How Does the Architect Manage Risks in Projects by Using Contracts?

INTRODUCTION

Architects should never underestimate the importance of risk management in their professional practices. In fact, contract is the single most effective tactic to help architects minimize the potential risks. The intent of this note is to provide an overview of how Client Architect Agreements (CAA) and Building works contracts are executed in different types of procurement strategy and how architects use the above documents as a means to handle risks in their projects. The analysis is mainly based on questions posed in the interviews with two practitioners in varying business contexts, Neil Cownie (Director) from Neil Cownie Architect (individual) and Dean Wood (Principal architect) from Building Management and Works (BMW), Department of Finance WA (government), so that contractual triangulation among client, architect and contractor in differing project scales can be revealed and compared.

INVESTIGATION & DISCUSSION

What is CAA?

CAA is a legal document that defines the contractual relationship between client and architect. It clearly states roles and responsibilities of the two parties involved; scope of services to be provided; fee structure; provisions to vary and insurance provisions.[1] As a valid agreement, it contains elements of offer and acceptance; intention to be bound; consideration; legal capacity; genuine consent and legality.[2] The agreement requires architect to deliver services as agreed while client is obliged to pay for the services at negotiated price. Currently, there are multiple versions of CAA and examples of templates include:

AIA Client-Architect Agreement (CAA2009)

This agreement is prepared by the Australian Institute of Architects (AIA) for all project types and scales. Architects can refer to the additional user guide for further clarification on particular term and condition. However, due to public misconception about architects, clients who have little previous experience in the industry (usually private sector/ individual clients) may have personal bias on this agreement. They think that CAA2009 is only beneficial to its members but not the clients. So they usually prefer using agreement drafted by the architect.[3]

Architectural firm’s template

Since CAA2009 cannot win the trust of some clients, architects in small practice context may formulate their own agreement templates to suit the needs of those clients. In the case of Roscommon House by Neil Cownie Architect, Neil tried to draft his own CA agreement in order to create a more personal set of conditions.[4] The scope of works and fee sections were divided into multiple sub-sections. More importantly, he wrote the agreement in plain language (but used legal terminologies for lawyer scrutiny). These are the techniques to reduce misunderstanding and confusion so that clients can follow the terms and conditions smoothly. It is also easier for architect to identify potential risks.

Australian Standard 4122-2010

AS4122 is a standardized form of agreement prepared by the Australian Standard committee of consulting professions. It sets out terms and conditions of each party and cover all necessary articles. Most large-scale projects and government building projects use this agreement. In the case of Dumas House refurbishment, amended AS4122 with added and deleted clauses is used. However, the terms and conditions of this amended agreement are highly beneficial to the government. Dean explained that this is because the government has to protect the interests of tax payers. So it is necessary to direct liability to the consultants or architects if the building does not perform as required, or someone lays a claim against it for loss of properties.[5] Therefore, architects should carefully examine the terms and conditions and prepare for any foreseeable risks in government building projects.

What is building works contract?

Building contract is another types of legally binding document that formalizes relationship between client and contractor/ builder. It includes scope of work, timeframe, construction quality and the cost etc.[6] Similar to CAA, the building contract must contain the principal elements of contract in order to be valid. And the roles and responsibilities of both parties are also well defined. One may see that there is no contractual relationship between architect and contractor. However, as the client’s agent and contract administer (in traditional procurement method), architect is obligated to advise and instruct the client throughout the construction phase.[7] Again, there are numerous versions of building contracts in Australia. Choice of contracts usually depends on project scales and procurement methods.

Australian Building Industry Contracts (ABIC)

ABIC SW/MW is a set of building contracts co-written by the AIA and the Master Builders Australia (MBA). The terms and conditions are considered to be the fairest because party liabilities are well balanced. Also, the contracts provide a pathway to resolution in the event of legal actions against prolongation fee, delay damages and payment disputes etc.[8] ABIC SW 2008 is usually used for small projects such as single dwelling, where the architect acts as a contract administer.[9] ABIC requires each party to complete the date they sign and the contract will be effective at the date the last party sign. Or it will be effective at a particular date if both parties agree.[10] The effective date is crucial because it defines the possession of the site and which party should be liable if contingencies happen on site.

Cost-plus

Cost-plus contract can be classified as traditional procurement method. In this contract, client and contractor agree upon a budget. When construction commences, the contractor will be paid cost plus a certain amount of profit margin monthly, or quarterly. It is widely agreed that cost-plus contract should be avoided because inexperienced clients may not fully understand the stages of construction and they may bear significant financial risk.[11] However, Neil thinks that this can be prevented. He prefers using cost-plus contracts in his projects because it can increase design flexibility as long as communication among client, architect and contractor is sufficient.[12] For example, the concrete front roof of Roscommon House required a custom-made formwork, which cost much higher than normal formwork. But the client has retained budget for the extra cost because they have been informed in design stage. And three parties have agreed on the construction methods before the commencement.[13] Financial risk upon client was well under controlled because of good communication among parties from day one.

