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Don’t Neglect Four Important Risk Mitigation Techniques

Any professional practice includes risk. How a firm handles that risk is critical to its profitability, and essential to its viability. According to Victor which manages the AIA Trust-sponsored CNA professional liability insurance program, four techniques are paramount to a firm to pursuing its preferred future.

Use a Written Contract to Collect a Reasonable Fee

One of the most valuable proactive risk management tools an architecture firm possesses is the ability to collect fees. Receiving payment for services in a timely manner is essential to the financial health of a business. Establishing and enforcing contractual payment provisions can help a firm avoid professional liability claims. Firms should execute written agreements with their clients that contain: payment terms; a schedule when payments are to be made; and clear invoicing and collection procedures. Enforcing the contractual right to payment should be considered a key practice management procedure.

Use a written agreement

Establish Payment Terms in a Written Agreement

Oral agreements create problems. Collecting the appropriate payment for services can be nearly impossible unless a written agreement exists. The agreement should carefully tie the fee to measurements that can be understood by the client and documented by the firm. Unclear or unspecified payment terms and untimely billing and collection often generate disputes. One of the greatest values in using AIA contract documents is that they are clear on payment provisions.

A contract should also clearly state who is authorized to approve payments on behalf of the client and to increase the scope of services. While the basis for payment can vary from hourly to value-added, the application of the fee system should be documented.

Retain Control Over Services and Deliverables

Firms should retain the copyrights to the project documents at least until all fees are paid. The right to suspend the firm’s services if payment is not received according to the contractual obligations of the client is essential. A basic element of good business practice is to avoid financing the client by demanding a significant retainer. Firms that accept a termination for the client’s convenience provision should be careful to negotiate the specifics of such an option, including who has control over the documents in progress and whether lost profits are recoverable.

Avoid Giving the Client the Right to Withhold Payment

Increasingly, architecture firms are faced with clients who want to be able to withhold fees on an arbitrary basis with no independent finding of fault. Fee negotiations can be rendered meaningless if a client can withhold professional fees to a firm at the client’s own discretion. Remember that any provision that empowers the client to make a unilateral determination of fault or responsibility for damages creates a business risk. The withholding of fees is not the same as a demand for money or services that would trigger professional liability insurance coverage.

Manage Risk Through Inter-professional Agreements

A written professional services agreement is a necessity when dealing with a consultant to:

  • define the scope of services;
  • set the time for performance of services;
  • create the rules for the exchange of payment for services; and
  • deliverables, and establish other terms and conditions of the relationship.

Architecture firms are perhaps best positioned to reduce confusion and minimize the impact of any professional liability claims that may occur if they have a separate written agreement with each consultant providing professional services. A clear delineation of duties and responsibilities, any limitations of service or risk, and other project-specific terms and conditions help to prevent misunderstandings and other communication problems that often generate claims.

Written agreements also need to address insurance coverage issues. It is not unusual for major claims against architects by clients or contractors to have their root cause in the negligence of a consultant. Therefore, consultants should have proper professional and general liability coverage and should provide certificates of insurance evidencing coverage.

One of the most significant risks for prime architects is assuming responsibility for uninsured or underinsured consultants. No prime architect should assume this risk unless it willingly decides to do so. Even if the specialty firm reports directly to the client, the prime firm may be held liable for third-party negligence because of a duty to provide project “coordination.” If a specialty firm does not have adequate insurance, the firm with overall design responsibility will be the source of cost recovery.

Use Independent Reviews to Manage Exposure

The likelihood of design deliverables being released for approval or actual construction while containing negligent errors or omissions is higher than most firms would like. This is due to projects becoming more complex and design times being severely constrained. Fees do not always compensate for the levels of service that architects feel are appropriate. Increasingly, architecture firms are using independent reviewers to assess design deliverables before they become final.

Use Project Peer Reviews

The effectiveness of a project peer review is that it is performed by an independent team or individual not associated with the original design team. While a separate firm often performs the review—perhaps a firm trading review services with a peer—the reviewer can also be a separate, experienced individual or studio within the same firm. Whether the review is performed internally or externally, the key is that the assessment be conducted by an entity that did not participate in the original design and is unlikely to miss some deficiency or possible problem because of time or budget constraints.

Assess Constructability

Professional liability claims may be reduced in number and scope through an independent constructability review. On projects where the construction team is engaged during the design phase, there is a much greater chance that the architect and client will benefit. A structured and well-documented constructability review process provides for the timely integration of construction input into project planning, design, and field operations. Clients are better served because considerations for the fabrication, installation, operability, and maintenance are addressed by representatives of the client, those responsible for construction, and other project stakeholders.

Because a constructability review should be an interactive process, the investigation should take place throughout the design process and not as a last-minute value analysis effort to cut costs. Even if the actual construction team is not identified during design, a constructability review performed by a consultant can achieve many benefits.

Follow Contractual Procedures to Mitigate Shop Drawing Exposures

Architectural practice involves the processing, review, and approval of shop drawings. Shop drawings play an important role in the architect’s ability to render appropriate professional services on behalf of the client. Whether or not a professional liability claim will result from the processing and approval of shop drawings often is determined by a number of factors. Such factors include how well the architect understands the function and purpose of shop drawings as well as their relationship to the design and contract documents. Another factor involves the willingness of the architect to insist that all parties adhere to the procedures for handling shop drawings as set forth in the general conditions of the construction contract. Rarely has a professional liability claim resulted from the architect’s approval of shop drawings when reasonable care in processing and approving them was exercised and the architect insisted that others meet their contractual obligations in connection with submitting shop drawings.

For many decades, the consensus documents published by the AIA have carefully defined the contractor’s responsibilities and the architect’s duties. Still, the shop drawing process has generated professional liability exposure and professional anxiety.

Risks Can Be Managed When Procedures Are Followed

Managing the risks intrinsic in asking for and reviewing shop drawings requires the exacting discharge of the contract for construction and the diligent performance of duties in the professional services agreement. The AIA documents require the contractor to provide a schedule for submittals that incorporates the required time for review and resubmittal, if necessary. Since this schedule affects the services of the architect, the construction contract requires that the architect approve the contractor’s schedule.

The AIA documents also require that the submittal schedule be prepared in conjunction with the construction schedule so that submittals are made in logical sequence and in a timely manner. This helps ensure that submittals can be reviewed and approved when called for by the construction schedule. Once the schedule is set, it should be strictly enforced.

Reduced Risk Can Also Reduce Deductibles

It’s not only good business practice to use standard AIA contracts, it can help firms insured through Victor reduce their deductibles when claims occurs. Both a premium credit and a deductible credit can be offered to eligible firms in states where the unique credits have been approved as an incentive to use good practice procedures and document performance. The deductible credit rewards firms that practice prudently if a claim occurs because claims against firms that use risk mitigation techniques can be highly defensible. More information about the risk mitigation credits is available through the AIA Trust or from https://www.victorinsuranceus.com/AE/Pages/AIA-Trust-Members.aspx, the landing page on the Victor website for AIA members.

Victor and CNA work with the AIA Trust to offer AIA members quality risk management coverage through the AIA Trust Professional Liability Insurance Program and Business Owners Program to address the challenges that architects face today and in the future. Detailed information about both these programs may be found on the AIA Trust website, TheAIATrust.com.

 




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Managing Risk Through Contract Language

Managing Risk Through Contract Language, one of the professional liability risk management tools available from Victor Insurance Managers Inc., reviews contractual demands by clients that could increase exposure or compromise professional liability insurance coverage and provides commentary and alternatives.