Architects liable for cost overruns?!

Log Out | Topics | Search Moderators | Register | Edit Profile

Author Message David Axt, AIA, CCS, CSI Senior Member Username: david_axt Post Number: 681 Registered: 03-2002 Posted on Friday, July 21, 2006 - 12:52 pm:    There are grumblings in our industry where architects are being held liable for cost overruns on projects. The recent AIA Trust newsletter has an article on this very subject. I can understand the frustration of Owners in this crazy construction climate, but to hold architects responsible for circumstances out of our control is not fair. Anne Whitacre, FCSI CCS Senior Member Username: awhitacre Post Number: 362 Registered: 07-2002 Posted on Friday, July 21, 2006 - 02:11 pm:    David: don't be an idiot. "Fair" has no meaning in contractual law and if an architect can't draw their contracts with suitable precautions against that very thing, then they should end up going out of business. David Axt, AIA, CCS, CSI Senior Member Username: david_axt Post Number: 682 Registered: 03-2002 Posted on Friday, July 21, 2006 - 02:22 pm:    Let me restate: Architects are being held liable for the construction project cost overruns not the architect's fee. David Axt, AIA, CCS, CSI Senior Member Username: david_axt Post Number: 683 Registered: 03-2002 Posted on Friday, July 21, 2006 - 02:27 pm:    Anne, You don't have to agree or even like what I post here, but please show me some respect and don't resort to calling me names. Thank you. David Axt, AIA, CCS, CSI Senior Member Username: david_axt Post Number: 684 Registered: 03-2002 Posted on Friday, July 21, 2006 - 02:41 pm:    Here is the article that I am referring to: http://www.theaiatrust.com/news.html#87 John Bunzick, CCS, CCCA Senior Member Username: bunzick Post Number: 554 Registered: 03-2002 Posted on Friday, July 21, 2006 - 04:13 pm:    My reading of the article is a little different. AIA is pointing out that in the early '80s there was a spike in claims against architects arising out of client disatisfaction stemming from rapid inflation in construction costs. AIA is advising only that, today, similar trends are occurring and we ought to remember recent history and protect ourselves. I might also note that since that time it's my observation that architects seem have gotten better about dealing with this risk. Project cost estimating is a much more likely to go to a qualified consultant than be done in-house, and architects are more likely to have clauses is their contracts about this issue. My recollection is that the AIA owner-architect agreement was revised as a result of this, requiring only that the architect redesign if the cost of the project is over budget. I don't think AIA is saying that there is currently a trend to holding architect's liable for inflationary construction costs. David R. Combs, CSI, CCS, CCCA Senior Member Username: davidcombs Post Number: 152 Registered: 08-2004 Posted on Monday, July 24, 2006 - 08:32 am:    Let's also clarify "cost overruns." There's Owner-added scope (which the A/E should not be held liable for). And then there's errors-and-omissions (E&O). Omissions - that which the A/E should have included in the documents but didn't, and were nonetheless required and the Owner would have had to pay for anyway. If the Owner decides to add them (after the discovery that they were not originally included), then the Owner pays - just as if they would have had they been included in the documents from the outset. These are basically "betterments" to the project, or Owner-added scope. The design team does not pay to build the Owner's building, the Owner does. And an Error - that which the A/E should have drawn correctly, but for whatever reason did not, and the Owner had to incur additional cost to correct. These types of issues the A/E may be held liable for. Obviously, experienced attorneys and liability insurance carrirs would be better qualified to address these issues specifically. George A. Everding, AIA, CSI, CCS, CCCA Senior Member Username: geverding Post Number: 191 Registered: 11-2004 Posted on Monday, July 24, 2006 - 10:56 am:    David Combs - The key point is betterment, as you point out, but I think your definitions of omissions and errors are not quite on the mark. I agree that an omission is information that should have been included but wasn’t. I agree that an error is information in the documents but incorrectly stated. However, either an error or an omission can lead to financial liability for the architect, depending on how much is attributed to betterment, and when the mistake is discovered. The AIA Handbook has a great example of this with various scenarios involving a door for which the architect has negligently failed to specify a required fire rating. The architect’s liability ranges from zero to several thousand dollars, depending on the circumstances of the scenario. For example, if discovered during shop drawing review, prior to the purchase of the door, the difference in the cost between a non-rated and a rated door is considered betterment, under the theory that the owner would have had to pay for a rated door anyway, so the architect has zero liability. If a non-rated door is already