Six elements of good contracts

July 2008 » Columns
If the laws required architects and engineers to prepare good contracts, far many more would have their licenses suspended. Most firm-developed A/E contracts are lacking—and that’s saying it nicely.
John P. Bachner

California law requires architects and engineers (A/Es) to prepare a written contract for each engagement they enter. The law does not require licensees to prepare good contracts, however, but that’s probably a good thing: If the law stipulated good contracts, far many more of the state’s A/Es would have their licenses suspended. It’s not that Golden State practitioners are worse about writing contracts than their peers in other states; they’re not. It’s just that most of the firm-developed A/E contracts I’ve seen are lacking—and that’s saying it nicely.

A good contract includes six elements. The first five elements are project description, scope of service, general conditions, performance schedule, and fee schedule. The sixth element we’ll reveal later; it might surprise you.

A good project description should include everything known or assumed at the time the contract is signed (or at the time the formatted proposal is signed, converting it into a contract). Omissions here have left A/Es open to accusations that problems developed because they failed to list key project variables, and not because (as the victimized A/Es contended) they were uninformed about changes.

Scope of service should identify everything the A/E will do, as well as significant services the client will have others perform or will forgo altogether. Failure to have a comprehensive scope leaves far too much to assumption. Failure to list services the A/E will not perform could result in a client’s allegation that "you should have told me I needed you to perform this service" after problems evolve because the service went overlooked or was dropped from the scope of service during undocumented discussions.

General conditions should anticipate many of the situations that commonly develop on similar projects, and should provide solutions to handle them that include risk-sharing and allocation.

Performance schedule should identify who will do what and when it will be done, allowing for common conditions such as wind and rain.

A good fee schedule should indicate how much various services will cost and when they must be paid. Given that unanticipated conditions almost always arise, the fee schedule should also include a reasonable contingency allowance that specifies how the allowance will be accessed and what specific approvals are required. Fees should consider the risks associated with the services involved. Those bearing more risk and for which design professionals are inescapably and personally liable should have a higher rate.

So what’s the sixth element? It’s one commonly found in many contracts, yet is unbelievably absent from almost every A/E-developed contract I’ve ever seen: definitions.

I am aware of an ongoing lawsuit over the definition of "substantial compliance," also known as "general compliance," "general conformity," and so on. The client used the term in the agreement its attorneys prepared and the A/E signed. Regrettably, the A/E did not ask, "What do you mean by substantial compliance?" before accepting all terms and conditions.

In fact, most A/Es I know more or less adopted this attitude toward substantial compliance: "I’ll do what I think might be OK, and maybe some of it will comply with a standard or specification of some kind." Oh? Shouldn’t the client know that? And shouldn’t the client be encouraged to learn more about the architect’s or engineer’s intent to avoid the usually sound allegation that he or she should have been warned?

In the case in question, we can suppose that the defendant engineer would claim, "But you used the term," to which the plaintiff client would counter, "But it’s up to you, as the design professional, to ensure we used the term properly."

In another case, an engineer failed to define the firm that employed him. The firm usually should be defined as "the legal entity and its directors, officers, employees, agents, and shareholders, their families, heirs, and assigns," and so on. The result? A judge upheld the firm’s limitation of liability (LoL) provision, but ruled that the engineer who signed the report at issue was not protected by the LoL, and so was personally liable without limitation.

A young engineer I know recently prepared a set of definitions for his firm’s contracts and agreement-formatted proposals. His firm’s CEO was reluctant to approve the definitions, but quickly changed his mind after the engineer—as part of ASFE’s Fundamentals of Professional Practice course—conducted a 20-question quiz about the meaning of 20 key words and phrases in the firm’s standard contract. The principals, associates, senior professionals, and major client representatives who responded to the quiz achieved an average score of 70 percent.

In truth, anything less than 100 percent can be defined as "trouble." And you know what that means! Or do you?

John P. Bachner is the executive vice president of ASFE, a not-for-profit association that provides programs, services and materials to help geoprofessional, environmental and civil engineering firms prosper through professionalism. Visit ASFE’s website at www.asfe.org.


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