by Mark Jackson
Your firm has been selected for a new project. Congratulations! The Owner wants you to start as soon as possible. Your team is excited to start working on the design. But what about the contract? It is not uncommon for design firms to begin schematic design without a contract. Unfortunately, while the contract is being negotiated, we often see firms continue with the design process, and even move into the construction documents phase, without a signed contract.
Working without a contract is like building without a blueprint. A signed contract provides a guide for how the project will proceed and outlines the responsibilities of each party. Contracts are important for all projects – whether big or small, and whether you are working with a new client, long-term client, or sub-consultant. And the risks of working without a signed contract apply whether you are the Prime negotiating with the Owner or a Subconsultant being hired by the Prime.
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. A written contract provides an opportunity to set expectations and allows the parties to align themselves on the following:
Clarity and Agreement on Scope: A contract outlines the scope of work, excluded services, deliverables, timelines, and any other relevant project details. This helps in setting clear expectations between the design firm and the client, reducing the likelihood of misunderstandings.
Payment Terms: Contracts specify the payment terms, including the total project cost, payment schedule, and any additional fees. This ensures that both parties are aware of the financial aspects of the project, reducing the risk of payment disputes.
Intellectual Property Rights: Contracts typically address issues related to intellectual property, outlining who owns the rights to the design work. This is important for both the design firm and the client to avoid future conflicts over ownership and usage of your work product.
Changes and Revisions: The contract should include provisions for handling changes or revisions to the original project scope. This helps manage expectations and provides a framework for addressing modifications to the project.
Project Timeline: Clearly defined timelines and deadlines are crucial for project management. The contract should outline the project schedule, including milestones and delivery dates, ensuring that both parties are on the same page regarding project timelines.
Legal Protection: A signed contract serves as a legally binding agreement between the parties involved. It protects both parties by clearly defining the terms and conditions, responsibilities, and liabilities. In case of disputes, the contract provides a basis for resolution.
Despite the advantages of having a contract, there are times when design firms provide 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 big claims. Regardless of the size of the project, you should have a signed contract. For small projects, your firm may want to consider having a short-form agreement for limited scope projects.
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. They can also help preserve relationships because terms are negotiated before problems occur and tensions are high. For long-term relationships, a fair and well-balanced contract should be easy to negotiate. We recommend using a Master Service Agreement for long-term relationships where there will be repeat work. You only have to negotiate the formal terms and conditions once and can use proposals for each new project.
Sometimes, a firm may begin work on the design services while still negotiating the contract. It is important that you do 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 completed 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 minimum, there should be a written statement for the scope of services and your fee. 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 a contract but memorializes key points for a limited time while the full agreement is being finalized. The Letter should include the following:
- Acknowledges that a formal agreement is being finalized
- Identifies the limited scope of services to be performed during the interim
- States specific payments terms
- Address the ownership of your work product
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 often occur from the work performed by your subconsultants, contracts with 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. An alternative solution is to get a signed proposal that includes terms and conditions or use a Letter of Authorization while the formal contract is being negotiated.
Your contracts are the first line of defense when there is a claim. We are here to help you navigate the intricacies of contracts whenever the need arises.