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Ten Commandments of Loss Prevention
By Gunther O. Carrle, Esq.


Introduction to the Loss Prevention Program

The program is intended to:

Loss Prevention is a crucial part of every design professional firm's project administration. It not only minimizes the administrative and financial costs of claims and disputes by assuring that all participants to the construction process are aware of their obligations and rights, it enhances their ability to produce a successful project.

A Sound "Loss Prevention" Program Contains Five Elements:

The proper selection of projects.

You should consider the following:

The preparation of an agreement for services.

The agreement must be:

Performance of your agreement so as to minimize the potential for dispute.

Recognition and resolution of potential problems when they arise, before they develop into a dispute.

Proper documentation of significant events during the project so that when problems arise they can be resolved as quickly and as cost effectively as possible.

Knowledge of the law and a consideration of the legal consequences of rendering professional services on a project is as important as understanding the engineering and architectural principles that underlie the professional services rendered. No matter how competent the professional is in his or her discipline, the likelihood that a project will be unsuccessful is increased if the legal aspects of rendering professional services are ignored. Understanding and applying the "rules" determines whether your project will be a successful business venture.

The Ten Commandments of Loss Prevention Are The Foundation For A Successful Project.

The First Commandment:
Define Your Scope of Services

Draft a detailed scope of services which avoids ambiguity and creates a definite and clearly understood allocation of obligations in order to avoid a dispute. A scope of services that merely attempts to avoid obligations without defining what is to be done is more likely to create a dispute than to avoid one.

The scope of services should be drafted with third-parties in mind. In many cases third-parties, and not the parties to the contract, will review and interpret the contract. Specificity is necessary to minimize the likelihood that third-parties can expand your duties by reference to custom and practice. In particular, address typical problem areas - shop drawing review, review and coordination of the work of design/build contractors, cost estimates, hazardous substances, certifications, site visits, ownership of documents, additional services, revisions, additional services and changes.

The following questions should be asked when reviewing the intended scope of services:

The Second Commandment:
Do Not Become The Insurer Or Guarantor of The Success of The Project

As a design professional you agree to perform your services in a non-negligent manner. The standard by which your performance is judged is typically defined as that of "the reasonably prudent [architect or engineer] exercising usual and customary [or in some states -'ordinary'] professional skill and care." Avoid contract language which either: raises that standard of performance or makes you a guarantor of performance.

Frequently owners, particularly governmental entities, will ask you to perform "in the best and most acceptable manner" or "in accordance with the highest professional skill and care." This language increases the likelihood that a deviation on your part will be the basis for liability. As important as the increase in your potential liability exposure is the fact that these higher standards are frequently not insurable.

Frequently owners will ask you to warrant a certain aspect of your services; i.e. compliance with the codes and regulations, absence of hazardous substances, that the design can be used for a stated purpose. This language makes you strictly liable for a deviation. Thus, if you warrant compliance with the code and there is a deviation from the code you are liable even if the omission was one which a "reasonably prudent" engineer would also have made. This risk is also not insurable. When you address code compliance be certain that you are not agreeing to make legal determinations. A good example is ADA compliance. Complete compliance with ADA requires not only design decisions but legal evaluations. Limit your obligation to compliance with known and identified design standards.

The Third Commandment:
Foresee the Foreseeable

Identify Those Areas of the Contract That Traditionally Have Been a Source of Liability for Design Professionals and Address Them in the Negotiations and/or the Language of the Contract.

Shop Drawing Review

The purpose of your review should be clearly stated. Generally, it is limited to a review for general conformance with design concept and with the information contained in the contract documents. You are not reviewing for: means and methods of construction, safety, dimensions, methods of installation, etc. Your shop drawing stamp should clearly set forth the purpose of, and limitations on, your review as contained in your Agreement. The shop drawing stamp cannot modify your contractual obligations. Make certain that the limitations on your shop drawing review are clearly defined in the agreement. The purpose of the stamp is merely to advise third-parties (contractor, subcontractor, etc.) of the limitations on your review.

You should:

Your contract should state that you will not review a manufacturer's shop drawings prepared in response to a performance specification for a determination that the system will perform properly. Your review is limited to a determination that the "claimed" performance of the item described in the submission meets the contract requirements.

Does a requirement that a submission be sealed by a registered professional engineer relieve you from an obligation to review the shop drawing? This is a complicated issue. You are not entirely relieved of your obligation to review the shop drawing for compliance with the design requirements. However, you can probably rely on the capability of the submittal to perform as specified.

