Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

The Cornerstone:
“Basic” Architectural Services
 Schematic design.

 Design development.

 Construction documents.

 Bidding or negotiation.

 Construction.
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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Characterizing the Client-Design

Professional Relationship
 Commercial transactions are typically conducted
at arm’s length where each party can think mainly
of its own interest.
 Duties of good faith and fair dealing.
 Importance of trust in professionals.
 In limited contexts: fiduciary relationship with
highest loyalty and strict fidelity.
 Most times the relationship is somewhere
between arm’s length and fiduciary.
 Type of relationship may depend on the role
played by the professional and the stage.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation

 Although compensation is driven by

professional considerations, the legal
framework is important when it comes to
interpretation of contract provisions.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation
 Many ways to compute compensation for design
professionals, including:
 Multiple of direct salary expense;
 Multiple of direct personnel expense;
 Professional fee plus expenses;
 Hourly billing rate;
 Stipulated sum;
 Percentage of the cost of the work;
 Multiple of consultant’s billing;
 Square footage;
 Unit cost;
 Royalty.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation: Percentage of
Construction Costs

 Common method.
 Under AIA B101-2007, the percentage stated
covers the 5 basic services (schematic design;
design development; construction documents;
bidding or negotiation; construction).
 Criticisms and flexible approaches in response.
 Possible difficulties in determining what is a basic
service and what is an additional service requiring
additional payment beyond the percentage.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Additional Services
 3 categories of additional services under AIA
B101-2007:
 Additional services agreed at the time the
contract is made, from among a list of 27
common services.
 Open-ended additions by the parties at the
time the contract is made.
 Additional services which the architect or owner
finds are necessary after the contract has been
signed; requires written authorization.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation: Multiple of Direct

Personnel Expenses
 Direct Personnel Expenses include the direct
salaries of personnel engaged on the project
and the respective portion of their benefits.
 Multiple is between 2 and 4 (average 2.5-
2.7).
 Dependent on effective recordkeeping at the
hourly level, which may be required
specifically by the client.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation: Professional Fee

Plus Expenses

 Incentive to reduce construction costs.

 Disincentive to reduce design costs.

 Effective recordkeeping required to keep track

of expenses.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation: Fixed Fee

 Attractive for owners to minimize price
uncertainty and risk.

 Requires a clear definition of scope and

project expectations from the outset.

 Basic versus additional services very

important.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation: Reasonable Value

of Services / Fee to Be Agreed
 Default method in the absence of agreement.
 Factors considered:
 Nature of the work;
 Degree of risk to the design professional;
 Novelty of the work;
 Hours performed;
 Experience and training of the professional
 Overhead costs;
 Reasonable profit.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation: Reimbursables

 Having to advance payment for certain

expenses on behalf of the owner may be
burdensome on the design professional.

 Some design professionals charge a

percentage markup on reimbursables to
account for the administrative burden.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation: Fee Ceilings

 Owners are concerned about risks of cost

overruns, and thus fee ceilings have become
attractive.

 Fee ceilings are generally upheld unless there

have been substantial changes to the project
scope.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Compensation:
Deductions from the Fee

 Under the AIA agreement, the owner may not

withhold the architect’s compensation unless
the Architect agrees or has been found liable
for the amounts in a binding dispute
resolution proceeding. See AIA B101-2007,
11.10.3.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Timing of Compensation
 Default rule: compensation is contingent on
completion of services.
 BUT, what if services are performed over a
long time for a big project?
 Possible approaches:
 Interim fee payments, where a percentage of
the agreed fee is paid after completion of each
basic service phase.
 Monthly billings.
 Late payments, interest charges, and notice of
suspension.
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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Payment When a
Project is Never Built

 A condition that must occur before a party is

obliged to perform:

 Failure of a condition typically excuses a party

from performing.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Other Client Obligations

 Obligation to furnish information within its
knowledge.
 Implied duties to cooperate and not interfere
with the performance of the design
professional.
 Duties of good faith and reasonable
promptness in reviewing work.
 Duties to put forth best efforts for actions
such as obtaining permits or financing.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Contract Completion
 Substantial completion versus final
completion.

 Punch list of relatively minor items to be

completed to take the project from substantial
to final completion.

 60 day window for punch list before additional

compensation for architect kicks in.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Suspension of Performance
 Either side may have reasons to want to
temporarily suspend performance under the
contract.
 Owner fails to make payment and architect
suspends work until paid.
 Owner may suspend work but must
compensate architect for services rendered,
and if resumed, expenses during the pause and
restart.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Termination of the Contract

 Right to terminate the contract after an
uncorrected substantial or material breach by
the other party.
 Material breach includes:
 Negligent performance or excessive delays by
the design professional.
 Unexcused and persistent failure by the owner
to pay compensation or cooperate in the
design.
 Notice requirements and the concept of cure.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Death or Unavailability of Design

Professional
 A client may wish to terminate a contract
when a key design professional is no longer
available.

 Highly personal services: Sole proprietorships

versus larger companies.

 Parties are well advised to consider this issue

while drafting the contract.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Remedies for Breach of the Design

Agreement
 Primarily examining the owner’s expectation
interest, to put them in the position they would
be in had the design professional fully performed.
 Defective design:
 Cost of correcting work;
 Difference in value between project as it should
have been completed, and project as-is.
 Delays:
 Claims by owner for loss of use of project result.
 Betterment Rule

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Claims by the Design Professional

 Most common claim: failure to (adequately)

pay for services performed.

 Expectation interest, lost profits.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

Summary
 The provisions of the design contract are
crucial for allocating risks and obligations, as
well as for determining the content of the
relationship between client and design
professional.
 There are many different common methods to
determine compensation for design
professionals.
 A major issue for minimizing disputes related
to payment is the clear definition of additional
services under the contract.

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Construction Law for Design Professionals, Construction Managers, and Contractors Sweet and Schneier

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