installed when the mistake is discovered, then the architect’s is liable for the installed cost of the incorrect door and labor to remove it. The cost of the fire rated door is on the owner: labor and installation are already in the contract, and the difference in cost to upgrade to fire rated is part of the change order. Consider this omission: an egress door was required but not shown at all on the documents. The wall is built when the omission is discovered. The owner pays for the total cost of the door, and the labor to install (betterment) and the architect pays for demolition of the wall and for relocation of anything within the wall that is in the way of the new door. David Axt – A few years ago, a certain governmental agency wanted to institute a policy that would require architects to pay for all change orders over a certain % of the job cost, regardless of reason for the change, owner change of scope excluded, of course. But included were things like concealed conditions, material escalations, and traditional betterments. Needless to say, the a/e community went up in arms in protest, and the policy was never put in place. One of the issues that was brought up at that time was: if we are paying for cost overruns, shouldn’t we get the savings when your projects come in under budget? Nobody was willing to go there, of course. John’s point about better cost estimating is well taken. If owners require architects to pay for overruns, then it becomes in our best interest to estimate high, rather than accurately. And that strategy would seem to be against everyone else’s best interest, not to mention the best interest of the project. John Bunzick, CCS, CCCA Senior Member Username: bunzick Post Number: 555 Registered: 03-2002 Posted on Monday, July 24, 2006 - 11:09 am:    The article is not really talking about the reasons for project change orders. It states that: "Project owners bring more claims during periods of rising costs. The costs of remedial work as well as costs related to claims for delays and extra compensation by contractors are magnified by higher interest rates and high inflation. Unless construction contracts recognize unanticipated increases in the cost of materials and products, contractors often are squeezed. As material prices escalate, contractors bring claims against owners or their architects to recover costs." These are risks specifically associated with a rapid rise in construction costs, not those risks associated with professional standard of care. The article's suggested defense includes primarily client education, plus a few suggested contractual considerations. No such current claims are documented in the article. A claim that does scare me a little bit is one for 24 million dollars against the Vinoly / HNTB design team for the Boston Convention Center, completed two years ago. Reportedly the roof leaked, sound system was poor, and there were problems with the mechanical systems (all fixed before it opened). The total project cost was $800 million (hard and soft). I haven't read the details of the alleged design negligence. I don't know what the design fees were, but I bet this settlement must be close to half of them. Now that's an exposure to risk. Ronald L. Geren, RA, CSI, CCS, CCCA, MAI Senior Member Username: specman Post Number: 290 Registered: 03-2003 Posted on Monday, July 24, 2006 - 12:54 pm:    George: Excellent points you mention. I'd also like to add to the fire door example: Consider the architect's liability if the non-rated door was never discovered until the investigation after an actual fire where it was discovered that the door failed, and it was proven that the failure led to injury, property damage, or loss of life. David R. Combs, CSI, CCS, CCCA Senior Member Username: davidcombs Post Number: 153 Registered: 08-2004 Posted on Monday, July 24, 2006 - 03:12 pm:    George, You are correct - there are situations where there will be "shared" cost, with the Owner paying for the base work and the design team paying the premium incurred to install it. (I intentionally left this wrinkle out of my original posting for simplicity's sake and to keep the posting brief.) There are also some Owners who will claim EVERY change order has some design team liability, or premium, associated with it. Their reasoning: Since it was not subjected to the competitive bidding environment, the added or corrective work is being bid at the [post contract award] higher price. Easy to claim, tough to prove and quantify: it requires an admission by the Contractor that they were essentially price-gouging. J. Peter Jordan Senior Member Username: jpjordan Post Number: 195 Registered: 05-2004 Posted on Monday, July 24, 2006 - 05:19 pm:    Owners have very real problems with "cost overruns" in inflationary times. No Owner has an open check book with unlimited funds, and failure to account for reasonably anticipated cost escalation can mortally wound an otherwise sound project. Postings on this forum have referred to inflation in the 1980s, but what I really remember is the 1970s especially when there was rampant inflation during a serious recession. I do remember have a discussion in the early '80s with a representative of