Contracts for Design Professionals – 3

Contract Guide for Design Professionals – module 3 of 9 modules. Discussion of the following contract clauses: Environmental Conditions, Green Design, and Standard of Care. Registered with the American Institute of Architects. Any combination of three modules can be for 1 hour of AIA continuing education credit. Class slides included: Contracts for Design Professionals – Module 3

Video Transcript

Hello. This is J. Kent Holland. It’s my pleasure to present this course on contracts for design professionals. The specific clauses that we will discuss in this particular module of the course will be shown on the next slide. Throughout the presentation, I will be using slides to include examples of the contract language that we’re discussing. With that brief introduction, let’s jump right into the clauses.

Environmental Conditions

The next clause we will deal with is environmental conditions. This is another area that’s important to deal with or address in our contracts. Assuming that the design professional is not specifically providing environmental remediation professional services and not otherwise dealing with environmental issues for its client, then the contract should realistically state that you’re not doing those services. Carefully limit the scope to exclude those services.

The AIA B101 explains it as follows: “Unless otherwise required in this Agreement, the Architect shall have no responsibility for the discovery, presence, handling, removal or disposal of, or exposure of persons to, hazardous materials or toxic substances in any form at the Project site.” The EJCDCE500 contains a similar clause.

Risk Management for Green Design and Construction

Now we move from environmental into another form of environmental, if you will, and that is green design and construction. Now, there can be some risk management problems associated with green design and construction.

So some of the points that I make include: be careful not to warrant obtaining LEED certification. Be careful about untested new manufacturers and materials. This is one of the areas that is of greatest concern. Historically when using innovative technology, a system or project is more likely to fail and not perform the way it was anticipated or expected. Indeed, that’s the nature of using innovative technology.

Yet, when we’re dealing with green design, we have project owners who want something innovative and new and exciting, and that’s going to get them LEED certification, but they don’t necessarily have an appreciation for the fact that there’s higher risk involved in using untested manufacturers, untested materials, new materials that simply haven’t yet survived the test of time.

So I do think there needs to be an education to the project owner by the design professional, and there needs to be a reasonable allocation of the risk between the owner who wants to get the LEED certification and wants to use the innovative technology or products, versus the designer who really just wants to probably do a fairly safe job, or I’ll say less risky job, by using more traditional materials.

So the owners sometimes have unrealistic expectations that need to be managed. Even AIA language in the B101 could be problematic. For example, consider this language out of AIA. “The Architect shall present its preliminary evaluation to the Owner and shall discuss with the Owner alternative approaches to design and construction of the Project, including the feasibility of incorporating environmentally responsible design approaches. The Architect shall reach an understanding with the Owner regarding the requirements of the Project.”

That sounds fine, but the issue there is that if you are under an AIA contract as a design firm, then you are required to have this conversation with the owner, and you really need to document that. So if you have any conversation with the owner over something as material as green design, that needs to be in meeting minutes. That needs to be in memos back and forth, documenting what was the substance of the discussion and what was concluded as a result of that.

The B101 has another article. It’s Section 3.2.5.1, and it requires the architect to consider environmental issues as part of the basic service for the design. It states, in pertinent part, as follows: “The Architect shall consider environmentally responsible design alternatives, such as material choices and building orientation, together with other considerations based on program and aesthetics, in developing a design that is consistent with the Owner’s program, schedule, and budget for the cost of work. The Owner may obtain other environmentally responsible design services under Article 4.”

So notice that under this particular article of the contract, it states that the design firm is affirmatively to consider these environmentally responsible design alternatives, including use of innovative materials, and it appears that this is required even if the owner and designer, pursuant to that previous clause of the contract, had a discussion where the owner said, “No, not interested. I’m only building a pump station in the middle of nowhere. I really don’t want it to be a green building. Nobody cares. I don’t want to spend any more money on it.”

Well, even if that happens, if I’m reading this clause correctly, it creates an affirmative obligation for the designer to go out and still consider the environmental consequences of the project and some good alternatives. So if that’s not going to be the case, that’s not going to be what your scope involves, I recommend deleting that clause right out of the contract. It should not be there if you are not going to do those things.

