Editor’s note: The article below is the third of five installments of an article from the March 2017 issue of The Practical Real Estate Lawyer discussing issues and concerns in design and construction contracts, from an owner’s perspective. Due to the length of the original article, it has been broken into five parts. The fourth and fifth installments will appear in upcoming issues of the NRTA Quarterly Newsletter.
Coordination of Work. Whether or not project engineers and consultants are brought under the architect’s umbrella, as discussed above, most owners will want to make sure to address for coordination of the parties that have input on the design process. In some situations, the architect may be taking over from a prior architect, or there may be preliminary design documents that will be used on the project. In all these situations, the architect is in the best position to coordinate the various engineers, consultants and applicable documents, but form architectural agreements often do not clearly place responsibility for coordination on the architect. This issue is addressed in the first insert below. Additionally, the architect typically has substantially more experience with the design and construction process than its client. The second insert below requires the architect to share that knowledge and experience by keeping the owner apprised of tests, studies and other items that will be necessary in preparing the construction documents. For example, this could apply to items such as the need for soil compaction tests or the need to obtain a variance or other type of special use permit to construct the project.
Sample Insert: Architect shall be responsible for the coordination of all drawings and design documents relating to Architect’s design and used on the Project, regardless of whether such drawings and documents are prepared by Architect, by Architect’s consultants, engineers or by others. If preliminary or design development work has been performed by others, Architect is nevertheless fully responsible for and accepts full responsibility for such earlier work when Architect performs subsequent phases of the Basic Services called for under this Agreement, as if the preliminary, schematic and design development work had been performed by Architect itself. Architect shall be responsible for coordination and internal checking of all drawings and specifications and for the accuracy of all dimensional and layout information contained in such documents, as if each drawing and specification were prepared by Architect. Architect shall be responsible for the completeness and accuracy of all drawings and specifications submitted by or through Architect and for their compliance with applicable codes, ordinances, regulations, laws and statutes.
Sample Insert: Architect shall advise Owner of any known need or advisability of Owner’s securing any tests, analysis, studies, reports, or consultant’s services in connection with the development of the design and construction documents for the Project. Architect shall also advise Owner concerning what governmental approvals and permits will be required for the Project and shall be responsible for notifying Owner of the requirements of filing all documents required for such governmental approvals and permits, and shall assist Owner in connection with such filings.
Lender Considerations. Though some owners are cash customers, there is often financing involved in the construction of a project. Although the AIA and Consensus documents address some of the lender-related issues, the two inserts below provide an owner with more comprehensive coverage on the issue and will be appreciated by the owner’s lender.
Sample Insert: Upon Owner’s request, Architect shall consent to the collateral assignment of this Agreement to Owner’s lender, if any, and agrees to cooperate with any such lender in connection with completion of the Project after any event of default under Owner’s loan agreement with the lender; provided, however, if the lender requires Architect to perform any work on the Project for which Architect has not already been paid, Architect’s obligation to perform such work shall be conditioned upon the lender agreeing to pay for such requested services. Architect acknowledges and agrees that the lender shall have no obligation to pay Architect for any work previously performed for which Owner has failed to pay Architect. Architect further agrees to provide Owner’s lender with such commercially reasonable certifications as lender may periodically request from Architect, including a certification that the then-completed construction work on the Project is in accordance with the Contract Documents prepared by or under Architect and in compliance with applicable law.
Sample Insert: Architect understands that Owner may finance the development or construction of the Project with lenders or other third parties. To the fullest extent permitted by law, Architect agrees to waive or subordinate its lien rights, if any, to the rights of any such lenders or third parties providing financing for the Project. Architect also agrees as a part of its Basic Services to follow any customary administration or reporting procedures reasonably required by such lenders or third parties and to cooperate with Owner in satisfying the reasonable requests and requirement of such lenders and third parties.
Changes to the Project. A key concern for most owners in the design and construction process is to maintain flexibility to change the project. Most form architectural agreements have a fairly narrow definition of the project, so it is important that owners build in flexibility to significantly change the project, which is addressed in the sample insert below. The issue of termination for convenience is dealt with elsewhere in this article.