a hotel chain in Latin America who was the Owner's contact person for a particular project. I asked him how they dealt with very scary inflation both in capital improvements and in operations. They budgeted and rebudgeted almost constantly, making adjustments as required to provide a certain level of service and maintain some degree of cost control. It can be done. On the other hand, we probably have all dealt with relatively inexperienced Owners (or their representatives) who would fail to make go/no go decisions on a timely basis. During an inflationary period, a delayed decision can have a very real cost. An Owner who was advised 18 months ago to authorize ordering structural steel in order to lock in a price delayed his decision 3 to 4 months. Not only did it put the project behind schedule, but there was a relatively serious cost increase. While some Owners will be able to see how their actions (or lack thereof) impact project schedules and costs, others will always try to shift the blame. Regardless of what any attorney or E&O carrier will tell an Architect about doing cost estimates (or opinions or whatever) for an Owner, most Owners expect their Architects to be knowledgeable about costs to a certain degree. When they ask an Architect to design to a budget, they expect a positive response to that request. I have recently run into a couple of younger designers whose attitude is to design what they want first, let the VE process happen, and redesign. This is to say that they expect to design the project at least twice. I am almost certain that the owners of their firms did not design a fee asssuming that the project would be designed twice. And we wonder why Architects get little or no respect. J. Peter Jordan Senior Member Username: jpjordan Post Number: 196 Registered: 05-2004 Posted on Monday, July 24, 2006 - 05:40 pm:    Owners have very real problems with "cost overruns" in inflationary times. No Owner has an open check book with unlimited funds, and failure to account for reasonably anticipated cost escalation can mortally wound an otherwise sound project. Postings on this forum have referred to inflation in the 1980s, but what I really remember is the 1970s especially when there was rampant inflation during a serious recession. I do remember have a discussion in the early '80s with a representative of a hotel chain in Latin America who was the Owner's contact person for a particular project. I asked him how they dealt with very scary inflation both in capital improvements and in operations. They budgeted and rebudgeted almost constantly, making adjustments as required to provide a certain level of service and maintain some degree of cost control. It can be done. On the other hand, we probably have all dealt with relatively inexperienced Owners (or their representatives) who would fail to make go/no go decisions on a timely basis. During an inflationary period, a delayed decision can have a very real cost. An Owner who was advised 18 months ago to authorize ordering structural steel in order to lock in a price delayed his decision 3 to 4 months. Not only did it put the project behind schedule, but there was a relatively serious cost increase. While some Owners will be able to see how their actions (or lack thereof) impact project schedules and costs, others will always try to shift the blame. Regardless of what any attorney or E&O carrier will tell an Architect about doing cost estimates (or opinions or whatever) for an Owner, most Owners expect their Architects to be knowledgeable about costs to a certain degree. When they ask an Architect to design to a budget, they expect a positive response to that request. I have recently run into a couple of younger designers whose attitude is to design what they want first, let the VE process happen, and redesign. This is to say that they expect to design the project at least twice. I am almost certain that the owners of their firms did not design a fee asssuming that the project would be designed twice. And we wonder why Architects get little or no respect. Anne Whitacre, FCSI CCS Senior Member Username: awhitacre Post Number: 364 Registered: 07-2002 Posted on Thursday, July 27, 2006 - 05:36 pm:    The City of Seattle (and King County) has long had a clause that if the cost came in more than 10% over budget, the Architect had to redesign to the budget for free. About 15 years ago, I worked on a project that was continually estimated and we built in a contingency of about 8% so that the bids would come in at or slightly below the budget. The project bid at a lean time, and the job came in nearly 20% under budget, which meant that they Owner had the firm do some redesigning to add in scope. Because of that, the clause now reads that the Architect has to redesign for no cost if the job is EITHER 10% over budget or 10% under budget. the firm in which I now work operates sort of half and half on this topic. we do take into account the Owner's budget, but I've been told that about "half the time" if the owner likes the design well enough, they will come up with the extra money if needed. We also saw that in the Seattle Library -- the Owner came up with an additional 23 million dollars to