Ownership of Documents

You should typically retain ownership of your documents. The drawings, specifications, CADD disks and other documents are merely instruments of your services. In other words, the design process is the service that your client is purchasing, not the documents.

Do not permit your documents to be used for completion of this project, for additions thereto or for other projects without permission of the design professional and without additional compensation. The alternative is to require that your seal and title block be removed and the documents redrawn and reviewed by a design professional.

Insist on additional compensation and indemnification for any requested reuse.

When you release CADD disks retain a print of the documents on the disk and require the party to whom you are releasing the disks to sign-off on the prints to confirm that the prints correspond to the disks.

Construction Cost

Consider the differences between detailed cost estimates and preliminary estimates of construction cost. The latter are typically provided by design professionals. A preliminary cost estimate should allow for contingencies and escalating labor and material costs. If detailed cost estimates are required, the owner should retain a cost estimator.

"As-built" or Record Drawings

You should generally categorize such documents as Record Drawings. The term "as-built" suggests that the drawings will reflect all actual field conditions. This is generally beyond the scope of knowledge. At most, you are able to provide a conformed set of drawings that reflect approved changes made during construction.

You should be entitled to rely on data supplied by contractors without independent verification subject only to your obligation to note obvious discrepancies of which you have actual knowledge and, possibly, your obligation to detect errors which a reasonable and prudent [architect or engineer] exercising usual and customary professional skill and care would have detected.

Structural Details

Determine if the structural details, in particular connection and erection details, raise questions of means and methods to impact on the project and not to the safety of the contractors' means and methods.

Geotechnical Consultants

Given the scope of the potential liability, geotechnical consultants should be retained by owner. Their mandate should be to provide you with their conclusions and recommendations. They should be required to make specific design recommendations, not merely present raw data. You should be entitled to rely on their conclusions without independent verification.

Owner and Vendor Supplied Data

You should be entitled to rely on such data without independent verification subject to the same limitations as in "record" drawings.

Design/Build Consultants

You should not be responsible for the code compliance of design/build work nor for the adequacy of the design/build systems. Your obligations to coordinate should be limited to providing the design/build contractor with the design criteria which will be used by you that impact on the design build aspect of the project, i.e. the architect can provide a space layout and wall section to the HVAC contractor; in turn, the architectural aspects of the project, i.e. architect receives size and location of ducts from HVAC contractor.

You should not be responsible for delays caused by the design/build contractor. Indeed, the owner should be obligated to ensure the cooperation of the design/ build contractors so that their performance does not unreasonably delay you.

Indemnification Agreements

Determine whether your professional liability insurance provides coverage for indemnification agreements. Typically, your professional liability insurance provides coverage only for those damages which were caused by your professional negligence.

Only agree to indemnify against losses to the extent that they arise directly as the result of your professional negligence in the performance of services under this agreement.

Specifically define who is to be indemnified. Typically this should be limited to the owner and its employees, not agents and other individuals or entities. Insist on a mutual indemnification for your benefit and for the benefit of your consultants.

Always remember that under certain circumstances, a state's anti-indemnification statute may preclude the enforcement of indemnification provisions. Before making your client's agreement to indemnify you a deal breaker, make certain that such an indemnification would be enforceable.

An indemnification from your client is particularly important where the client has employees who will be exposed to potential defects in the projects created or exacerbated by the negligence of the employee or the employer. In the absence of an express indemnification agreement, the workers' compensation statutes of most states specifically preclude you from joining the employer to a lawsuit. Thus, even though a dangerous condition partially caused by an error or omission is made worse by the employer, you may bear full responsibility for the claim of an injured employee, unless there is an indemnification agreement.

Insist that the Owner obtain an indemnification agreement for your benefit from the contractors or construction manager. This is critical in the case of a construction site injury, again because of the immunity enjoyed by an employer from claims brought by the employer's employees.

Limitation of Liability Clauses

Limitation of liability clauses can have an extremely beneficial impact in preventing losses that are disproportionate to your benefit from the project. While they are generally enforceable, their specific applicability varies from state to state. Typically, the clauses attempt to limit your liability to your client to a multiple of your fee, to the amounts remaining under your professional liability insurance policy or to a fixed amount. In some cases, they simply exclude a particular category of damages such as those resulting from loss of profits and loss of use.

The limitation must be rationally related to the services rendered and the clause should contain a preamble that sets forth a basis for the clause. For example, that:

You should review the clauses used by AIA/EJCDC and by various of the professional liability insurers.

