There are grumblings in our industry where architects are being held liable for cost overruns on projects. The recent AIA Trust newsletter has an article on this very subject.
I can understand the frustration of Owners in this crazy construction climate, but to hold architects responsible for circumstances out of our control is not fair.
David:
don’t be an idiot. “Fair” has no meaning in contractual law and if an architect can’t draw their contracts with suitable precautions against that very thing, then they should end up going out of business.
Let me restate:
Architects are being held liable for the construction project cost overruns not the architect’s fee.
Anne,
You don’t have to agree or even like what I post here, but please show me some respect and don’t resort to calling me names.
Thank you.
Here is the article that I am referring to: http://www.theaiatrust.com/news.html#87
My reading of the article is a little different. AIA is pointing out that in the early '80s there was a spike in claims against architects arising out of client disatisfaction stemming from rapid inflation in construction costs. AIA is advising only that, today, similar trends are occurring and we ought to remember recent history and protect ourselves. I might also note that since that time it’s my observation that architects seem have gotten better about dealing with this risk. Project cost estimating is a much more likely to go to a qualified consultant than be done in-house, and architects are more likely to have clauses is their contracts about this issue. My recollection is that the AIA owner-architect agreement was revised as a result of this, requiring only that the architect redesign if the cost of the project is over budget. I don’t think AIA is saying that there is currently a trend to holding architect’s liable for inflationary construction costs.
Let’s also clarify “cost overruns.”
There’s Owner-added scope (which the A/E should not be held liable for).
And then there’s errors-and-omissions (E&O).
Omissions - that which the A/E should have included in the documents but didn’t, and were nonetheless required and the Owner would have had to pay for anyway. If the Owner decides to add them (after the discovery that they were not originally included), then the Owner pays - just as if they would have had they been included in the documents from the outset. These are basically “betterments” to the project, or Owner-added scope. The design team does not pay to build the Owner’s building, the Owner does.
And an Error - that which the A/E should have drawn correctly, but for whatever reason did not, and the Owner had to incur additional cost to correct. These types of issues the A/E may be held liable for.
Obviously, experienced attorneys and liability insurance carrirs would be better qualified to address these issues specifically.
David Combs - The key point is betterment, as you point out, but I think your definitions of omissions and errors are not quite on the mark. I agree that an omission is information that should have been included but wasnt. I agree that an error is information in the documents but incorrectly stated. However, either an error or an omission can lead to financial liability for the architect, depending on how much is attributed to betterment, and when the mistake is discovered.
The AIA Handbook has a great example of this with various scenarios involving a door for which the architect has negligently failed to specify a required fire rating. The architects liability ranges from zero to several thousand dollars, depending on the circumstances of the scenario. For example, if discovered during shop drawing review, prior to the purchase of the door, the difference in the cost between a non-rated and a rated door is considered betterment, under the theory that the owner would have had to pay for a rated door anyway, so the architect has zero liability. If a non-rated door is already installed when the mistake is discovered, then the architects is liable for the installed cost of the incorrect door and labor to remove it. The cost of the fire rated door is on the owner: labor and installation are already in the contract, and the difference in cost to upgrade to fire rated is part of the change order.
Consider this omission: an egress door was required but not shown at all on the documents. The wall is built when the omission is discovered. The owner pays for the total cost of the door, and the labor to install (betterment) and the architect pays for demolition of the wall and for relocation of anything within the wall that is in the way of the new door.
David Axt A few years ago, a certain governmental agency wanted to institute a policy that would require architects to pay for all change orders over a certain % of the job cost, regardless of reason for the change, owner change of scope excluded, of course. But included were things like concealed conditions, material escalations, and traditional betterments. Needless to say, the a/e community went up in arms in protest, and the policy was never put in place. One of the issues that was brought up at that time was: if we are paying for cost overruns, shouldnt we get the savings when your projects come in under budget?
Nobody was willing to go there, of course. Johns point about better cost estimating is well taken. If owners require architects to pay for overruns, then it becomes in our best interest to estimate high, rather than accurately. And that strategy would seem to be against everyone elses best interest, not to mention the best interest of the project.
