Risk Management PDF

C H A P T E R 16 Risk Management 16.1 Risk Management Strategies Peter Gifford Longley, AIA, CSI CCS, LEED AP PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S Being in the business of architecture means taking risks. But any good endeavor, like the privilege of practicing architecture, is...

C H A P T E R 16 Risk Management 16.1 Risk Management Strategies Peter Gifford Longley, AIA, CSI CCS, LEED AP PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S Being in the business of architecture means taking risks. But any good endeavor, like the privilege of practicing architecture, is worthy of some risk. The best approach is to know the risks, and then know how to manage them. HOW DOES THE AR CHI TECT MAN AG E RIS K ? The word “risk” derives from the archaic Italian word riscare, which means “run into danger,” or to imperil, endanger, or jeopardize. All choices in life entail some risk; for example, play and risk injury, or pass and risk boredom. When a decision is made to risk one thing or another, security lies only in managing the risk. There are four classic strategies, all used by prudent firms to manage risk. These are manifested in the practice of architecture as shown in Table 16.1. Identifying Sources of Risk Some aspects of the practice of architecture are, by nature, more likely to create unmanageable risk—risk of claims that place a firm’s reputation, even its existence, in jeopardy. Professional liability insurance companies track actual claims by category, frequency, and cost. These data are used to determine premiums—costly for customers servicing areas of greater risk, and less so for those where risks are low. Peter Longley is an architect with more than 35 years of experience. He has developed and authored firm standards for documentation and quality control. As director of operations for Tsoi/Kobus & Associates, he is responsible for the firm’s risk management and quality assurance/quality control practices. 989 TABLE 16.1 Strategies to Manage Risk Avoid Risk Transfer Risk Assume Risk Control Risk Marketing selects project types that fit with prior experience, working for clients with excellent reputations. Contracts transfer risk appropriately to the client, or downward to a consultant. Insurance transfers risk to a business financial partner. Accept appropriate work, but maintain enough cash to responsibly satisfy insurance deductibles. Adopt best practices, and educate staff. Seek good counsel to prevent or reduce losses when claims emerge. Measured liability losses, organized by category, form a quantifiable basis for decoding areas of greatest risk. Professional liability insurance provider XLGroup identifies nine such categories in its Risk Drivers research: 1. 2. 3. 4. 5. 6. 7. 8. 9. Communication Project team capabilities Client selection Negotiation and contracts Budget control Schedule control Loss prevention issues Construction phase services Billing procedures PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S XL Group’s Risk Drivers research reveals that one or more of areas 1 through 4, shown in Figure 16.1, were present in 93 percent of all claims. Therefore, a focus on these four areas will address most causes of risk to architects—to determine best practices to avoid, to transfer, or to control risk…reasoning, alternatively, which risk is reasonable to assume. The four greatest areas of risk that architects face are examined below, with potentially effective means to manage each of them also discussed. The order is to build to a key risk factor. N O. 4 : N E GO TIATIO N AN D CO N TRA CTS Claims almost always appear in a legal form, targeted directly at the failure of the architect to comply with some term of their design services agreement—the document that set forth the responsibilities now in dispute. (See Figure 16.2.) Not surprisingly, Top 4 Non-Technical Risk Drivers Percentage of Claims Affected 40% 2001 39% 2012 35% 30% 23% 25% 20% 15% 10% 27% 24% 25% 16% 13% 6% 5% 0% Negotiation and Contracts Client Selection Project Team Capabilities Communication Risk Drivers data provided by The Design Professional unit of XL Group FIGURE 16.1 Chart Depicting the Four Greatest Areas of Claims 990 Risk Management Negotiation and Contract Issues No separate contingency fund set aside 5% Contruction phase services not in contract or not fulfiled 8% Other 8% Unclear or Lack of inappropriate mediation clause scope of services 6% 38% Did not formally evaluate project risks 16% Contract: - Not firms own -Not industry std. - Not reviewed by counsel 2% Contract not in place before work started 12% Deal breakers in contract 3% Client-generated agreement, not reviewed by senior mgmt. Field staff didn’t 1% have/understand contract 2% Risk Drivers data provided by The Design Professional unit of XL FIGURE 16.2 Chart Depicting Negotiation and Contracts Claims by Type PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S the contract is the first piece of paper consulted when a claim comes to light. Designers frantically examine it to learn if the claim has any basis in reality. Copies are requested by attorneys and insurance companies. Everyone scours it for the magic words that prove their perspective, supporting or refuting the claim. Long before the claim emerged, times were happier. At the beginning of the project everyone is excited about getting started. Still, the project is, after all, a business deal—a contract—a fee paid for services rendered. Central to both the client’s and architect’s mind are the large matters: the project description, the site, the program, the schedule, the budget. Next come the means to get there: the team, the consultants, the services needed, what’s included, what’s not, and the fees. Finally come the terms and conditions: all the legal fine print governing everything mentioned, and then some. The main characters typically lose interest at this point—the prime reason projects often begin without a contract in place. They turn over the business of sorting out the details to other people. These main characters are the same ones who frantically reach for the contact (if it was ever executed) once the claim notice arrives. They need to see what was previously agreed. That day’s conclusion will likely be determined by how well the agreement was negotiated. Deal Makers and Deal Breakers From the architect’s perspective, the key issues in agreements are profitability and insurability. Simply put, if a profit can’t be made with the deal as stated, the commission shouldn’t be accepted. Likewise, agreeing to take on responsibilities excluded by a firm’s professional liability insurance policy could leave the firm uninsured when a claim emerges. Either issue can put a firm out of business. Both present unmanageable risk. Both are deal breakers. Negotiation is the time to identify and remove deal breakers. If they can’t be removed, some way must be found to offset the risk—something that would instead be a deal maker. Finding the deal makers are theoretically possible (e.g., a large enough fee can compensate for increased risk), but require willpower and skill to negotiate. Below are noteworthy deal makers and deal breakers. ▶ Negotiating Agreement (15.3) discusses negotiation as a skill that can be learned and mastered. 