Tag: Contract Issues

Construction Observation: Important Risk Management Service

By Lynda

Construction observation is a powerful weapon for architects and engineers (A/E) in their risk management arsenal. Certain clients understand the benefits when A/E firms offer construction phase services. However, driven by slow economic conditions, many clients are asking firms to do more, with less, including reducing or eliminating construction phase services. Other clients decide they will administer the construction contract themselves or decide to use a third party instead of the A/E firm.

Clients have also held the A/E to a higher standard of care when providing construction observation services. How do these actions affect A/E firms? It significantly increases the A/E’s risk and liability exposures.

Construction Phase Risks

Details in design documents cannot anticipate every contingency that may occur during the construction phase. If the A/E firm of record is not retained to provide clarification of the plans and specifications the risk of misinterpretation of the contract documents increases.  Bad decisions can lead to project confusion, delays, increased costs, disputes and claims between the owner and the A/E.

The exposure of the A/E is increased due to certain owners and contractors asserting that the designer has a similar responsibility of the contractor for discovering all defects on the project. Based on this distortion and unrealistic expectation of construction observation services, owners and contractors have stated the A/E should be a guarantor of the contractor’s work. These expectations dramatically increase the A/E’s standard of care and risks associated with construction phase services. Court decisions have ruled in Owners’ favor holding that the A/E has a duty to guard the owner against all non-conforming work on the project, although much of that work was completed when the firm was not present on-site. Members of the plaintiff’s bar continue efforts to hold the A/E accountable for this higher standard of care for construction phase services. Continue reading “Construction Observation: Important Risk Management Service”

The Impact of Sub Consultants in the Design Build Process

By Lynda

The Perspective of the Fire Protection Engineer 

Integrated Project Delivery (IPD) is a collaborative alliance of people, systems, business structures and practices into a process that harnesses the talents and insights of all participants. Its aim is to optimize project results, increase value to the owner, reduce waste and maximize efficiency through all phases of design, fabrication, and construction. The most popular method of IPD is Design-Build, one of the most significant trends in design and construction in the U.S. today.

The Design-Build Team works under a single contract with the project owner to provide design and construction services: one entity, one contract, one unified flow of work from initial concept through completion. It consists of many players, including the General Contractor, Architect, Engineering Consultants, and a variety of sub contractors. Collectively, the team has the knowledge and expertise to complete a project from start to finish and each team member is equally important in the outcome of the project.

The role of the specialty sub-consultant is no different. For example, the Fire Protection Engineer (FPE) is a critical member of the Design-Build Team, and provides comprehensive input and guidance on all aspects of fire and life safety for the project. This includes, but is not limited to, building code analysis, water supply, smoke control, fire department access, exiting, and an analysis of the active and passive fire protection systems.

From an FPE’s perspective, the design-build process can be broken down into four separate and distinct phases: the teaming phase, the pre-proposal phase, post-award phase, and the construction phase.

Teaming Phase

The client should understand the value of the FPE in the teaming phase and that communicating with the key individuals responsible for selecting the team is a priority. Generally, the people responsible for selecting team members are the general contractor’s project manager, project estimator or the project architect. They may or may not be familiar with the value that the FPE provides so it is important to reaffirm the FPE’s role. Other disciplines can contribute to fire protection and life safety, but none of them take the total fire protection and life safety perspective that an FPE does. Continue reading “The Impact of Sub Consultants in the Design Build Process”

Is there such a thing as a Standard Contract?

By Lynda

The most common refrain I hear when talking to clients about Contract Review and Administration is: “I only sign a standard contract.”

Most clients feel there is no reason for contracts to be reviewed prior to signing, because they only sign a standard contract. Unfortunately, the only standard contract I ever see is one in which an owner or client uses and wants their consultants and contractors to sign. Ironically, one of the few things that makes any contract a “standard contract”…is the omni-present and onerous broad hold harmless/indemnity and defense clause.

Contract Review and Administration is probably one of the most important aspects of a prudent risk management and loss prevention program. A contract that any Contractor or Consultant signs should identify their rights and responsibilities to the owner and third parties. All of this should be determined at the “request-for-proposal” stage. If done here…it allows the Contractor or Consultant to identify, evaluate and treat the risks in the Owner or Client standard contract. Please remember that no one is putting a gun to the Contractor’s or Consultant’s head when he or she signs the contract; so it’s absolutely essential that the Contractor or Consultant knows what he is signing and what his rights and responsibilities are when negotiating for future work.

