Understanding Your Contract · Understanding Your Contract Webinar Handout September 26, 2019 © 2019 Berkley Design Professional. All Rights Reserved. 9 17 1. Remember that the proposal

Understanding Your ContractWebinar Handout

September 26, 2019

© 2019 Berkley Design Professional. All Rights Reserved. 2

Understanding Your Contract: The Foundation for Successful Projects

Presented by

© 2019 Berkley Design Professional 4

Diane P. MikaVice President, Director of RM Education

• 20+ years in loss prevention education for A/E professional liability insurance

• BS in Organizational Behavior from University of San Francisco

• Certified Instructional Designer• Has led in‐depth claims studies to

understand A/E risks and has translated that into meaningful education programs

Andrew D. Mendelson, FAIASenior Vice President, Chief Risk Management Officer

• Licensed architect with 36+ years in practice

• PM, Market Leader, Contract Officer, CFO, Director of Practice Management

• Member of the AIA Documents Committee 2003‐2017, LFRT Legal Committee 2000‐2010, ACEC Risk Management Committee

• Risk Management education from the practitioner’s perspective


September 26, 2019


© 2019 Berkley Design Professional

Berkley Design Professional

Our mission is to offer the right combination of products and services that help

design professionals improve and protect their businesses.

• Dedicated to the Design Industry

• Expert Underwriters

• Expert Claims Service

• Real‐world Risk Management Education

Products and services are provided by one or more insurance company subsidiaries of W. R. Berkley Corporation. Not all products and services are available in every jurisdiction, and the precise coverage afforded by any insurer is subject to the actual terms and conditions of the policies as issued.

Berkley Design Professional is a registered provider of AIA‐approved continuing education under Provider Number 40107869. All registered AIA CES Providers must comply with the AIA Standards for Continuing Education Programs. Any questions or concerns about this provider or this learning program may be sent to AIA CES ([email protected] or (800) AIA 3837, Option 3).

This learning program is registered with AIA CES for continuing professional education. As such, it does not include content that may be deemed or construed to be an approval or endorsement by the AIA of any material of construction or any method or manner of handling, using, distributing, or dealing in any material or product.

AIA continuing education credit has been reviewed and approved by AIA CES. Learners must complete the entire learning program to receive continuing education credit. AIA continuing education Learning Units earned upon completion of this course will be reported to AIA CES for AIA members. Certificates of Completion for both AIA members and non‐AIA members are available upon request.

AIA Registered Provider & Approved Program


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This presentation is protected by US and International Copyright laws. Reproduction, distribution, display and use of the presentation without written permission of the speaker is prohibited.

Information provided by Berkley Design Professional is for general interest and risk management purposes only and should not be construed as legal advice nor confirmation of insurance coverage. As laws regarding the use and enforceability of the information contained herein will vary depending upon jurisdiction, the user of the information should consult with an attorney experienced in the laws and regulations of the appropriate jurisdiction for the full legal implications of the information.

Practice management recommendations should be carefully reviewed and adapted for the particular project requirements, firm standards and protocols established by the design professional.

Legal Notices


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Workshop Outline

Risk Management Fundamentals

Contract Review Strategies

Contract Elements and Clauses


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Risk Management Fundamentals

Section 1

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Risk Management +Practice Management +Project Management =

Firm Success

Risk Management and Your Firm


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• Direct Expenses:• Your deductible

• Any expenses beyond your policy or per claim limits

• Indirect Expenses:• Lost staff time

• Lost opportunities

• Diminished client relationships

• Future insurance premiums

Total Cost of Risk

Claims Are Expensive

You need a carefully drafted contract to manage this risk

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Legal Terms and Conditions

Scope of Services +

Fee

Contract Basics

Contract

general provisions project‐specific terms


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Risk Management Strategies for Contracting

Section 2

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• Client Selection Factors

• Project Selection Criteria

• Team Qualifications

Establish a Go/No‐Go Process


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Tool: Go/No‐Go Project Evaluation Checklist

Available on BerkleyDP.com

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1. Remember that the proposal is the first step in the contracting process• Prepare the scope and fee definition with diligence

• Have a second set of eyes review scope and fees and proposal language

Preparation for Contract Negotiation


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1. Remember that the proposal is the first step in the contracting process

2. Understand the benefits of using association agreements• Intricacies of a design and construction project are fully contemplated

• Offer coordinated family of agreements


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1. Remember that the proposal is the first step in the contracting process

2. Understand the benefits of using association agreements

3. Begin with your agreement• Gives A/E better control

• Can serve as a discussion outline to educate the client about important issues and clauses