ensure that the design wasn't compromised. (on top of an original $157 million budget). Every architect I've worked with declaims responsibility for costs in their contract for services -- because they cannot be responsible for the bidding of the contract. Cost estimators are not responsible for cost, because there is no way they can guarantee a "guess", and they often are not licensed or required to be. And ultimately, "cost" is not a health and/or safety issue except to the health of the architect who is working too late to comply with it. Ronald L. Geren, RA, CSI, CCS, CCCA, MAI Senior Member Username: specman Post Number: 293 Registered: 03-2003 Posted on Thursday, July 27, 2006 - 07:44 pm:    So, Anne, if a project in for the City of Seattle comes in, let's say, 15% under budget, do they throw out the bids, redesign, and rebid? Seems crazy to me--almost a catch 22 situation: bids under by >10%, architect redesign, bids now >10% over, architect redesigns....and so on. Frederick L. Jang, RA, CSI Junior Member Username: fred_jang Post Number: 2 Registered: 07-2005 Posted on Thursday, July 27, 2006 - 07:51 pm:    This brings up an interesting question concerning the cost of A-E services. Government contracts (Brooks Bill) usually sets a 6% fee limit of the estimated construction cost for A-E services. With the recent rising construction materials escalation, the Owners are paying more for A-E fees and construction cost. Are the A-E's providing additional services such as additional Cost Estimating services to justify their fee increase? Julie Root Senior Member Username: julie_root Post Number: 61 Registered: 02-2004 Posted on Friday, July 28, 2006 - 12:09 pm:    Anne can talk more to her experience, but I know I have had experience with clients when the bid has come in so low that yes they want to redesign. This clients are schools, universities, convention centers....projects that usually have some type of bond money that they can only spend on that particular project. If they do not spend it they are critized for taxing citizens too much or they lose the dollars by not having he tax payers buy those bonds. One way we have helped the situation is develop an extensive list of alternatives both additive and deductive. It also helps clients who derive some of their funding from donors. They then know how much for each of these pieces they need to raise and if the bids come in low they can add items. If the bids come in high they know they need to raise more money or decide they cannot afford it. It is a very tricky subject. I find the more cards you can just put on the table about the process the better the discussion and the resolve goes. Of course there are some clients who some cannot say 'no' to, but I suggest you try to stay away from those clients if at all possible. They are usually ones not so interested in partnering. Anne Whitacre, FCSI CCS Senior Member Username: awhitacre Post Number: 365 Registered: 07-2002 Posted on Friday, July 28, 2006 - 12:16 pm:    for the King County jobs, if the bids come in too low, they don't necessarily throw out the bids, but they do require a redesign for "free" from the architect. as Julie says, they want to use up all the bond money that was appropriated, so they want the most building for the money they have available. Ronald L. Geren, RA, CSI, CCS, CCCA, MAI Senior Member Username: specman Post Number: 294 Registered: 03-2003 Posted on Friday, July 28, 2006 - 01:29 pm:    I like Julie's approach of using alternates, which we use considerably in our office. However, I don't specify if they're deductive or additive-I let the bidders tell us that (but, I already have a good idea what they'll be). Having to redesign after receiving a low bid to increase construction cost to meet budget, to me, could lead to unsuccessful bidders contesting the owner's bid procedures, especially on public projects. Robert W. Johnson Senior Member Username: bob_johnson Post Number: 110 Registered: 08-2004 Posted on Tuesday, August 01, 2006 - 12:22 pm:    Years ago the State of Colorado A/E fees were determined by a percentage of the construction contract amount. If they were high you were required to redesign down to budget per above discussion. But if they were low, your fee got cut - great incentive clause to keep construction costs low! Don't have knowledge of their current A/E agreement provisions. Joe Back, CSI, CCS, AIA Junior Member Username: j_back Post Number: 2 Registered: 05-2005 Posted on Wednesday, August 02, 2006 - 01:18 pm:    True story: Large public agency doing many projects establishes an A/E fee schedule based on percentage of construction budget (notice I said "budget," not actual "cost"). Large public agency also establishes, without any input from the A/E, the project program and construction budget. A/E is retained for a fee based on the owner's construction budget. A/E designs the project, incorporating all elements of the program as approved by the owner. The project is over budget. A/E is required, by contract, to redesign without additional fee to meet the construction budget. However, eliminating any of the project program is strictly forbidden. A/E spends hundreds (sometimes thousands) of