Guide to Architectural Contracts

Start protecting your business from unnecessary litigation and the associated stress by creating an airtight contract

An architectural contract is something you hope to never look at again once it is created. Typically, it’s only brought out if one party believes the other isn’t upholding their part of the contract. It’s best if this document sits in the project folder forever.

It’s also the most important document you will create for a project.

Table of Contents

  1. Steps to Create the Contract
  2. Role of the Contract
  3. When Is the Contract Signed?
  4. What Is in the Contract?
  5. Types of Contracts
  6. Terms to Include
  7. Risks

Steps to Create the Contract

As with most things, having a series of steps will help make sure all your bases are covered when creating your contract.

Letter of Proposal

Once you understand the scope of the project you will send your client a Letter of Proposal. This Letter of Proposal doesn’t contain any designs or contracts – those come after the client has decided to move ahead. A Letter of Proposal is mainly to communicate to the client your basic understanding of a project and the way you would go about completing the scope of work. A standard letter proposal should contain the following:

  • Identifiers for each party
  • the project location
  • a brief description of the project
  • a basic scope of services to be performed by you
  • a proposed compensation structure
  • actions for the client to take if they elect to move forward with you

If a client accepts your letter proposal, you would move forward to the next step using either an old-fashioned handshake, a Letter of Intent, a Letter of Agreement, an Architect-Prepared Contract, or AIA Contract Documents. Each of these provided varying levels of legal protection for you, with a handshake providing no legal protection at all and Architect-Prepared Contracts or AIA Contract Documents providing full legal protection. What you use is up to you and depends on your level of comfort with the client, however, we advise avoiding using a handshake.

Handshake

A simple handshake is not legally binding and provides no legal protection at all. This is considered very old school. While many will shake hands during the process, most will follow up the handshake with one of the other, more legally binding actions.

Letter of Intent

A Letter of Intent is often considered a written handshake – meaning it’s simple and offers very minimal legal protection. In it, the architect will restate the terms and scope described in the Letter of Proposal, while expanding the terms and conditions. Only the architect signs this document. Usually, a Letter of Intent is followed by a more formal contract.

Letter of Agreement

This document provides slightly more legal protection, as it’s signed by both the owner and the architect, but it still isn’t recommended as the only written agreement. It is essentially a more developed Letter of Intent, with the scope described, terms and conditions set forth, and a basic compensation plan developed.

Architect-Prepared Contract

This is the route most recommended by professionals. Architect-Prepared Contracts are contracts that are prepared by the architect vs. another agency. Since you are creating the document yourself, you can add terms to it that will enable you to do your best work. Any issues you have dealt with on previous projects can be added to your contract to eliminate the fear of going through that problem again.

Your contract should be a legally binding, fully developed document. Review by an attorney will help ensure that any holes are fully patched up – protecting both parties.

One last benefit: because you control the language and look of this document you can best tailor it to be appealing to your clients. It will appear non-threatening and your clients will be quicker to sign it. You can even revise each contract to fit each client personally.

AIA Contract Documents

Somewhat formal and stuffy, AIA Contract Documents get the job done. They contain non-biased language – which provides equal protection for all involved – and complete terms, conditions, and documents for any project of any size. AIA has contract documents for many different types of projects including conventional, sustainable, small projects, design-build, program management, and more.

Because they are made to fit any project, they will contain very broad terms and language. This necessitates very formal, legal language that might intimidate your client. Often, this type of document will be reviewed by attorneys – slowing down the process.

They cannot be edited to include terms and conditions specific to your needs or projects but are great and quick to use if customizability is not a high priority.

Role of the Contract

A contract is, at its most basic, communication between the owner and the architect. It lays everything on the table and makes everyone aware of the expectations and the roles everyone will play. A contract can be used later to solve disputes, but, if a contract is done well, it will prevent issues from coming up in the first place.

When Is the Contract Signed?

The terms used here are from The Open Group Architecture Framework’s (TOGAF’s) Architecture Development Method. Since it’s estimated that 80% of Global 50 architecture companies and 60% of Fortune 500 companies use TOGAF’s method, if you work for a large company it’s likely you use this method.

There are four points in TOGAF’s process when it makes the most sense for the contract to be signed.

  • Upon receipt of the Statement of Architecture Work – a statement of project estimates, plans, and schedules based on the purpose, focus, scope, and constraints of the project.
  • When a subcontractor is hired on the project.
  • At the beginning of the Implementation Governance Phase.
  • At the end of the Implementation Governance Phase.

