Professional liability insurance for architects and engineers.

Key Clauses of a Consulting Agreement: Design Professional to Design Professional

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By on Oct 3, 2017 in All Topics, Contracts, Newsletters |

By Tom Owens

A good risk management strategy for design professionals requires proper contracting of all firms engaged in the project. When you are the prime design consultant to the owner (client) you assume responsibility for the performance of the consultants contracted to you. Agreements with your consultants can be just as important as the agreement with your client, as claims often evolve from the performance of your consultants. And, similar to the agreements with your client, it is important that you recognize that your consultant relationships are as important as the contracts between your firms. When you get in a tough spot with the client, a positive relationship with your consultants can mean the difference between a team that is working to resolve an issue collectively and the disaster of “every firm for itself.” Prompt and thorough response to a project circumstance based on a relationship of cooperation and collaboration amongst the design team can turn a potentially significant problem into one that is more manageable, mitigating risk to the client relationship as well the cost of resolution of the issue.

The most important clause in a consulting agreement passes through the obligations of your prime agreement to your consultant for the scope of services allocated to that consultant. This clause defines the consultant’s scope and binds the consultant to the provisions of the prime agreement consistent with the terms and conditions to which you are subject. There are several ways to accomplish this and I must clarify that this advice has not been tailored for the particular state in which you work. You should consult with an attorney licensed in your state and experienced in design-construction matters to adjust this clause as appropriate. With that legal disclaimer in place, the following clause should work almost everywhere:

• Designer has an agreement with Client dated ______, entitled ____ (“Prime Agreement”), which is attached and incorporated as part of the agreement between Designer and Consultant (“Contract”). If this Contract includes Consultant’s proposal, it is included for adding detail to Consultant’s scope of services but does not modify the scope required by the Prime Agreement for Consultant’s services. All other terms in the Consultant’s proposal are not a part of this Contract. Consultant agrees to be bound to Designer in the same manner and to the same extent as Designer is to the Client under the terms of the Prime Agreement. If Consultant’s obligations, duties, and responsibilities under the Prime Agreement and the obligations, duties, and responsibilities in this Contract differ so that both cannot govern Consultant’s services, then the requirements of the Prime Agreement govern Consultant’s services.

In addition to making sure that the scope your consultant is covering will satisfy your obligation for the consultant’s specialty under the Prime Agreement, you also eliminate any term in your consultant’s proposal to you to which you shouldn’t agree. Terms such as “limits of liability” or “waivers of consequential damages” can be very detrimental to you and are eliminated. Certainly, if you are able to negotiate those favorable terms with your client in the Agreement, the entire design team will benefit. Your consultants must accept the shared risk of the project.

The suggested language causes the client requirements that you want to, or are required to, pass through to the consultant. Since you are required to provide the services and deliverables defined in the Agreement, if you are inconsistent in the drafting of your consulting agreement, this language acts as a savings clause to keep the clients’ requirements in place for your consultants. You may also wish to incorporate additional expectations that aren’t a part of the prime agreement, including expectations for consultant visits to the site, the frequency and nature of reports you may want from the consultant, and the requirement to follow project process protocols of your firm such as BIM planning and execution standards.

The next issue you need to address is payment. This includes the fee amount, when you pay, when the consultant needs to invoice and how much the consultant can invoice relative to project progress. However, there are other considerations. Most consultants want you to pay them right away no matter what. Who wouldn’t? In almost all states, you can defer that responsibility until the client pays you and in most states you can avoid paying your consultant completely if your client doesn’t pay you. These two situations are called “pay when paid” and “pay if paid”. Here are two clauses that you may use, depending on your state:

1. The timing of Designer’s payment to Consultant under this Contract is conditioned upon Designer’s receipt of payment from Client. Designer will pay Consultant within 30 days after receiving payment from the Client for Consultant services. Designer shall exert reasonable and diligent efforts to collect prompt payment from the Client.

2. Designer’s payment to Consultant under this Contract is conditioned upon Designer’s receipt of payment from Client. If Designer does not receive payment from Client for Consultant’s services, Designer is relieved of any obligation to pay Consultant. Designer will pay Consultant within 30 days after receiving payment from the Client for Consultant services. Designer shall exert reasonable and diligent efforts to collect prompt payment from the Client.

You may ask what happens under the first clause when the client never pays. In those states where the obligation to pay cannot be removed, even if your client doesn’t pay, the courts have usually set a trigger that matures the consultant’s right to collect from you for non-payment. A typical trigger would be when you know that the client will not be paying, such as when they are bankrupt, when a project is abandoned and the client entity is dissolved or when you lose your claim against the client for fee.

Sometimes it is necessary to part ways with a consultant even when you have managed your relationship with them well. More often than not, you are better off terminating the consultant without accusing them of having breached the contract. This is called a termination for your convenience. While consultants may ask for the same clause for themselves, Designers should not grant them that right as 3 | the Designer cannot fulfill its contractual duty without the consultant services. You want a consultant to leave only when you have another means of satisfying your overall contractual duty. As long as you are paying the consultant, the consultant needs to continue performing. An example clause for consultant termination is as follows:

• Designer may terminate this Contract for its convenience upon seven days written notice. If the Agreement terminates for any reason, this Contract will also terminate effective immediately. Consultant will not receive any compensation for termination but will only be compensated as provided in the compensation section and only for authorized services actually performed prior to the termination date.

Insurance and indemnity clauses are the last two clauses I will discuss in this article. It is important that your consultants have professional liability insurance with policy limits sufficient to protect you; PLI limits should be appropriate for the size and complexity of the project and the scope and complexity of the consultant services. If your consultant makes a mistake, you are responsible to your client for that mistake. While your professional liability insurance will pay for that mistake, assuming you have enough insurance, you will pay in the long run in higher insurance premiums. To assure responsible behavior, it is important that the maker of the mistake pay for the short term and long-term consequences. It is reasonable to expect every design professional to be appropriately insured. Too many designers have suffered from under insured consultants.

Indemnity is a complex subject that I cannot cover in this article. The most important part of an indemnity is to make sure that the indemnity you gave to the client is backed up by an indemnity from your consultant to you. You will have that if you use the first clause discussed in this article. Almost all lawyers will recommend you have more than that.

Author Info:
Tom Owens | Mendel Owens Consulting
1001 Fourth Avenue, Suite 4322, Seattle, WA 98154 USA
Direct: +1.206.395.6904 | Email: tomowens@mendelowens.com