manhours redesigning in a vain attempt to squeeze the program into the artificially low budget. Finally, everyone involved, including the large public agency, agree that the project has been VE'd to death and it obviously will not fit within the budget without cutting important program spaces. A miracle happens. The large public agency announces it has "found" the additional funding necessary to make up the difference between the savagely VE'd design and the artifically low initial construction budget. But wait...A/E is not entitled to additional fee on the new funding because "A/E failed to design within budget." You may not think this is true, but I actually had an employee of the large public agency admit to me that it was a strategy of that agency to establish an unrealistic construction budget in order to set a low A/E fee and then run the A/E through the ringer squeezing out every ounce of design effort to get the full VE, knowing that the budget would never actually be met. Then, the agency would announce that they had the funding (which had been residing in their "total" project budget all along. But, the A/E was ridiculed for not being able to design within budget and no additional fees were forthcoming to the A/E. Mr. Johnson's post reminded me that this is the real problem. Ralph Liebing, RA, CSI Senior Member Username: rliebing Post Number: 434 Registered: 02-2003 Posted on Wednesday, August 02, 2006 - 01:45 pm:    Carefully read contract: Understand implications; Do NOT sign contract; Run! Joe Back, CSI, CCS, AIA Member Username: j_back Post Number: 3 Registered: 05-2005 Posted on Wednesday, August 02, 2006 - 06:33 pm:    Mr. Liebling, I knew somebody would say that. And, of course you are correct. The one problem with that course of action, though, is that public agencies control a huge portion of the available design/construction work. There is typically no negotiation (or very little) on a pubic agency contract. They operate on a "take it or leave it" basis. Sure, any architect can walk away, and some do, but when you make that decision you are not walking away from just one project, you are walking away from a lot of work. Now, if all of that work is going to be a nightmare, then why bother...I would agree. The problem is that larger firms, in particular, simply can not walk away from what amounts to the largest pool of available work to feed the machine. The public agencies know this. Another true story is that I had the head of one very large state agency (he is an architect) tell me that it was nearly impossible for him to raise architectural fees because his agency consistently had a large pool of qualified firms beating their door down to do their work. During the same timeframe that I was hearing this, I was sitting on a committee of architects wringing hands trying to figure out how to get said state agency (along with several other state agencies) to raise their fees because all of the "qualified firms" were losing money on every project they did for this (and other) state agencies. It is a vicious cycle. Truly, if enough architects walked away from these types of situations, the world would change, but as an individual firm just trying to make the monthly nut, it is a very hard decision to make. Ralph Liebing, RA, CSI Senior Member Username: rliebing Post Number: 435 Registered: 02-2003 Posted on Thursday, August 03, 2006 - 07:01 am:    Of course, Mr. Black, there is the other side of the coin. You are exactly right about the work controlled under these circumstances and the line-up of firms "willing" to work within this framework. but would seem that some organziation, in each state could come to deal with the inequity of this through its political connections and its professional aplomb. Perhaps the AIA; perhaps in association with the CSI. Would seem to have enough expertise there [and perhaps political influence] Anonymous   Posted on Thursday, August 03, 2006 - 10:06 am:    It's a losing battle. AIA and CSI could never have the same clout as the political appointees of a Governor, which the heads of these agencies usually are. But, while we have always felt things like this were happening, this agency seems to be particulary eggregious. They need to be outed. Maybe if enough Architects tell the same story over and over showing a consistent pattern of behavior, there may be some recourse. Biggest problem is that trying to organize Architects is sort of like herding cats. Nathan Woods, CCCA Senior Member Username: nwoods Post Number: 114 Registered: 08-2005 Posted on Thursday, August 03, 2006 - 10:58 am:    Seems like you could head up a panel discussion at your city's AIA chapter meeting, get those major firms to share their expereinces and develop a united approach, perhaps create a referendum and approach the (mayor?) to publically decry this practice or those implementing it. Joe Back, CSI, CCS, AIA Intermediate Member Username: j_back Post Number: 4 Registered: 05-2005 Posted on Thursday, August 03, 2006 - 06:38 pm:    There has been some organized attempt at a negotiated and/or legislative response to this situation, but with little to no effect so far. Anonymous is basically correct in identifying the