When the Fine Print Isn’t Enough: Trust, Payment and Risk in Engineering Contracts
Guest columnist Dan Reider reflects on decades of work; revealing how contract language is often less important than personal integrity
TRUST: Engineers and architects review project plans, but the real work of building trust – and ensuring fair payment – often happens outside the contract.
In the architectural and engineering professions, the contracts developed between the owner and architect and the architect and engineer are perhaps unique when compared to other contracts for professional services, maybe due to the nature of the services provided by the A/E. The uniqueness of the contract developed between the owner and architect is largely transferred to the contract developed between the architect and engineer – often with added stipulations or requirements. As a former consulting engineer, I worked with a large number of architectural firms, each of which added their own preferred clauses to a contract. There was frequently language in the contract where our attorney advised us either not to sign the contract or at least to try to get the architect to change the way a clause was written. Or, if the architect was not going to change the contract – either because that verbiage is in their agreement with the owner or they just are not receptive to a change – our attorney advised us to evaluate the risk posed by the offending clause. To do so, we considered the relationship with the architectural firm, the people we would be working with, and the level of risk posed by the objectionable language.
The bigger problem I found after thirty-plus years in the engineering profession was not so much with the contracts but with getting full payment for the services performed. While not a huge issue in this profession, it is probably more of a problem than many people in our field like to admit. The purpose of writing this article is to give a heads-up for some of the younger engineers entering this profession and to make them aware, if they are not already, that sometimes who you are working with is as much or more important than any contractual language – especially when it comes down to getting paid for services.
So now you have your contract, completed the design and bid/negotiated the project, supported the project during construction, provided inspections, and are ready to close the project out and collect all outstanding fees. I wish it were that simple, but sometimes it is not. The contractual part of this profession still relies heavily upon the integrity and fairness of the parties on both sides of the agreement. I have worked with many tremendously successful architectural firms and have found them to be very fair and honest partners. I have also worked with some that I did not feel were very trustworthy, but suppose they might have felt the same about us. Unfortunately, even within the firms where we have long been treated very fairly, they too sometimes have project managers who, in my opinion, did not always resolve issues or fulfill contractual obligations in a fair and equitable manner.
With regard to compensation, engineering consultant agreements are often written in one of two ways. The first is a fixed fee for services. In this approach, the contract should spell out as specifically as possible the services being provided. The other method is compensation based upon a percent of construction. It is still important to clarify services but often not to the extent required when compensation is a fixed amount. Although these two methods may be the basis of compensation in the agreement, I have found that many other factors come into play on projects from time to time.
Example 1: We agreed to a 4% engineering fee based on the cost of construction for the M/P/E designed. The project bids and M/P/E was $6,000,000 and we calculated the fee at $240,000. The owner asked the contractor to find ways (value engineering) to reduce costs. The M/P/E construction cost was reduced to $5,400,000 and the architect calculated a revised fee of $216,000 – a loss of $24,000.
Example 2: The owner/architect agreement stated that the owner was responsible for change orders up to 2% of the construction contract. Any change orders beyond that were the responsibility of the A/E. When the project eventually had some M/P/E change orders (which typically come later in construction than some other disciplines), the A/E was asked to pay for these costs. We found out that most of the 2% had been used up with change orders related to building or structural changes. The engineers were therefore asked to pay for a majority of the M/P/E costs of the change orders. We had suggested that the 2% for change orders be allocated proportionally among each discipline but received no consideration by the architect.
Example 3: A project had some change orders which the owner asked the A/E to take a certain level of financial responsibility for. The architect told all team members that we were to share in the cost proportional to our fees on the project. Costs were not allocated to the percent each discipline was responsible for the change orders. The explanation was that we should all “share equally in the pain.”
Example 4: We were negotiating a fixed fee for M/P/E services for a new college classroom project. When negotiating a fixed fee, the difficulty or ease of designing certain systems, such as HVAC, comes into consideration. Some systems take a fair amount more time to design than others. For example, a rooftop Dx VAV system takes less time to design than a VAV system with hot water and chilled water. On this particular project, we had understood that the college wanted a hot water and chilled water system and therefore quoted a fee based upon those systems. The architect came back and said that unfortunately the project could not support the chiller and boiler system and we were to design rooftop Dx systems. We revised our fee with a cost reduction of $40,000. After some delays, we eventually got started with preliminary design. At that point the architect advised us that the college decided that they could afford the boiler and chiller systems and that our fee was being increased $14,000 – not the $40,000 we originally discussed. We were told that the $14,000 was the only amount that the college would agree to, but I did not feel 100% confident the college was making that decision. I decided to see if I never added the change for the $14,000 to our invoices if the architect would ever remind us that they were going to pay the additional $14,000 for the hot water and chilled water change. The architect never reminded us nor did we ever bill for it nor did we ever work with this architect again.
Example 5: Construction on a project was completed and we were owed $5,000 from the architect. The project manager said we could not get paid until some issues and punch-list items were completed on the project, which is pretty standard regardless of what the outstanding items were that were not 100% acceptable to the owner. We contacted the architect every month or two asking for an update on payment and were told that the project was still not closed out. After about six months, we decided that the better course of action was to wait for the architect to let us know that the project was completed and then we would get paid. After several more months, we still had not heard anything back on this project and contacted the project manager. The project manager, half-apologizing, told us that the project had been closed out in their office and all books closed on the project and there was no way to be paid for the outstanding amount. Again, that was the last time working with that firm.
Example 6: The construction of a large laboratory project was going very slowly and was obviously going to be a year or so late in completion. The architect asked us to submit a proposal for additional services for the extra year of meetings and inspections as they were negotiating additional services with the owner. For whatever reason, the architect said later that our additional services for the additional year were not approved. We found out after the project was completed that the owner did approve additional services. We don’t know for sure if the engineering additional services were accepted but suspect that they were.
Example 7: We had provided a proposal for a sizable school addition and a smaller renovation. The architect asked us to break the fees out separately for the new addition and the renovation. After the architect negotiated a fee with the district, we got our contract from the architect. The contract listed the scope of services for both the addition and renovation work. However, the total fee was only the fee we provided for the design of the addition. After bringing this to the architect’s attention, we were told that they inadvertently had forgotten about the engineer’s fee for the renovation work but there was nothing that could be done about it at this point as the owner/architect agreement had already been signed. We continued on with the work as we had a very good relationship with the owner.
Example 8: We had been working on a project through preliminary design. Due to various circumstances, the architect wanted to move forward with another engineering firm on the project but wanted to pay us for the time we had in the project. I told them I thought we had at least $8,000 – $10,000 on the project and was asked to send an invoice. We actually had a little more than $10,000 but thought the best thing to do was to send an invoice for the lower end of the range I had mentioned. I informed our accounting staff that I would be really surprised if we got paid anything. A week later, I got a voice message from the architect saying that after further review, they could only pay $7,000 for the work we had done. It wasn’t two days later when I got an email stating that they would consider paying $6,500 for the services we provided. We sent a revised invoice for $6,500. After several weeks, we did not receive payment and never got paid the $6,500 or any amount.
I could continue on with these and similar examples of how the contract an engineer signs may ultimately have little to do with final payment received on projects. The examples above are the exception and, for the most part, we and most engineers are treated very fairly by architects and others in our industry. Also, the examples shown are events that occurred over many years. I also know that architects have similar stories – or even much worse stories – with owners. The point is that while the contract is important, especially if you should find yourself in court one day, more important is the integrity of the people you are working with. As my career wound down, it became far more important that I work with owners and architects whom I trust than take a project for a few dollars more with people I cannot trust.
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