16.1 Risk Management Strategies 991 Working Without an Agreement Working without an agreement is an unmanageable risk. If a claim emerges before the contract is executed, there are no clear rules for settlement. The party due something may have to walk away without anything, perhaps even having to pay. In the case of the architect, that means real trouble. The effects of working without an agreement are many. Foremost concerns include: • Difficulty in getting paid, or getting paid all that the architect believes it is entitled to be paid • Claims of architect responsibility for any and all things not the firm’s fault—such as the client’s consultants’ negligent services, the presence of hazardous waste on-site, inaccuracy of client’s budget, changes in the code, bad construction safety, poor performance of the builder • Claims of architect responsibility for broader scope than may have been intended or understood by the architect • Claims of the architect causing delay due to a lack of written schedule, or definition of the schedule approval or amendment process ▶ Architects and the Law (5.1) PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S further discusses the standard of care in architecture practice. Textbook definition of standard of care: Rendering services with the ordinary degree of skill and care that would be used by other reasonably competent practitioners of the same discipline under similar circumstances, taking into consideration the contemporary state of the art and geographic idiosyncrasies. ▶ Owner-Generated Agreements (17.3) covers a systematic approach to evaluating terms in agreement provided by owners. MARKETING MATERIAL S: SINGING OUR P RAISES A professional carefully negotiates an agreement and then, unwittingly, attaches the proposal to it—too lazy to retype the scope. There, lurking in the proposal, are the promises of performing among the best in the nation or region at one thing or another. Plaintiffs’ attorneys can take those promises to the bank. 992 Risk Management Most architects would probably never work with just a handshake, wink, or nod. But exchanging draft agreements that never get signed has the same net effect—no written agreement. There are too many skilled attorneys and different-minded judges that would dismiss those unsigned pieces of paper, regardless of arguments about payments made (“course of conduct”). Architects need to get the agreement negotiated and signed before issuing documents for use by the client or the builder. Once the work product is delivered, the architect loses the leverage necessary to get the client to the signing table. Heightened Standard of Care The standard of care is the basis against which architects are measured to determine whether they are performing to a level of legal competence. The standard of care does not require performing services perfectly. Rather, when errors and omissions occur, they are judged against a standard consistent with the work of other architects doing similar projects. Errors and omissions that fall short of this “norm” constitute a failure to meet the standard of care, amounting to legal negligence. The key to the concept is that there is a norm—and the norm is not perfection. The standard of care flows from a concept in English law that recognizes that professional services—from doctors, lawyers, architects, and engineers—are rendered based upon learned opinion. Such professional opinions are provided by gifted human beings who have plied their trade over time, developing varied pathways to success. There isn’t always a single solution. To determine whether an architect has been negligent, performance will be measured against what architects would typically have done in the same situation. The problem with nearly all client-developed agreements is that they seek to prescribe a standard for care that is higher than the norm. Problematic words abound that define the architect’s enhanced performance level, including “best,” “better,” “high,” and “higher.” These words are red flags and should be stricken not only from agreements but also from marketing materials and proposals. What is the problem with being contractually required to perform at a higher standard of care? Professional liability insurance does not cover such a higher performance level. Architects are insured against acting negligently in performing their services. Beyond that, they are on their own. How does establishing a higher standard lead to claims? When architects are required to be near-perfect, the client will expect them to pay for every problem on the plans, everything missed, every mistake that the typical architect would be forgiven. Everything. Indemnities Almost every client-furnished agreement comes with a professional services indemnity provision—most are horribly written. The AIA has addressed client demands for such contractual indemnities in the major 2007 versions of the AIA’s standard architectural services agreement forms. The AIA’s language was reviewed by professional liability insurance carriers and determined to be insurable under typical professional liability insurance policies. The principle of the professional services indemnity is that the architect ought to reimburse the client for claims brought against them by a third party—claims arising from the architect’s negligence. Indemnities of other types actually benefit the architect: • Client indemnity to the architect for claims arising from the presence of hazardous materials on the job site • Client indemnity to the architect for claims from the client’s misuse of the architect’s drawings • Mutual indemnities between the architect and consultants, making each party legally responsible for their own mistakes and not for the mistakes of the other Problems with professional services indemnities occur when they become too broad, holding the architect responsible for performance beyond professional liability insurance policy coverage. Common examples include: • Indemnifying persons or entities not a party to the agreement • Indemnifying the client from their own mistakes • Indemnifying for errors and omissions not rising to the level of legal negligence • Defending the client against third-party claims— providing legal defense—prior to legally establishing negligence THE LIAB ILITY BU C KE T Sophisticated clients may try to come up with ways to quantify or measure the standard of care. One such attempt is to express the barrier in terms of construction change orders. For example, any amount of error and omission (E&O) change orders in excess of, say, 1.5 percent means that the standard of care has been breached. So each time an E&O change order is classified, it is dumped into a “liability bucket.” When the amount in the bucket rises to the established rim, in this case 1.5 percent, the architect pays for the rest that spills over. The liability bucket is a noble idea. It has its basis in facts, as expert witnesses often quote normal change order percentages, such amounts varying by project size, complexity, new or renovated construction types, and the like. This seems like a fair and reasonable way to establish expectations of performance. Doesn’t it? The problem is that there is no statutory or judicial percentage threshold for an across-the-board definition for the standard of care. None. The standard of care must be argued before the finder of fact (arbitrator, judge, or jury) and legally established for each element in every claim. Plaintiff’s experts opine