CHOP 3.8 - RISK MANAGEMENT AND PROFESSIONAL LIABILITY

Question 1

Indemnification

Answer 1

Where one party agrees to pay certain damages or losses incurred by another party.

Question 2

Liable

Answer 2

Legally bound; subject to penalty; under obligation to do; exposed or open to suffer something undesirable.

Question 3

Risk

Answer 3

An uncertain event or condition that, if it occurs, has a positive or negative effect on a project’s objectives.

Question 4

Sources of Project Risk: Pre-Agreement Phase

Answer 4

1) Client Selection.

2) Project Selection and the GO/NO GO Decision.

3) Assembling the Consulting team.

Question 5

The Request For Proposal (RFP) / Proposal Stage And Risk

Answer 5

1) Non-Disclosure Agreements

2) Contracted Owner Representatives and Project Management Service Providers (PMSP).

Question 6

Non Disclosure Agreement (NDA)

Answer 6

Non-disclosure agreements, are legally enforceable contracts that create a confidential relationship between a person who has sensitive information and a person who will gain access to that information.

Question 7

Contracted Owner Representatives and Project Management Service Providers (PMSP)

Answer 7

Facility owners may retain the services of a contracted third party to act as their authorized representative.

NOTE: As part of the client selection (GO/NO GO) process, the identity and role of a third-party project manager should be investigated and considered. Any agreement with the client should be negotiated with this in mind.

Question 8

Sources of Project Risk: Client-Architect Agreements

Answer 8

It is not only professional but also good business practice to have a clear, written agreement that outlines the roles and responsibilities of both client and architect. There should be a policy that requires a written agreement in place for all projects, regardless of size of the project, size of the fee, or length of relationship with the client. The use of the Canadian Standard Form of Contract for Architectural Services is always recommended.

Question 9

What is a good way to minimize risk (Client-Architect Agreement)

Answer 9

One of the best ways of minimizing risk is to spend time with the client at the outset and carefully discuss the client-architect agreement, clause by clause, describing:

1) what services will be provided;

2) what the services entail;

3) what will not be included in the agreement;

4) allocation of risk;

5) standard of care;

6) payment of fees;

7) termination;

8) dispute resolution.

Question 10

Examples of Client-Initiated variations to standard forms of agreement.

Answer 10

Client-initiated variations to the standard forms of agreement often include the following phrases or conditions:

• architect to warrant contractor’s work;
• architect to assign copyright to client;
• client will not pay for reproduction of drawings;
• architect will supply a stipulated number of construction drawings and specifications;
• architect will guarantee building permit will be issued;
• architect will guarantee construction cost estimate;
• architect will guarantee LEED or other certification;
• architect will visit site only when called by client;
• architect will engage surveyor, geotechnical engineer, and hazardous materials consultant;
• architect will perform to a higher standard of care;
• architect will be responsible for site safety and contractor means, methods and sequencing;
• “time is of the essence” and guarantees of timely delivery of services as well as construction;
• withholding or set-off of the architect’s fees.

Question 11

Contractual Clauses of Concern

Answer 11

1) Indemnification.

2) Lender Requirements and Certifications.

3) Copyright and Ownership of Documents.

4) design-Build and Public-Private Partnerships.

5) Limitation of Liability.

6) Standard of Care.

7) Time is of the Essence.

8) Sustainable Design and Certifications.

9) Professional Fees.

Question 12

Indemnification

Answer 12

Although all client-prepared contract terms and conditions should be carefully reviewed, the indemnity clause has the potential of posing the broadest implications from a risk perspective.

Simply put, “indemnify” means to reimburse a client following a loss.

If an architect agrees to indemnify for anything beyond damages caused by their own negligence, the architect will be contractually liable for damages that they would not have been liable for under common law.

Question 13

Lender Requirements and Certifications

Answer 13

Client-prepared agreements may require the architect to co-operate with the lenders and also sign documents that the lender is then entitled to rely upon. This should be avoided.

The documents may include certifications and warranties that are excluded from coverage under the professional liability insurance policy.

Question 14

Copyright and Ownership of Documents

Answer 14

In many instances the client may seek to transfer the architect’s copyright to the client. This should be avoided.

An agreement should specifically state that copyright and ownership of documents will be retained by the architect.

Question 15

Design-Build and Public-Private Partnerships

Answer 15

Having a balanced contract as part of these alternative delivery methods is very important.

In many of these arrangements, other parties may look to transfer inappropriate and uninsurable risks to the architect. Examples include warranties, certifications, and responsibility for liquidated damages.

Question 16

Limitation of Liability

Answer 16

A limitation of liability clause in a contract limits the amount of money or damages that one party can recover from another party for breaches or performance failures.

In other words, the clause can put a cap on the number of damages the organization will have to pay under certain circumstances.