The prudent Contractor or Consultant should discuss all contracts with their counsel and agent before signing. Some general practice tips to consider when reviewing contracts are:

  • Scope of services: Think about whether the contract is exactly what you thought is was going to be in terms of encompassing more or less services, added responsibilities or services outside your area of expertise. It is also wise to describe things you are not doing to reduce the potential for misunderstandings.
  • Change orders: Find out if the Owner is allowed to change the scope of work once under way, and, if so, under what conditions. For instance, look at what input or options you have and what time frame you have to consider this.
  • Warranties and Guarantees and Performance Standards: First, you have to know if there are any. Try not to assume any and don’t agree to unreasonable ones…if you must assume any! Don’t forget that all professional liability policies exclude the assumption of liability policies which turns out to be a warranty or guarantee or performance guarantees.
  • Compliance with all laws, regulations, etc.: These responsibilities can be difficult to live up to since no one knows what all the laws, regulations, ordinances, rules, etc. are, much less how to comply with all of them. Continue reading “Is there such a thing as a Standard Contract?”

A Reasonable Contract

By Lynda

Risk Allocation is an important part of the contract negotiation process for Architects, Engineers, and other Design Consultants.

“In allocating risks by contract terms and conditions, the goal is to allocate the specific risks to the party with the best ability to manage them. Although a contract can assign ownership of risks to any party, there can be serious adverse consequences if a party assumes risks it can’t manage. A design firm, for example, isn’t in a position to manage site safety responsibilities that most appropriately belong to the construction contractor. Despite the practicalities, however, of who is actually in the best position to manage site safety, if the design firm agrees to such responsibility by contract, the designer may be found liable for site safety by courts and possibly the Department of Labor.

“To be reasonable, a contract must be reasonable for all parties involved. If a contract attempts to shift all the risks to one party or the other, it will create problems on the project. A one-sided contract is likely to cause hard feelings during contract administration. It may also increase the likelihood of claims turning into litigation. As a practical matter, this means parties are better served by negotiators who don’t try to negotiate a contract that unreasonably shifts risk to someone who can’t logically manage it or accept legal responsibility for it. Such risk transfer will cause problems in the long run, and may even create uninsurable losses and claims.

“In evaluating who the various risks should be assigned to, parties can develop a table or list of responsibilities and risks to more easily see which risks most logically belong to each party. For example, site safety typically falls to the construction contractor. Easements and rights-of-way, as well as site data, including geotechnical information, may logically be allocated to the project owner. Responsibility for exercising due care in the planning and designing of a project generally falls to the design professional performing those services.

“Problems begin when any of these risks are allocated to the party that is not technically responsible for the related services. Unless you are in a position to manage a particular risk, it is not appropriate for you to accept contractual liability for that risk.”

This is an excerpt from a/e ProNet’s Risk Management & Contract Review Guide for Design Professionals (© Copyright 2006; a/e ProNet & J. Kent Holland, Jr.), one of the many resources ProNet Member Broker’s provide to their clients. A digital version of the full guide is available for purchase ($19.99). Contact a/e ProNet today to get in touch with your local ProNet broker.

About the Author: J. Kent Holland is a construction lawyer located in Tysons Corner, Virginia,  (formerly with Wickwire Gavin, P.C. and now with Construction Risk Counsel, PLLC) representing design professionals, contractors and project owners. He is founder and president of a consulting firm, ConstructionRisk, LLC. He is also the author of Contract Concerns, a series of articles available on our website here.

Just a Rabbit? Small Projects Can Bite

By Lynda

Who doesn’t love a good Monty Python reference? With our latest ProNetwork Newsletter, Just a Rabbit? Small Projects Can Bite, we’ve proven that the classic moments in Monty Python and the Holy Grail can be made analogous to anything, even insurance. Or, more accurately in this case, to potential professional liability claims:

“King Arthur and his knights approach a cave known to be guarded by a ferocious beast.  Upon seeing that the beast is but a wee rabbit, they let down their guards, proceed forward and are savagely attacked.  Was the mistake having approached the cave at all or having done so without anticipation of the risk and use of appropriate protection?  I sometimes ask the same question of design professionals who undertake small fee projects and unhappily receive large claims. But it has always been true that little projects can generate big claims, particularly where we let informality replace careful practice and appropriate documentation.  In a troubled economy, a/e’s want to take the work and no responsible lawyer should tell you to minimize your risk by eliminating your work. Take the work but don’t skimp on process, procedures and gut feelings in contract negotiations and documentation, even if done less formally.