Legality of your Contract

Are you authorized to engage in the practice of architecture or engineering in the state in which the project is under construction? This means more than having a professional license to practice in the state. Is your firm authorized to engage in the profession? Are architects performing engineering services or are engineers engaged in the practice of architecture? The states vary in the extent to which they permit an overlap of the two professions and in the extent to which they enforce limitations.

If you are a corporation, are you registered as a foreign corporation in the state?

Has your firm complied with the regulations of the state licensing board or applicable state statutes? Many states require professional certification of the entity in addition to the licensing of professionals and compliance with the state's corporations statute.

A failure to comply can result in the contract being illegal. If the contract is not legal, you will not be able to collect your fee.

Is your Client the Contractor or a Design/Builder?

If you are not working for the owner, you must carefully examine the contract to avoid obligations to safeguard the owner from the errors, omissions or wrong doing of the contractor - who may be your client.

Is the form of project contracting, i.e. design-build, legal in the state? If not, you may not be able to collect your fee. Make certain that the prime contract contains a provision that the owner will not assert any claimed illegality of the contract as a defense to a claim for payment.

Many state architects' licensing boards take the position that design/build contracts are illegal unless the design/builder is organized under the state's licensing statute as an entity authorized to provide architectural services.

Additional Services

Make certain that the definition of additional services is clear. In particular, if the client has requested that you provide services on the basis of time and expense with an estimated maximum fee, clearly define what is and is not included in the maximum and under what conditions the maximum increases. For example:

  1. change conditions
  2. change orders or owner requested revisions
  3. contractor error
  4. revisions due to budgetary constraints
  5. additional services
  6. changes in scope
  7. changes due to code revisions
  8. extension of project schedule

Dispute Resolution

Request the owner to agree to submit any dispute to good faith non-binding mediation. This can resolve potential claims quickly and inexpensively.

Certifications

Insist on adequate time to review lender and other certifications before being required to execute them.

Insist on a provision that you will not be required to execute any certification which is not consistent with the scope of services undertaken or which seeks to modify or expand those services.

The Fourth Commandment:
Make Certain That Your Subconsultants Live By The Same Rules You Do

Make certain that you have a written Agreement with your subconsultants and that they are required to perform in the same manner and under the same conditions you are. Your Agreement with your subconsultants should be discussed contemporaneously with the prime Agreement and its terms should be consistent. Be particularly aware of these clauses:

Frequently, prime professionals will make commitments to their clients and agree to contract terms that their subconsultants ultimately reject. Make certain that you always provide a copy of the Owner-Prime Professional Agreement to the consultant before it is signed and request the consultant's input on issues that affect the owner - ownership of documents; indemnification by contractor; number of site visits; limitations of liability, etc. Also, demand proof of insurance from the consultant.

The Fifth Commandment:
Never Begin Services Until The Agreement Is Completed

All too often the parties begin to discuss the terms of the Agreement just before services are to begin. It is much more difficult after the work has started to negotiate the terms of the Agreement. Frequently, where there has been no dispute during performance, many of the typical safeguards are ignored. Remember your Agreement can come back to haunt you many years after the project is completed.

The Sixth Commandment:
After Making A Contract, Adhere To Its Terms And Modify It Only By Written Amendment

The contract should not be ignored after the project starts. If your "agreed upon" performance is substantially inconsistent with the terms of the Agreement, you may not have an Agreement to rely upon later. Don't fall victim to the famous last words - "Our lawyer made us put it in the Agreement, but we can work something out." Or, "Our lawyer said we can't agree to do it in the contract, but don't worry, it's something we always do."

Review all documents that you are requested to execute, Architect's Consent To Assignment of Contract, Architect's Consent To Assignment of Contract as Collateral, Waiver of Liens, to ensure that they do not alter, expand or modify the terms and conditions of your contract.

Avoid agreements that require you to protect someone else's interests or to notify them of changes in the project or other events relating to your relationship with the client.

The Seventh Commandment: Be Wary Of The Scope Of Your Duties During Site Visits

The design professional's presence on the site, typically: to review the progress of the job; to review the work in general to determine if, when completed, the work will be in substantial compliance with plans and specifications; and to respond to specific inquiries, creates two potential areas of liability. One such area is the design professional's failure to detect deviations from the plans and specifications. The second area is the failure to detect unsafe conditions that cause injury to a third-party.

Safety - Several states have amended their workers' compensation statute to specifically extend immunity from suit to design professionals. This clause may not, however, have the intended effect. Moreover, this does not relieve you from liability for:

In order to minimize the possibility that your conduct will deny you the immunity from suit provided by statute your conduct should continue to be consistent with your performance before the statute was revised.

