for services rendered, [FIRM] will transfer all Instruments of Service, including plans, specifications, and other information, to [CLIENT]. (In the case of incomplete plans: These plans cannot carry the name or professional seal of [FIRM].)

[Client] acknowledges and agrees that any changes made to the documents by [CLIENT] or any consultant providing services to [CLIENT] and any modifications to the project or interpretations of the documents during construction will be at the sole risk of the party making the changes.

In exchange for the transfer of these Instruments of Service, [CLIENT] agrees to release [FIRM] from any future claim by [CLIENT] or anyone claiming through [CLIENT] against [FIRM]; likewise, upon final payment for the services of [FIRM], [FIRM] shall release [CLIENT] from any future claims for fees. Acceptance by [CLIENT] of these terms means that in addition to agreeing to waive any claim against [FIRM], [CLIENT] will defend [FIRM] and make [FIRM] whole if there is any claim for costs, losses, damages, or injuries made by any subsequent design professional; by any contractor, subcontractor, or supplier; or by any other party allegedly arising from or in any way connected with this project. This transfer of the Instruments of Service of [FIRM] also is contingent upon the agreement of [CLIENT] that any time spent or expenses incurred by [FIRM] in defense of any such claim or liability will be paid by [CLIENT] based upon the fee schedule and expense reimbursement policy that [FIRM] and [CLIENT] established for direct services to [CLIENT].

In conclusion, project abandonments in the construction industry are becoming increasingly common, posing significant challenges for architects and contractors alike. To protect their financial interests, architects should ensure that they are compensated for completed services and address the status of project documents. It is also crucial to include a release from any claims and an indemnification in the termination agreement. Consult with competent legal counsel to draft a termination agreement that addresses the specific needs and circumstances of each project. By taking these steps, architecture firms can mitigate the risks associated with project abandonments and safeguard their financial security.