Question 17

Standard of Care

Answer 17

Sometimes a client will insert a standard of care clause in their agreements that elevates the standard beyond what is otherwise required in law. Examples of unacceptable terms include “highest,” “first class” and “best.”

Question 18

Time Is of the Essence

Answer 18

This phrase appears in many client-authored documents and should be deleted. This clause may constitute an elevation in the standard of care, and therefore is problematic.

Question 19

Sustainable Design and Certifications

Answer 19

Many clients, in the interest of being or appearing to be environmentally conscientious, may request that their buildings meet or be certified by a sustainable building rating system, such as LEED. The architect should never guarantee or warrant that a building will be certified.

Question 20

Professional Fees

Answer 20

If a client seeks to pay a fee that is inadequate in an architect’s professional opinion, the architect should consider declining the project. If fees are not sufficient, it may be a red flag of future budget and payment problems.

Question 21

Sources of Project Risk: Design and Documentation

Answer 21

1) Integrated Project Information Systems and Building Information Modeling (BIM)

2) Composition of the Design Team

3) Method of Project Delivery

4) Project Management of the Design Project

5) Quality Assurance (QA) and Quality Control (QC)

6) Checklists

Question 22

Integrated Project Information Systems and Building Information Modeling (BIM)

Answer 22

The objective of optimal effectiveness and efficiency in design and construction is closer to realization with the advent of building information modeling (BIM) methods supported by sophisticated software and design-process innovation.

Question 23

Composition of the Design Team

Answer 23

The “chemistry” among the various people on the project may require re-assessment. (Consider changing the personnel if working relationships are not harmonious.) The relationships to be considered include the internal relationships within the firm, the relationships with the client, and the relationships with the contractor and trades on site.

Question 24

Method of Project Delivery

Answer 24

There are several methods of project delivery, and each has unique risks for the architect.

Question 25

Project Management of the Design Project

Answer 25

Firms should use a project management methodology to plan and track scope, schedule and costs. This information will support management of project resources, keep the team on track to meet their schedule obligations, provide ongoing cost information, and generate historical data to assist in future project planning.

Question 26

Quality Assurance (QA) and Quality Control (QC)

Answer 26

Quality assurance (QA) is the process of ensuring that quality management systems, processes and tools are in place and being used as intended.

Quality control (QC) is the process of ensuring that the output of each operation, be it design, production, or contract administration, satisfies the requirements for which the deliverable is intended.

Question 27

Checklists

Answer 27

One of the most important elements in the management of risk is a thorough and comprehensive checking process.

Question 28

Sources of Project Risk: Contract Administration

Answer 28

This phase is prone to many risks that expose the architect to potential claims. The person(s) assigned to the contract administrator (CA) role must possess the necessary experience relative to the characteristics of the project. Oftentimes, the firm might assign a junior person to this task who lacks the requisite skill set. Sometimes this is done because by the time construction is underway, insufficient fees remain to assign an experienced person.

Question 29

he architect can reduce risks by rigidly adhering to standard routines, forms and policies. Some of these include:

Answer 29

1) pre-construction meeting procedures

2) a pre-packaged kit for field reviews

3) proper safety equipment

4) a checklist for field review

5) pre-determined format for field review reports

6) pre-set notes of site meetings

7) timely response to all contractor requests, to avoid potential delays

8) timely review and processing of shop drawings, samples or mock-ups

9) recognition and understanding of the roles of all participants in the project

10) adequate assessment of the contractor’s application for payment (experienced contract administrators will review the application with the contractor on the site before the application is finalized by the contractor)

11) care in issuing the Certificate of Substantial Performance

12) exercised impartiality between the client and the contractor

13) documentation of all communications, findings and observations, in part to support future defense of any claim.

Question 30

Substitutions (Sources of Project Risk: Contract Administration)

Answer 30

There should be procedures in place and followed in relation to substitutions. Substitutions are a potential source of claims against architects. All substitutions need to be carefully documented. Appropriate due diligence is required in the review of all substitution requests.

Those responsible for the CA function should be aware of these responsibilities, as well as others that may be imposed by supplementary conditions. The architect must be careful to undertake this role, showing no partiality to either party in the construction contract. The architect must be sensitive to any undue influence as they fulfill these obligations.

Question 31

Sources of Project Risk: Post-construction

Answer 31

Most client-architect agreements provide for the termination of the agreement one year following the date of substantial performance. The architect should maintain contact with the owner and should bring warranty items to the contractor’s attention promptly for rectification. Provide a list of warranty items for correction by the contractor, following a final on-site review scheduled shortly before expiry of the warranty period.