Just a Rabbit

“Like King Arthur’s knights, I have frequently heard that the project was just a rabbit, or just a slab on grade, or just a retaining wall, or just a room addition, or just a (fill in the blank).  Insurance statistics prove that smaller firms do not necessarily get smaller claims, nor do smaller projects necessarily generate only small claims.   A modest structural engineering engagement for balcony maintenance on a condominium building can bring in modest fees.  When one of the balconies collapses or defects become apparent in 350 identical units with 350 separate plaintiffs, the defense and repair costs can be astronomical.  The same can be true for a small church addition, with the church school remaining open during construction.

Just a Contract

“Aside from legalities, written contracts serve two important practical purposes.  First, before work begins, the contract serves as a discussion outline with which a client can be educated about what you do for a living, what they have to give you in order for you to do the work, what work you have in mind and, equally important, what work is not included. All of these topics are much more easily and less emotionally discussed before anyone has started working and before a problem has arisen.

“I frequently receive calls about contracts just as the a/e is finishing Construction Documents and realizes either that nothing has been paid to date or that a risky project is about to go out for bid. This is not ideal, but very common, and still better than having the discussion after CDs are out or a problem has arisen.  I also frequently receive calls after the contract is signed, work is proceeding and could I just take a quick look at the contract, because it is “just a room addition” or similar small project?  Once signed, there is little I can do but warn the a/e of the teeth on that rabbit.

“Contracts serve a second important purpose as well – to tell a third party (judge, jury, arbitrator, Grand Inquisitor) what the parties thought about the scope of services, risks, rewards and the deal before they got to court.  If you show up to court with a contract calling you “contractor,” saying that you will perform your services to the “highest, best” standards of care and that you intended to “ensure” a successful project, you will be hard pressed to proclaim otherwise, even if Mrs. Justaroomaddition was a little flaky and Mr. Justaroomaddition employed his brother-in-law to do some of the work.   You will also create insurance coverage problems for the claim, perhaps ending up with two lawyers and two lawsuits instead of one of each.  Use the same scrutiny of contract language for your small projects that you use for your large projects, because the same words can cause problems regardless of size of the work.”

Visit our website to continue reading this newsletter. You may download the full PDF version here.

ProNetwork News is the latest value-added resource produced by a/e ProNet. Each monthly edition includes an informative, timely article relevant to the design industry and authored by an industry expert. Contact your a/e ProNet broker for early access to these excellent newsletters.

About the Author: Eric Singer is a partner at Ice Miller, LLP. He concentrates his practice in construction law, with emphasis on the representation of architects, engineers, contractors, owners, and lenders as well as other professionals, in litigation and alternative dispute resolution of design and construction issues. Eric is an active speaker and prolific author on the subject of construction litigation and the liability of the design professional.

To Hire or Not To Hire?

By Lynda

As the American economy recovers, all eyes are on the construction design industry, a key indicator of the economic climate. Design professionals are preparing for the next phase of recovery in a variety of ways. Not only is there the hope that new projects will begin to come in soon, but there is a backlog of projects which began two or three years ago, but stalled. These projects have been pending in different stages, some abandoned completely, many without funding to continue. Unfreezing from that limbo would mean the potential for immediate work in many design firms, and that work could require additional hands.

In the April issue of CSPE Online, The Official Newsletter of the California Society of Professional Engineers, a/e ProNet Member Reno Caldwell published a column which addresses this exact scenario. For architects, engineers, consultants, and other construction industry professionals, this will bring up one very important question:

To Hire or Not to Hire?

Excerpt:

“Raise your hand if you were thinking of hiring someone this time last year.  Had I posed this question to a group of business owners in April 2011, I am confident not too many hands would have gone up.  The following two questions may still be far fetched, but if the tide begins turn and the project light-switch flicks up it’s worth asking both:

  1. When will your firm begin hiring?
  2. Will errors and omissions liability affect your hiring decision?

“You may be thinking that errors and omissions liability has nothing to do with a hiring decision.  Are you sure?  Most business owners understand the importance of balancing risk for the potential reward.   The term ‘reward’ probably seems distant, but many design and engineering firms have multiple projects that have long been in a perpetual ‘waiting’ mode.  Your office could get busy very quickly should these projects become active within a few months of each other, and as new projects come in the door.   Yes, this will be a happy day!

