From oral agreements to custom agreements: A practical guide to navigating contracts

Mitigate risk through contract language

The contract negotiation process provides an opportunity to set the client-architect relationship on a firm and productive course. Too often, inexperienced architects rely on undocumented statements as the basis for the scope of their services and the compensation they will receive. Whether through mutual enthusiasm or haste to put the new capital asset in place, the essential details of the agreement for professional services are often left unclear or incomplete.

Both parties on a project—the client, expressing the project’s goals, and the architect, establishing the methodology and time frame for the professional services—must fully appreciate the issues involved in the negotiation process. A contract between an architect and a client is usually carefully negotiated to record their expectations and establish the ground rules for their relationship until both parties fulfill their contractual obligations. The contracting process can be viewed as the first phase of project delivery, and the resulting contract serves as the foundation for each phase of service that follows.

To help firms navigate these complexities, Victor Insurance Managers LLC (Victor) has identified some steps that firms can take. There are four steps that firms can take to help ensure that the contract negotiation process is productive. Each one is critical to the overall success of project delivery.

Step 1: Determine the type of agreement

Architects typically encounter five generic types of professional services agreements:

• Oral agreements
• Letter agreements
• Purchase orders
• Standard form agreements (often with extensive modifications)
• Custom agreements

There are no business or risk management advantages to oral contracts. An obvious problem with oral contracts is that their existence and terms are difficult to prove. Although parties may have the best of intentions at the start of a project, misunderstandings can arise without clear documentation of the scope, timing, and compensation. Such misunderstandings can plague the project and lead to disputes after project completion. Employees often move on to other assignments, and memories often fade over time.

Even though a contract might not need to be in writing to be enforceable, executing written contracts is a good policy and offers benefits. A written contract provides objective, documented evidence of the agreement, unlike an oral contract, in which the terms are left to the subjective and biased recollections of each party. Having contracts in writing provides an opportunity for each party to review those terms and ensure they are comfortable with their undertakings and obligations. If a dispute cannot be resolved directly between the parties, a written contract provides a basis upon which a third party (e.g., judge or arbitrator) may resolve the dispute.

Custom agreements created by the prospective client can present significant challenges for the architect. Such agreements usually arise due to the unique nature of a project or specific circumstances with the client. Therefore, carefully review custom contracts as they may establish an unbalanced contractual relationship.

Obviously, the use of one of many standard professional services agreements published by the American Institute of Architects (AIA) is preferable to an unwritten or owner-generated agreement form. The AIA documents carefully translate the normal standard of care for professional services into balanced and clear agreements. They provide a sound basis for professional relationships, reflect industry customs, and have been construed by courts.

No architect, however, should use an AIA standard form of agreement without understanding the reasons for the provisions included in the consensus contract forms. The AIA provides guidance on what the provisions mean and offers alternative language to enable the architect to customize the contract with the client to meet specific concerns.

It is important that architects include certain project­specific and general conditions terms in their agreements and strive to limit onerous, unrealistic, or ambiguous terms. In this effort, it is often useful to start by comparing the proposed changes to a standard form or the provisions in an owner-generated contract with the carefully crafted language of standard AlA documents.

Step 2: Ask these questions

From a risk management perspective, the contract negotiation process is successful if a firm can answer “yes” to each of these questions:

• Are the expectations of the parties clearly articulated and reasonably integrated?
• Are the rights and obligations of the parties clearly expressed?
• Are the risks and rewards fairly allocated?
• Is each source of risk allocated to the party in the best position to control or otherwise manage that risk?
• Is insurance available to support any common law or contractual indemnity obligations?
• Do mechanisms exist to accommodate changes during the project?
• Is the mutual understanding of the parties confirmed in writing?

It is often helpful to think of the professional services agreement as an inventory and explanation of rights, responsibilities, and procedures. Through their agreement, the parties can state the goals and expectations they have of each other and of third parties; they can allocate rights, responsibilities, risks, and rewards. The parties can establish procedures for dealing with conditions that may change during the performance of their contractual duties, and they can mitigate the impact of disputes by establishing dispute resolution provisions that are both timely and fair. Such an agreement can allow performance to unfold over time without placing either party at the whims of the other.

Victor specializes in assisting firms with these critical risk assessment questions. Our expertise ensures that insurance coverage aligns with contractual indemnity obligations and that risk is allocated to the party best positioned to manage it. This alignment is essential to protect firms from unforeseen liabilities and financial exposures.

Step 3: Check the establishment of scope, time, and compensation

The two most important aspects of an agreement are the description of the scope of services and the method for determining the architect’s compensation. Architects should take great care to delineate the scope of services. A good approach is to divide the services into four categories:

• Basic services—those that are included.
• Additional services—those that will be provided at additional costs when authorized.
• Expressly disclaimed services—those that are not included and for which responsibility is expressly disclaimed.
• Client responsibilities—those that will be provided by the client at no cost to the architect and upon which the architect can reasonably rely.

A third and increasingly important aspect is the time allocated for the delivery of services. The architect should define the scope of services with reasonable precision within the agreement. An ambiguous or unspecified definition of scope may lead to an obligation to perform uncompensated services or to a dispute with the client.

The agreement should also specify the time expectations for the rendering of services and the submission of deliverables. Time parameters, however, cannot be stated as absolute; milestones or deadlines must be adjusted when delays are caused by factors beyond the architect’s control. Although standard AIA professional services agreements do not contain a “force majeure” provision (which excuses delays caused by uncontrollable events), courts often interpret the standard of care provision to allow for such delays. The AIA’s standard of care provision states that “the Architect shall perform its services as expeditiously as is consistent with such professional skill and care and the orderly progress of the Project.”

Professional services agreements must include guidelines for prompt payment. Prevention of unreasonable withholding of fees and renegotiation requirements of fees for delayed or terminated projects are important parts of the professional services agreement.

Step 4: Check that the professional services and construction contracts are coordinated

One of the most common oversights architects make is failing to check that the general conditions guiding the professional services and the authority of the architect stated in the construction contracts are coordinated. Often, the contract for design services is executed months before the construction contract and general conditions are developed and the architect does not have an opportunity to check for conflicts between the two agreements.

If the architect is to perform construction phase services, the construction contract and general conditions must specify the architect’s role. Provisions that should be carefully checked include:

• Evaluation of construction
• Certificates of payment to the contractor
• Submittal review
• Change orders
• Project completion and closeout

Since the AlA publishes families of documents, coordination is less of an issue if an AIA professional services agreement and the General Conditions of the Contract for Construction (A201) are both used. However, if the design and construction contracts are custom agreements, or if one agreement is standard and the other is custom, care should be taken to make sure the agreements are coordinated.

Conclusion

Often, inexperienced architects look at contracts for professional services as taking time away from their design opportunities, as starting the relationship with the client on an adversarial basis, or as unnecessary or incomprehensible “boiler plate.” Defining your role on the project, clearly setting expectations, establishing the lines of authority and communication, and matching the scope of services to appropriate compensation are basic components of providing professional services. So are the appropriate steps in reviewing your contractual rights and obligations before starting your services on a project.

For more information about the various risk advisory services and platforms available to Victor and CNA insureds, visit our Risk Advisory website today.