Who Takes the Risk?
Wendy Poulton reflects on the changing landscape of risk in architectural practice, and offers a check list of ten things to look for in commercial consultancy agreements.
Constructing a building is one of the riskiest commercial enterprises you can embark upon. Property development draws together a whole raft of risks: legislative compliance, workplace health and safety, project finance, manufacturing, technological advancement, and the perpetually fluctuating property market. The rewards can be handsome, but realising them depends on how those unpredictable risks pan out. Since not all risks can be insured for, principals are motivated to find ways to manage them, or transfer them to others.1
In fact, it would appear from the 1,500 consultancy agreements we review each year that some principals and their advisers believe that construction can be made wholly predictable and risk-free – for the principal. This misconception translates into onerous client/architect agreements that impose unmanageable risks, and performance standards equivalent to perfection. Let’s look at three examples.
1. Document completion
We regularly see this clause in consultancy agreements:
The Deliverables and all other information, recommendations and reports produced by the Consultant must … be comprehensive, co-ordinated and complete, containing all information necessary to convey the design requirements to the Contractor for the purposes of construction, so that construction can proceed without the need for further clarification or information.
Principals see this clause as creating certainty, by clarifying the standard for documentation. But that standard is unrealistic. On novated or fast-tracked projects, architects will not complete documentation to the point of construction readiness. Even on traditional projects, a certain level of detail will be left to the specialist expertise of trade sub-contractors and manufacturers, and the manufacturer might even provide elements to be incorporated into a BIM model.
In other words, a good architect adjusts the level of document completeness to the project. But a clause that recognises this is unpalatable to a principal who wants one single clause to provide the maximum risk transfer on all projects.
Every project is a bespoke creation. To articulate the principal’s needs, the architect draws on experience to ask the right questions and consolidate the answers into a brief. This can’t be done without input from the principal about how the project will be used and developed, and the principal’s tolerance for maintenance and repair work.
However, the last decade has seen a retreat by some principals from engaging with the briefing process, because it is seen as ‘taking back’ risks that could be transferred. Instead, we see consultants asked to sign contracts containing absolute promises that ‘the Brief’ can be fully delivered, within a strict time and for a prescribed budget, when the brief has not even been written, let alone annexed to the contract.
Even more problematic is replacing the brief with a contract clause that requires the architect to give a warranty that the design will be ‘fit for purpose’. This warranty is beyond the architect’s control to deliver, and likely to be outside the cover of their insurances.
Not all principals understand that, after being novated, the architect works for the builder and not the principal. The builder directs the architect, and the architect’s duty of care is to the builder.
It is difficult (and arguably impossible) to perform a full superintendent role after novation. How can you police the quality of the construction when the builder can direct you when to conduct observations, and what to observe? How can you assess whether works comply with the design requirements when the builder can change the design without your knowledge or consent?
Novation brings an inherent risk of under-performance by the builder. The principal can protect itself by appointing its own experienced superintendent, and by inserting robust provisions for security and defects liability into the design and construct contract. However, what we often see instead is a novation deed that requires the architect to report to the principal every last deficiency in the builder’s performance (including any inaccuracies in site minutes), failing which the architect will become liable for breach of contract. This effectively makes the architect a guarantor of any building defects, while doing little to actually prevent or correct defects.
The Way Forward
However, alongside problem areas like those, we’ve seen plenty of improvements as well. These are some trends we’ve observed over the last decade:
- Principals expect to have a negotiation. Although some still refuse to amend their contracts, there is no longer genuine surprise that an architect has read the contract and raised objections.
- Contract drafters have come to understand the limits of architects’ professional indemnity insurance. Some principal contracts are carefully drafted to avoid unnecessary inclusion of ‘fit for purpose’ warranties, ‘ensure’ obligations, or no-fault indemnity clauses.
- At the same time, solicitors add value by crafting new protections for their principals. As solicitors invent new ways to protect the principal by transferring risk to others, new risks for consultants are created.
- Many principals are tightening up commercial clauses that they know are outside the scope of insurance advice. Extension of time and variation clauses, for example, often provide inadequate redress for the architect.
- After a slow take-up, Australian Standard 4122-2010 is now in more regular use, although in proportion to client-drafted contracts it still makes up less than 10% of the contracts sent to our review service in the last year.2
Some clients are putting out better contracts than they were ten years ago. Others are getting worse. Either way, in our experience, contracts are becoming longer and taking up time that could be more valuably spent on design work. For architects working in the commercial or government sphere, it has become necessary to gain the skills needed to evaluate contracts and manage the negotiation as efficiently as possible. The only alternative is to find that rare breed of client willing to use an AS4122-2010 in its unamended form.
Ten Things to Check in Your Next Consultancy Agreement
If your contract ticks more than half these boxes, it’s better than most commercial consultancy agreements we see:
- Does the contract clearly identify a brief, or set out the process for developing one?
- Have all the documents mentioned in the contract (especially annexures) been provided to you?
- Does the contract provide for you to be paid for all variations to your design or your scope, except where the change results from your error?
- Does the contract give you the right to terminate your services?
- Does the contract provide for you to claim an extension of time for all delays caused by factors beyond your control?
- If the contract requires you to indemnify or pay compensation for loss, is that limited to the extent that the loss was caused by your negligence or other fault?
- Is any ‘fit for purpose’ obligation limited to using reasonable care to produce a ‘fit for purpose’ result?
- Does the copyright clause preserve your right to use any elements developed independently from this project, that were part of your general business systems?
- Does any moral rights clause preserve your right to be attributed as author, and your right to withdraw attribution?
- Does the contract provide for you to be paid in full, without allowing the principal to set off or reduce your fees due to unsubstantiated allegations?
We look forward to a day where architects can take all of those protections for granted, use a standard contract, and concentrate their talents and energies on the project.
1. In this article, “principal” means the party who owns the site, procures the project and engages the contractor. The principal will usually be the architect’s client.
2. For a snapshot of trends in consultancy agreement based on the 1300+ consultancy agreements we reviewed in 2016, see our article 2016: the Year in Contracts
Wendy Poulton is a risk manager at informed, by Planned Cover.
informed is the education and risk management arm of specialist insurance broker Planned Cover, one of ACA’s sponsors. Wendy and the team of legally qualified risk managers at informed provide online and live CPD, industry updates and guidance material, and deliver Planned Cover’s contract review service.
Planned Cover is an ACA Corporate Sponsor.