There is a new AIA guide that is on green design, and it is definitely worth taking a read. It was published in 2011. It’s document D503. It’s called “A Guide for Sustainable Projects.” The guide discusses issues related to sustainable design and construction, and it contains model language to amend the A101, the A201, and the B101. So I would commend that to your reading.

What are the solutions for green design? A good example of a clause explaining that the design professional does not control third parties and can’t, therefore, warrant LEED certification is the following: “The Project shall be designed in order to enable it to achieve LEED silver certification and with a possible target of achieving LEED gold certification. The Owner shall render decisions concerning LEED certification prior to the completion of the Design Development Documents. The Owner acknowledges that many of the elements required to achieve any LEED certification are controlled by the Owner or third parties not under the control of the Architect, and that the Architect does not warrant or guaranty that the Project will be LEED certified.”

So that really begins to show an understanding on the part of the project owner, and it starts to show that there’s been a communication, that the parties have discussed these issues, and that the expectations have become reasonable. This can go a long way in later dissipating a potential dispute between the parties, concerning the failure of a project to attain the LEED certification that was anticipated.

One of the things that we see on projects is that the project gets designed, it gets constructed, but beyond the designer’s control is how the contractor builds the project, how the contractor maintains all the documentation to prove that the LEED certification should be granted, how the project is commissioned by the owner and the contractors, and how it’s really started up and all the documentation that goes with that.

So these things become very much beyond the control of the designer. I think some of the worst design contracts I’ve seen in this regard were actually a couple of hospital contracts, where the designer warranted that as a result of its design, the hospital would attain a certain LEED-level certification, and that failure to attain that level would result in liquidated damages of $1.5 million being awarded against the design firm. I was just shocked to see that kind of a clause in a design contract, and I would just warn you against agreeing to that kind of a clause.

We talked a little bit earlier when we were doing damages. We talked about waiver of consequential damages. Well, this has a very useful benefit when it comes to green design and construction. Since most of the damages that might be awarded to a project owner against a design firm, related to failure to attain LEED certification, are going to be economic losses, lost profits, lost rents, things of that nature, inability to rent the buildings because people somehow were expecting that they want to be in a LEED gold, and the building didn’t get it. Those are all economic losses.

Well, we know that the way to eliminate those is through a waiver of consequential damages. So this would be a good tool to include, a waiver of consequential damages, particularly as it impacts these green design damages.

Architect Standard of Care

Let’s move now to standard of care. I’m sort of jumping ahead. This is a clause that I’m going to cover in virtually every one of these little segments because if you watch all of my little segments on contracts, I really want you to take away from it the importance of negotiating a proper standard of care in your contract.

So owners seem to be more and more demanding perfection. Professional liability, of course, doesn’t cover perfection. It covers negligence, as we’ve discussed before. Owners are sometimes including language in their contracts requiring the design professional to perform to a standard greater than the generally accepted standard. For example, one such clause is as follows: “Design Professional represents that its services will be performed in a manner consistent with the highest standards of care, diligence, and skill exercised by nationally recognized consulting firms for similar services.”

When you look at that clause, I hope that you’re seeing that it is saying that you’re not going to perform to the normal generally accepted standard of care, but rather to the highest standard of care. Well, what is the highest standard of care? The way I describe it is it’s sort of this gold-plated standard that perhaps is how you would design a bridge if you were designing it in Los Angeles, but here we are in Pennsylvania designing a bridge, and we don’t have to worry about the same earthquake sensibilities with a bridge.

So we wouldn’t design it with the same types of features as we would in LA, and yet, we are being judged by this clause, by a nationally recognized firm, to the highest standard of care. It becomes ambiguous. It becomes impossible for me to bring in a defense expert to testify, well, what would be the generally accepted standard of care for design professionals in Pennsylvania who are designing a bridge.