• Client‐drafted contracts require an extremely careful review as they tend to contain onerous and often uninsurable terms and conditions



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Designate a Contract Review Team

Risk ManagerProject PrincipalProject ManagerRM Team Rep

Internal TeamInternal Team

External ResourcesExternal Resources

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• Develop a contract review checklist that helps you identify deal makers/deal breakers

Contract Review Best Practices


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Tool: Contract Review Checklist “Top 10”


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Tool: Purchase Orders as Contracts Article



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Tool: BDP Contract Review Guide

Available to policyholders on BDPrisk.com

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• Develop a contract review checklist that helps you identify deal makers/deal breakers

• Do not proceed with design services until written authorization from the client is received:

• Use an interim agreement to memorialize scope, fee, and other expectations as formal agreement is being negotiated

• Use a short‐form agreement for limited scope projects

Contract Review Process Best Practices


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Tool: Letter of Authorization


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Tool: Professional Services Agreement – Short Form



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Ensure solid understanding of:

• Scope of Services

• Schedule

• Deliverables

• Budget

• Responsibilities of the parties

• Key clauses

• Change management

One of the Most Overlooked Practices: Contract Education for the Design Team

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Tool: Contract Business Terms Summary



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Section 3

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Initial Project Information

Standard of Care

Scope of Services

Client (Owner) Responsibilities

Cost of the Work

Key Legal Terms and Conditions

Compensation and Payment

Contractor Responsibilities

Specific Disclaimers and Exclusions


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2

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• Project Description

• Schedule and Budget

• Project Delivery Method

• Project Team

Initial Project Information1

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• Exists whether or not it’s a clause in your contract

• Establishes a reasonable expectation and standard for professional services to be performed

• Must be fair and insurable—not a warranty standard

• Avoid superlatives such as “high,” “highest,” “best,” “utmost” in contract, marketing material, website, publications

• Discuss with clients to help them understand that your services will not be perfect even though they will meet the Standard of Care

Standard of Care2


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Sample Base LanguageThe Consultant shall perform its services consistent with the professional skill and care ordinarily provided by consultants practicing in the same or similar locality under the same or similar circumstances ("Standard of Care"). The Consultant shall perform its services as expeditiously as is consistent with such professional skill and care and the orderly progress of the Project.

Standard of Care2

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Additional Language – No Warranties/Guarantees, Modification

The Consultant shall perform its services consistent with the professional skill and care ordinarily provided by consultants practicing in the same or similar locality under the same or similar circumstances ("Standard of Care"). The Consultant shall perform its services as expeditiously as is consistent with such professional skill and care and the orderly progress of the Project. Consultant makes no warranties or guarantees, express or implied, under this Agreement or otherwise in connection with Consultant's services. Notwithstanding any other representations made elsewhere in this Agreement or in the execution of the Project, this Standard of Care shall not be modified.

Standard of Care2


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Additional Language – No Fiduciary DutyThe Consultant shall perform its services consistent with the professional skill and care ordinarily provided by consultants practicing in the same or similar locality under the same or similar circumstances ("Standard of Care"). The Consultant shall perform its services as expeditiously as is consistent with such professional skill and care and the orderly progress of the Project. Consultant makes no warranties or guarantees, express or implied, under this Agreement or otherwise in connection with Consultant's services. Notwithstanding any other representations made elsewhere in this Agreement or in the execution of the Project, this Standard of Care shall not be modified. The Consultant shall act as an independent contractor at all times during the performance of its services, and no term of this Agreement, either expressed or implied, shall create an agency or fiduciary relationship.

Standard of Care2

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• Licensed to practice in the jurisdiction• Provide and maintain insurance

• Perform in accordance with the Standard of Care

Design Professional’s Responsibilities2


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Scope Basics

• What services you will perform for the negotiated fee (basic services)

• What services you can perform for an additional fee (supplemental services or additional)

• What services you will not perform (e.g., something specifically excluded)

• What services should be performed by others (e.g. the geotechnical services will be performed by a separate firm and contracted directly with the owner)

Scope of Services 3

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Contract Scope and Process Definition3

Don’t forget meetings, presentations, client review/approval period, bid packages

Carefully define Basic Services for fee negotiated; beware of unlimited or open‐ended services

As projects increase in complexity, define the services and design process with greater specificity


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Create a Change Management Policy:

Additional Services Awareness

Identify

Notify

Authorize

Document change in project fileDocument

3

Obtain approval/ authorization for additional services

Notify appropriate individuals

Identify issues: project changes, risk situations

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• Provide project information and data

• Establish and update project budget, including appropriate contingency funds:

• Construction – to cover changes in construction cost due to unforeseen conditions, errors, omissions and coordination issues

