Negotiating design contracts during a pandemic

PaulKnupp-2018Guest blog post written by Paul E. Knupp, III, Esq., of Lee/Shoemaker PLLC. Paul Knupp is Counsel at Lee/Shoemaker PLLC, a law firm devoted to the representation of design professionals, in DC, Maryland, and Virginia. The content of this article was prepared to educate related to potential risks, but is not intended to be a substitute for professional legal advice.

COVID-19 dramatically changed daily life and instilled a collective fear for the safety of our loved ones. While it remains unclear what our “new normal” will look like, we know the pandemic is damaging businesses across all sectors and that the construction industry is no exception. Trade media is rife with predictions of an impending construction industry recession, as work crews diminish due to self-isolation and an increasing number of state and local governments issue orders halting or severely restricting construction activities.

Despite the uncertainty caused by the current pandemic, design firms can mitigate the associated risks at the contract negotiation stage of future projects, and protect their bottom lines. This article discusses some key issues and contract provisions for design professionals to consider and address in this new and evolving era of pandemic.

First, thought should be given to how you price your proposed services, as previous models for pricing services may not accurately reflect your actual costs:

  • How have COVID-19 restrictions affected the efficiency of your team, as they transition from working in a collaborative studio setting to a more isolated remote work environment?
  • Have your quality control efforts increased since transitioning to a remote work environment?
  • How have the COVID-19 restrictions affected your overhead costs, and for how long do you anticipate experiencing that impact?
  • Have you been forced to lay off personnel and, if so, how does this affect the operation of your firm? We anticipate that many design firms may not fully appreciate the full impact of the pandemic on their operations, and risk inadvertently extending the consequences by neglecting to consider the continued applicability of existing pricing

Second, extra attention should be paid to the terms included in your future contracts to account for pandemic-related exigencies:

  • Does your proposed contract account for the uncertainty regarding the duration of impacts associated with COVID-19 restrictions on business?
  • Does your proposed contract entitle you to additional compensation, time, or both in the event that COVID-19 restrictions impact you?
  • Does your proposed contract require you to continue performing services— potentially without compensation—in the event that your client disagrees with your entitlement to additional compensation/time resulting from COVID-19 restrictions?

Design firms should be transparent in identifying any assumptions/qualifications tied to their proposals, and should be vigilant in incorporating any such assumptions/ qualifications into the parties’ contract for the project. Failing to state these terms explicitly in the parties’ contract may result in disputes over whether the design firm’s fixed fee accounted for, or did not account for, pandemic-related impacts.

Design firms should work out provisions that specify the parties’ rights and responsibilities in case of extended and/or new pandemic-related restrictions (e.g., if there should be a lull in restrictions over the next few months, followed by newly implemented restrictions in the fall), including:

  • How fees are to be handled upon and during a suspension;
  • Which party decides whether and when to suspend or abandon the project; and
  • What rights and remedies the parties will have if the project is halted by governmental

You should consider addressing contingencies for increased social distancing/self-quarantine policies—such as attendance of OAC meetings by video conference and greater flexibility as to the timing or frequency of site visits. You should try to confirm that the contractor and owner have formulated demobilization and remobilization plans in the event of a suspension or government-mandated shutdown. Consider referencing or memorializing such plans in your own contract and spelling out your firm’s entitlements and obligations in those scenarios.

Third, you should understand the insurance policies and coverage required by your prime and subconsultant agreements, and how the pandemic may affect coverage under those policies. Additionally, it may be prudent to find out what types of business interruption insurance may be available, either for the design firm or for a project. As many design agreements (including AIA documents) include a provision where each party waives its claims against the other to the extent insurance proceeds are available, requiring your clients to obtain business interruption insurance may provide design professionals far greater protection and less uncertainty than their standard contract’s insurance requirements typically provide.

Finally, design firms should be cognizant of the impact of the pandemic on the market for design services. Given the staggering economic disruptions thus far, we anticipate that some design firms may be inclined to assume greater risk in the near term, by agreeing to either reduced fees or unfavorable contract terms. Our experience is that, where profit margins are thin (or non-existent) and contract terms are one-sided, this approach is a recipe for future claims. If you are considering taking on more risk to remain competitive (or to remain in business), you may want to consider whether that merits an adjustment to your insurance program, through either lower deductibles or increased limits.

Whatever particular arrangements and concessions your design firm successfully negotiates, the foreseeable risks COVID-19 now poses to all projects amplifies the importance that parties negotiating a contract harmonize their expectations as to how these risks are being allocated and managed. The prudent design firm should carefully and thoughtfully assess the pandemic-related impacts on future contracts, and plan accordingly.

Upcoming Webinar

Victor will be hosting a webinar featuring Jonathan Shoemaker, of Lee/Shoemaker. He will address the impacts of the pandemic on design professionals while using industry standard documents as a foundation.

Don’t Just Flatten – Get Ahead of the Curve in Risk Management
Wednesday, May 27, 2020
1:00 – 2:30 pm EDT

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