as to how bad the services in question were, how the mistakes were so egregious that, regardless of change order amount, “no other competent architect would have made that mistake.” Then after hearing the charges, defendant’s experts explain why everything that happened on the job was no different from any other project. In the end, the decision by the finder of fact will boil down to how convincing the arguments were, considering the credentials of the opposing experts—it’s the proverbial “battle of the experts.” The fact remains: There is no clear legal definition of a breach of the standard of care. Therefore, there is a problem in trying to establish a contractual measuring stick for the standard of care. Doing so removes the insurance company’s ability to argue against claims that breach the contractual standard, but might arguably not have breached the standard of care. That is why underwriters specifically exclude “contractual breaches” from coverage. Check the firm’s policy. The liability bucket may be uninsurable. Overbroad indemnities provide unmanageable risk. Therefore, read every proposed indemnity carefully. Use the AIA version (e.g., AIA Document B101TM–2007, section 8.4) as a good model. Always seek legal advice before agreeing to the client’s version of an indemnity clause. Construction Means and Methods The architect designs the finished project. How it gets built, the “means and methods” to get there, are determined by the builder. Construction means and methods ought not, and generally are not, the responsibility of the architect. Means and methods claims examples include excavation cave-ins, scaffolding failures, and crane collapses. Fortunately such claims are rare, but the result is almost ▶ The AIA Documents Program (17.5) details the range of AIA contract documents that capture and convey the expectations, relationships, responsibilities, and rules that bring parties together for the design and construction of buildings. 16.1 Risk Management Strategies 993 PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S Thankfully, most clients will accept pushback on this negotiation issue and will agree to take out the words “best” and “highest.” As businesspeople, they understand the limits of insurance. They also recognize that if the policy does not cover their claim, the only other assets the architect has are used desks and computers—which don’t amount to much. always tragic, with property damage, personal injuries and death involving workers and members of the general public. These accidents turn into media events, with plaintiff awards that amount to tens of millions. AIA standard agreements have effectively managed this issue for decades, with carefully considered language in the architectural services agreements and the general conditions for the contract for construction. Take advantage of this language in AIA agreements—language tested in the courts. PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S ▶ See Agreements with Owners (17.1) for more information related to the contract with the client. Guarantees and Cer tifications Architects are often asked to guarantee or certify the quality or completeness of their design. There is real danger here. The only guarantee that the law typically requires, and that professional liability insurance policies cover, is a guarantee to perform to the standard of care. Beyond this, guarantees and certifications are excluded from coverage. The words guarantee and warranty should either be stricken from the agreement, or at least used properly—for example, “Architect makes no guarantee of performance.” Other terms take on the same meaning—“ensure,” “assure,” “insure,” “confirm,” “verify,” “thorough,” “any,” all,” and even “100% complete.” Each may be placed in a context requiring that the architect perform at a level of perfection—to provide any and everything needed at the architect’s expense. Certifications are far more common than guarantees, and cannot realistically be avoided. Building officials and jurisdictions require certifications stating that drawings have been prepared per code, or, after construction, that the project was completed per plans and specs. Other common certifications are requested by project financiers, banks, and lending institutions—all requesting the same thing: that architects promise that they didn’t make any mistakes. There is a simple solution to any certification. Remember the standard of care— that the architect is a professional who exercises judgment. An architect should only certify “in my professional opinion” or “to the best of my knowledge, information, and belief.” The contract should give the architect the ability to review and reasonably limit certifications before signing them. Do not certify perfect performance. Proper Scope ▶ Defining Project Services (15.1) further discusses the centrality of scope definition to effective agreements for professional design services. Badly written scopes of services lead to claims and lost revenue. Unclear scopes can make architects responsible for the performance of someone not under their direct control. Overbroad scopes rob architects of the ability to invoice for extra services. Bad scopes can ruin a firm, damaging its relationship with the client. Good scopes of services set forth with precision the services the architect will provide, and exclude those they won’t. Spend time getting it right. Review it with the client and other members of the team; include the junior staff that will work on the project. Getting the words right will clarify everyone’s expectations and may eliminate later disputes. ▶ Construction Phase Services Administration of the Contract for Construction (10.9) covers the architect’s evaluation and reporting of the progress and quality of the work and its conformance to the design intent expressed in the contract documents. During the construction phase, the task for the architect is to “administer the contract for construction” between the owner and builder—various services that collectively are commonly referred to as “CA.” These CA tasks include field observations, review of contractor’s payment applications, answering contractors’ questions about the drawings and specifications, review of contractors’ submittals, review and approval of change orders, issuing revised documents for changes, and inspecting for substantial completion. Clients sometimes want to save on professional design fees by eliminating CA services. They reason that after the construction documents have been prepared, that the architect is done with design. But “design” is not done until the project is built. Changes occur during construction, brought about by contractor substitutions, products and systems purchased off of 994 Risk Management performance specifications, unanticipated field conditions, modifications to accommodate construction means and methods, owner changes, and errors and omissions. Plans are never perfect, nor are they “complete.” With these change forces at work, the architect must continue to protect the client’s core interest—the design. In protecting the design, architects also protect their own reputation and liability. Costs from fixing systems not properly integrated, not meeting code, or not functioning could become a basis for claims. Professional liability insurance providers recognize a rise in claims among firms that do