• Design – to cover changes that may exceed the negotiated scope of design services and the scope and/or cost estimate of the of the project

Client Responsibilities4


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• Establish and update project budget• Designate a representative authorized to make decisions

• Make timely decisions in accordance with the Project Schedule

• Approve and process changes (design and construction phases)


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• Retain client consultants and contractors• Furnish specialty consultants

• Share scope of services and contract information

• Coordinate services

• Grant right to rely on the accuracy of information provided by others



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• Retain client consultants and contractors• Provide its own legal, accounting, insurance services

• Require contractor to name design professional on CGL policies


Sample clause language available in the BDP Contract Review Guide

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When Not Using an Association Agreement

• Know that client‐generated agreements may be limited or even silent on client responsibilities

• Be sure to include terms for client responsibilities if they are missing



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Cost Estimating: Whose Responsibility Is It?

• A/E always has responsibility to design to budget

• Contract should:• Define the party responsibility for Cost Estimating

• Establish the A/E’s right and ability to rely on cost estimating by others

Cost of the Work5


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If you accept responsibility for cost estimating:

• Your contact should acknowledge: • Estimate is professional opinion not a guarantee • Outside factors may impact• Bids may vary from client budget

• Limit your responsibility to redesign with no damages

• Reinforce the necessity of client‐established contingencies for both design and construction

Cost Estimate Disclaimers5



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• Dispute Resolution

• Indemnity

• Limitation of Liability

• Ownership of Documents

• Suspension and Termination

• Assignment of Agreement

• Attorneys’ Fees

• Confidentiality

• Design Professional as Business Entity

• Integration

• Professional Liability Insurance

• Third‐Party Exposure

• Waiver of Consequential Damages

Key T&Cs Other T&Cs

Key Legal Terms and Conditions6

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Dispute Resolution Clause – Recommendations

• Recognize that disputes will occur—and that prompt resolution can reduce claims

• Address how they will be handled in your contract

• Gauge your client’s willingness to deal with problems at the time of contract negotiation

• Align all professional services agreements

• Notify PLI agent and carrier of any potential claim situation



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Dispute Resolution

• Recognize that disputes will occur—and that prompt resolution can reduce claims

• Address how disputes will be handled in your contract, defining the type, process, and venue for dispute resolution

• Gauge your client’s willingness to deal with problems at the time of contract negotiation

• Align all professional services agreements

• Notify PLI agent and carrier of any potential claim situation


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Dispute Resolution Clause – Types of Approach

• “Meet and Confer” approach strives to resolve disputes within the project team

• Project Level

• Executive Level



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Dispute Resolution Clause – Types of Approach

• “Meet and Confer” approach strives to resolve disputes within the project team

• Project Level

• Executive Level

• Mediation precedent to• Arbitration or

• Litigation


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Indemnity Clause

• Common contractual risk‐shifting mechanism

• To indemnify means to assume a specific liability in the event of a loss

• Added to certain AIA Agreements in 2007 (B103, CM, IPD)



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Indemnity Clause – Recommendations

• Delete, if possible


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Indemnity Clause – Recommendations

• Delete, if possible • Negotiate a mutual indemnity; use one‐way indemnity as a last resort

• Limited to damages that are directly and proportionally attributable to the negligent performance of your professional services

• For the benefit of the client and its defined representatives, not agents or other parties (limit number of indemnitees)

• Not include or delete the word “defend” (may need to expressly disclaim any defense obligations)

Defense obligation prior to a finding of fault is uninsurable



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Indemnity Clause – One‐Way Sample LanguageThe Consultant shall indemnify and hold the Client and the Client’s officers and employees harmless, but not defend, from and against damages, losses and judgments arising from claims by third parties, including reasonable attorneys’ fees and expenses recoverable under applicable law, but only to the extent they are caused by the negligent acts or omissions of the Consultant, its employees and its consultants in the performance of professional services under this Agreement. The Consultant has no obligation to pay for any of the indemnitees’ costs prior to a final determination of liability or to pay any amount that exceeds the Consultant’s finally determined percentage of liability based upon the comparative fault of the Consultant, its employees and its consultants.


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Limitation of Liability Clause

• Manages risk exposure proportionate to fees and services

• Critical in limited scope projects: feasibility studies, master plans, concept development, design without CD or CA

• Variations (lump sum, available insurance)

• Must be clearly identified and understood (statutory requirements)

Key Legal Terms and Conditions

DEAL MAKER CLAUSE!