Australian Standard 2124

AS2124 is a well written, standardized building contracts prepared by Australian Standard committee. It is often used for large scale projects as well as government building projects because construction process is clearly stated and build result is predictable. Dumas House refurbishment project, for instance, used this contract, but the role of contract administer was engaged by the principal i.e. BMW instead of the architect.[14] As mentioned above, the government has to protect the interests of tax-payers from the risks posed in public works. In this circumstance, BMW has the majority control upon cost, time and quality. Throughout the construction phase, representative from BMW ,known as superintendent representative, will stay on site for inspection and observation (but not supervision, it is contractor’s job).[15] Architect is placed in a minor position and is only responsible for design development.       

SUMMARY

In some small scale projects, which are mostly traditional procurement methods, clients and architects prefer to use architectural firm’s template because of its flexibility. It is suggested that the tailored contract is only suitable for private sector/ individual clients, or regular clients who have developed trust with architects. Otherwise, architect should go for standardized CAA2009 because its terms and conditions cover all project types and scales. For building contracts, ABIC SW 2008 is the most commonly used standardized contract because of its simple structure. Fig. 1 shows both the contractual and functional links among parties in traditional procurement method. Architect, as a contract administer, has majority control over the project and hence, better control on potential risks.

Fig. 1 Links of parties in traditional procurement method

In contrast, standardized forms of Australian Standard contracts are usually used for large-scale projects and government building projects. In this regards, contract administration is no longer the role of architect. The contractors have their own superintendents (it is assumed that these projects are Design & Construct procurement methods, which have become prevalent in recent years), or in government building projects, the principal itself i.e. BMW is the superintendent. Fig. 2 and Fig. 3 depict the links of parties respectively.

Fig. 2 Links of parties in Design and Contract procurement method

Fig.3 Links of parties in government building projects

ADVISORY NOTES

Coordination

1)       Know your partner(s)
Although client’s expectations have been discussed in briefing stage, CAA provides an opportunity for them to re-state and confirm their needs and requirements. It is the reference point where project architect and other working fellows, who may have no direct contract with the client, should go back to if there is any confusion. Likewise, architect’s duties and abilities can be reflected in the CAA. Client should know very well that what architect can or cannot do. Before the contractual relationship is formed, it is essential for both parties (client and architect/ client and contractor) to walk-through the clauses in detail so as to clarify confusion and align expectations. If either side has found something wrong or they cannot agree with, just talk and solve before the contract is signed. 

2)       Lines of communication 

As the project leader in traditional procurement method, the architect should set up a clear communication channel. For example, contractor/ client should always report to architect for any discrepancies; then architect should promptly notify related parties about the issue (whether it has been solved or not). Some individual architects tend to outsource contract administration for complex projects.[16] In such circumstance, the project architect should hire experienced person in order to minimize errors during coordination between the outsourced works and internal works.

Contractual procedures

1)       Use standardized contracts
Architects are advised to use standardized forms of contracts such as CAA2009 and the AS suite in their projects because they have been developed over years and the industry has formed consistent interpretation and understanding towards the terms and conditions. Also, those contracts will be updated and refined regularly to ensure they are fully compliant with the latest regulations. If architects, clients or contractors have to use their self-drafted contracts, they should:– use legal terminologies so that the contracts can be examined by the court in the event of legal actions;

– avoid misleading wordings and remove any ambiguities;

– seek legal advice for risk assessment before finalizing the contracts.

2)       Manage client’s expectations
Difference between reality and client’s expectation may lead to risks. To shorten the distance, architects should guide and educate clients throughout the project. Provision for variations in contract allows acceptable alternative or substitution. Architects should first assess the variations objectively, then ethically instruct clients if they should approve the alternatives in order to handle time and cost differences in the contraction process (without scarifying design quality and integrity). Of course they should have discussed the issue with clients in detail and managed their expectations beforehand. Once the variation has been approved, architects should promptly adjust contract sum when necessary.[17]  

Administration 

1)       Written and digitalized contracts
Verbal agreements can easily be misinterpreted or forgot.[18] It is suggested that all contract documents should be recorded in writing and then electronically formatted, scheduled and archived. In fact, the party with the most comprehensive records always has advantages in the event of legal disputes.[19] 

2)       Miscellaneous
All site visits should be recorded in the form of written reports with photographers.[20] Every meeting minute must be taken. Architect’s instruction and records of schedule and cost variations should be kept along with contracts (to prevent unfair claims from contractor).[21] These materials may seem unimportant, but they form a useful checklist for architect to spot any possible omissions or variations throughout the project. If there is dispute, the architect can refer to those materials and trace who would be liable.    

