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Posted By SDA Headquarters,
Thursday, June 20, 2024
Updated: Friday, June 21, 2024
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Indemnification Clause
The indemnification clause is among the most highly disputed provisions in every A|E contract. The indemnification clause’s specific language can significantly impact a firm’s risk exposure. Thus, every architect, engineer, and contractor should understand the meaning of the indemnification before executing a contract.
An indemnification provision is a contractual provision under which one party (the indemnitor) agrees to assume liability for the losses incurred by another party (the indemnitee). In other words, your Client wants you to promise to reimburse them for damages caused by your negligence.
A broad-form indemnity requires one party to assume the obligation to pay for another party’s liability, even though that other party is solely at fault.
Example: A/E shall defend, indemnify, and hold harmless the Owner from any claims, damages, and losses arising out of the performance of this Contract.
An intermediate form indemnity clause is when the indemnitor is not bound to indemnify for the indemnitee’s sole negligence but is bound to indemnify for all damages to which it partially contributed, even when its contribution was minor.
Example: The A/E shall indemnify and hold harmless the Owner for all damages, losses, or claims that arise as a result, in whole or in part, from the negligence, error, omissions, or failure to perform by the A/E, his employees, or his agents.
In a narrow form indemnity provision, the indemnitor agrees to be responsible only for losses or harm it actually caused.
Example: A/E shall indemnify the Owner for damages arising out of the performance of the Work, but only to the extent caused by the negligent acts, errors, or omissions of the A/E
It is important to remember that architects and engineers are like doctors and lawyers—licensed professionals—required by law to meet the standard of care for their professions as determined by their peers. Professionals are not legally required to be perfect, as they provide a service, not a product. They do not provide widgets, gadgets, or gizmos. Professional liability insurance (PLI) (in the A|E licensed environment) is written to cover damages caused by a professional’s negligent acts, errors, or omissions. An architect or engineer cannot purchase any insurance coverage to defend their clients before negligence is established.
PLI only insures the professional and only for professional liability (as opposed to contractual liability). When broad form indemnification or “duty to defend” clauses are used in design contracts, the “duty to defend” language in the Contract effectively nullifies the A|E’s PLI coverage. Architects and engineers also carry general liability insurance; defense can be included in general liability coverage.
In contrast, contractors are strictly liable because they are providing a product—negligence does not need to be established to trigger insurance coverage. Therefore, contractors defend their clients before negligence is established and are covered under their general liability insurance.
Defense in Indemnification Clauses
Part and parcel of many indemnification clauses you may come across is an expectation from your Client that you also “defend” them. It has become increasingly important to recognize the difference between “indemnity” and “defense” and its implications on you as a design professional. Here is the problem: When you agree by Contract to “defend” your Client in the event of a claim against them, you agree to pay your Client’s attorneys’ fees and costs from the first day a claim is made against them, regardless of your liability. The Client has every right to hire an attorney of their choice and send you the monthly invoice. And perhaps the biggest clincher is that your professional liability insurance will probably not cover you for defense obligations you have assumed vis-à-vis the Contract. At a minimum, the question of coverage among carriers remains unclear.
The use of broad-form indemnification clauses in A/E contracts can often be viewed as a “cut and paste” issue. However, these clauses do not make sense for contracts for architectural or engineering services (where only PL insurance is available since the broad-form indemnity is not insurable). Many lawyers simply borrow broad-form indemnification language they come across in other contracts (including contracts they have drafted for their clients to use with contractors) and use them for architectural and engineering contracts, too.
A majority of clients or owners do not understand that the broad form of indemnification and duty to defend clauses in the A/E context is uninsurable. They want the benefit of the indemnitor’s insurance policy, but broad-form indemnification language nullifies it. It’s a lose-lose scenario. Shifting risk to a party who cannot obtain insurance for that risk is not in the best interest of anyone involved. Indemnity provisions provide assurance, not insurance, and are only as valuable as the indemnitor’s ability to pay. No one should “bet the firm” against whether or not an owner, with a broad-form indemnification provision protecting them, will be sued.
Solutions
An agreement to “defend” can be quite costly. If your Client continues to fight you and insists that you pay their costs of defense from the moment a claim rears its ugly head, consider the following:
1. Whether this is a Client you genuinely want to work with.
2. There are means to negotiate. Perhaps you can negotiate a “cap” on defense costs coming from your firm’s pocket.
3. Language that will limit your duty to defend to your adjudicated share of responsibility (the intermediate or narrow provision from above).
4. Incorporating two indemnity paragraphs, one for general liability and one for professional. You include defense in the former and not in the latter. If you are working on a design-build project and your Client is construction-oriented, explain that defense is an uninsurable condition under a professional liability policy, but you are happy to include it under the general liability provisions. It may be understood when the Client realizes they cannot access your insurance for this and must rely strictly on your firm’s assets.
