Lawyers, Financiers, Architects

Ian Hore , 13 May 2014

How can financiers, architects and lawyers find better and fairer ways of working together? Ian Hore reports on a recent ACA – SA round table discussion.

The ACA – SA’s recent round table with finance providers, lawyers and architects looked at the drivers that determine the allocation of risk in contracts and the work of the architect. A lot of the discussion centred on the current tight, difficult marketplace for both the development industry and the architectural profession.

In difficult times, poor practices or behaviour can be compounded and exaggerated. All sectors – the financiers, developers, builders, subcontractors and the design and engineering professions – are affected by increased pressure to get a development funded, approved, constructed and let/rent/sold.

Financiers want people to be successful and profitable – it is better for their business, but they must also protect their own profitability and shareholder’s interests. To do this, they must assess the risk associated with a development being successful and their exposure if it fails. Financiers prefer fixed-price contracts, guaranteed-maximum-price contracts and others where the total costs of projects are identified (no surprises). As part of their assessment, financiers also look at the track record of the developers, builders and the design team in delivering successful projects. Financiers typically lend around 60% to 65% of the total project cost, with the developer required to fund the remainder.

Financiers and developers are both beholden to the valuer for the project valuation and for their assessment of the development, its potential and ultimately its value at completion or sale. It is believed that financiers do not dictate contractual conditions for development contracts between developers and consultants.

To those at the meeting it appeared that there is cultural change across the board. Risk is being passed down and consultants are expected to provide a service that has no surprise, no mistakes, no errors or omissions. Architects are being asked to take on a responsibility and risk which they cannot manage or have no way to control. Architecture is creative and each project is different. There is no prototype and documents will, even with the best endeavours, contain some omissions. This is likely to be exacerbated on the current climate of extremely tight fees. Very constrained fee structures also mean that there is even less opportunity to consider alternative contractual conditions, or to take on more risk. Nonetheless, clients continue to ask architects to take responsibility for items that professional Indemnity insurance will not cover.

The meeting noted that government and large institutions have different pressures and that their contractual response is also different. Alliance contracting has been used in the past and for large complex projects – with potential high-risk elements – alliance contracts can be beneficial for all parties. Current government managing-contractor project contracts can be onerous. This has an impact for the whole industry, with the transfer down to the subcontract market risks and onerous conditions. The universities have adopted a range of contract positions from ‘no-risk’ contracts to various forms of managing contracts.

At national level, an Australian Procurement Panel Committee panel is looking at best practice in government procurement, but good principles tend to go out the window when everybody is chasing after the cheapest cost.

Lawyers work for clients and prepare contracts based on client instructions. Sometimes there is very limited opportunity to influence clients’ requests. It was considered that often contracts are poorly written because risks have not been identified, who can control or manage risk is not identified and who the risk affects is not identified.

Lawyers noted that in South Australia they have one insurance provider for all registered practices, which makes client negotiations easier regarding onerous contract conditions. In contrast, architects do not have a single insurer and there is no solidarity regarding managing risk relative to the scope of insurance policies. The meeting questioned if architects should ask insurance companies would cover architects for the extra risk and what would that do to premiums, it may be small?

 In summary meeting thought it would be worth pursuing a better way of working that is fairer for all parties.

The ACA – SA Roundtable Lawyers, Financiers, Architects was held on Wednesday 30 April 2014. Ian Hore is a member of the ACA – SA Committee and a director of Walter Brooke and Associates.

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