A few weeks ago, the Willis A&E Group presented our annual Halloween webinar special, Contracts From Hell, in which we discussed current trends and challenges design professionals face when negotiating professional agreements with their clients. This is one of our more popular webinars because all architect and engineering firms are faced with the same dilemma: Most owner-drafted agreements, if executed without modification, would put their firm at serious financial risk.
Owner-drafted agreements often create unfair and uninsurable risk to the design firm; a great deal of thought has to be given in the area of contract negotiations to effectively manage this risk.
Considering the complex nature of contracts and the negotiation process, I am dividing this subject into two posts. This first post on the subject of contracts (Part I) will review professional liability insurance and the standard of care of the design professional within the context of the contract negotiation process, as well the importance of documentation and using the contract as a vehicle to establish and manage expectations. My next post, (Part II) will go into more depth on some key contract issues including “deal makers” and “deal breakers.”
The Good News/Bad News of Professional Liability
A design professional’s greatest exposure is by far his or her professional liability/errors and omissions. The good news is that a properly drafted A&E professional liability (PL) insurance policy should cover the design firm for everything it does as a design professional.
The bad news is that, by contract (or the actions of an employee on the jobsite), a design firm can find itself over and above the standard of care and possibly in an uninsured position.
All A&E PL policies exclude liability assumed under contract—unless the firm would have been liable in the absence of that contract. It’s important to recognize this relationship between a design firm’s PL insurance coverage and its standard of care. If a firm agrees contractually to accept risk over and above the standard of care, such as providing a warranty or guarantee, it very well won’t have insurance—which is in nobody’s best interest.
Understanding the Standard of Care
Effective contract negotiation begins with an understanding of the standard of care of a design professional, which is “the ordinary degree of skill and care that would be used by other reasonable competent professionals of the same discipline under similar circumstances.”
All design professionals are faced with the fact that they are surrounded by folks that simply don’t understand what the standard of care of a design professional is.
Like a Doctor: No Guarantees
Most don’t comprehend that the standard of care of a design professional is more closely aligned to that of an attorney or a doctor than it is to a contractor. And, just as an attorney won’t agree that he/she will win every case nor a doctor will claim he/she will cure every ill – a design professional should not guarantee much of anything.
Perfection Not Required
Most would agree that there is no such thing as a “perfect” set of drawings. In fact, the average errors and omissions on a new construction project is 3% to 5% of construction values. For a renovation project it is in excess of 15%, and for design build and fast-track projects this can climb well in excess of 25%. This is the norm, which reasonably illustrates that design professionals are not perfect and thus should hold their ground when it comes to signing unreasonable contracts that hold the design professional above the standard of care.
The Importance of Documentation
When considering the importance of documentation, the design professional needs to recognize that professional liability is a “long-tail” exposure, meaning it can take a very long time for a claim to fully develop. It can take months if not years from the time a project is substantially completed to the time an allegation of negligence surfaces to when a firm is dragged through mediation, arbitration and/or litigation.
If a design firm does not have good documentation procedures in place, it will be very difficult for them to “tell their story” sometime in the future. If a firm has to defend itself with nothing more than the anecdotal testimony of one of its former employees, it won’t be in a favorable position.
To avoid this, a firm should have good documentation procedures in place. There are essentially three forms of documentation:
- the executed agreement, including any amendments to the contract
- certified mail or email confirming receipt
- memos to the file
Every firm should establish its documentation protocol and use it consistently.
The importance of documentation for the design firm cannot be overstated. However, it is also important to note that documentation can be a double-edged sword – and if not managed properly can come back to haunt you.
Be careful of what you put in field notes, meeting minutes –and beware of emails! People tend to be far too informal when it comes to emails. Everyone needs to recognize that emails are discoverable and retrievable.
The risk management advice in all of this is to educate all your staff on the pitfalls of emails and reckless documentation – and remind them that this is a business.
For more information on documentation, please join us on December 9th for our next webinar, Managing Risk Through Effective Communication and Documentation.
Look out for Part 2 of this series, in which we delve into the specific contract clauses that need to be addressed in every design professional’s contract.
To request a copy of the power point or live recording of the Willis A&E ‘Contracts From Hell’ webinar, email us at WillisAE@Willis.com
For more information about Willis A&E and to register for our next webinar visit our website at www.WillisAE.com