Project Participants Need to Refocus on Contracts

Contracts and negotiations between architects and owners are constantly evolving, and both sides should educate themselves about recent trends that can influence a project’s success.

by C. Jaye Berger

When owners, developers, architects, and interior designers sit down to negotiate their contracts for projects through their attorneys, there are certain topics that arise over and over again.

How these issues get resolved can mean the difference between a project that ends on a happy note and one that is terminated before completion and ends in litigation.

The issues can run the gamut from increasing the scope of contract administration to holding back money in the event of a dispute. Owners and architects of all stripes should be aware of the changing environment.

With modern software allowing AIA contracts to be edited electronically, some attorneys have introduced such extensive editing that it can no longer be considered an AIA document. I have even seen contracts that have been re-typed to have the “look” of an AIA contract, but which are substantially changed.

Be on the look out. You may think the language is “standard” language on contract administration, but a closer look would show that it has been re-drafted. Architects need to be especially careful because clients may make changes that alter the standard in the industry for their services.

Another very important issue these days is confidentiality. Many owners and developers want to limit or restrict what information is revealed about a project and to whom. On residential projects, the owner often tries to restrict information about the project location and the name of the owner. On commercial projects, the developer may want to delay the release of information to the public until it can plan its formal announcement.

What items will be deemed confidential must be defined, because a lot of information is being circulated to a lot of people, including many consultants working on the project. It cannot all be deemed confidential.

Another evolving area is the dispute resolution process, which now has many more levels of complexity. Owners often inject the concept of paying for “undisputed” invoices versus holding back payment for “good faith” disputes.

What constitutes good faith and how much money can be held back is open to debate, especially when the design professional or contractor is being asked to continue work. This area requires careful negotiation because the architect or contractor may have only a limited right to suspend or terminate work in the face of such disputes.

A historically tricky subject involves ownership of drawings. Many owners assume they own the drawings and designs on a project simply because they have paid a lot of money throughout the course of the development. It is important to negotiate this issue before the contract is signed to avoid protracted negotiations if the architect’s services are terminated before the project is complete.

The typical owner should have no problem allowing the architect to own the drawings, provided that the two sides negotiate appropriate provisions to allow the owner to use those drawings to complete the project and fairly compensate the architect. This concept also should apply to ownership and use of furniture designs.

Ownership of drawings also crosses over into copyright infringement, which arises because owners sometimes give design professionals the chance to review the work or prototypes of other designers or project participants. Design professionals have to be careful that they are not infringing on anyone else’s rights when they are reviewing or using such information.

Owners and architects should also be discussing the types and amounts of insurance, particularly with regard to who is named as an additional insured and whether the coverage will be primary.

For instance, errors-and-omissions insurance only runs to the party with whom the architect or interior designer has contracted. Thus, if an interior designer retains the architect, the client will not be insured for errors and omissions of the architect under that contract.

Another important point of discussion involves the extent of the design professional’s contract administration. Some owners try to save money during this phase and ask the architect to only make limited, scheduled visits. However, when something goes wrong, the owner is likely to contend that the design professional “should” have been there and known about it – a weak position if there is a limitation on site visits.

There is also the other extreme where the owner expects the design professional to visit every day and virtually act like a construction manager. The key in either case is to make certain that both sides agree on the proper level of review by the design professional.

Finally, the design professional’s use of consultants is an important topic. Owners and developers have many provisions in their contracts that need to be passed down in their agreements with subcontractors and consultants, such as insurance and indemnification requirements. 

Owners and developers that have not adequately addressed this topic to ensure that the proper provisions are being extended to all project participants could end up finding mechanic’s liens on their property and lawsuits arising from a consultant’s work.

In the end, the best advice is to have legal counsel familiar with these contracts review them carefully and aid in the process of negotiation to pinpoint problems. The goal is to have a balanced contract that both sides can work with to achieve a successful project.

C. Jaye Berger is the principal of Law Offices C. Jaye Berger, a Manhattan law firm that represents developers, contractors, construction managers, architects, engineers, and other industry firms.