CONCLUSION

Risks could lead to enormous damages. One party may suffer from huge financial loss because of a small mistake. The deficit may be covered from other sources. But it is difficult for a firm to earn back the damaged reputation in the industry.[22] Architects should develop risk managing skills to protect not only their own interests but interests of other stakeholders so that fairness and justice can be maintained.[23] And contract is the most effective tool that can be utilized to assess, mitigate and transfer risks. There is no risk-free project. A good architect is in fact a good problem-solver. Be objective and reasonable. The more day-to-day problems you can tackle, the more successful built outcome you can celebrate.   

BIBLIOGRAPHY   

Australian Institute of Architects, “ABIC contracts”, Acumen practical advice for architects. Accessed May 31, 2019, https://acumen-architecture-com-au.ezproxy.library.uwa.edu.au/project/building-contracts/abic-contracts/.

Australian Institute of Architects, “Cost-plus contracts”, Acumen practical advice for architects. Accessed May 31, 2019, https://acumen-architecture-com-au.ezproxy.library.uwa.edu.au/project/building-contracts/cost-plus-contracts/.

Australian Institute of Architects, “Risk management and insurances”, Acumen practical advice for architects. Accessed May 31, 2019, https://acumen-architecture-com-au.ezproxy.library.uwa.edu.au/practice/risk-management-and-insurances/.

Cownie, Neil. Interview by author. May 14, 2019.

Hislop, Kate, and Dean Wood, “Introduction to Architectural Practice.” Lecture, University of Western Australia, February 27, 2019.

Hislop, Kate, and Dean Wood, “Commissioning Projects: Client-Architect Agreement.” Lecture, University of Western Australia, March 13, 2019.

Hislop, Kate, and Dean Wood, “Procuring Buildings: Types of Building Contract.” Lecture, University of Western Australia, Apr 17, 2019.

Hislop, Kate, and Dean Wood, “Administering Contracts: Schedules and Standard Forms.” Lecture, University of Western Australia, May 15, 2019.

Hislop, Kate, and Dean Wood, “Administering Contracts 2: Schedules, Standard Forms, Permits and Certificates.” Lecture, University of Western Australia, May 22, 2019.

Wood, Dean. Interview by author. May 14, 2019.

[1] Kate Hislop and Dean Wood, “Commissioning Projects: Client-Architect Agreement.” (Lecture, University of Western Australia, May 13, 2019.)

[2] Ibid.

[3] Neil Cownie, interview by author, May 14, 2019.

[4] Ibid.

[5] Dean Wood, interview by author, May 14, 2019.

[6] Kate Hislop and Dean Wood, “Procuring Buildings: Types of Building Contract.” (Lecture, University of Western Australia, Apr 17, 2019.)

[7] Kate Hislop and Dean Wood, “Administering Contracts 2: Schedules, Standard Forms, Permits and Certificates.” (Lecture, University of Western Australia, May 22, 2019.)

[8] Australian Institute of Architects, “ABIC contracts”, Acumen practical advice for architects, accessed May 31, 2019, https://acumen-architecture-com-au.ezproxy.library.uwa.edu.au/project/building-contracts/abic-contracts/.

[9] Neil Cownie, interview by author, May 14, 2019.

[10] Kate Hislop and Dean Wood, “Administering Contracts: Schedules and Standard Forms.” (Lecture, University of Western Australia, May 15, 2019.)

[11] Australian Institute of Architects, “Cost-plus contracts”, Acumen practical advice for architects, accessed May 31, 2019, https://acumen-architecture-com-au.ezproxy.library.uwa.edu.au/project/building-contracts/cost-plus-contracts/.

[12] Neil Cownie, interview by author, May 14, 2019.

[13] Ibid.

[14] Dean Wood, interview by author, May 14, 2019.

[15] Ibid.

[16] Neil Cownie, interview by author, May 14, 2019.

[17] Hislop and Wood, “Administering Contracts 2: Schedules, Standard Forms, Permits and Certificates.”

[18] Kate Hislop and Dean Wood, “Introduction to Architectural Practice.” (Lecture, University of Western Australia, February 27, 2019.)

[19] Ibid.

[20] Hislop and Wood, “Administering Contracts 2: Schedules, Standard Forms, Permits and Certificates.”

[21] Neil Cownie, interview by author, May 14, 2019.

[22]  Ibid.

[23] Australian Institute of Architects, “Risk management and insurances”, Acumen practical advice for architects, accessed May 31, 2019, https://acumen-architecture-com-au.ezproxy.library.uwa.edu.au/practice/risk-management-and-insurances/.