Fundamental Contracting Strategies to Mitigate Project Risk

While the importance of well-drafted contracts for design professionals cannot be understated, the design professional’s work begins before the terms are negotiated. A good contract begins with a realistic sense of the parties—their needs, expectations, and goals. The possibility that a project will be difficult and fraught with disputes can be mitigated when a design professional has a realistic perception of its client.

Prospective clients will certainly engage in an internet search of a design professional to review prior projects and reputation in the professional community. Likewise, a design professional should not hesitate to evaluate prospective clients: their financial capacity to undertake and complete a given project, whether they have had positive relationships with prior designers and project teams or have a penchant for litigation. Understanding whether a prospective client is sophisticated, or a newcomer who could benefit from a design professional’s guidance, is equally important to determine whether the client and its project are a good fit.

This understanding does not guarantee a dispute-free, or claim-free, project, but sets the stage for a more transparent, open relationship between the parties, allowing them to develop a path for resolving issues and to avoid serial crises that can arise due to misunderstandings. While a good relationship between a design professional and its client is critical, it is a mistake to assume that a client’s needs, expectations and goals will not change from project to project. Taking the time to understand all aspects of a given project, and memorializing those elements in the contract, goes a long way to avoiding costly redesign and delays, for which the design professional may be found liable.

A design professional should understand the nature of the proposed project, realizing that some projects are riskier than others, and must weigh the potential risk associated with a project against the financial and reputational benefit of engaging in the project. Some projects are worth deviating from this tolerance, others are not; an honest inquiry is essential to the determination.
Once a design professional has decided to proceed with a project, it must strategically negotiate the terms of the contract. A thoughtfully drafted contract can be the design professional’s most formidable tool to avoid or mitigate project issues and claims. The other party’s refusal to negotiate and agree upon fair terms should raise a red flag as to the project’s chance of success.

Although the specific contract terms will turn on, among other things, the type of project, nature of the owner, and the delivery method, certain fundamental clauses should be incorporated into a contract including, but not limited to: delineation of roles and responsibilities, non-heightened standard of care, appropriately aligned limitation of liability, equitable indemnification obligation, and reasonable termination conditions. These provisions are further addressed here.
Scope of the design professional’s services.

Always incorporate the design professional’s scope of services into the body of the contract. This minimizes ambiguity as to the design professional’s obligations. It is equally important to identify any services that are excluded from the design professional’s project scope. In many instances, a clearly defined list of exclusions in the contract can bring a claim to a screeching halt.

Roles and responsibilities of project participants.

Because many entities are responsible for successfully completing a project, explicitly delineate which project participant is responsible for each aspect of the project. Clearly defined roles will help a design professional resolve issues with other project participants and enable the parties to mitigate, if not avoid, claims.

Standard of care.

A design professional’s performance is evaluated by comparing how it renders its project services as compared to other design professionals practicing in the same discipline, geographical area, and time frame. The design professional should never warrant its professional performance, nor include terms like “the highest” or “the best,” or ensure that the services will be “fit for a particular purpose.” This is a rational standard that reflects reality because no design is, or is expected to be, perfect. As long as the standard of care in the parties’ contract is typical and non-heightened, a claimant will be required to retain an expert to demonstrate that the design professional has failed to meet that standard of care, as measured against its peers.

Limitation of design professional’s liability.

Design professionals do not typically have sufficient assets to satisfy a judgment that might be entered against it. What they do have are professional liability insurance policies, and their skill, knowledge, expertise, and education, the latter of which are intangible assets.

If a judgment is entered against a design professional in an amount exceeding its available insurance, the design professional’s livelihood could be placed at risk.

To avoid that risk, a design professional should incorporate a limitation of liability in its contract that aligns with its contractual scope of services and its fee. An example of one limitation, as suggested by design professional trade organizations, is a limitation of liability to the available proceeds of insurance that the design professional is required to maintain under its contract.
Another way to limit a design professional’s liability is to include a mutual waiver of consequential damages which might preclude recovery of, among other damages, indirect, special or punitive damages, lost revenue, reputational damages and insurance or finance costs.

Indemnification.

If a design professional is required to provide indemnification, that indemnification obligation should be limited to the design professional’s client and its officers, directors, and employees. The design professional should never agree to indemnify its client, or third parties, for damages caused by the client’s or a third party’s conduct. The indemnification obligation should be further limited “to the extent to which” the design professional is actually determined liable, which is equivalent to its proportional liability for damages.

Finally, the indemnification should be limited to the design professional’s negligent conduct, not “any and all acts or omissions.”

Termination.

A contract should be terminated only for a serious default that goes to the heart of the contract. A design professional should craft the contract so it is subject to termination only for cause: for violating the standard of care, applicable laws, codes, and regulations, and/or for “persistent” or “repeated” “material” breaches of the contract. Likewise, a design professional should be entitled to terminate a contract in the event of a material breach by its client including, but not limited to, the client’s breach of its payment obligations to the design professional.

Although no contract is ever litigation-proof, a well-constructed, equitably negotiated contract can mitigate a design professional’s exposure for risk and resulting damages. ■