not provide CA services—because the architect is not around to correct their documents or to defend them, to interpret and explain them, to preempt or minimize costly construction mistakes. Some underwriters will not insure firms that take on commissions for construction that does not include CA services. Without a limitation of liability (LOL), there is “no limit” L I MI T I NG T HE L I A B IL I T Y O F A to an architect’s liability. If a professional liability insurance C ON S ULTA NT policy has a per-claim limit of $10 million, a firm is not protected for any claim in excess of that limit. A $20 million Jay S. Gregory, Esq., founding partner of the Boston claim, if enforced, could put a firm out of business. office of LeClairRyan, PC, tells the story of an architect Uninsured loss is an unmanageable risk. he represented who had unwittingly agreed to certain A limitation of liability is an agreement not to seek fine print in the contract of a structural engineering damages in excess of a pre-established and agreed-upon consultant. When the structural design of the project amount. To be legal, the limit must provide fair payout in turned out to be defective, resulting in repairs totaling relation to the value of the services; unreasonably low LOLs several million dollars, his client turned to the engineer to have been struck down by courts. An enforceable LOL can make good. The engineer immediately produced the be an effective way to manage risk. Most underwriters offer contract and turned to the fine print, which stated a a break in premiums if all the insured’s projects, or at least limitation of liability in the amount of $100,000. The a significant percentage of them, have an LOL. engineer freely admitted guilt—“Here, I’ll get my What is a reasonable value for an LOL? Some advise checkbook and write you a check for one hundred that it should equal the compensation received on the projthousand.” ect. But that can amount to a big number, exceeding policy The architect, holder of the prime agreement with the client, was responsible for the rest of the damages— limits. A reasonable target is to set the LOL at the “prodamages arguably not his fault. ceeds of available insurance.” Doing so will ensure that the firm never has to pay out of pocket, even if the annual policy limit (aggregate) has been eroded by claims on other ▶ Insurance Coverage for projects. [Note: Savvy clients may require that eroded limits be replaced with the purBusiness and Professional Liability chase of add-on coverage. Even so, that is a better deal than no LOL.] (16.2) covers the terminology Significantly, LOLs should apply to the full sum of any and all claims on the projand necessary considerations ect. Otherwise, the LOL may not do what it is supposed to do—set a limit on liability. and alternatives when selecting insurance for one’s firm. Making Better Agreements Establish Standard In-House Practices There are firms with no standard approach to developing, executing, and maintaining design services agreements. Almost anyone can authorize work and sign contracts, committing the firm to situations of unmanageable risk. Consider these tips to address this risk: • Appoint a single person or, for larger firms, a team of individuals, to review and negotiate all contract terms and conditions. People who review contracts all the time know what to look for, acquiring the skills to effectively negotiate with difficult clients and attorneys. It takes years of training and experience to develop these skills. Consider hiring someone with a legal background or a licensed attorney to perform this role. Contracts legally obligate a firm and should be reviewed and approved by select firm members only. 16.1 Risk Management Strategies 995 PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S Limitation of Liability • As part of the review process, the project manager (PM) should review their own contracts. They will manage the project and ought to play a role in shaping what the contract says. However, the PM should not be the only person reviewing the contract. • Provide access to signed agreements for review by the entire project team. • Save electronic copies of every agreement with the electronic project records. Also save a copy in a general office directory of the firm’s contracts. When a problem emerges on a project, perhaps several years after the records have been archived, there will be a dash to find the contract. Make it readily available on that day. Get Professional Support PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S If there is a claim, a firm will need support from an attorney, but attorneys can also help avoid a claim before it happens. Attorneys specialize in areas of legal expertise; contract law is one such specialty, and construction contracts a subset within it. There are attorneys that work with owners, builders, or design firms. Finally, there are attorneys that specialize in developing agreement text, and others that are called in to resolve disputes. At times, help may be needed from both of these subspecialties. To find the right attorney, ask other architects in the area or a professional liability insurer for recommendations, or attend seminars in risk management conducted by attorneys to get a glimpse of what they know. Take time to make the right choice. Architects should select an attorney with relevant experience, clients, and references. A qualified attorney can help with the review of contracts, or perhaps just with difficult agreement clauses. Some architects use outside counsel to negotiate contract terms—speaking attorney to attorney to the one representing the other party. While this is an extra expense, it could avoid a far more costly contract claim later that stems from improper review. In addition to paid attorney consultation, many insurance providers offer contract reviews. These reviews best address matters of insurance and insurability. Using both outside insurance and legal counsels will combine to make the contracts best suited to preserve the interests of the firm. Use Standard Agreement Forms Most professional liability insurance carriers offer discounts to their clients that use standard agreement forms, such as AIA documents. AIA forms have been tested by the courts. In addition, clients recognize and respect these forms, making the negotiation process with these as a starting point much easier. Standardized forms can be used “as is,” but it is more typical that they be modified beyond project particulars and changes to common services, to include technical edits to the legal terms and conditions in response to the advice of legal and insurance advisers. One way to use outside legal and insurance counsel is in the development of a suite of standard agreement forms customized for use by the firm. These documents may seldom be adopted as is by the client, but they will be very useful as a reference to a firm’s preferred language. There will be many times when client’s counsel is pushing for certain text in the client’s standard form. In that situation, an architect can transmit the firm’s preferred paragraph for consideration—a good negotiation strategy. There are several key customized agreement forms to have on hand: • Full services agreements of the types most frequently used. • Small or limited-scope agreements: Short-form terms and conditions for projects where there is no construction involved, such as feasibility studies, programming, and planning services. • Notice to proceed: Brief letter agreement used to get a project going until the final agreement is executed. Such notices include limited items to agree on quickly: definition of limited scope and payment, intent to execute the final agreement, and rules to terminate or extend. 