“However, many business owners have depleted their retirement savings in order to keep the lights on and doors open over the past three years.  It will be very tempting to replenish the bank account when the economy improves.   The risk management pendulum could swing quickly from ‘low risk / low reward’ to ‘high reward without considering risk.’  This move would be understandably tempting, but I urge you to take a closer look beforehand.”

To continue reading (and to get some valuable advice) visit IOA Insurance Services’ website for the full text of this article, as well as a downloadable PDF.

About the Author: Reno Caldwell is Vice President of IOA Insurance Services. He operates from the San Francisco Bay Area office in Pleasanton, CA, which he joined in 2007. He has specialized in providing professional liability insurance for design professionals, construction managers, law offices and other professional consultants since 1996. Reno is an affiliate member of the California Society of Professional Engineers; IOA is the exclusive broker of CSPE’s endorsed professional liability insurance program. reno.caldwell@ioausa.com

a/e ProNet at SDA’s EDSYMPOSIUM12

By Lynda

Longtime design industry advocate, a/e ProNet, announced this week that ProNet President Leslie Pancoast will make a presentation at EDSYMPOSIUM12, the 42nd annual education conference hosted by the Society for Design Administration (SDA), an affiliate of The American Institute of Architects.

For more than 50 years, the SDA has promoted education and best practices for design firm administrative personnel. EDSYMPOSIUM12 will take place from May 2-5 at the Embassy Suites Hotel in Portland, Oregon. a/e ProNet will sponsor Saturday’s luncheon, where Pancoast will make a two-fold presentation: Introduction to a/e ProNet and Professional Liability—Coverages, Nuances and Endorsements. SDA members will learn more about a/e ProNet and its active support for the design industry, as well as receive a brief overview of professional liability coverage and the standard endorsements available from most professional liability insurance providers for architects and engineers.

About Leslie Pancoast

Pancoast has specialized in the insurance needs of architects, engineers and other design consultants for more than 20 years. She is a Managing Partner of Insurance Office of America (IOA), one of the largest privately-held insurance agencies in the country. She is also the Branch Manager of IOA’s San Francisco Bay Area office, operating in California as IOA Insurance Services, which she opened in 2005. Pancoast has earned the designations of Commercial Insurance Counselor (CIC) and Registered Professional Liability Underwriter (RPLU). She has been an active board member of a/e ProNet since 2005, and currently serves as the membership’s President.

About a/e ProNet

Established in 1988, a/e ProNet is a national network of specialist brokers. The group focuses on providing educational resources and risk management services to its members’ clients. Its member brokers represent a combined annual professional liability premium volume exceeding $300 million, giving top-tier insurance companies a major incentive to work closely with a/e ProNet to enhance their various a/e programs.

As well, a/e ProNet makes a wide range of Risk Management resources available to all design professionals via their website, including ProNet Practice Notes, Guest Essays, ProNetwork News, Contract Concerns, Typical Coverages, and Frequently Asked Questions.

a/e ProNet is excited about the opportunity to partner with the SDA in order to provide this value-added educational resource to design firm administrative personnel across the country.

Additional information is available about a/e ProNet by visiting their website, following them on Twitter, and/or Liking their Facebook page.

Right of Set-off on Unrelated Projects

By Lynda

The following is an excerpt for the most recent ProNet Guest Essay by Frank L. Pohl, Esq. and James C. Washburn, Esq.:

“Frequently, general contractors will work with the same subcontractor or supplier on two separate, unrelated projects. When that happens, the situation may arise that on the first project (Project A), the subcontractor defaults on its contract, resulting in a back-charge that exceeds the subcontractor’s contract balance, i.e. the subcontractor owes the general contractor money. On the second project (Project B), the subcontractor satisfactorily completed its work and is due money from the general contractor. It may seem obvious that the general contractor would have a right of set-off, allowing the general contractor to deduct the amount due from the subcontractor on Project A from the amount that the general contractor otherwise owes the subcontractor on Project B. Seemingly, the general contractor should only have to pay the net difference or be able to avoid paying the subcontractor anything if the back-charge on Project A exceeds the amount due on Project B. However, as outlined in this article, that seemingly straight-forward right to “net out” the competing claims might not always be available.

