04/10/2019 by James W. Walker & J. Brandon Sieg
No design professional is perfect all the time. At some point, they make mistakes—specify the wrong materials, leave out a required element, overlook a code requirement, bust a calculation, among other things. Sometimes they catch and correct their mistakes before any harm occurs. Sometimes, though, mistakes in construction documents cause our clients to spend “extra” money or the con-tractor to lose time, or both. What is the design professional’s financial responsibility to the client?
The standard of care for design professionals is to perform services with the same degree of care and skill as “those ordinarily skilled in the business.” See, e.g., AIA B101-2017, § 2.2 (“The Architect shall perform its services consistent with the professional skill and care ordinarily provided by architects practicing in the same or similar locality under the same or similar circumstances.”). Unless the contract says otherwise (and it shouldn’t!), the architect does not ordinarily promise a perfect plan. The cases emphasize that the owner does not ordinarily bargain for infallibility in the performance of design services.
Defense Considerations for Damages in Architect/Engineer Malpractice Cases
So this raises some interesting questions: How many mistakes can a design professional make before being financially responsible to the owner? Does it matter if the architect or engineer (A/E) makes lots of tiny mistakes or one giant one? Does it matter if the mistake is an error or an omission? Is there a dollar threshold, either by individual mistake or in the aggregate? Here are some things to keep in mind when your A/E client’s client comes asking for money.
The “Betterment” Principle
Suppose the construction documents (CDs) show a light fixture but omit wiring and a switch. The contractor’s price does not include the cost of the wiring, the switch, or the labor to install them. Naturally, the owner has always wanted a switch, so the contractor issues a change order to install one and wire it to the light. Should the design professional pay 100 percent of the change order? No. The owner received something of value in the change order—a switch and wiring—that was not included in the general contractor’s bid. Had the plans included these items, the bid would have been correspondingly higher and the owner would have paid the higher price. Should the design professional pay any of the change order? That’s more complicated…
The “Out-of-Sequence” Principle
Suppose in our example that the omission of a switch is not discovered until after the electrician has demobilized following rough-in and after drywall has been installed. Now the work required to install and wire the switch includes remobilizing the electrician and tearing out and replacing some drywall. The cost of the switch and wiring has not changed, so the owner still pays for that, but labor and material costs are higher now because the work is done out of sequence. The owner gets no value from that portion of the change that is the added costs of out-of-sequence work, so that portion of the change order is the design professional’s responsibility, unless…
The “You Didn’t Bargain for Perfection” Principle
Suppose in our example that the switch and wire change order cost is $5,000, and of that, $2,500 represents the out-of-sequence cost. Suppose also that the guaranteed maximum price (GMP) for the job is $5 million. Whether we look at the total cost of the change or just the out-of-sequence added cost, the cost of the omission is a miniscule fraction of the total job cost and should be within the expected range of added costs, given the less than perfect standard, unless…
The “Death by a Thousand Cuts” Scenario
Suppose in our example that the switch and wiring change order is one of 315 distinct change orders on the job with an aggregate total cost of $300,000 and aggregate “out-of-sequence” costs of $200,000. Now the added costs are a more sizeable percentage of the total job cost—4 percent to 6 percent, depending on what counts. Suppose the industry’s track record shows that on average, jobs of this type and delivery method typically experience change orders in the range of 2 percent to 3 percent of the cost of construction. Does that provide an allowance of sorts? Does the design professional pay for all errors and omis-sions from dollar one, or just for the compensable costs in excess of the tolerance threshold? The case law is not clear on this point.
How About Changes Originating from the Owner or the Authority Having Jurisdiction?
Suppose in our example that 212 of the 315 change orders are either owner initiated or required by the authority having jurisdiction (AHJ). Does that mean that the design professional can disregard those costs when determining whether the level of imperfection in his or her services is tolerable? With respect to owner-initiated changes, the answer should be “yes.” With respect to AHJ-related changes, the picture is murkier. There is certainly an expectation that the design professional is well versed in code requirements and preferences in the jurisdictions in which he or she practices, but we all know that sometimes there is just no predicting who will be reviewing the plans or what will be required. What if the design professional took some chances on what would get through plan review, hoping to save the owner money if successful? Again, muddy.