The article is not really talking about the reasons for project change orders. It states that:
“Project owners bring more claims during periods of rising costs. The costs of remedial work as well as costs related to claims for delays and extra compensation by contractors are magnified by higher interest rates and high inflation. Unless construction contracts recognize unanticipated increases in the cost of materials and products, contractors often are squeezed. As material prices escalate, contractors bring claims against owners or their architects to recover costs.”
These are risks specifically associated with a rapid rise in construction costs, not those risks associated with professional standard of care. The article’s suggested defense includes primarily client education, plus a few suggested contractual considerations. No such current claims are documented in the article.
A claim that does scare me a little bit is one for 24 million dollars against the Vinoly / HNTB design team for the Boston Convention Center, completed two years ago. Reportedly the roof leaked, sound system was poor, and there were problems with the mechanical systems (all fixed before it opened). The total project cost was $800 million (hard and soft). I haven’t read the details of the alleged design negligence. I don’t know what the design fees were, but I bet this settlement must be close to half of them. Now that’s an exposure to risk.
George:
Excellent points you mention. I’d also like to add to the fire door example:
Consider the architect’s liability if the non-rated door was never discovered until the investigation after an actual fire where it was discovered that the door failed, and it was proven that the failure led to injury, property damage, or loss of life.
George,
You are correct - there are situations where there will be “shared” cost, with the Owner paying for the base work and the design team paying the premium incurred to install it. (I intentionally left this wrinkle out of my original posting for simplicity’s sake and to keep the posting brief.)
There are also some Owners who will claim EVERY change order has some design team liability, or premium, associated with it. Their reasoning: Since it was not subjected to the competitive bidding environment, the added or corrective work is being bid at the [post contract award] higher price. Easy to claim, tough to prove and quantify: it requires an admission by the Contractor that they were essentially price-gouging.
Owners have very real problems with “cost overruns” in inflationary times. No Owner has an open check book with unlimited funds, and failure to account for reasonably anticipated cost escalation can mortally wound an otherwise sound project. Postings on this forum have referred to inflation in the 1980s, but what I really remember is the 1970s especially when there was rampant inflation during a serious recession.
I do remember have a discussion in the early '80s with a representative of a hotel chain in Latin America who was the Owner’s contact person for a particular project. I asked him how they dealt with very scary inflation both in capital improvements and in operations. They budgeted and rebudgeted almost constantly, making adjustments as required to provide a certain level of service and maintain some degree of cost control. It can be done.
On the other hand, we probably have all dealt with relatively inexperienced Owners (or their representatives) who would fail to make go/no go decisions on a timely basis. During an inflationary period, a delayed decision can have a very real cost. An Owner who was advised 18 months ago to authorize ordering structural steel in order to lock in a price delayed his decision 3 to 4 months. Not only did it put the project behind schedule, but there was a relatively serious cost increase. While some Owners will be able to see how their actions (or lack thereof) impact project schedules and costs, others will always try to shift the blame.
Regardless of what any attorney or E&O carrier will tell an Architect about doing cost estimates (or opinions or whatever) for an Owner, most Owners expect their Architects to be knowledgeable about costs to a certain degree. When they ask an Architect to design to a budget, they expect a positive response to that request. I have recently run into a couple of younger designers whose attitude is to design what they want first, let the VE process happen, and redesign. This is to say that they expect to design the project at least twice. I am almost certain that the owners of their firms did not design a fee asssuming that the project would be designed twice.
And we wonder why Architects get little or no respect.
Owners have very real problems with “cost overruns” in inflationary times. No Owner has an open check book with unlimited funds, and failure to account for reasonably anticipated cost escalation can mortally wound an otherwise sound project. Postings on this forum have referred to inflation in the 1980s, but what I really remember is the 1970s especially when there was rampant inflation during a serious recession.
I do remember have a discussion in the early '80s with a representative of a hotel chain in Latin America who was the Owner’s contact person for a particular project. I asked him how they dealt with very scary inflation both in capital improvements and in operations. They budgeted and rebudgeted almost constantly, making adjustments as required to provide a certain level of service and maintain some degree of cost control. It can be done.