996 Risk Management • Consultant agreements: These should always be tied to the terms and conditions of the prime agreement between the architecture firm and the client. Never sign the consultant’s proposal—and avoid attaching it to a consultant’s agreement form— where its terms and conditions might conflict. • Common exhibits: Rate schedules, reimbursable expenses schedules, sample invoices, standard scopes of services for each type of consultant regularly hired, consultant standards. NO. 3 : SELECTI NG THE CLI ENT The third most frequent source of claims comes from client selection. (See Figure 16.3.) It is the client that most frequently sues the architect for failing to fulfill their duty. A client who is unsophisticated, or short on the cash needed to fund the project, or has a record of litigation, or is completely unknown to the architect, is one to avoid. Know the Firm’s Exper tise—Know the Market PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S An architect that keeps designing the same thing, over and over again, necessarily develops an expertise in that one thing. The purest example of this is the prototype building. Examples include box stores and fast-food outlets. Each successful franchise solves a series of problems very effectively—established brand recognition, optimal layout for both customer service and product preparation, predictable construction cost and schedule, and significant reduction in errors and omissions. These prove a simple principle—if an architect were given the opportunity to design a project just like their last one, they would likely expect to do a better job. We see that specialization helps mitigate risk, while establishing a record of accomplishment. Sophisticated clients want to select firms that have successfully designed and completed projects similar to theirs. Such is their means of managing risk. Know the Client Before beginning to work with a client, an architect should know them. Are they an experienced developer, having previously done projects like the one proposed? Can they afford the project? Do they have a reputation for negotiating fairly? Do they have a long list of architects they have hired—and if so, who? What is their track record for paying? Do they have a history of litigation? Client Selection Issues No formal review of client 4% Client behind in fee payments 7% Contractor selection 4% Other 3% Client in poor financial condition 17% Client not receptive to ADR 1% Client inexperienced in design issues 43% Client has history of claims/ litigation 21% Risk Drivers data provided by The Design Professional unit of XL Group FIGURE 16.3 Chart Depicting Client Selection Claims by Type 16.1 Risk Management Strategies 997 PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S ONE G OOD LAWSUIT DESE R V ES ANO T H ER A design firm completed a commission for a major institution and received popular recognition for a job well done. The client was happy. There was good publicity. Awards were given. But not everyone on the team was satisfied. Several years after the project was completed, three of the major trades filed suit over change orders that were long denied and never paid—three separate suits in three different jurisdictions. Whom did they sue? The architect. The subs each lost money on their contracts, primarily because there were unanticipated changes to the schedule that led to labor overruns. Despite these facts, the basis of the suits alleged that the plans were incomplete and uncoordinated, leading to their losses. This basis quickly faced an important legal obstacle: the architect, a third party to the construction contract, does not have a legal duty to save the builder’s subcontractors from economic loss due to defective plans. Only the owner, through the general contractor, has this legal duty. But the builder did not want to sue his client to aid his subcontractors—the same client he wanted to work for again in the future. The subs didn’t want to sue the builder for the same reason. At this point in the claim, summary judgment, with dismissal of the claims against the architect, seemed possible. Ensuing legal discovery exposed the faults of all team members—not surprisingly, no one had been perfect. Meanwhile, both the general contractor and owner, neither a defendant in the suits, watched with interest from the sidelines. Both suspected that at any time, they could get pulled into the fray. In the end, the owner and builder, the ones with legal agreements relevant to the claims, succumbed to pressure to do right by the subcontractors. Both volunteered to participate in mediation and settlement with the parties. The architect settled for six figures, about one-tenth of the stated claim value. The owner also kicked in seven figures. The parties agreed to settle, ending what could have been a much costlier trip to court, where anything could have happened. There is no justice in settlement—only conclusion. The lesson that the architect learned was this: People to whom you owe no legal “duty” can sue—and they may obtain something for their effort, even in claims lacking merit. The more that is known about a potential new client, the better equipped a firm will be to make a proper decision. Seeing the potential pitfalls and negotiating with these in mind helps avoid a bad client relationship. This information is often available in the community of architects or from the firm’s insurance agent. Condominium Projects Condominium projects begin with a client, the developer. But the moment that the developer sells the first unit, there is a new client—an owner of the design product. With each unit sold, the architect acquires another new client—one whom they didn’t select and have no relationship with, and who might have unreasonable expectations. As a result, condo projects are notorious for claims. Professional liability insurance companies will charge substantial premiums for covering this project type. Repeat Clients Are Like Gold Surveys of architectural firms across America indicate that most current clients are repeat clients. The repeat client rate can vary between 60 and 85 percent, and for a few firms, be even higher. There are two messages in these data: (1) It’s very hard to break in with a new client who has previously worked with another architect, and (2) clients and their designers, after they’ve worked together, generally like and trust each other. Respect is key to these relationships. Where there is respect and clear expectations, there is a reduction in claims. Get the Right Builder A good builder can make a project a big success. Likewise, a bad builder—one that causes delays, can’t follow the plans, or charges extra for everything—can make a project into a financial disaster, and not just for the owner. When a builder fails to perform well, everyone pays in one way or another. To the extent that architects have a voice in the decision, they should help their client choose a builder that is well organized, understands and respects the architect’s role, and appreciates the value of all of the relationships involved. Impact of the Project Deliver y Method How the project is contracted for construction is known as the delivery method. Some of the most common alternatives are explained below, with an eye toward identifying risk. Hard Bid ▶ Project Delivery Methods (9.1) provides an overview of the available models for project delivery. 