By Mark E. Jackson, JCJ Insurance Agency
It is extremely important for design firms to have a signed contract before providing professional services. A written contract provides an opportunity to set expectations and allows the parties to align themselves for a successful project. Working without a contract is like building without a blueprint. Contracts are very important for all projects; whether big or small, and whether you are working with a new client, long-term client, or sub-consultant.
There are numerous advantages to having a signed contract. With conditions such as scope of services, payment provisions, indemnity obligations, standard of care, and limitation of liability, a contract provides a guide for how the project will proceed and outlines the responsibilities of each party. In the event of a disagreement or dispute, the contract is the first source to determine what each party agreed to do. If there is no contract, it can become a matter of “he said/she said” if a dispute arises.
Despite the advantages of having a contract, there are times when a design firm provides services without one. For instance, an existing client has a small project and needs a quick response and no one thinks to get a signed contract. Even a small project can have claims. Regardless of the size of the project, you should have a signed contract.
Some firms do not use a contract because they have a long-term relationship with the owner or subconsultant. Their opinion is that they have worked with the party for many years and have never had a dispute and, therefore, they do not need a contract. It is great to have strong, long-term relationships, but that does not guarantee there will not be a dispute on the next project. Contracts are designed to protect both parties, not just the design firm. For long-terms relationships, a fair and well-balanced contract should be easy to negotiate.
Sometimes, a firm may begin work on the design services while still negotiating the contract. It is important to not forget about the unsigned contract. Negotiations need to continue and be finalized before the construction documents phase of the project is completed. You do not want to have the project complete and final payment owed without a signed contract. Also, disputes are more likely to occur after the project is complete. If the contract is the only thing between you and your final payment, you do not want to be forced to agree to unfavorable terms in order to receive payment.
There are some options that should be considered if work is going to begin without a signed contract. One option is to include contractual terms in the proposal. In the event there is no signed contract, the proposal can establish the terms of your agreement. It should address the scope of services (both what is included and what is not included), the payment terms, and the ownership of your work product. It should state that, until a final written contract is executed, the terms of the proposal shall constitute the contract between the parties. At the least, there should be a written statement for the scope of services and the fee schedule. These two items will help to avoid some of the more common ambiguities and misunderstandings that result in disputes with clients.
Another option is to have both parties sign a Letter of Authorization. This type of document acknowledges that the parties are working on an contract, states the initial payments, and identifies the limited scope of services until the contract is finalized. It should also address the ownership of your documents.
In some cases, the owner-drafted contract is so one-sided in favor of the owner that you prefer not to sign it. While this will protect you from some onerous contract terms, you may lose out on the many benefits of having a contract, such as payment provisions, scope of services, and use of your work product by your client.
Since claims can often occur from the work performed by your subconsultants, contracts with your subconsultants should be treated with as much emphasis as contracts with clients.
In summary, we highly recommend that firms have a signed contract before providing any professional services. This applies to contracts with both the project owners and those between the prime consultants and the subconsultants. A contract is like a blueprint for a successful project.
Mark Jackson is a founding partner of JCJ Insurance Agency. Mark specializes in professional liability and other commercial insurance for architects and engineers. Mark provides an array of services, including contract review and continuing education seminars. He serves as President for a/e ProNet, a network of insurance brokers and attorneys who specialize in serving design professionals. Mark graduated from UCF and has earned the Associate in Risk Management (ARM) designation from the Insurance Institute of America.