Design professionals typically encounter five generic types of professional service contracts: oral agreements, letter agreements, purchase orders, standard form agreements (often with extensive modifications) and custom agreements. Custom agreements drafted by the prospective client and negotiated with the design professional present the greatest danger. While such agreements are often developed because of the unique nature of a project or because of events that occur in the normal course of dealing with the client, the use of custom contracts is driven by the client’s intent to establish an unbalanced contractual relationship.

It is important that the design professional keep sight of the need to include certain project-specific and general condition terms in those agreements and strives to limit onerous, unrealistic or ambiguous terms. In this effort, it is often useful to start by comparing the proposed agreement with the consensus industry documents from the AIA or EJCDC.

Contracts as a Productivity Tool

The contract negotiation process provides an opportunity to set the client-design professional relationship on a firm and productive course. Both parties must have a full appreciation of the issues involved in the negotiation, their interrelationships and relative importance. From a risk management perspective, the outcome of the contract negotiation process can be considered successful if it results in a contract that satisfies the following criteria:

• The expectations of the parties are clearly articulated and reasonably integrated.
• The rights and obligations of the parties are clearly expressed.
• Risks and rewards are addressed and fairly allocated.
• Each source of risk is allocated to the party in the best position to control or otherwise manage the risk.
• Insurance is available to support any common law or contractual indemnity obligation.
• Mechanisms exist to reasonably accommodate change during the course of the project.
• The mutual understanding of the parties is confirmed in writing.

A contract establishes the scope of services, overall professional relationship, system of communication, standard of care, and the rights and responsibilities of both parties. The likelihood of misunderstandings, disputes and litigation decreases significantly if the contract is in writing and clearly represents the agreement of the parties.

Basic Questions to Ask When Reviewing Custom Contracts

Whenever a custom contract is reviewed, some basic questions should be asked. They include the following:

• What does the language say?
• What does it mean?
• Why is this language "better" than the consensus language?
• What problem is this language intended to solve?
• How does the language affect the design professional's responsibilities?
• Will the language have an adverse impact on the working relationship between the client and design professional?

The Establishment of Business Terms–Scope, Time and Compensation

Design professionals in practice operate as commercial entities. Commercial concerns, therefore, are not irrelevant in professional practice. A design professional must enter into contract negotiations with certain commercial and professional expectations. Good business judgment often reflects sound risk management judgment—and sound risk management judgment can result in profitable business transactions.

Business terms in a professional service agreement include the scope and nature of the services, the schedule for providing those services, and the compensation and payment conditions for services and reimbursable expenses. The negotiation of such terms is of primary importance to the success of the project and the financial viability of the design professional.

Perhaps the two most important aspects of an agreement are the description of the scope of services to be provided and the method for determining the design professional's compensation for per-forming those services. A third, and increasingly important, aspect is the time for the delivery of services.

The design professional's scope of services should be defined with reasonable precision within the contract. A clear, precise definition of the scope of services is essential for business and payment purposes. An ambiguous or unspecified definition of scope may lead to an obligation to perform more services than contemplated or to a dispute with the client. Problems could include the shifting of services that might be considered as additional services into the category of basic services and the continuing enlargement of the scope because of unclear expectations or intentional accretion.

Most claims against design professionals are brought by their clients. Misunderstandings and poor management generate many of the problems leading to disputes and disagreements over compensation amounts. Procedures can also exacerbate the problems, resulting in claims. Professional service agreements should provide for the prompt payment for services, prevent the unreasonable withholding of fees, and require the equitable adjustment or renegotiation of fees for delayed or terminated projects.

Similarly, an agreement should specify the time expectations for the rendering of services and the submission of deliverables. Time parameters, however, cannot be stated as absolute; milestones or deadlines must be adjusted when delay is caused by factors beyond the control of the design professional. The timely delivery of services may be a material element of an agreement, but it should not establish a warranty.

Onerous Transactional and Liability Terms

The business terms of any agreement, the general conditions, and project–specific terms that define the services, delivery and compensation are usually accompanied by transactional and liability terms that structure the relationship. Although few contractual provisions are "deal breakers," in that they alone should cause a prudent design professional to reject a contractual relationship, there are provisions that clearly go beyond the ability of the design professional to manage risk. Since part of that management is the ability to transfer a portion of risk through insurance coverage, these provisions often exceed the scope of professional liability insurance and other insurance coverages. In reviewing a contract, a design professional should be alert to the following provisions that either significantly increase risk or create a situation where the design professional may not be able to appropriately manage or insure against the risk.