The plaintiff’s going to say, “Well, that’s not what you agreed to. You agreed to the highest standard, and that can be worldwide for a bridge.” So it makes it difficult to get out on a summary judgment motion, which you know is critical for defending design professionals.

Now, I was looking at the consensus documents, and I haven’t done very much on those in this presentation, but if you look at consensus docs 240, it increases the standard of care by requiring more complete construction drawings rather than those that are normally required by a designer.

The contractors and design professionals frequently debate whether the disputed work is reasonably inferable from the construction documents. But under the consensus docs, it requires the documents to “completely describe all work necessary to bid and construct the project.”

Now, in my view, that is contrary to industry practice of what is actually expected of design professionals when it comes to drafting plans and specifications. Typically a design professional only designs up to a point, and the contractor takes it from there and fleshes out through means, methods, and procedures how the design is going to be finalized, if you will, and constructed.

So the design professional does not normally give absolutely a set of documents that completely describe all work necessary. Instead, the contractor has to reasonably infer work that’s going to be required to meet the design intent. But under the consensus docs, that seems to take that requirement away from the contractor and put it on the designer. I don’t know whether that was intentional or not, but beware.

Now, interestingly in the AIA B101 document, for the first time, the AIA has stated the standard of care. The last version of the documents, back in 1997, had something to the effect that said the architect shall perform its services as expeditiously as is consistent with a professional skill and care and orderly progress of the project, and that was great for avoiding time of the essence clauses and scheduling issues because we were saying, “Well, we’re going to meet the schedule but only as consistent with the professional skill and care.”

Well, now in the new document, section 202 reads as follows: “The Architect shall perform its services consistent with the professional skill and care ordinarily provided by architects practicing in the same or similar locality, under the same or similar circumstances. The Architect shall perform its services as expeditiously as is consistent with such professional skill and care and the orderly progress of the Project.”

So you can see how these two concepts are put together. The standard of care is sentence one, and the scheduling idea is sentence two. The design professional might also add, at the end of the standard of care clause, a brief statement that the contract is not intended to create any guarantees or warranties on the part of the design professional. An example might be as simple as, “No warranty or guarantee, either expressed or implied, is made or intended by this agreement.”

In instances where the owner may have refused to delete that highest standard language, you might still be able to negotiate something that is workable by adding a sentence to the end of that paragraph, stating something like the following: “The performance standard is not intended to create a warranty, guarantee, or a strict liability standard, and it is expressly agreed that the design professional is agreeing only that its services will not be performed negligently or with willful or reckless misconduct.”

I’ve used that successfully in a number of contracts where I was not able to get some of the language that I wanted deleted in the main paragraphs, and it seemed like there was warranty-type language kind of scattered around the contract. I wasn’t really sure that some of that wasn’t going to expand the normal standard of care that we had in the standard of care paragraph.

So to be extra cautious, I add a sentence that says, “Look, notwithstanding anything else in this contract to the contrary, we’re only going to meet the standard of care that is the generally accepted standard of care of design professionals participating in projects of this nature, at the same time and place,” et cetera. So you get the idea. What we’re doing is we’re trying to do a catch-all somewhere in the contract to keep our standard of care to the negligent standard.

This same point becomes important if you are going to flow down the prime contract, and you’re a subcontract design professional, and the prime contract somehow has a higher standard or some warranties in it. Your client, whoever it is, it might be a design firm or it might be a contractor, is saying, “Well, you’ve got to agree to whatever standard of care and warranty we agreed to with the project owner, and we can’t deviate from this language of the clause.”

I’ve sometimes been successful, again, adding a sentence saying that we take exception to any provision of the prime contract that would increase the standard of care beyond the standard established in our subcontract language, which is the generally accepted standard of care, et cetera. So it’s a good way to approach that.

Thank you for joining me today. I hope you enjoyed this session that we did on risk management. If you would like to contact me, I am putting a slide up here at the end that has my name, phone number, email address, and website information.

Don’t hesitate to call me or contact me, particularly if you’d like continuing education credits. We’ll explain how that can be accomplished. Thanks. I look forward to seeing you again.