problem. In the end, it all does come down to whether individual firms are willing to walk away from these situations. So far, not nearly enough firms have been willing to do so. Until that happens, public agencies will continue to operate in this manner. From their perspective, if they are getting qualified firms and getting good (if not great) service from those firms for the fee schedule and contract terms they dictate, it is not their problem whether the firms are making money. From that perspective, I would probably have to agree with them, as much as it pains me to say that. The issue that really gets me about all of this is that architects and engineers have been shot down in the past regarding even feeble attempts at establishing recommended fee schedules, yet, public agencies can set fee schedules and contract terms that govern a majority of the available design/construction work. In my opinion, this really amounts to price fixing in reverse. They control the market. I believe that the only remedy to this is a legislative remedy, but Anonymous already knows how hard that would be. David Axt, AIA, CCS, CSI Senior Member Username: david_axt Post Number: 690 Registered: 03-2002 Posted on Tuesday, August 08, 2006 - 09:20 pm:    Here is the deal. The bidder bids the job according to 2 year old pricing with a minor increase planned for escalation. Remember, he has to bid low to get the job. So he gets awarded the job. Now some time later the price of raw materials and labor shoots through the roof. Does the contractor say, "Oh silly me! Gosh darn! Well I guess I will make money on the next job." No. Instead the contractor tries his darndest to squeeze every last nickel out of the project. I know of one project where the contractor is millions of dollars in the hole due to escalation. So he is trying every trick in the book to get more money. He is blaming the architect for incomplete documents and the owner for last minute changes. The team actually feels sorry for the contractor because he is unfortunately caught between a rock and a hard place. It’s like watching a man drown all the while trying to protect yourself from him dragging you under the surface. So let’s review. The contractor is losing money due to escalation. The architect is called upon to do more CA and CYA paperwork than originally planned. So the architect is losing money. The owner is having to shell out more money that originally budgeted to get the building built. So it is a Lose-Lose-Lose situation. John Bunzick, CCS, CCCA Senior Member Username: bunzick Post Number: 561 Registered: 03-2002 Posted on Wednesday, August 09, 2006 - 08:43 am:    True. However the architect, and the contractor as well, are providing a service. The owner ends up with the asset (the building) whose value is based upon things such as land value and cost of construction materials. In my view, they should bear the lion's share of the escalation risk because of this. Of course, construction contracts are intended, in part, to allocate risks to each party by agreement. Unfortunately, owners frequently posses a stronger negotiating position than the contractor -- and most certainly stronger than the architect -- and push the risks onto parties less able to bear them. David Axt, AIA, CCS, CSI Senior Member Username: david_axt Post Number: 694 Registered: 03-2002 Posted on Thursday, August 10, 2006 - 12:41 pm:    Most school districts that we work for have a provision that if the bids come in over 10% (I think) over the budget that we have to redesign the building on our nickel. In order to protect ourselves we usually add alternate bid items. Well I am currently writing a spec that has 29 (yes TWENTY NINE!) alternate bid items. Even still the project manager is worried that the bids will be over budget. We have also had projects whose estimate changed dramatically from DD to CD, even though we have not alterned the program or significantly changed materials. I tell you. In today's economy the budget is a crap shoot. Ronald L. Geren, RA, CSI, CCS, CCCA, MAI Senior Member Username: specman Post Number: 303 Registered: 03-2003 Posted on Thursday, August 10, 2006 - 12:45 pm:    Sounds like you have a project manager that didn't do just that...manage the project. John Bunzick, CCS, CCCA Senior Member Username: bunzick Post Number: 564 Registered: 03-2002 Posted on Monday, August 14, 2006 - 09:31 am:    Massachusetts law governing public projects has a built-in limitation (in a sense) to excessive alternates. When determining the low bidder, alternates must be accepted in the order they were listed, and cumulatively. That is, if you want alternate 5, you have to take alternates 1 through 4 also. Then, the low bidder is determined on the basis of the alternates selected. Thus, the owner really has to have their act together in terms of priorities, and having alternates where one material is used in lieu of another can get complicated plenty quick if you have overlapping systems. Public owners thus have a built-in incentive to keep it simple. By the way, the point of this is to keep owners from skirting the requirement to select the low bidder by cherry picking alternates to get the bidder they want (like).