Sample Insert: Architect shall not unreasonably withhold its consent to any Change in Services requested by Owner. Owner shall not be responsible to pay, and Architect shall not be entitled to receive, compensation for any Change in Services or Additional Services if such services were required due to the fault of Architect (including Architect’s engineers and consultants) or Architect’s failure to perform in accordance with Architect’s obligations under this Agreement. Furthermore, items shall be deemed Additional Services only if Architect can demonstrate to Owner that a direct increase in Architect’s costs has been incurred as a result of such change. In the event of a material change in the scope of the Project or Architect’s services, Architect shall continue to perform in accordance with the terms of this Agreement during the course of any renegotiation of Architect’s compensation under this Agreement.
Architect’s Billing Rates. Most agreements for architectural services provide for the architect to be paid for at least some services it performs on a time-and-materials basis. Even if the architect has agreed to a lump-sum amount for basic services, additional services are typically compensated for on an hourly basis. It is prudent for owners to have the architect commit to a schedule of rates at the time the agreement for architectural services is executed and, if possible, have the architect commit to those rates for some period or limit the annual rate increases (e.g., tie to CPI). The provision below deals with establishing a rate schedule for architectural services and freezing those rates for a specified period. Where appropriate, the schedule of rates can be expanded to include the hourly rates for the architect’s engineers and consultants.
Sample Insert: Architect’s compensation for Changes in Service shall be computed on the basis of Architect’s usual and customary hourly rates for time productively devoted to the Project by Architect’s principals and technical personnel as set forth and defined in the schedule of rates attached hereto as Exhibit __. The rates set forth in Exhibit __ shall not be increased for a period of ___ months following the date of this Agreement.
Mark-Up on Reimbursable. As mentioned above, many form architectural agreements allow the architect to add a mark-up percentage to reimbursable expenses. Many owners will negotiate to both limit what can be included as a reimbursable expense and try to eliminate any mark-up by the architect of reimbursable charges.
Sample Insert: Reproduction and plotting charges shall be deemed to constitute Reimbursable Expenses only to the extent that Owner requests additional sets of documents to be prepared and any reproduction or plotting done for internal purposes by Architect and its consultants or for Instruments of Service required to be provided to Owner by Architect pursuant to this Agreement shall not be charged as Reimbursable Expenses. The multipliers in this Agreement for Change in Service and Reimbursable Expenses shall be one (1).
Financial Accountability. Architects often bill for at least some services on an hourly basis. Similarly, reimbursable expenses are typically charged to the owner using an item-by-item approach. As with any agreement where one is charged on a time-and-materials basis, it is good to recall Ronald Reagan’s famous line from his Reykjavík summit with Mikhail Gorbachev–“Trust, but verify.”
Sample Insert: Architect shall maintain records of Architect’s expenses and hours pertaining to this Project in accordance with generally accepted accounting principles, consistently applied. To the extent that any portion of Architect’s fees under this Agreement are to be paid based on Architect’s hourly rates, Architect shall make records available to Owner or Owner’s authorized representative for inspection and copying during regular business hours for three (3) years after the date of the final Certificate of Payment for the Project.
Defective Design. The sample insert below will likely cause some pushback from many architects, as it requires the architect to cover all damages arising from its design defects, including consequential damages. Architects, engineers, design-builders and contractors typically fear and push hard for a waiver of consequential damages, but in situations where the owner has bargaining power, considering using the sample insert below.
Sample Insert: Any defective designs or specifications furnished by Architect will be promptly corrected by Architect at no additional cost to Owner, and Architect will promptly reimburse Owner for all damages, if any, resulting from the use of such defective designs or specifications. Owner’s approval, acceptance, use of or payment for all or any part of Architect’s services under this Agreement or acceptance of the Project itself shall in no way alter Architect’s obligations nor Owner’s rights under this Agreement.
Andy Jacobson is a partner in the Real Estate Group at Maslon LLP in Minneapolis, Minnesota. His practice covers a broad range of commercial real estate issues, with particular focus on commercial and retail leasing, land use and telecommunications, as well as design- and construction-related agreements. Andy is a frequent author and speaker on real estate subjects and teaches Real Estate Transactions at the University of St. Thomas School of Law. A graduate of Boalt Hall School of Law at the University of California, Berkeley, Andy is also a registered architect, having earned his Bachelors of Architecture from California Polytechnic State University, and practiced architecture prior to attending law school. Andy is a member of both the Minnesota and California bars and can be reached at firstname.lastname@example.org.