The ”Perfect” Indemnification Clause
If you need counter-language for your Contract, consider the following indemnification language provided by Stephan Andrews, Esq., O’Hagan Meyer.
“The subcontractor shall indemnify and hold harmless the contractor and its respective officers, directors, and employees from and against all damages, costs, and expenses (including, without limitation, reasonable attorney fees and costs of defense) to the extent caused by or resulting from 1. The negligence, errors, omissions, or failure to perform by the subcontractor, its agents, partners, employees, subconsultants, anyone directly or indirectly employed by them, or anyone for whose acts they may be liable or 2. The negligent breach of the Agreement, intentional acts, omissions or other failures to perform the subcontractors, its agents, partners, employees, and subconsultants, anyone directly or indirectly employed by them or anyone for whose acts they may be liable.”
Other Resources:
Indemnification Clauses: All You Need to Know, By Glenn W. Birx, FAIA
Walking the Thin Line on Indemnification, AIATrust
The Indemnity Dilemma, by Mark C. Friedlander
Indemnification Clauses, ContractsCounsel
Indemnification - Negotiating a Reasonable Clause, YouTube Presented by Kent Holland
Understanding the Implications of “Defending” Your Client by Jacqueline Pons-Bunny, Esq., Weil & Drage, APC.
NOTE: SDA does not endorse any products or services mentioned, and SDA does not assume responsibility for any circumstances arising out of the interpretation, application, use or misuse of any information presented. SDA recommends the reader consult the appropriate legal, financial or human resource counsel before implementing information contained herein.
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Posted By SDA National,
Wednesday, May 15, 2024
Updated: Thursday, May 16, 2024
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As a general rule, when there is a breach of contract, the injured party—in the case of a building owner and architect/engineer, the owner—must receive what they had a right to under the contract, but no more. A windfall or a benefit greater than would have been received had the contract been performed correctly is not allowed at the expense of the performing party or architect in this case.
Black’s Law Dictionary describes betterment as:
“An improvement of a … building that goes beyond repair or restoration.”
For example, suppose an owner realizes that a standard built-in (plaster/painted) receptionist station is facing the wrong way on the drawings and was built as such. In that case, the owner cannot now ask for the station to be faced with marble or add a planter or other enhancement. This additional work, called “betterment,” is outside the scope of the original contract, and its costs are not allowed.
In another example, no light fixture has been shown in an entry closet. During construction, the owner adds a light fixture in the entry closet. All expenses related to adding the fixture are betterment.
Betterment depends on what is reasonable. If an improvement is necessary and reasonable to complete the terms of a contract, then it will be allowed. If it is unreasonable, it will be considered betterment; thus, the amount of damages that constitute the upgraded improvement is not allowed.
For example, if a city ordinance required the sidewalk around a building to be 48”wide, and it was only constructed 40” wide, the owner would benefit from the additional 8,” and it was required. The cost of the additional 8” is betterment, but demolishing pavement, for example, to allow for the additional 8” would be a cost for the engineer as it is reasonable and necessary to bring the sidewalk up to code.
Betterment in the case of omission in design. Design professionals frequently invoke the betterment or added value defense in the context of claims involving omissions in design documents. Generally, courts require owners to pay what the omitted item would have cost had it been included in the original design. Accordingly, if the error is not discovered in the design stage, the owner should not have to pay for any additional labor or materials necessary to correct the error or the cost of necessary retrofitting demolition that would not have been part of the original design.
For example, an engineer was sued for designing an inadequate tank-drain septic system with a 1,000 sq ft drainage field instead of the required 1,200 sq ft drainage field. The owner would have had to pay the costs of the additional 200 feet required, and the engineer is not obligated to pay for that cost, but only any additional costs incurred, if any.
Timing is crucial for the betterment defense. Traveler’s Risk Management Advisory Bulletin states:
“Timing plays a crucial role in the availability of the betterment defense and to what extent it can apply to reduce monetary liability. The key timing components are whether the project has been bid and a contract signed with the contractor, and if so, has this design element been constructed? If not, the owner may not have suffered compensable costs, at least not yet. With no compensable costs in play, a design change may fix the problem; however, the design professional will generally not be compensated for their re-work. On the other end of the spectrum, if the owner or contractor has spent money to construct all or a part of a deficient design, and must spend more to remediate the constructed design, the owner will attempt to recover these costs from the design professional who may have both a betterment defense and an associated defense of limitation of expense to the owner’s ‘first costs.’”
The concept of betterment is a highly complex but potentially money-saving defense. Consultation with the insurance company’s legal counsel and your construction lawyer is necessary to determine the correct structure of the claim, precedents, and arguments to use. Architects must understand that consulting engineers may also use this defense against them in suits.