998 Risk Management Hard bid is the so-called traditional method, or design-bid-build method (DBB). Under this option, the architect (design team) completes the plans and specifications (construction documents) and puts them out to bid. Regardless of the many options for selecting bidders, the bottom-line goal of the bidder is to get low and win. On the surface, the hard-bid scenario sounds like it should be the best approach for reducing claims. The design process is linear, flowing uninterrupted from schematics, through design development, and then finishing with construction documents—suggesting no impediment to completing and coordinating the documents before they are put out to bid. The true difficulty is that no set of documents is ever fully complete or perfectly coordinated. This fact plays right into the hand of a skilled estimator—one that is looking for any advantage it can find over the competition. In the bid situation, the goal is to get low—quality in construction is not a priority for those that plan to win. Missing information in the bid documents affords opportunity to achieve the low bid. The real payday comes later, after award, when the seed of missing information yields a harvest in change orders. Mounting change orders—uncontrolled project costs—puts undue strain on the owner-architect relationship. Claims histories show that there are more claims by percentage of type of project delivery method on DBB projects than any of the other project delivery types. ▶ Bidding and Negotiation (10.8) discusses the processes involved in selecting a contractor. Negotiated contracts are said to produce the best quality for the lowest price. In this option, the owner interviews and selects the builder independent of a bid process. Qualifications may include the cost of the builder’s services, but more important drivers will be reputation for quality, on-time delivery, and effective cost management. Negotiated contracts come in a variety of forms. The builder might take on a purely advisory role (construction manager, adviser) with all of the “subs” under separate contracts direct with the owner; or the builder may build the project with their own forces and subcontractors. The cost model may be in the form of reimbursement for all costs plus a fee, a fixed fee, or a guaranteed maximum price (GMP). Regardless of the many combined options, negotiating a contract with a good, qualified builder is most apt to bring the best results, and produce the lowest risk to all involved. Fast-Track Fast-track construction involves phasing of design activities to overlap the construction process—construction commences in one phase before design is complete for the next. Under this option, a series of “bid packages” are organized and scheduled. Throughout the fast-track process, the biggest (highest-cost) decisions are made first, the smallest (lowest-cost) decisions last. The risk in the process is that decisions are always made and implemented without complete information, and may later need to be changed at some expense. This risk is an outfall of the owner’s decision to speed the construction process. The need for speed, over quality and first cost, is the owner’s choice—and the owner ought to weigh the decision carefully. Architects should attempt to highlight this point in the contract. At minimum there should be a record of discussion with the client regarding the increased risk of change orders. Managing this risk is mostly about clarifying expectations in advance. AIA Document B103TM–2007 contains good cautionary language for the fast-track method. Other Project Deliver y Methods A number of other delivery methods are available, including contractor-led designbuild (CLDB), architect-led design-build (ALDB), construction management (CM), and integrated project delivery (IPD). In each of these, the traditional roles of the architect, builder, and owner are modified to some degree, creating the potential for increased risk. In each case, understanding and clearly limiting the responsibilities of the architect, while maintaining insurability, is one way to keep the risk model from crumbling into disarray. ▶ For further discussion of these fast-growing project delivery methods, see Contractor-Led Design-Build (9.4); Architect-Led Design-Build (9.5); and the accompanying backgrounder, Architect-Led Design-Build and Architect as CM for Small Firms and Small Projects. The Architect’s Role in Construction ManagerConstructor Project Delivery (9.2), Integrated Project Delivery Overview (9.3), and Project Team Agreements (17.2) cover further dimensions of project delivery. 16.1 Risk Management Strategies 999 PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S Negotiated Contracts Public vs. Private Clients There are many opportunities to compete for public design contracts. However, public contracts offer significant problems over private client relationships: • Terms and conditions are often one-sided against the architect, with little or no room for negotiation. • Profit margins are tight. The parties that fund the project have to answer to their taxpaying constituents. • The press often has a field day with public projects, magnifying and misstating problems that leak out—sometimes without fact checking, and without understanding the construction or design trades. • Public officials owe more to their constituents than they owe to the design team. This can make it hard to establish a normal designer-client relationship. • Public officials come and go. After an election, an architect could be working for a person who previously opposed the project. Any of these issues can increase risk on public projects. Understand the risks and figure out how best to manage them. Establish a Reasonable Fee ▶ Services and Compensation (15.2) covers the variables when determining what to charge for services, methods of compensation, and strategies for getting paid. Examine a client’s expectations and degree of sophistication and take into account the real level of risk inherent in the project. Then formulate the processes needed to prevent anticipated problems. After quantifying these processes, determine the real cost of taking the commission. Add profit to that figure to establish a fee. If the client consents to that sum, then, and only then, will it be known that the project constitutes a manageable risk. PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S N O. 2 : P RO JE C T TE A M C APAB IL ITIE S The second most frequent source of claims comes from the risk category known as project team capabilities. (See Figure 16.4.) Dominating this category are claims arising from the use of inexperienced staff. Coming in a close second and third are similar issues—inexperienced staff on site, and an inexperienced PM. To proactively help avoid Project Team Capabilities Inexperienced design staff 50% Inexperienced on-site staff 20% Inexperienced project manager 18% Other 4% Unqualified backup staff 2% Project outside firm’s normal territory 