Engineering Better Contracts

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The email arrived with congratulations: the owner selected your firm as engineer of record for their new project. Attached were the terms and conditions—standard boilerplate, they assured you. Just sign here.

Three years later, that signature would be the decision that would haunt you.

The problem isn’t that owners are inherently duplicitous. It’s that when someone takes the time to draft custom contract terms, those terms almost certainly transfer risk away from the owner and onto you. And if you don’t understand what you’re agreeing to, you’re gambling with your firm’s profitability, or worse!

Before diving into specific contract dangers, we need to establish what fair risk allocation looks like. I’ve developed four guiding principles that have protected countless firms from preventable disasters:

The approach I advocate starts with a simple premise: review every contract for clauses that threaten your insurance coverage and profitability. The key to this analysis is understanding the professional standard of care and the legal protections surrounding it—because your professional liability policy covers legal liability but specifically excludes contractual obligations that wouldn’t exist without the contract you signed.

The professional standard of care is your most important protection. It’s generally defined as the degree of skill demonstrated by similarly situated professionals practicing in the same community at the time services were provided.

The critical protection here: perfection is not required.

Under the professional standard of care, you’re not providing warranties or guarantees. Change orders are expected. One of the most powerful tools for protecting against claims is ensuring the owner establishes an adequate contingency budget from the start.
Yet owners routinely attempt to elevate this standard through contract language that seems innocuous until disaster strikes.

The most obvious danger comes when contracts require you to perform to the “highest” standard of care. This language fundamentally changes your obligation from meeting industry norms to achieving perfection—a standard that voids your insurance coverage and invites claims over any imperfection, no matter how minor.

A less obvious but equally dangerous provision is a requirements to “comply with all codes and laws”—as if codes never conflict.

Nearly every engineer has experienced situations where a building official’s interpretation differs from an occupancy inspector’s view. Codes are abstractions subject to interpretation, and reasonable professionals can disagree about their application.

The real danger: “comply with all laws” creates a warranty. You’re no longer promising to exercise reasonable professional judgment about code compliance—you’re guaranteeing a specific outcome. This establishes strict liability rather than the basic negligence standard, which means your insurance coverage vanishes precisely when you need it most.

The better approach: agree to comply with the professional standard of care relative to codes and laws. This maintains a negligence standard consistent with your insurance coverage.

“Time is of the essence” is a legal term of art with devastating implications. If you’re one day late with any deliverable, you’re in breach of contract—regardless of circumstances.
This language suggests that timely performance is the paramount consideration, which directly conflicts with the ethical obligation of design professionals to place public health, safety, and welfare above all else.

Professional association guidelines strike the appropriate balance: “services shall be performed as expeditiously as is consistent with sound professional practices and the orderly progress of the work.” This language recognizes both the importance of timely service and adherence to professional standards.

The professional standard of care also defines who can sue you and for what damages. Under the law, engineers are only liable for damages “to the extent caused by” their negligence—defined as failure to meet the professional standard of care.

The vast majority of claims against engineers involve purely economic losses: cost overruns, delays, and lost profits. Most states follow the “economic loss rule,” which provides that parties can only sue you for pure economic loss if you have a contract with them.

This rule is your shield against the contractor, subcontractors, suppliers, and any other party on the project who might like to blame you for their financial problems.

The indemnity clause is where responsibility for damages gets assigned, making it the most critical provision to scrutinize. To “indemnify” means to reimburse—to repay someone else’s losses.

You need three essential protections:

First, limit your indemnification duty to your direct client and their officers, directors, and employees. In states following the economic loss rule, you owe no financial duty to your client’s agents, affiliated companies, contractors, or other third parties. Don’t let contract language override this legal protection.

Second, limit indemnification to damages “to the extent caused by” your negligence. Most owners will request indemnity for damages “arising out of” your services. This distinction is critical: courts have interpreted “arising out of” to mean you’re responsible for all project damages—whether you caused them or not.

Third, eliminate any duty to defend the client. Under the law, you’re not obligated to pay anything until you’ve been adjudicated liable. Assuming a defense obligation means paying the owner’s attorney fees as incurred—depriving you of due process and triggering obligations your professional liability insurance specifically excludes.

If the owner absolutely insists on a defense obligation, we recommend bifurcated indemnity language: the duty to defend exists only for claims covered by your Commercial General Liability insurance pursuant to Additional Insured status—not for professional liability claims.

Many owners attempt to eliminate your due process rights through “set-off” provisions allowing them to withhold amounts they determine are necessary to protect against possible claims.
Read that again: “they determine” and “possible claims.”

Under set-off language, the owner becomes judge and jury, deciding unilaterally that you might be liable for something and therefore they’re keeping your money. You haven’t been found negligent. You haven’t had an opportunity to present your case. They simply decide to withhold payment.

Your contract should only allow set-off for amounts you’ve been adjudicated to be liable for—meaning a court or arbitrator has made a finding after you’ve had the opportunity to defend yourself.

Similarly, an owner may request indemnification against any mechanic’s lien claim you might file. Most states prohibit requiring waiver of lien rights as a condition of contract. So instead of asking you to waive your lien rights directly, clever attorneys ask you to indemnify against your own lien.

The practical effect is identical: you give up your most powerful collection tool without the owner violating the letter of the law prohibiting such waivers.

This provision should be eliminated entirely or limited to situations where fees have been paid as agreed—making it a pure bad-faith protection rather than a blanket elimination of your rights.

Another risk transfer device is “prevailing party attorney fees” language. Under U.S. law, everyone typically pays their own attorney, win or lose (with certain limited exceptions). Therefore, any obligation to pay prevailing party attorney fees is contractual liability not covered by your insurance.

Consider this scenario: The owner sues for $1 million. After lengthy litigation, they receive an award of $10,000. Are they now the “prevailing party” entitled to payment of their $300,000 in attorney fees?

This clause should be eliminated entirely. If that’s not possible, revise it to limit application by carefully defining what it means to be the “prevailing party.”

If your request for equitable contract terms falls on deaf ears, try appealing to the owner’s self-interest: your professional liability insurance is the liquid asset standing ready to back your contractual promises.

When contract language voids that coverage, everyone loses. The owner believes they’ve transferred risk to you through contract terms, but they’ve actually eliminated the insurance coverage that would fund any recovery. You’re left personally exposed, and they’re left with a judgment against a firm that may not have assets to pay it.

It’s in nobody’s interest to void your professional liability coverage through poorly drafted contract terms.

By targeting high-impact terms—the standard of care, indemnity clauses, set-off provisions, and attorney fee obligations—you can negotiate contracts that protect both your interests and your insurance coverage.

This isn’t about being difficult or unreasonable. It’s about ensuring that when you sign that congratulatory email attachment, you’re not inadvertently signing away your firm’s profits.

The technical work you do deserves protection. Equitable contract terms provide that protection—but only if you recognize the dangers before you sign. ■

The information contained herein is not intended to constitute legal or other professional advice and should not be relied upon in lieu of consultation with your own legal advisors.

About the Author

Mark Blankenship is Director of Risk Management for WTW A&E. WTW A&E is the Center of Excellence for WTW that is exclusively dedicated to providing insurance and risk management solutions to architects and engineers in North America. More information on WTW A&E can be found at www.wtwae.com/.