The article below is the fourth of five installments of an article from the March 2017 issue of The Practical Real Estate Lawyer discussing issues and concerns in design and construction contracts, from an owner’s perspective.  Due to the length of the original article, it has been broken into five parts.  The fifth installment will appear in an upcoming post.

Maintaining Budget. Owners rarely enter into the design and construction process without a budget. Owners are often frustrated when the construction documents are complete and the bids for the work, based on the construction documents, come in well above budget.  If the owner makes the architect aware of the project budget at the start of the design process, the owner should be able to expect that the architect will design a project that can be constructed within the parameters of such budget. Owners often rely on the architect to point out where the owners’ design or materials decisions are going to create budget issues. The insert below requires the architect (at the architect’s expense) to rework and cost engineer (one of my favorite construction euphemisms) the project to the budget.

Sample Insert: Provided that Owner has provided Architect with a budget for the Project prior to Architect’s completion of the Construction Documents, if the lowest bona fide proposal by a responsible contractor satisfactory to Owner for the construction of the Project pursuant to the Architect’s drawings and specifications for the Project exceeds Owner’s budget by more than ten percent (10%), then Architect will, at its sole cost and expense, promptly revise the drawings and specifications as may be required by Owner to reduce or modify the quality or quantity, or both, of the Project so that the total cost of the work will not exceed the Owner’s budget by more than ten percent (10%).

IP Considerations. Not surprisingly, there are a handful of important intellectual property issues that should be addressed in the architect’s contract. First, there is the issue of ownership, use and control of the construction documents, sometimes referred to as the architect’s “instruments of service.” In most form agreements, the owner is granted a limited license to use the instruments of service, but that license is conditioned upon the architect being fully paid. This arrangement can result in a potentially unpleasant hostage-like situation where the architect has significant leverage over the owner in a dispute over fees. Most owners elect to amend a conditional license to an unconditional license, as provided in the first sample insert below.  Note that in all cases, the owner should anticipate that its license to use the instruments of service will have limitations. For example, the architect has a legitimate concern that the owner not take construction documents prepared by the architect for one project and later use them to replicate the project on other parcels unless that was the specific intent of the parties (e.g., architect hired to design a prototype building for the owner). Second, the architect may want to photograph a finished project and use those photos in its promotional materials or submit them for publication. With respect to photographs, most owners are concerned with: (a) the period when the architect is allowed access to the project for photography, (b) use of images of individuals (including pictures or photographs displayed at the project site that appear in the architect’s photographs), and (c) pictures of proprietary equipment or assembly lines. The second sample insert below addresses these items. Finally, most owners value obtaining electronic copies of the instruments of service from the architect at the end of the project. These electronic documents can be useful in connection with future work on the project. Instruments of service can usually be transferred to the owner at little or no cost to the architect, and the third sample insert below addresses this issue.

Sample Insert: The Project is the property of Owner, and Architect specifically grants authorization and a license to Owner to use the Drawings, Specifications and other Instruments of Service prepared by Architect: (a) as necessary for completion of the Project by others in the event of termination of this Agreement, provided reasonable compensation is made to Architect; and (b) for reference and use by Owner in the event of a future additions or renovations to the Project.

Sample Insert: Architect’s right to photograph the Project shall be limited to the period prior to and including ___________ business days after substantial completion of the Project. In no event shall architect use images of Owner or Owner’s family in any manner without the express prior written consent of Owner and/or such individuals, as applicable. Architect shall not photograph any of the following components/aspects of the project: _______________________.

Sample Insert: On completion of the Project, at no additional charge, Architect will provide Owner with electronic versions of the Instruments of Service for Owner’s record and for potential use by Owner in connection with future maintenance and/or remodeling of the Project.

Termination for Convenience. As discussed above, maintaining flexibility is important for most owners in the design and construction process. Though most form agreements for architectural services address termination for cause, not all cover the issue of termination for convenience. In addition, if the original architect is terminated, it is good to make sure that the owner can hire a replacement architect to finish the project without having to go back and redo all of the work done by the prior architect.