Want More Information?
Click here for a video by Baker Law, “What is Betterment – The “No Free Lunch” Rule – in Design and Construction,” by Jeremy Baker, 2/26/2021.
Click here for a Federal Highway Administration (FHWA) overview and examples of transportation betterment under emergency relief.
References:
Atkins, FAIA, James B. & Simpson, FAIA, Grant A. AIArchitect, Vol. 13, November 3, 2006, “A Loss Cause Too: Betterment.”
Travelers Advisory Bulletin: A Risk Management Publication for Design Professionals.
NOTE: SDA does not endorse any products or services mentioned, and SDA does not assume responsibility for any circumstances arising out of the interpretation, application, use or misuse of any information presented. SDA recommends the reader consult the appropriate legal, financial or human resource counsel before implementing information contained herein.
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Posted By SDA Headquarters,
Friday, April 26, 2024
Updated: Friday, April 26, 2024
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April 24 was National Administrative Professionals Day. And this year, we’re taking a different approach. At SDA, we’re celebrating how business professionals in the A|E industry with roles in marketing, finance, human resources, project management, and operations keep the firm in business. Instead of spotlighting individual achievements, we’re diving into the collective essence of our firms, celebrating the interconnectedness of diverse business functions that underpin design endeavors. Much like the celebrated Architecture and Engineering Weeks, let’s delve deeper all week into the intricate business ecosystem of our firms. Today's focus is Human Resources.
In the fiercely competitive landscape of the Architecture, Engineering, and Construction (A|E|C) industry, the battle for talent rages on. As firms strive to attract and retain top-tier professionals, the role of human resources (HR) professionals becomes increasingly pivotal in shaping organizational success.
At the heart of HR’s mission is creating a dynamic and engaging workplace culture that sets firms apart as desirable destinations for experienced and talented professionals seeking growth and fulfillment. From designing effective onboarding systems to implementing robust career development programs, HR professionals play a central role in nurturing employee engagement and professional advancement.
Crafting compelling job descriptions is just the tip of the iceberg. HR teams leverage their expertise to attract candidates with the right skills and cultural fit, ensuring that each hire contributes to the firm’s overall success. Through innovative recruitment strategies and competitive compensation packages, HR professionals create an enticing value proposition that resonates with top talent.
But HR’s impact extends far beyond the recruitment process. By understanding the latest HR benefits available to the firm to save money and retain talent, HR managers leverage the firms’ benefit dollars to their maximum effect.
Case in Point: Cutting-edge HR conference speakers bring our members the latest 401(k) plans, health plans, and compensation trends. Many A|E|C HR managers learned about HDHP health insurance programs and HSA spending accounts early, saving their firms considerable payroll taxes by structuring health insurance premiums as pre-FICA tax deductions.
At SDA, we understand the vital importance of HR in driving talent acquisition and professional growth. That’s why we’ve established initiatives within our SDA network, including our virtual First Friday Coffee Connections and many Focus Area Forums. These platforms are invaluable member resources for sharing knowledge, exchanging best practices, and fostering collaboration within the A|E|C community.
Case in Point: Spreading the word about pursuing the Paycheck Protection Program (PPP) and Employee Retention Credit (ERC) made a real monetary difference to the bottom line while weathering COVID for many firms.
HR professionals can be the unsung heroes of the A|E|C industry, establishing best practices to drive talent acquisition and retention while favoring the firm’s bottom line. Through their expertise, dedication, and innovative initiatives, they create the foundation for organizational success and foster a culture of excellence that propels firms to new heights of achievement.
SDA Webinars:
Join us at our next First Friday Coffee – Register Here
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Posted By SDA Headquarters,
Thursday, April 25, 2024
Updated: Thursday, April 25, 2024
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April 24 was National Administrative Professionals Day. And this year, we’re taking a different approach. At SDA, we’re celebrating how business professionals in the A|E industry with roles in marketing, finance, human resources, project management, and operations keep the firm in business. Instead of spotlighting individual achievements, we’re diving into the collective essence of our firms, celebrating the interconnectedness of diverse business functions that underpin design endeavors. Much like the celebrated Architecture and Engineering Weeks, let’s delve deeper all week into the intricate business ecosystem of our firms. Today's focus is Operations.
In the intricate world of architecture and engineering, the design process often takes center stage, with its creative endeavors and technical innovations capturing the spotlight. Yet, behind the scenes, two critical functions quietly ensure the success and viability of every project: contract administration and risk management.