2% Insufficient number of staff 1% Design firm inexperienced in project type 3% Risk Drivers data provided by The Design Professional unit of XL Group FIGURE 16.4 Chart Depicting Project Team Capability Claims by Type 1000 Risk Management these kinds of claims, hire or train qualified staff and, as much as possible, have the most qualified people working on each project and each phase of the project. This includes a thoughtful division of labor, taking advantage of the lower billing rates of lessexperienced staff for tasks that are appropriate to their skill level. A successful work plan requires enough senior level experience to balance the inexperience of youth. Managing this risk, while turning a profit, requires finding the right mixture of lessexperienced interns and experienced architects. Use of Technology • Train senior level staff to draw again—on the computer, to become hands-on in the building information model being created in the computer. There are things in the model that cannot be seen on a print. Senior staff need to be able to see them. • Train junior level staff to know what they should draw, and why. • Manage the generational differences. Break down barriers between old and young so they can communicate effectively, respecting the different but needed value each brings to the team. • Foster mentoring. Senior staff possesses a wealth of experience to share with the next generation. Some will share, but only if asked. Effective mentoring happens when mentor and mentee both see the value. Both must be motivated to make it happen. • Hire and maintain a good mixture of staff at the various levels. Firms should invest in training staff of all ages in the proper use of technology. Staff Continuity on Projects People come and go for a variety of reasons. Whatever the cause, their departure creates a void in the knowledge base of the project team—the perfect opportunity for unresolved issues to fall through the cracks. Take these steps whenever someone leaves: ▶ Professional Development and Mentoring (8.4) discusses the training, mentoring, and appraisal programs that can support a firm’s strategic plan. • Obtain a written “to do” list from the person leaving, documenting unfinished items and design decisions yet to be made. • Get commitments from remaining team members to pick up and close out the loose ends that result with the departure. • When appropriate, bring in the right replacement. If the position vacated was senior, the client may want to interview or review qualifications of the replacement; obtaining client approval might even be a contractual obligation. Regardless, make the client aware in a timely fashion of the change. Demonstrate intent to fulfill contractual commitments. 16.1 Risk Management Strategies 1001 PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S In the “old days,” when drawings were prepared by hand, the plans were almost always drawn by the most senior staff. The plans required more depth of experience; more things had to be known to draw them properly—the program, the structural grid, the clearances for a toilet, what the walls are made of (how thick), the code, what’s going on overhead, how to label, how to dimension. The details, on the other hand, were far more one-dimensional. With a small amount of coaching, and reference to prior projects’ working drawings as examples, an intern could in short order be equipped to become productive at drawing the details. Thus interns began their drawing careers with exciting tasks like door schedules and toilet room details. In the current day, drawings are prepared entirely on the computer—increasingly in 3D. The older experts are often less computer-savvy, becoming hands-off. The new generation, however, uses the computer with great familiarity, but lacks expertise in design and construction—they don’t know what to draw. Neither can operate effectively entirely on their own. This can create a significant risk. Both generations need the skill that the other possesses. Below is a series of ways to manage the multigenerational approach: Office Standards ▶ Origins and Development of Quality Management (12.1) discusses quality management as a system that supports and improves a firm’s performance. Standards exist for good reasons. They portray the signature of a firm, its image, its attitude. They establish a quick solution to a problem, avoid reinventing the wheel, and save money in the process. They also exist as a repository of firm knowledge, a reference in how to avoid failures in quality. Standards are indeed great, but only when they are used. Firms can now host their quality plans online—available for reference by every employee as their home page. These online documents set forth the firm’s policies and procedures for how to do almost everything—providing instant access to checklists, templates, and forms. They can provide handy links to resources, such as online building codes, industry standards, an electronic library of past project drawings and specifications, image databases used for marketing, case studies, white papers, and lessons learned. Company intranets and online quality plans have become essential tools for today’s architecture firms. These require significant investment of time and money, both to develop and then to maintain. But this investment is returned many times over by improving quality and reducing risk. N O. 1 : C O MMU N IC ATIO N The most frequently cited cause of claims is poor communication. (See Figure 16.5.) More than half of communication complaints arise out of a lack of procedures to identify conflicts, errors, and omissions. Secondarily prevalent are the problems that happen when people don’t follow procedures that are in place. For the project to proceed without problems, people must communicate effectively. Peer Reviews: Quality Assurance/Quality Control (QA/QC) PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S One sure way to prevent mistakes is to check the work—the benefit best characterized in the carpenters’ saying, “measure twice, cut once.” On any given project there are hundreds, even thousands of decisions that have to be communicated. Any decisions not made by the design team will be made by Communication Issues Regular progress reports regarding changes not approved Project issues and 1% potential disputes not handled correctly 17% Lack of documentation re: changes in scope, budget, etc. 9% Scope of services not explained to client 13% Project staff not aware of responsibilities 6% Other 3% Lack of procedures to identify conflicts, errors, and omissions 51% Risk Drivers data provided by The Design Professional unit of XL Group FIGURE 16.5 Chart Depicting Communication Claims by Type 1002 Risk Management someone else, and the architect may not like that decision or its impact on the project. This situation is less likely when a system is employed for managing or controlling quality. Here are several practical ways to manage quality: • Self-checking: Each team member must be responsible for the quality of their own work. They know their piece of the project better than anyone else. They can use checklists from the company standards, or a list developed by their immediate supervisor. Either way, expectations and communications need to be clear. • In-house third-party review: A “fresh set of eyes”—experienced eyes—can be a big help. Third-party reviews