What is a “safe harbor” and does it really protect you?

A “safe harbor” provision establishes a contingency percentage for change order costs during construction. If written properly, it can be an effective risk management tool.

We recently reviewed a professional services agreement that included the following provision:

“It is understood that the nature of the design process is such that plans, specifications and other documentation prepared by the Design Professional will contain errors, omissions and ambiguities that will require clarifications or corrections. Accordingly, Owner agrees to establish a design contingency equal to 2% of the cost of the work. The design contingency will be used for costs attributed to errors, omissions, conflicts, and ambiguities excluding any improvements or betterment costs implemented by Owner. Costs incurred by the Owner, excluding any improvements or betterment cost, in excess of this design contingency shall be the responsibility of the Design Professional.”

It’s wonderful that this apparently experienced client recognizes the need for change orders—although it could be argued that 2% may be low considering that this project was a renovation. It’s also great to recognize that the design professional should not be responsible for the increased value to the owner created by such change, often referred to as “added value” or “betterment.”

However, in drafting a “safe harbor” provision it’s important to articulate that the responsibility of the design professional for any costs above the contingency will only be for the amount of damages to the extent caused by the design professional’s negligence. The legal liability of the design professional for negligence would have to be established before professional liability insurance will respond to a contractual obligation. The owner cannot simply state that everything over the contingency is the design firm’s responsibility.

Thus, the above “safe harbor” provision could be beneficial to the design professional if the following language was added to the last sentence “…but only to the extent caused by the Design Professional’s negligent acts, errors or omissions in the performance of services under this Agreement.”