By Andrew Mendelson, FAIA
Senior Vice President, Chief Risk Management Officer, Berkley Design Professional
Scope creep is the bane of profitability for design firms if not properly managed from the outset of contract negotiations. Once the actual project begins, it’s almost impossible to renegotiate the agreement’s terms and conditions.
The task can become even more difficult due to the fixed-fees commonly associated with most professional services agreements as well as circumstances beyond control that undoubtedly rear their ugly heads during some phase of a project’s life cycle. In addition, these unanticipated or unknown circumstances can make the project manager’s job of planning, organizing and directing resources to remain on time and on budget—while also achieving and adequate profit—extremely difficult.
But, then again, that’s scope creep—the inability to control expanding project demands without a corresponding increase in fees. Unfortunately, a diminished profit margin is only one of the many negative effects that can result from such situations. Others include wide ranging challenges extending from account receivable issues and the loss of professional credibility to long-term exposure problems and even litigation.
Here are three stories that illustrate just some of the challenging situations that can lead to scope creep:
One Project, Two Major Issues
Unforeseen project changes beset the design and construction of a university student recreation and athletic center. The architecture firm began schematic design (SD) based on a functional and space program completed five years earlier by another reputable design firm. However, during the SD phase, the university’s director of recreation and athletics challenged the accuracy of that program and directed revisions to it. The design staff carried out the revisions but failed to inform the firm’s project manager (PM) that they were performing out-of-scope services. By the time the PM became aware of the added services, the design team had used more than half of the budgeted SD labor hours. The PM requested that the university cover the additional services, which it declined to do, citing the architecture firm’s failure to receive the proper authorization prior to their performing the additional services. Eventually, the architecture firm recaptured about 30 cents on the dollar for these additional services, resulting in a financial loss on the project. The lesson learned related to this issue is to insist on a separate fee to create, validate or confirm the owner’s program.
In addition to this problem, the project’s design team faced a second, notable, unforeseen issue.
The university desired that the athletic facility be a notable structure that would promote student life and also act as a campus “gateway.” The long-span structure was composed of a steel mast and cable system that is commonly used for bridges, but had not been previously utilized for a building in this city. The city’s building department took eight months to review the plans, including numerous technical review meetings, and required the university to hire an outside engineer for a peer review (which confirmed the validity and integrity of the original design). While the architect and structural engineer (SE) were timely in their request for additional services, the university pushed back since the contract did not address delays in this phase of the project, stating that the architect and SE “should have anticipated” that the city’s building department would take a longer period of time to review the plans for this novel structure. After negotiations, a portion of the additional services were paid, but the design team took a financial loss on the added labor.
Back to School Lesson Learned
A more positive outcome involved a new elementary school project with a construction manager (CM) who was responsible for cost estimating. The CM bid the project to 15 trades. Thirteen bids came in on budget, while the other two were significantly over budget (precast concrete all panels and electrical). With CM delivery, the architect and owner were entitled to rely on the CM’s estimates, which indicated on-budget for all trades. Therefore, the architect was due additional services for the redesign required to reduce the cost for precast and electrical. Working collaboratively with the owner and CM, the updated construction documents realized $1.8M in savings from the prior bid, bringing the project back on budget. What’s more, the architect was paid fully for its additional services. The lesson learned is that when a third party is responsible for cost estimating, the architect’s contract should acknowledge the ability to rely on that estimate in order to justify any additional redesign services not related to errors and/or omissions by the architect.
Diagnosing Your Client: A Change Management Success Story
A new hospital project shows the importance of knowing your client, fully understanding its funding and contracting accordingly. The owner (hospital) had limited funds for the initial phase of this large new-construction project, but was confident that funding would be increased over time to enable completion of the entire project. The architect agreed to develop design and construction documents for the shell of the entire project and the portion of the interior the owner could initially afford. The architect’s contract defined the fee basis for additional services for the remaining interior fit out as a percentage of the construction cost as the owner was able to increase the funding. This strategy became an efficient way for the architect to request and receive authorization for the added scope without having to create extensive data justifying hourly labor costs. The lesson learned on this project is that creative contracting can streamline the process for an architect to attain valid additional services for owner-generated scope increases.
Professional Services Agreement Best Practices
It’s extremely important to proactively address potential scope creep issues during the negotiation and execution of the design contract. This includes firmly establishing an understanding of the project’s intent and conditions – location, budget, schedule, functional/technical program, sustainable design goals, project delivery method and other relevant initial information. These factors form the basis of the professional services agreement and subsequent changes to these project conditions can justify change in services and additional fees.
In addition, to ensure contractual obligations are met by all parties, client expectations are satisfied and a reasonable profit is returned, it is imperative for contracts to:
• Clearly define the scope of services and deliverables provided for the defined fees, including consultants, within the architect’s responsibility
• Distinguish supplemental and additional services from basic services, and specify the fee basis for known/possible services that the owner can opt to add during the project
• Include project and design schedule definitions to provide an overall context for the provision of services
• Insist on a separate fee to create, validate or confirm the owner’s program
• Specify the right to rely on reports provided by the owner’s consultants, such as geotechnical reports and cost estimates
Roles and Responsibilities
Every party involved in a project has specific roles and responsibilities and those roles should be negotiated and carefully documented before professional services ever begin. Successful outcomes result from team efforts. For owners this traditionally means providing site surveys, geotechnical and environmental reports, identifying a representative authorized to make timely decisions and process pay requests or change orders. In addition, a construction manager or general contractor may be retained to provide cost estimating and other strategic pre-construction services. Bottom line, the roles, responsibilities and expectations of all participants in the project delivery process should be understood so that changes or deficiencies can be identified and addressed as they occur.
What to Do When a Problem Arises
Project leaders of the architectural firm engaged in the project should be fully aware of contract language including the scope of services, specific/unique client requirements and any other relevant issues of each project before it begins. In addition, project managers should be encouraged to share the business issues and criteria contained within the contract with the entire design team. There should never be guesswork pertaining to the project’s scope, schedule, deliverables and budget. Transparency is not a luxury. It is a necessity for efficiently and cost-effectively identifying and managing changes in a timely, orderly and cost-effective manner.
For instance, well-defined change management protocols consisting of the following steps should be integral to every negotiation:
• Identify – further the ability to recognize change conditions as they occur
• Notify – follow the chain of communication to notify the project manager and communicate promptly to the client
• Authorize – receive authorization (it is the client’s right in any contract to authorize additional services before they are performed)
• Document – memorialize the situation, recommendations and any authorization or other client decision in the project file
Every project is defined by its own criteria. No two are alike. The overriding truth is that change and challenges are inevitable. What separates successful, profitable enterprises from financial catastrophes is the ability to readily confront and overcome changes and issues as they occur.
Almost any situation can be remedied if the proper processes are in place. The ability to assess and address change is essential for not only effectively controlling scope creep, but also delivering projects on time, within budget and to everyone’s satisfaction.
This article originally appeared in the June 2019 issue of Commercial Architecture.
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