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Limitation of Liability Clause –“Lump Sum” Sample LanguageNeither the Consultant, Consultant’s subconsultants, nor their agents or employees shall be jointly, severally, or individually liable to the Client in excess of the compensation to be paid pursuant to this Agreement or __________Dollars ($_______ ), whichever is greater, by reason of any act or omission, in tort or contract, including breach of contract, breach of warranty or negligence.


THIS LANGUAGE IS IDEAL FOR ANY PROJECT AND IN PARTICULAR SHOULD BE USED FOR ANY LIMITED SCOPE PROJECT SUCH AS A FEASIBILITY STUDY, INSPECTION, MASTER PLAN OR OTHER DESIGN SERVICES NOT CONSIDERED “FULL SERVICES” DUE TO THE POTENTIAL DISPROPORTIONATE RISK OF LIMITED SCOPE SERVICES

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Limitation of Liability Clause –“Available Insurance” Sample LanguageNeither the Consultant, Consultant’s subconsultants, nor their agents or employees shall be jointly, severally, or individually liable to the Client for an amount in excess of the proceeds of the available professional liability insurance coverage required by this agreement by reason of any act or omission, in tort or contract, including breach of contract, breach of warranty or negligence.



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Ownership of Documents

• Your documents and electronic files are Instruments of Service—not products—and have significant value

• Use of your documents without payment is a copyright violation

• Clients and client‐generated agreements frequently insist on ownership or unlimited license


AIA Document: Article 7

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Ownership of Documents – Recommendations

• Never extend license or transfer document ownership without payment in full

• Obtain an indemnification from the client for an liability related to use of the documents after transfer

• Always retain ownership of your firm’s standard details, schedules, specifications not unique to project

• Electronic transfer of files, CAD, and BIM must be subject to a properly drafted electronic transfer agreement



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Copyright and License Clauses –“A/E Retains Ownership” Sample LanguageAll documents prepared or furnished by Consultant pursuant to this Agreement are instruments of Consultant’s professional service, and Consultant shall retain ownership and property interest therein, including all copyrights. Upon payment for services rendered, Consultant grants Client a license to use instruments of Consultant’s professional service for the purpose of constructing, occupying, or maintaining the project. Reuse or modification of any such documents by Client, without Consultant’s written permission, shall be at Client’s sole risk, and Client agrees to indemnify, defend, and hold Consultant harmless from all claims, damages, and expenses, including attorneys’ fees, arising out of such reuse by Client or by others acting through Client.

(Note: See AIA B101‐2017 Article 7 for more thorough language addressing this important clause.)


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Copyright and License Clauses –“Ownership Transfer” Sample LanguageAll documents prepared or furnished by Consultant pursuant to this Agreement are instruments of Consultant’s professional service. Consultant assigns ownership including copyright to the Client upon payment for services rendered except Consultant retains copyright in its standard systems, sections, details, and specifications. Consultant grants Client a license to use consultant’s standard systems, sections, details, and specifications but only for this Project. Use of the instruments of service without engagement of the Consultant by Client shall be at Client’s sole risk, and Client agrees to indemnify, defend, and hold Consultant harmless from all claims, damages, and expenses, including attorneys’ fees, arising out of such use by Client or by others acting through Client.



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Suspension of Services/Termination

• Gives you the right to suspend or terminate services in the event of:

• Non‐payment of services

• Other material failure of the client

• Gives client the right to suspend project or terminate Consultant:

• Due to non performance of Consultant

• For convenience (with conditions)


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Suspension/Termination Recommendations

• Address payment for services rendered, demobilization, license fee for future use of documents

• Recognize the significant risk of a delay claim if the suspension or termination clause is invoked

• Include a notice and cure period (this is critical to avoid delay claim)


IF SITUATIONS ARISE THAT CAUSE THE YOU CONSIDER TERMINATION, CONSULT WITH YOUR ATTORNEY, BROKER, AND PLI CARRIER. SUCH CIRCUMSTANCES SIGNAL A SIGNIFICANT DETERIORATION IN YOUR CLIENT RELATIONSHIP AND THE VERY REAL RISK OF A CLAIM.


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Suspension of Services/Termination Clause Sample LanguageIf the Client fails to make payments to the Consultant in accordance with this Agreement or fails to meet its other material responsibilities under this Agreement, such failure shall be considered substantial nonperformance and cause for termination or, at the Consultant’s option, cause for suspension of performance of services under this Agreement. If the Consultant elects to suspend services, the Consultant shall give seven (7) days’ written notice to the Client before suspending services. In the event of a suspension of services, the Consultant shall have no liability to the Client for delay or damage caused the Client because of such suspension of services. Before resuming services, the Consultant shall be paid all sums due prior to suspension and any expenses incurred in the interruption and resumption of the Consultant’s services. The Consultant’s fees for the remaining services and the time schedules shall be equitably adjusted.