Construction observers are generally not responsible for injuries to third-parties resulting from the contractor's operations. Under certain circumstances they can be liable for the failure to direct the correction of unsafe conditions.

To minimize your potential liability:

Despite these guidelines, however, many design professionals have been confronted with the dilemma of ignoring an unsafe condition they have observed or reporting it and potentially being accused of having assumed duties with regard to safety. The courts of most jurisdictions generally do not hold a design professional liable for construction site injuries that relate to the contractor's operations merely because the design professional made periodic visits to the site absent conduct which evidences the assumption of safety related duties.

Frequently, however, courts will find that a design professional bears at least some responsibility for a construction phase injury because the conduct at the site is inconsistent with the position that the design professional has no duties with regard to safety. Courts have also held that, as a professional, an architect or engineer cannot ignore an unsafe condition of which he or she has knowledge and which poses a risk to third-parties.

The best compromise is to advise the owner or construction superintendent of an observed unsafe condition in writing. The writing should not address the manner of correction. The writing should emphasize that the design professional does not have, and is not undertaking, any duties with regard to safety. Rather, in the course of the visit to the site to check on the progress of the work and the compliance of the work with the plans, a particular condition was observed.

If your firm is retained to provide project management responsibilities, you may have more responsibilities for safety. The Owner may want you to affirmatively monitor the contractor's safety programs and/or conduct loss control surveys. This should be avoided. If the owner desires such services they should be contracted for separately, directly by the Owner, with a Safety Engineer. If some additional involvement with safety is required, the services should be limited to the following:

Construction Observation of the Work - Your review of the work for compliance with the plans and specifications should be limited to:

Avoid definitions in the contract documents which include temporary structures as Work.

The Eighth Commandment:
Treat Certifications Like A Bad Neighbor

Are you required by your Agreement to give the certification requested? If not, try to avoid it.

Does the certification attempt to expand your services beyond those contained in your Agreement for services?

Certifications should always be based on "your knowledge, information and belief"; particularly if they involve matters outside of your total control - compliance of construction with plans and specifications; contractor's entitlement to payment; absence of hazardous materials.

Certifications should always be based on your professional judgment - they should not be language of warranty or guaranty. Even where you have control over the subject matter, such as compliance of plans with codes, your statement of compliance should be terms of "a reasonable and prudent [architect or engineer] rendering services of the type set forth in the agreement exercising usual and customary professional skill and care." Guarantees and warranties are generally not insurable.

Certifications should be accurate and reasonable. Limiting the certification to "your knowledge, information and belief" and to "your professional judgment exercised as reasonable and prudent [architecture or engineering] using usual and customary professional skill and care" is not always enough if the subject matter of the certification is outside of your expertise or is overly broad. For example, compliance with "all" codes, statutes and regulations, etc. is not reasonable. You are not likely to be fully aware of all of them, they may not all apply to your services, they may be contradictory. Another example is the absence of hazardous substances at the site (asbestos, urea formaldehyde, pcb's) or the absence of hazardous substances in the building materials incorporated.

Are you improperly assuming a governmental function? Building code officials may require certification that the structure complies with the building code. It is their duty to make this determination and an effort should be made to avoid this type of certification.

Is your compensation adequate for the risk and for the level of services required?

If possible, the form of certification should be developed during the negotiations for the contract and attached as an exhibit. This is particularly useful with lender certifications.

The Ninth Commandment:
If You Can't Prove It, It Doesn't Exist - Documentation of events, directives received, information distributed to others is crucial.

Memories fade even when there is an incentive to remember accurately. In the absence of confirming memoranda your "adversary's" recollection will, not surprisingly, be quite favorable to his or her own interests. "Put it in writing and keep the other side honest."

The Tenth Commandment:
It's Easier To Avoid a Lawsuit Than It Is To Win One.

Remember the eight ways to avoid litigation.

Attribution

Gunther O. Carrle, Esquire is an attorney who represents Architects & Engineers with the law firm of Powell, Trachtman, Logan, Carrle & Bowman, P.C. with offices in King of Prussia, Harrisburg, P.A., and Cherry Hill, N.J. Mr. Carrle can be reached at (215)354-9700 or by e-mail: GuntherOCarrle@mcimail.com

The information in this and all other RISK Administration and Management Company articles is intended for information and risk management purposes only and does not constitute legal advice. For legal advice and assistance, please contact competent counsel in the jurisdiction of your professional practice.

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