Guarding Against Construction Contingency Overruns; or, Asking Architects and Contractors to Put Their Money Where Their Mouth Is.

Take a traditional delivery model where the owner hires the architect to prepare construction documents, and separately hires a contractor to implement the construction documents to build the project...

Owners are often faced with change orders resulting from required clarifications and corrections of the construction documents during construction, and this cost cannot be recovered from the architect unless the architect's services fell below the standard of care.  Architect agreements, take the AIA B103 as an example, will usually include language that the drawings and specifications should be fully and completely coordinated.  In reality, however, this is never the case--and the standard of care does not require it.  Owners should expect some number of changes during construction resulting from clarifications and corrections in the plans and specifications. 

The contracts usually make the Architect responsible for his errors and omissions.  Damage resulting from E&O is insurable, and the cost of insurance is covered by the fee and included in the owner's budget.  But changes and clarifications in plans that don't exceed the E&O threshold must be carried in the owner's construction contingency.  The construction consultants and the architect should be able to advise the owner what is a reasonable contingency for such changes, and the owner should build that contingency into its budget.

How does the owner guard against overruns in this construction contingency?

Once the architect has advised on a reasonable contingency number for construction changes resulting from anticipated clarifications and corrections during construction, an owner should be able to ask the architect to put his money where his mouth is, i.e. to accept some risk if this contingency amount is exceeded. 

Here is some language that an owner might propose in a traditional procurement owner/architect agreement. This asks the Architect to share in the increased costs if the clarifications and corrections contingency is exceeded. 

To the extent that changes to the Contract Documents are required because of conflicts, or lack of detail in the information provided by Architect, and that could not have been avoided with the exercise of due diligence and care in accordance with the requirements of this Agreement and the professional standard of care (“Clarifications and Corrections”), Architect will work proactively with the Contractor throughout construction to avoid or mitigate any increased costs.  The Project will carry a construction contingency of $___________ to cover change orders to the Contractor relating to increased costs resulting from Clarifications and Corrections.   To the extent that there are any cost increases resulting from Clarifications and Corrections in excess of this Clarifications and Corrections contingency, the Architect’s fee will be reduced in the amount of 50% of any such additional compensation issued to Contractor by change order.   

If this idea, which is not contained in the available form agreements, is pursued, an owner can also raise the concept with the Architect and Contractor together.  If an owner enters into a traditional GMP agreement with a contractor, the owner might include a mirror image provision in his agreement with the contractor that would require the contractor to a) be involved during the design to assure the plans are constructable and complete, b) agree to the Clarifications and Corrections contingency, c) to work proactively with the Architect to avoid increased costs on account of Clarifications and Corrections, and d) to bear 50% of any increased cost in excess of the Clarifications and Corrections contingency amount. 

Negotiating such a term should be approached from a conceptual level first.  If both the Architect and Contractor can be persuaded to buy into the concept, the owner, architect and contractor should then be able to establish an appropriate contingency amount together.  Some additional terms might be required to provide some input by everyone in how the contingency is spent.