If you don’t use this method (small firms don’t use it), it makes the most sense to sign the contract when the contract is completed.

What Is in the Contract?

At a minimum, every contract should contain the name, address, and signatures of both parties, the scope of work, the project cost and payment terms, the schedule of work, and the authority.

  1. Full Name, Address, and Signatures of Both Parties

    Without this component, your contract is just a useless piece of paper. It can be easy to forget the most basic aspect, even if it is the most important, so double-check this is included.

  2. Scope of Work

    Since a contract is essentially communication between the two parties about the work that will be done, a full scope of work should be included. That way both parties can make sure they are agreeing to the same description of materials, quality of work, schedule, and other specifications.

  3. Project Cost and Payment Terms

    With a clearly defined cost of services, schedule, and terms and conditions, there can be no confusion from either party about how much should be paid and when payment will happen.

  4. Schedule of Work

    Include details like when the project will start, when milestones will be reached, and the project completion date.

  5. Authority

    During construction, with many decisions to be made, it needs to be clear who has the authority to make those decisions. Detailing it now in the contract will eliminate frustration or delays during the project.

Types of Contracts

Stipulated Sum Contract

Also called a lump sum or fixed price contract, this is the architectural contract at its most basic. The owner agrees to a set price and the amount they pay says the same no matter the bumps along the road. The contractor is responsible for finishing the work for the agreed-upon price.

This contract can often lead to somewhat higher costs, as the contractor will include a higher markup to cover themselves if issues arise. The contractor can increase their profit by ensuring the labor and materials costs are at a minimum, but any estimation errors, delays, or mistakes could quickly eat away at that profit.

When Should Stipulated Sum Contract Be Used?

Use the stipulated sum contract when the scope and schedule are solid and clearly defined. The contractor will need to provide as accurate as possible cost estimates for this type of contract to work well.

Cost Plus Contract

With a cost plus contract, the owner pays for the work, labor, materials, and equipment costs, plus a fee for overhead and profit. If there are any savings on the actual cost, the owner gets to keep the difference. If the costs run higher, the owner will be responsible for those extra costs. This contract eliminates the risk to the contractor but also eliminates any profit other than the previously agreed upon fee. In general, there are three variations to this contract.

  1. Cost Plus Fixed Percentage – The owner pays for the actual cost, the contractor’s overhead, and an additional fee based on a percentage of the actual cost.

  2. Cost Plus Fixed Fee – The owner pays for the actual cost, the contractor’s overhead, and an additional fee independent of the actual cost.

  3. Cost Plus Fixed Fee with Guaranteed Maximum Price Contract – The owner pays for the actual cost, the contractor’s overhead, and an additional fee independent of the actual cost, with the total cost of the project not to exceed an agreed-upon amount.

When Should Cost Plus Contract Be Used?

This contract is best used when there is no clear scope before construction starts. You will often see this when the owner wants a fast time to completion.

Design-Build Contract

A design-build contract is the same concept as a design-build delivery method. The owner hires one entity who is responsible for both the design and construction. Often, the design-build contractor will sub-contract out some work to other businesses, but the owner will only have one contract.

When Should Design-Build Contract Be Used?

This is often the best method for tight schedules, as the bidding process is usually eliminated in favor of a negotiation between the owner and contractor. Because the architect and contractor are one firm, coordination between the two speeds things up too.

Integrated Project Delivery Contract

An integrated project delivery contract is a contract between the owner, architect, and contractor. All three will share the risk. The contractor is involved early in the design and the architect is involved during construction.

When Should Integrated Project Delivery Contract Be Used?

When tight coordination between the owner, architect, and contractor is ideal this contract will typically fit the best. It is viewed as one of the most efficient contracts and is still relatively new.

Terms to Include

When creating an Architect-Prepared contract, there are specific terms that should be included. These terms are very standard for the industry and reflect the most common issues that come up during an architectural project. Not including them could mean a headache later. A complete list to copy and paste into your contract can be found here.

Risks

Since the two legal doctrines that protected architects from liability– the economic-loss rule and contractual privity – are long gone, court and arbitrations are an increasingly common event for architects. Usually, litigation comes into play over money. Sometimes the project costs more than expected or the schedule was not met. In any case, the owner can directly sue the architect. Contractors and sub-contractors will typically try to sue the architect if the owner is suing them.