What About Fast-Track or Design-Build Projects?
Suppose in our example that the project was fast tracked or was a design-build project. Does that affect the tolerable error rate? The answer is definitivel…maybe! The notion of a financial error rate reflecting the expected level of imperfection in design services is not well developed in the courts. However, there is no reason why the chosen style of project delivery may not also have a higher or lower error rate associated with it. Be sure to consider your jurisdiction’s version of the economic-loss rule if your architect client is sued by a project owner in the design-build context. Similar to so many things in this area, it depends on the industry’s experience, and data of this sort is scarce. It is certainly worth considering the complexity and speed of the project when assessing the tolerance for imperfection.
Pre-litigation Considerations for Your A/E Client
Considering the legal defense issues described above, you may want to discuss the following concepts with your A/E clients to better prepare them for future claims:
- Consider negotiating terms in the owner–architect agreement to address change order premiums. By establishing a presumption about the maximum reasonable “retail” markup, the design professional can begin to limit his or her exposure in unexpected circumstances. As a practical example, the Commonwealth of Virginia handles this issue in state-let design services contracts by establishing that the cost of work associated with a change order is presumed to be 15 percent greater than the cost that would have been included in the original bid. Commonwealth of Virginia, CO-3a, Terms and Conditions of the A/E Contract (2013). The A/E is free to prove a lower premium. In other settings, nothing precludes the owner and design professional from crafting their own unique “rules” on this issue. Because sorting out the actual retail markup can be complex and expensive, having a “default cap” can be quite useful.
- Encourage the owner to establish, during the bid stage, maximum percentage markups to be applied in change orders to accommodate the contractor’s overhead costs and profit. Remember to apply these percentage mark-ups to deductive change orders, for which the overhead is no longer required.
- Encourage the owner to obtain sufficient pricing information from the contractor during the bid stage to evaluate future change orders. Information such as unit pricing in the contractor’s bid will be valuable to evaluate the reasonableness of change order costs. This works best in GMP programs without competitive bidding at the owner–contractor level.
- Discuss change order documentation requirements with the contractor early to clarify expectations.
- Insist on documentation from the contractor and subcontractors detailing anticipated net unit costs
(reflecting cost reductions available to the contractor or subcontractors and supported by quotes from suppliers and manufacturers) and labor costs (actual cost per hour) associated with proposed change orders. Discourage (and reject when appropriate) unsupported “contingency” values in the change order pricing.
- Require the contractor to state whether change order work reflects higher unit costs. You might be surprised how many times the contractor says “no” (to look good to the owner), even if the real answer is “yes.”
- When practical and warranted by the dollars involved, independently estimate the anticipated cost of a proposed change to compare against the contractor’s proposal.
- Distinguish time premiums from unit-cost premiums. If the change order arises from a shortage of materials, has the contractor still provided a premium for subcontractors who are currently on-site? Are full rental costs included for on-site equipment that is not currently needed for other tasks? Even if there is a need to remobilize subcontractors, how is the cost supported?
- After reviewing the change order documentation, clearly document to the owner, in writing, all concerns or objections with the proposed costs or need for the change order.
Every relationship and every project is unique, so no one approach fits all circumstances. These general principles are intended as an introduction to damages considerations when defending A/E malpractice claims and counseling clients during contract negotiations.
About the Authors:
James W. Walker and J. Brandon Sieg of Vandeventer Black LLP, Richmond, Virginia, are admitted to practice in Virginia and Washington, D.C., and practice extensively in the mid-Atlantic region. The authors devote a significant portion of their practice to defense of design professionals, accountants, lawyers, and other licensed professionals in malpractice and disciplinary claims and to helping licensed professionals manage risk through contract negotiation, education, and early problem solving. Mr. Walker is a member of the DRI Professional Liability Committee. This article represents the authors’ viewpoints, is intended for general information purposes only, and does not constitute legal advice.