Sample Insert: Notwithstanding anything in the Agreement to the contrary, this Agreement may also be terminated by Owner upon seven (7) days written notice, without regard to any fault or failure to perform by any party, and solely for Owner’s convenience. In the event of such termination, Architect shall be paid equitable compensation for the services performed by Architect prior to such termination.

Sample Insert: In the event of any termination of this Agreement by Owner, Architect consents to Owner’s selection of another architect of Owner’s choice to assist Owner in any way in completing the Project. Architect further agrees to reasonably cooperate and provide any information requested by Owner in connection with the completion of the Project and consents to and authorizes the making of any reasonable changes to the design of the Project by Owner and such other architect as Owner may desire. Any post-termination services provided by Architect which are requested by Owner after termination shall be treated as Additional Services as provided in this Agreement and paid for by Owner on that basis, provided that Owner shall have right to deduct amounts then owed by Architect to Owner, if any, from payment for such post-termination services.

Indemnity. It is not particularly surprising that the AIA form owner-architect agreement does not include any express indemnity from the architect to the owner. From an owner’s perspective, the ConsensusDocs forms, which include a mutual indemnity, are only slightly better. An owner’s primary obligation to an architect is to pay for services, while the architect is responsible for designing the improvements. Given this dramatic asymmetry in responsibilities, the concept of mutual indemnities is a bit odd. Below is a sample indemnity from the architect that can be used in an addendum to any form agreement. It is important to note that state laws pertaining to indemnity vary significantly. As a result, one should make sure that an indemnity provision comports with the applicable state law.

Sample Insert: To the fullest extent permitted by law, Architect agrees to indemnify, hold harmless, protect and defend Owner and Owner’s agents, representatives and any affiliated or related entities against any and all claims, loss liability, damage, costs and expenses, including reasonable attorneys’ fees, that arise from or are alleged to have occurred in whole or in part as a result of or due to the negligence or fault of Architect, its agents, consultants, employees or representatives.

E&O Insurance. While most of the form agreements for architectural services address insurance requirements, not all do. For many owners, it is important to verify that the architect carries adequate errors and omissions insurance. For larger projects, it is often prudent for an owner to review the insurance provisions in any design, engineering or construction agreement with the owner’s risk adviser during the negotiation process.

Sample Insert: Architect shall maintain throughout the period of this Project and for a period of two years thereafter, a standard form of errors and omissions insurance with an insurance company satisfactory to Owner. Architect shall submit to Owner proof of such insurance in the amount of not less than $___ million each claim and $_____ million aggregate. Architect shall ensure that any and all engineers and consultants engaged or employed by Architect carry and maintain similar insurance with reasonably prudent limits and coverage, with Architect to obtain Owner’s approval for such limits in advance.  Dispute Resolution. Form architectural agreements (particularly the AIA and ConsensusDocs forms) often prescribe mediation and/or arbitration as the required mechanisms for dispute resolution. Choosing to agree to arbitration is a strategic decision each owner must make in the context of a specific project.  In some instances, the owner may not have the bargaining power to deviate from the dispute resolution mechanism set forth in the form agreement. In any situation, however, there are several issues that most owners will want to address. First, many owners will agree to arbitrate smaller dollar issues but want some threshold established above which the owner can elect to litigate the issue. Second, if the owner is required to arbitrate, it is critical that all parties necessary to the dispute can be brought into the same arbitration. This will help the owner avoid getting whipsawed between an arbitration with the architect and a separate arbitration or litigation with other parties involved in that dispute (e.g., the contractor).

Sample Insert: Owner shall have the right to elect not to be bound by the mediation and/or arbitration provisions in this Agreement in connection with any dispute involving more than ____________ Dollars ($____).

Sample Insert: Owner shall not be bound to arbitrate any dispute with Architect where all necessary parties to such dispute are also required (or otherwise agree) to be part of and bound by the results of such arbitration.

Andy Jacobson, [email protected], is a partner in the Real Estate Group at Maslon LLP. His practice covers a broad range of commercial real estate issues, with particular focus on commercial and retail leasing, land use and telecommunications, as well as design- and construction-related agreements.