The Standard of Care

The standard of care is a legal concept that comes into play with cases involving professional negligence. It implies you should only be required to uphold the level of care and skill that professionals with similar skill levels, professions, and experience would possess and exercise. What this aims to do is to not compare your efforts to an unfair standard.

Owner

Usually, if the owner is suing the architect it is related to the following five situations:

  1. Payment Certifications

    As the architect, you are responsible for reviewing and approving the payment requests from the contractor. If the owner feels like you approved payment certifications that resulted in an overpayment on their part, they will want to receive compensation from you.

    You can avoid this risk by thoroughly reviewing payment requests. Even if your contract does not specifically list payment certifications as your responsibility, courts have found that they are a duty architects must fulfill, as it is considered for the benefit of the owner.

  2. Contractor “Front Loads” Payment Applications

    Sometimes, contractors will request payment above what the current work in place requires. This is often due to the uncertainty and changes that can happen at the beginning of a project. The funds could be used for buying a piece of equipment, stockpiling materials, or foregoing expensive financing.

    Other times, it is less innocent. Contractors sometimes use those excess funds to complete prior projects. If the owner suffers a loss as a result of this practice, the architect is the one held liable, as they are approving the payment applications.

  3. Errors in Contract Observation or Inspection

    If the owner feels like a lack of quality and/or frequency of your inspections resulted in increased costs for them, you will likely find yourself in court over the matter.

    Minimize your risk of litigation over this issue by doing the best job you can with your inspections. Keep in mind that some courts have found that you, as the architect, are responsible for any construction error you miss, regardless of what your contract states.

  4. Failure to Report Construction Defects and Require Correction of Defective Work

    Even though contracts may not explicitly require the architect to report and correct construction defects, several courts have decided that reporting and correcting is required when an architect is providing site observation services.

  5. Deficient Design Documents

    If the design drawings were flawed or insufficient, the client may have a claim against the architect. The validity of this claim is going to depend on the standard of care for an architect. Avoid agreeing to follow all applicable laws, statutes, rules, and regulations when creating your design documents, as you will be unequipped to know the details of every requirement.

Contractor

Because the architect and contractor are not bound by a contract, most claims against an architect use either a third-party contract theory or tort theories. How successful these claims are will depend largely on state laws governing these claims.

  1. Third-Party Contract Beneficiary

    This type of claim is typically not successful. The contractor argues that they are a third-party beneficiary of the architect’s contract with the owner. These fail so often because most contracts contain wording that makes it clear that there is no intent to benefit any third party.

  2. Tort Theories

    Tort theory claims have seen success in many states. The contractor must show that there is a duty owed to the contractor by the architect.

  3. During bidding

    Contractors who were unable to win a project contract might try to submit claims against the architect for defamation and intentional interference with contracts. In these cases, the architect either oversaw the bidding or was an advisor to the owner during the bidding process.

  4. Deficient Design Documents

    Because contractors rely on design documents, deficiencies or errors in the design document could give them a valid negligence claim. Most successful claims prove that the contractor was totally dependent on the architect’s drawings and the contractor couldn’t possibly protect themselves from the consequences of the deficient drawings.

  5. Contract Administration

    This is where most of the claims against architects come from by contractors. In general, the architect must prove that the architect intentionally interfered with the contractor’s work and that the interference caused an economic loss.

Sub-Contractor

Because the sub-contractor is so far removed from the architect as far as contracts are concerned, the sub-contractor filing a claim against the architect is rare. Delays in the project, failure to notice design defects, and deficient design specifications have all been used in successful claims against an architect by a sub-contractor.

Actionable Takeaways

  1. Never, ever use just a handshake (or Letter of Intent/Letter of Agreement) as a contract.
  2. If you don’t have a good contract, create one. Look for any holes that could cause problems and close them up.
  3. Update your contract regularly to include issues that have come up in past projects.
  4. Use the contract that makes the most sense for the project requirements.
  5. Understand fully who can sue you and what kind of claims they can bring against you.

Additional Resources

  1. Four Common Construction Contracts You Need to Understand
  2. Five Essential Elements of a Construction Contract
  3. Who Sues the Architect?
  4. Why is the Architect Sued When a Project Goes Wrong?
  5. Terms That Should Be Included in Architecture Contracts
  6. AIA Contract Documents
  7. Architectural Contracts 101
  8. Architecture Development Method
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