On the other hand, we probably have all dealt with relatively inexperienced Owners (or their representatives) who would fail to make go/no go decisions on a timely basis. During an inflationary period, a delayed decision can have a very real cost. An Owner who was advised 18 months ago to authorize ordering structural steel in order to lock in a price delayed his decision 3 to 4 months. Not only did it put the project behind schedule, but there was a relatively serious cost increase. While some Owners will be able to see how their actions (or lack thereof) impact project schedules and costs, others will always try to shift the blame.
Regardless of what any attorney or E&O carrier will tell an Architect about doing cost estimates (or opinions or whatever) for an Owner, most Owners expect their Architects to be knowledgeable about costs to a certain degree. When they ask an Architect to design to a budget, they expect a positive response to that request. I have recently run into a couple of younger designers whose attitude is to design what they want first, let the VE process happen, and redesign. This is to say that they expect to design the project at least twice. I am almost certain that the owners of their firms did not design a fee asssuming that the project would be designed twice.
And we wonder why Architects get little or no respect.
The City of Seattle (and King County) has long had a clause that if the cost came in more than 10% over budget, the Architect had to redesign to the budget for free. About 15 years ago, I worked on a project that was continually estimated and we built in a contingency of about 8% so that the bids would come in at or slightly below the budget. The project bid at a lean time, and the job came in nearly 20% under budget, which meant that they Owner had the firm do some redesigning to add in scope.
Because of that, the clause now reads that the Architect has to redesign for no cost if the job is EITHER 10% over budget or 10% under budget.
the firm in which I now work operates sort of half and half on this topic. we do take into account the Owner’s budget, but I’ve been told that about “half the time” if the owner likes the design well enough, they will come up with the extra money if needed. We also saw that in the Seattle Library – the Owner came up with an additional 23 million dollars to ensure that the design wasn’t compromised. (on top of an original $157 million budget).
Every architect I’ve worked with declaims responsibility for costs in their contract for services – because they cannot be responsible for the bidding of the contract. Cost estimators are not responsible for cost, because there is no way they can guarantee a “guess”, and they often are not licensed or required to be. And ultimately, “cost” is not a health and/or safety issue except to the health of the architect who is working too late to comply with it.
So, Anne, if a project in for the City of Seattle comes in, let’s say, 15% under budget, do they throw out the bids, redesign, and rebid?
Seems crazy to me–almost a catch 22 situation: bids under by >10%, architect redesign, bids now >10% over, architect redesigns…and so on.
This brings up an interesting question concerning the cost of A-E services. Government contracts (Brooks Bill) usually sets a 6% fee limit of the estimated construction cost for A-E services. With the recent rising construction materials escalation, the Owners are paying more for A-E fees and construction cost. Are the A-E’s providing additional services such as additional Cost Estimating services to justify their fee increase?
Anne can talk more to her experience, but I know I have had experience with clients when the bid has come in so low that yes they want to redesign. This clients are schools, universities, convention centers…projects that usually have some type of bond money that they can only spend on that particular project. If they do not spend it they are critized for taxing citizens too much or they lose the dollars by not having he tax payers buy those bonds.
One way we have helped the situation is develop an extensive list of alternatives both additive and deductive. It also helps clients who derive some of their funding from donors. They then know how much for each of these pieces they need to raise and if the bids come in low they can add items. If the bids come in high they know they need to raise more money or decide they cannot afford it.
It is a very tricky subject. I find the more cards you can just put on the table about the process the better the discussion and the resolve goes. Of course there are some clients who some cannot say ‘no’ to, but I suggest you try to stay away from those clients if at all possible. They are usually ones not so interested in partnering.
for the King County jobs, if the bids come in too low, they don’t necessarily throw out the bids, but they do require a redesign for “free” from the architect. as Julie says, they want to use up all the bond money that was appropriated, so they want the most building for the money they have available.
I like Julie’s approach of using alternates, which we use considerably in our office. However, I don’t specify if they’re deductive or additive-I let the bidders tell us that (but, I already have a good idea what they’ll be).
Having to redesign after receiving a low bid to increase construction cost to meet budget, to me, could lead to unsuccessful bidders contesting the owner’s bid procedures, especially on public projects.
Years ago the State of Colorado A/E fees were determined by a percentage of the construction contract amount. If they were high you were required to redesign down to budget per above discussion. But if they were low, your fee got cut - great incentive clause to keep construction costs low! Don’t have knowledge of their current A/E agreement provisions.