Indemnification or Hold Harmless Clauses

These shift risks from one party to the other, and usually the shift is from a client, such as a developer, to the design professional. Frequently, these clauses demand more of the design professional than the law would otherwise require—if they do not, there is no reason for these provisions to be in a contract.

Defense Obligations

These are rarely stated separately, but are usually included within an indemnification agreement. While it is reasonable for the design professional’s client to ask for indemnification of defense costs that result from the negligence of the design professional, the assumption of defense responsibilities not resulting from the design professional's negligence is an entirely different matter. The design professional may find that it alone is responsible for the high costs of a legal defense of its client when there is no allegation of active negligence.

Express Warranties or Guarantees

These impose liability in a manner that is neither realistic nor effective. They can also appear throughout a contract, cleverly disguised through the addition of only a word or term to an otherwise innocuous statement of service. While a design professional may feel comfortable providing a warranty of facts or situations within its control, such as the existence of proper professional and business licenses in a particular state, providing a warranty of services is irrational. Even more important, guaranteeing the work of others—for instance, the work of the contractor—is irresponsible and inadvisable because the design professional has no control over the contractor’s work.

Standard of Care

An improper or enlarged definition of the standard of care can create expectations that simply cannot be met. The law speaks for itself; without any statement of a standard of care, the design professional must perform services with the usual and customary professional care and in accordance with generally accepted practices in effect at the time the services are rendered. While that standard can be restated, or even expanded to be based on the competence and qualifications of the firm, such changes must be carefully crafted. What might, at first glance, appear to be a simple word change could create unexpected and unclear obligations for you.

Cost Estimates

Cost estimates provided by the design professional should be carefully qualified. It should be emphasized that estimates are, by necessity, limited in their purpose and based on some conceptual estimating technique. Estimates refined during the design process can be described as being based on the professional experience and judgment of the design professional. Since a design professional has no control over market conditions or bidding procedures, the client should not expect that bids or ultimate construction costs remain consistent with cost estimates.

Site Visits

The reason for any site visits should be clearly identified. While design professionals can provide a wide range of services for evaluating the work of the contractor, the client must be aware of the scope, cost and limitations of these services. It is also important that clients understand how often site visits are to occur. They should be defined as either an agreed number of visits, tied to specific construction events or a specific number, and conducted when deemed appropriate to the stage of construction by the design professional.

Missing Provisions

There are also statements that could be missing from client-generated contracts. Missing provisions can cause misunderstandings. They can also make a dispute difficult to resolve. Some of these statements can be vital in drawing a "bright-line" separation between the services of the design professional and the work of the contractor. It is important that con-tracts clearly define duties. Comparisons to the consensus documents can help in identifying provisions that were inadvertently, or intentionally, omitted.

Responsibility for the Work

A positive statement that the contractor is solely responsible for the means, methods, techniques, sequences and procedures of the construction work, and for the final project, should be included in any design contract leading to construction. Unless construction management or design-build services are requested, the client should understand that while a design professional can evaluate the work of the contractor during the project, that evaluation does not change the contractor's responsibility to accomplish the design.

Worker Safety

Because the contractor has control of the site, the contractor alone should be responsible for the safety of the construction workers, the client and others on the site, and adjacent property owners. Liability may be created if a duty is assumed by the design professional; the risk that liability may be implied because of imprecise language may be even more perilous.

Agency Status During Construction

Adding an explicit statement that the design professional is acting as the agent of the client can prevent the involvement of the design professional in claims brought by a contractor.

Dispute Resolution

Design professionals and their clients should anticipate the possibility of disputes or claims and include some provision for dispute resolution in their agreements. For example, in the event that direct negotiations fail to resolve a dispute, the agreement may provide for mediation, arbitration, litigation or some combination of those methods of dispute resolution. CNA claims specialists have found that the mediation of disputes is less expensive, less time consuming and less adversarial than any other form of dispute resolution. While some firms may prefer arbitration because it places the power to resolve a dispute in a third party, a “mediation-first” provision does not preclude another form of dispute resolution should the mediation fail.

Document Control and Ownership

Agreements should clearly state ownership and proper use of any documents. As a general rule, documents produced by the design professional should be acknowledged as instruments of the design professional's service and not regarded as products. As instruments of service, they should remain the property of the design professional. Now, many clients are requiring that some or all of the information and deliverables created by design professionals be immediately and unequivocally transferred for use by the client. There are significant differences between the copyright and ownership of documents.

The information presented here is for professional liability risk management guidance. It is not legal advice nor should it be construed to be a determination on issues of coverage for specific claims. Contract language establishes legal duties and rights and should be reviewed by competent local legal counsel.