“There are several different factors that can frustrate the general contractor’s right of set-off. In some jurisdictions, state statutes may prohibit the general contractor from withholding from the subcontractor the amounts received from the owner for the subcontractor’s work, such statutes holding that those funds are held in trust for the benefit of the subcontractor. Some states might even find the withholding of funds received by the owner for the subcontractor’s work to be statutorily criminal. On projects covered by a payment bond, courts in some jurisdictions have held that even if the general contractor has a contractual right to set-off, the Surety may not. As a result, in those jurisdictions, notwithstanding the contractor’s contractual right of set-off, the subcontractor may be entitled to recover the full amount on Project B (from our scenario above) from the Surety without any deduction of the amounts the subcontractor owes on Project A. Given that the general contractor must almost always indemnify the Surety, such a result has the practical effect of eliminating the contractual benefit of a right of set-off. Additionally, in certain circumstances, by the discretion afforded to judges under the rules of civil procedure, courts have required the two competing claims to be handled by separate lawsuits independently and without regard to the general contractor’s claim of set-off. This article discusses these scenarios and others that impact the right of set-off.”

To continue reading, download a the full PDF version of this article at our website.

About the Authors:

Frank L. Pohl, Esq. and James C. Washburn, Esq. are partners in the law firm of Pohl & Short, P.A. in Winter Park, Florida.  Pohl & Short, P.A. is a business boutique law firm concentrating in four main areas of business law: commercial litigation, real estate law, corporate law and trusts and estates.  Mr. Pohl has been advising clients involved in all aspects of real estate development for over 30 years.  Mr. Washburn practices construction law and is Board Certified in Construction Law by The Florida Bar.

This article is intended for general discussion of the subject, and should not be mistaken for legal advice. Readers are cautioned to consult appropriate advisors for advice applicable to their individual circumstances.

Your Company’s Auto Liability – What’s Covered? What’s Not?

By Lynda

Other than Professional Liability claims, Auto Liability claims are the largest exposure faced by Architecture and Engineering firms.

If your design firm is small to mid-sized, often “a standard BOP (Business Owner’s Policy) is sufficient to meet your property and casualty coverage needs. A BOP combines the basic coverage requirements a small to medium sized business owner would need in a package.” Those insurance companies that understand the specialized needs of design firms sometimes combine certain coverage enhancements within their standard BOP. These enhancements can include extended coverage for architectural models, a waiver of subrogation (as is often required by project Owners during contract negotiations), and even some limited Auto Liabilty coverage.

“If your firm does not own any autos, the BOP can usually include ‘Hired and Non-Owned’ auto liability coverage. This would pay for damages to a third party, on behalf of your company, if an employee causes an accident while using a rented car or the employee’s own car while on company business. This addresses liability to others, but what about damage to the rented car? Some but not all insurers will provide this protection in a BOP; it’s usually referred to as Hired Physical Damage coverage.”

Our latest ProNetwork Newsletter, Your Company’s Auto Liability – What’s Covered? What’s Not?, focuses on the necessity of this coverage. A coverage which, if both architect/engineer and broker aren’t careful, can be overlooked at renewal time.

What does Hired Physical Damage cover? And why/when would you need this coverage?

Your star employees requests permission to attend a conference hosted by your state professional society. The conference is about 200 miles away. Public transportation isn’t an option; therefore, with an eye toward keeping expenses down, your employee decides to rent a car to drive to and from the event in one day. He asks you about taking out the rental car company’s insurance coverage. You mean to call your insurance broker, but, pressed for time, you decide that the BOP must cover this and you know that the extra insurance from the rental company would cost anywhere between $15 and $50 for the day.

Tragically, on the way home, your employee swerves to avoid some large debris in the roadway and inadvertently hits an oncoming car with a young adult driver and three co-workers who were headed home from a client’s golf outing. No one is killed, and fortunately your employee walks away unharmed. The other four, however, are not as lucky. All four are hospitalized, miss time from work, and require significant rehabilitation. Both vehicles suffer total loss.

To read about the outcome of this “doomsday scenario,” and to understand how Hired Physical Damage coverage can help, download the full PDF version of our newsletter here.

ProNetwork News is the latest value-added resource produced by a/e ProNet. Each monthly edition includes an informative, timely article relevant to the design industry and authored by an industry expert. Contact your a/e ProNet broker for early access to these excellent newsletters.

About the Author: Barbara Sable is Assistant Vice President for RLI’s Professional Services Group. She is responsible for developing the content of RLI’s risk management programs and addressing the day-to-day needs of policyholders. RLI is an a/e ProNet Platinum Sponsor.