(Refer to Article 9 of AIA B101™‐2017 for terms and conditions of termination and Client’s rights to use Instruments of Services after termination. The Consultant should establish a license fee for such use if termination was not caused by a default of the Consultant.)

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Clearly define and include:

• Fees and Payment Schedule

• Basic Services, Supplemental Services, Additional Services, and subconsultant mark up

• Reimbursable expense types and allowable mark up

• Fee for licensed use of documents if services are terminated

• Prompt payment requirement

• Interest or penalty for late payment

• Prohibition on client to withhold fees in case of dispute

Compensation and Payment7


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Fee Basis

• Fixed Fee or Stipulated Sum (Lump Sum)

• Percentage of Construction Value (recommend fee fixed no later than end of DD; don’t gamble on the bid results)

• Square Footage/Unit Cost (typical for interiors, retail, warehouse)

• Invoiced (earned) on a Percentage of Completion Basis


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Time and Materials (T&M)

• Invoiced (earned) based upon a hourly billing rate for each labor category, with set maximum or open‐ended

• Manage carefully: Open‐ended T&M can lead to unexpected total fees and create problems from client’s perspective



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Manage Accounts Receivable

• Understand client’s schedule for review, payment

• Develop a relationship with client’s A/P department

• Adapt invoice format and timing

• Invoice regularly (e.g., monthly)

• Follow‐up when invoices are notpaid on time

• Stress importance of prompt payment; apply penalty for late payment


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Professional Services Agreement Considerations

• Design professional services are defined in the Client‐Consultant Agreement

• Consultant services should be coordinated with but not expanded by the Client‐Contractor Agreement

• Clauses to include:• Specification of the General Conditions (GCs) document

• Disclaimer that modifications of the GCs shall not affect Client‐Consultant Agreement

• Requirement that client shall coordinate the consultant’s duties between the two agreements, and provide a copy of the GCs to the consultant

Contractor Responsibilities8


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General Conditions of the Contract for Construction

• A201™‐2017 and EJCDC® E‐700 are industry standard for general conditions of construction

• Understand the GCs and SCs

• Coordinated family of contracts


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The Client‐Contractor Agreement should:

• Align Client‐Consultant Agreement terms and conditions

• Specify Contractor performance requirements: means, methods, logistics, jobsite safety, coordination, and other procedures

• Require the Contractor to waive rights against the Consultants and hold them harmless from claims associated with these responsibilities

• Require the Contractor to name design consultants as additional insureds on Contractor’s CGL



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• Client’s Acceptance of Non‐conforming Work

• Hazardous Materials

• Remodeling and Renovation

• Site Safety and Contractor Means and Methods

• Condominium Conversion

• Fast Track, Phased, or Other Accelerated Schedule

• Record Documents

• Submittals

• Sustainability and Green Design

• Value Engineering and Substitutions

In Today’s ProgramAdditionally available in the BDP Contract Review Guide

Specific Disclaimers and Exclusions9

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Client’s Acceptance of Non‐Conforming Work

• Express disclaimer of responsibility for your client’s acceptance of substitutions or non‐conforming work that you do not agree with, including value engineering

Hazardous Materials

• Disclaims A/E responsibility for any hazardous materials on the project site



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Remodeling and Renovation

• Addresses unforeseen conditions inherent in remodeling and renovation, and confirms that services required due to such conditions is compensable as Additional Services

Site Safety and Contractor Means and Methods

• Specifies that the A/E does not have responsibility for means, methods, procedures, etc., including responsibility for jobsite safety, and that the client agrees that such is the sole responsibility of the contractor


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• Properly drafted professional services agreements are the foundation of a successful relationship between you and your clients

• The process of drafting and negotiating establishes and confirms the expectation and responsibilities of the parties

• Contractually defined scope, services, schedule, process, and fee form the basis of your project work plan and enables management of the project’s finances

• Contract negotiation is a team effort that includes your PLI agent/carrier and legal representatives

• When properly informed, all design team members can and should contribute to the business success of the project

Summary


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• Group attendance – use sign‐in sheet and validate

• Berkley DP Policyholders – delivered via BDP Risk

• Non‐policyholders – request certificates by email

• Got questions?

Email: Risk‐[email protected]

Call: Janie White at 831.293.6254

Certificates of Completion


Questions?

Andrew D. Mendelson, FAIASVP, Chief Risk Management OfficerBerkley DP – Chicago, [email protected]

Diane P. MikaVP, Director of Risk Management EducationBerkley DP – Monterey, CA831.293.6243 [email protected]