By Mark Jackson, JCJ Insurance
What are the design firm’s responsibilities when the construction bids exceed the owner’s budget? What about when construction costs are over budget due to change orders? The answer is… “it depends”. It depends on what your contract requires in regards to redesign services.
Many municipality, state, and federal contracts include redesign obligations. However, there is an increase in owner-drafted contracts requiring design firms to redesign projects for free, without any limitation on the number of redesigns. Even worse is that most of these obligations are regardless of whether the A/E firm was negligent or at fault.
Since the design firm has no control over material escalation costs or the bids submitted by potential contractors, it is not possible to guarantee that the bids received will not exceed the budget. Also, as a result of normal change orders during construction, the project will most likely exceed its budget. Below are two examples of Owner-drafted redesign clauses that are not tied to negligence and do not provide payment for the redesign. With these types of obligations, A/E firms are forced to redesign for free, or under-design it (value engineering) to meet the owner’s budget.
Consultant will modify at its expense the drawing, specifications, and related bidding and contract documents to the extent necessary to reduce the anticipated construction costs so that the re-solicitation of bids or price proposal will realize bids or price proposals being received that are within the range of accuracy established for the project.
Consultant shall, at the Owner’s direction, redesign each Project and/or work with the Owner to reduce the costs to within the Final Statement of Probable Construction Costs at no additional expense to the Owner.
The problem with these examples is that the redesign obligation is not based on any negligence or fault of the design firm. The firm is required to work for no additional compensation due to construction cost and market conditions that are beyond their control. There also is no limit on the number of redesigns that the design firm must complete. With owner-drafted contracts, you may want to consider adding language that allows for additional compensation if you are not negligent.
… and will do so without additional compensation when due to failure to perform services consistent with the Standard of Care.
The AIA and EJCDC industry standard documents have addressed the redesign issue. The EJCDC allows the Engineer to redesign at cost if the owner waives their rights for any claim due to the redesign. Under the AIA agreements, the Owner has the following options if the construction bids exceed the Owner’s budget:
1. increase the budget
2. authorize rebidding or renegotiating of the Project
3. terminate the Project
4. in consultation with the Architect, revise the Project program, scope, or quality as required to reduce the Cost of the Work
5. implement any other mutually acceptable alternative.
If the owner selects the redesign option (4.), the following AIA B101 language applies.
§ 6.7 If the Owner chooses to proceed under Section 6.6.4, the Architect shall modify the Construction Documents as necessary to comply with the Owner’s budget for the Cost of the Work at the conclusion of the Construction Documents Phase Services, or the budget as adjusted under Section 6.6.1. If the Owner requires the Architect to modify the Construction Documents because the lowest bona fide bid or negotiated proposal exceeds the Owner’s budget for the Cost of the Work due to market conditions the Architect could not reasonably anticipate, the Owner shall compensate the Architect for the modifications as an Additional Service pursuant to Section 11.3; otherwise the Architect’s services for modifying the Construction Documents shall be without additional compensation. In any event, the Architect’s modification of the Construction Documents shall be the limit of the Architect’s responsibility under this Article 6.
With the 2017 revision, the Architect is no longer required to redesign without being compensated when the construction budget is exceeded due to unanticipated market conditions that cause the bids or proposals to be higher than reasonably expected. Furthermore, while the AIA documents allow the redesign obligation, if the Owner selects this option, the only recourse against the design firm is the redesign. This limits the firm’s exposure to future claims by the Owner.
Major sources of claims against design firms are the result of the firm’s perceived inability to design to a budget and complete the design services in a timely matter. These industry standard contracts attempt to limit the firm’s exposure solely to redesign services.
There may be unintended consequences facing project owners when their contracts include broad redesign obligations. In order for design firms to reduce the exposure to uncompensated work, they may under-design or value engineer the project to ensure the construction bids come in under budget. This could result in the owner getting a project that does not meet all of their needs.
For design firms, it is crucial to fully understand your obligations, as well as the nature of your client, when calculating your basic service fees. You do not want your firm to be responsible for performing redesigns if they were not contemplated in your basic fee, or if your contract does not allow for additional compensation. Understanding the contract language and fee structure regarding redesign is important for a profitable and claim-free 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.