Question 32

Other Sources of Risk

Answer 32

1) Replacing Another Consultant and Being Replaced by Another Consultant

2) Records

3) Statute of Limitations

4) Getting Paid

5) Stopping Work

6) Projects in Other Jurisdictions

Question 33

Replacing Another Consultant and Being Replaced by Another Consultant

Answer 33

If an architect is asked to replace another architect, the replacing architect should insist on being able to communicate with the original replaced architectural firm. There may be legitimate reasons for the cessation of the relationship on the part of both the original client and the replaced architect. Due diligence is essential.

Similarly, if a firm is being replaced as the architect of record, it will need to take appropriate steps, which may include notifying the authorities having jurisdiction. The replaced firm will also need to determine the status of payments and, if not paid in full, consider the time requirements for any lien rights or collection proceedings.

Question 34

Records

Answer 34

Irrespective of the phase of the project underway, it is critical to maintain proper and complete documentation. In many cases, litigation is commenced several years after project completion and the individuals involved have retired or otherwise left the practice.

Question 35

Statute of Limitations

Answer 35

Depending on the provincial statute of limitations or other regulations regarding an architect’s archives, it may be necessary to store the large quantities of documentation, files and drawings that a practice will accumulate over time. Accurate and comprehensive records can be invaluable when mounting a defense against a claim.

Question 36

Getting Paid

Answer 36

One of the risks an architect faces is a client who, for whatever reason, is delinquent in honoring a contractual obligation to pay invoices in a timely manner.

Non-payment and late payment are usually a red flag – either the client is having financial problems OR they are dissatisfied for some reason with the architectural services. The earlier an architect is aware of this, the easier it is to manage.

Question 37

Stopping Work

Answer 37

1) Review the agreement in place with the client insofar as stopping work is concerned.

2) f stopping work is permitted under the agreement, advise the client that non-payment or late payment is a serious matter and that services will be stopped if payment is not received. Architects should consider seeking legal advice before stopping services.

3) Stop work if necessary – if services are not halted at the first instance, there will be no credibility if late payment should re-occur.

The final alternative to withholding services may be to resign the commission and terminate the relationship. If this is the decided course of action, it must be properly documented and in accordance with the termination clauses in the contract. Architects should consider retaining legal counsel to assist in this process.

Question 38

Projects in other Jurisdictions

Answer 38

Architects working outside their base jurisdictions should learn about the differences in construction practices and professional services in other jurisdictions that may increase risks. The further from home, the greater the differences. Some differences to watch for include:

1) different laws

2) different customs

3) Political Issues

4) Forms of Contract

5) Payment

6) Other differences

Question 39

Disputes and Dispute Resolution

Answer 39

Owners, contractors, suppliers and design consultants have separate interests and motivations before, during and after a project is delivered.

Disputes and conflicts are almost inevitable. Therefore, an important part of an architect’s risk management strategy relates to the handling of disputes.

Question 40

Litigation

Answer 40

1) Judge / Jury / Special Master

Question 41

Binding Resolution

Answer 41

1) Binding Arbitration
2) Private Judge

Question 42

Nonbinding Resolution

Answer 42

1) Mediation
2) Mini trial
3) Advisory arbitration
4) Advisory opinion

Question 43

Standing Neutral

Answer 43

1) Architect’s ruling
2) Dispute review board
3) Standing arbitration

Question 44

Negotiation

Answer 44

1) Direct negotiation
2) Step negotiation

Question 45

Prevention

Answer 45

1) Risk allocation
2) Incentives for cooperation
3) Partnering

Question 46

Alternative Dispute Resolution (ADR)

Answer 46

In the event of a dispute, the architect may be requested by the client, or perhaps others, to participate in some form of alternative dispute resolution (ADR) such as mediation or arbitration. ADR is a conflict management strategy that seeks to avoid the very costly and lengthy process of litigation.

Question 47

Partnering (DISPUTE RESOLUTION)

Answer 47

Developed as a method of dispute avoidance, partnering has the following objective: to solve problems as they arise, in a manner that will best achieve agreed-upon collective goals rather than trying to affix blame.

Question 48

Negotiation (DISPUTE RESOLUTION)

Answer 48

In the event of a dispute, the parties may initially attempt to resolve the matter by negotiation.

Note: generally less successful

Question 49

Mediation (DISPUTE RESOLUTION)

Answer 49

When two or more parties mutually agree to refer their dispute to mediation, a neutral person is usually selected to act as a mediator.

The mediator:

1) does not impose a settlement;
2) is not a decision-maker;
3) does not act as an expert providing a legal or other expert opinion.

NOTE: Anything disclosed during this process cannot be used later in subsequent or ongoing legal proceedings.

Question 50

Arbitration (DISPUTE RESOLUTION)

Answer 50

In arbitration, two or more parties submit a dispute to an independent and impartial arbitrator or arbitration panel, mutually agreed upon by the parties in dispute. The arbitrator makes a final and binding determination in a quasi-judicial manner. This process is much more formal than mediation.

NOTE: Most professional liability insurers for architects prefer to avoid mandatory binding arbitration.