ought to occur at the conclusion of every major project phase, before deliverables are issued. Project leaders should see written proof that the reviews have occurred before they issue the documents. • Peer reviews: Some jurisdictions require independent, outside consultant “peer” reviews before they will issue a building permit—at least for some critical portions of the work. For projects with which a firm does not possess significant prior experience, or when working with a new consultant, it might be prudent to have a peer review. Some institutional clients may even require it. Small firms can greatly benefit from a peer review. • Building information models: BIM can take advantage of electronic checking, employing clash-detection software. These software add-ons produce reports that still have to be reviewed by humans to determine which clashes are real and which are incidental. Nonetheless, the thoroughness of the reports is a remarkable benefit. ▶ For more information on peer reviews, see Construction Drawings (10.6). PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S Remember the simple goal of checking: to identify and correct a mistake before it becomes too expensive to fix. Checking, regardless of which tool or method is employed, helps members of a project team learn to communicate better—to provide better design. Know the Contract Nothing is as disappointing as a failure to meet expectations. Clients readily become dissatisfi ed because the architect didn’t do things the way they had expected. Likewise, many project leaders become dissatisfied because the members of the team didn’t complete tasks as they expected. Why does this happen? Bad communication. One simple way to address this concern is to review the services agreement—the written expectations—with everyone. Sit down with the client and go over the scope of work. Show examples of the deliverables that will be produced. Listen to the client. Their preferences might alter the standard approach. Likewise, review the agreement with the team at the beginning of the project. At appropriate times, pull out a copy of the agreement to confirm the written rules— expectations—for key deliverables. It is always better to discuss matters and review a change of strategy or approach in advance. The alternative, which is to make assumptions, often results in disappointment. Conduct Proper Meetings Meetings should never happen just because they’re on the calendar. Meetings should be organized to complete a set of distinct decisions along the road to finishing the project. Each meeting deserves attention to the advanced development of an agenda, planning who should be there, and the topic of necessary decisions. The written outcome of meetings is the minutes. Minutes need not be lengthy. They just need to record date and location, attendees, a summary of each item discussed, decisions made, and identification of action items, assigning who is responsible for each. The key in this record is decisions. 16.1 Risk Management Strategies 1003 The architect is often the one responsible for preparing and issuing minutes during the design phase. Once construction commences, this responsibility often shifts to the builder. Regardless of formal responsibility, it is essential that the architect take written notes of some form at every meeting. Minutes issued by other parties should be reviewed promptly. If there is any disagreement, write and send a record of comments or corrections right away. In the ebb and flow of the project, often spanning several years, the minutes represent a key record of who said what, what they knew, and when they knew it—documenting the involvement of people no longer around or available for comment. These become the means to affirm prior decisions, dissolve disagreements, or to resolve claims. Document Control PA R T 4 : C O N T R A C T S A N D A G R E E M E N T S ▶ The backgrounder on Project Documentation (5.1) discusses one of the most essential elements of communication in the construction industry. ▶ Information Management and Services (5.12) further covers today’s robust information management practices and technology-based information services. Every paper document issued by the architect needs several points of identifying information: the author, who it is being issued to, the date issued, and, in the case of contract documents, a reference number. Documents that are revised and reissued, such as drawings, need a revision date. Last, copies of each document issued must be saved in the project record. In resolving disputes, the resolution hinges on who knew what and when they knew it. For example, change orders arise over information added or subtracted from the contract documents. Reference to copies of the documents of the two dates in question, before and after the change, will support or disprove the claim. Practice throughout the entire construction industry is moving toward a paperless exchange of information. E-mail is used to transmit documents of modest size. The courts now accept electronic records as a means of storing data for use in litigation. The benefit of this decision saves significant money on printing and delivery. In addition, re-access to the data is improved, since many document storage systems are databases that can be electronically searched. Regardless of the system in place, access to important project records must be preserved long after the project has been completed—until the statute of limitations or repose (if any) precludes litigation. If project records are saved remotely during the life of the project, obtain a copy for safekeeping. If appropriate, convert the files into an electronic format that will still be recoverable by computer systems toward the end of the potential litigation period—some 6, 10, or 15 years from now. Warning Signs of a Claim ▶ Dispute Management and Resolution (16.4) covers strategic and effective use of mediation, arbitration, and litigation. When someone has made a mistake, the human tendency is to hide. This is true in all relationships, including that between architect and client. Sooner or later mistakes will come out. Though difficult, it’s always better to face one’s own mistakes head-on—to tell the client about a problem before they hear about it from someone else. That, at least, gives the architect some measure of control. See It First Many claims begin with the architect being among the first to know of a problem. If they aren’t among the first, it’s likely because they’re not listening or paying attention to what is going on. The discovery of an error often begins with denial. After this comes the realization that the problem needs to be fixed. Start with fact checking. Speak to the people involved with the situation; find out everything about it. Check out the timing on the issue; who knew or did what, and when. At the same time, formulate what has to change to resolve the matter. Is a change really needed? A partial change? What are the options? What is the cost? How would the schedule be impacted? 1004 Risk Management Any serious mistake can damage the relationship with the client. If a claim could erupt, call in outside legal and insurance counsels for advice. Don’t wait for the claim letter from the client’s attorney. After the problem and its implications are understood, and good advice received from insurance providers or legal counsel, the