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Claim of the Week(3/29/2017): Onerous Public Contracts

March 29, 2017

Often, the biggest challenge in taking on a public project isn't the project itself, but the owner—the city, school district, state, etc. In addition to the normal pressures that confront any project, public projects have their own. Pressures like having every politician and taxpayer in town scrutinize the budget, timeline, design and environmental impact. As if that weren't enough to make an A/E question whether public projects are really worth the risk, public entities are using tough contracts as a way to transfer inordinate amounts of project risk onto design professionals' shoulders, jeopardize their insurance and make demands that design firms cannot reasonably fulfill.

 

Some public agencies include in their contracts indemnity clauses that aren't limited to the A/E's negligence. Since a design professional's work is not contemplated or required to be perfect, any indemnity not limited to your negligence typically goes beyond what's required under the law. Since professional liability insurance is intended to cover your negligent acts, errors or omissions, if you agree by contract to a clause that raises or modifies that standard of care, there may be no coverage.

 

Another clause that can come back to haunt an A/E is one in which you agree to “defend” the client. This means that long before any legal liability on your part has been established, you may be obliged to retain an attorney and mount a defense on your client's behalf. Generally, this is an obligation your insurance carrier is likely to refuse to accommodate; you could find yourself paying for the client's attorney out of your own pocket. Public entities are also fond of getting A/Es to accept onerous or unrealistic insurance requirements, such as naming the client as an additional insured or specifying maximum deductibles, higher policy limits or extended coverage. Some of these conditions are unreasonable or prohibitively expensive; others are simply unobtainable at any price.

One architect shared this experience working with a large American city: “We were up for an ongoing, multimillion dollar contract,” he says. “We felt confident about the project because we had already completed a very visible, very successful project with the same city. We reviewed the proposed contract and found five deal breakers, including the absence of a provision for alternative dispute resolution and a clause that had our firm indemnifying the city, even for the city's negligent actions.” The city official overseeing the contract agreed that the contract needed some adjustments and said he'd see what he could do. But the city's attorneys didn't agree. “The official said the city wouldn't budge an inch,” the architect reports. “After all, 30 other design firms had already accepted the same terms on previous projects.”

 

Perhaps most indicative of the love/hate relationship design professionals have with public entities is the fact that this architect, while obviously frustrated with the outcome, didn't want his name used. The reason? He'd like to do more business with the same city! But, he says, no project is worth doing under those terms. “If we can't get an insurable contract,” he says, “we walk away.” This architect, of course, isn't the only one who'd like to continue working on public projects.

 

Here are some steps you can take to help make your next public project a positive experience. Read the contract. It sounds obvious, but too many A/Es assume that the contract for a new project is the same one they received from the same entity on the last project. Onerous clauses and phrases that you negotiated out of one contract have a way of finding their way back into another. In addition to looking for anything that transfers an unfair level of risk to you, look for what isn't in the contract. For example, is there a dispute resolution process, or does it default to the civil courts? Do you disclaim responsibility for the discovery, handling or disposal of hazardous or toxic materials at the site? Do you have the right to terminate the contract if you aren't paid or if there's a material change to the conditions of the agreement?

 

We can provide you with a checklist of terms to look for. Run client-drafted agreements by Poole Professional, and your attorney before you negotiate. Your attorney can help you understand the legal implications of proposed provisions, and we can explain insurance-related issues. Educate your client. Explain why certain contract provisions are just not appropriate for design services. Often, people don't understand an A/E's obligations under the law. For example, they may see no reason why you can't agree to guarantee your work. If there's an issue that must be addressed—a requirement for impossibly high insurance limits, for example—consider enlisting the help of your public counterpart on the project. Explain that while you want to do the project, you can't agree to something that just isn't available, and offer an alternative.

 

As one practitioner says, “If you make your counterpart your problem-solving ally, he or she can go to the county attorney and propose a solution.” Once you've identified the worst provisions, negotiate to delete or amend them. No matter what the agency tells you, nearly every contract is negotiable. Do your homework, be prepared to explain the issues and know your bottom-line position on each critical provision. Remember, you're not in a position to assume someone else's risk, nor can you insure against that risk. If the agency representative tells you everyone else signs the contract, remember that what other A/Es accept has nothing to do with you. You have an obligation to your firm to accept only those risks you feel you can manage.

 

Public agencies have tremendous power and many delight in using it. However, persistence, reason and the knowledge that you were chosen based on your track record can get you past more than a few government attorneys. When you're tempted to sign on the dotted line, think about your exposure to serious liability for circumstances you'd be rendered powerless to control. As tough as it may be to get a good public contract, it's even more difficult to defend yourself under a bad one.

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