These functions are often seen as the unsung heroes of project execution, handling the intricate details that can make or break a project’s outcome. Imagine, for a moment, the complexity of an 18-month project with four critical milestones spaced every four months. Here, the intricacies of contract administration come into sharp focus. Do you prefer invoicing four times throughout the project’s duration, or would you opt for the flexibility of monthly progress billing? The answer might seem trivial, but it has profound implications for working capital management and project liquidity.
Trained contract administrators are pivotal in navigating these intricacies, scrutinizing every clause and provision to ensure alignment with project goals and objectives. One of their critical tasks is to zero in on the Payment Clause, as well as the Limited Liability and Rights of Use clauses, to control professional liability and financial risk.
Furthermore, operations specialists are instrumental in securing signed contracts with all subconsultants, a crucial step in mitigating professional liability insurance costs. Ensuring that all subcontractors have the requisite certificates of insurance helps shield the firm from potential legal and financial liabilities.
SDA recognizes the paramount importance of effective contract administration and risk management. That’s why we’ve partnered with industry leaders like Berkeley Design Professionals to offer comprehensive webinars and conference sessions on these critical topics. Through these educational initiatives, we empower our members to stay abreast of the latest best practices and industry standards, equipping them with the knowledge and tools to navigate complex contractual landscapes confidently and precisely.
In essence, contract administration and risk management are the bedrock upon which successful projects are built. By investing in these fundamental functions and arming our members with the necessary knowledge and resources, we position them for success in an ever-evolving industry landscape.
Want to know more about contract administration and risk? Check out these SDA programs:
SDA Webinars:
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Posted By SDA Headquarters,
Wednesday, April 24, 2024
Updated: Wednesday, April 24, 2024
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April 24 is National Administrative Professionals Day. And this year, we’re taking a different approach. At SDA, we’re celebrating how business professionals in the A|E industry with roles in marketing, finance, human resources, project management, and operations keep the firm in business. Instead of spotlighting individual achievements, we’re diving into the collective essence of our firms, celebrating the interconnectedness of diverse business functions that underpin design endeavors. Much like the celebrated Architecture and Engineering Weeks, let’s delve deeper all week into the intricate business ecosystem of our firms. Today's focus is Finance.
Financial management is pivotal in driving success and sustainability in the complex world of architectural and engineering firms. From navigating tax regulations to optimizing project profitability, finance professionals are responsible for fiscal health and strategic decision-making.
One often overlooked aspect of financial management is understanding and mitigating tax liabilities. In Virginia, firms are subject to a Gross Receipts Tax, which can significantly impact the bottom line.
Case in Point: Take, for instance, the scenario of a joint venture operating in Virginia. Not only does the JV incur Gross Receipts Tax, but each partner is also subject to additional taxation at the individual level. A double whammy can eat into profits and erode financial viability. However, astute financial analysis and strategic planning can uncover opportunities for optimization and savings. Consider the case of a recent joint venture where a firm’s controller identified a significant tax-saving opportunity. By strategically headquartering the JV in Colorado instead of Virginia, the venture saved $13,000 annually and $65,000 over the contract’s life. This simple yet strategic decision increased the JV’s profit dollar for dollar to the bottom line.
But tax optimization is just one piece of the puzzle. Equally important is understanding project profitability by client—a metric that can reveal hidden inefficiencies and identify lucrative opportunities. By analyzing profitability metrics, firms can weed out underperforming projects, allocate resources more efficiently, and prioritize clients with the highest returns.
At SDA, we’re committed to empowering our members with the knowledge and insights needed to navigate the intricate terrain of financial management. It’s one reason why we partner with industry leaders such as PSMJ, Profit by Design, and Morrissey Goodale during our conferences. Through these partnerships, we provide our members access to up-to-date financial analysis, industry trends, and best practices—like Deltek & A|E Clarity’s financial survey and McGraw-Hill industry trends—equipping them with the tools and strategies needed to thrive in a competitive marketplace.
Case in Point: After a member attended an SDA conference session by Mony Financial Services on deferred compensation plans using whole life insurance, she brought the idea back to her firm, the firm established and funded the plan, and it continues to be a successful part of the firm’s succession planning.
Finance is the lifeblood of A|E firms, driving strategic decision-making and ensuring long-term sustainability. By embracing financial acumen and leveraging our various member resources, firms can unlock new opportunities, optimize profitability, and chart a course toward continued success in the industry’s ever-evolving landscape.
Look for SDA’s new Certificate in Design Firm Financial Management (CDFO-FM) accreditation coming soon. CPAs and CMAs designations are helpful, but an accreditation specific to A|E|C finances will be a game changer.
Webinar Suggestions:
Benchmark Your Firm Performance for Growth – Deborah Gill
RAISE Your Value and Charge What You’re Worth– June Jewell
How to Achieve a Sustainable, Profitable Business - Mark Goodale
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