Considerations When Being Retained to Replace a Design Firm

Considerations When Being Retained to Replace Design Firm

replace a design firm

Sometimes economic conditions cause an increase in the frequency of design firms being hired to replace other design firms involved in a project. The original design firm might have been unable to complete the project because of financial troubles or staffing reductions. The project might have been delayed because of client funding issues or change in ownership. Or there might have been simply a desire to have another design firm carry the project through to completion. Whatever the cause, there can be significant risk to the replacement firm that the client might not recognize. The risk is usually dependent on the stage of the project and status of the original firm.

When a design firm is asked to replace the original firm on a project, there are ethical, regulatory, and professional liability concerns that should be addressed. Perhaps more important to many design professionals, however, is whether they are assuming a costly and unmanageable exposure to claims if they take over a project after many design decisions have already been approved by the client. Design firms should also be concerned if their role is to serve as the client’s representative during construction.

While there are contractual methods of addressing and mitigating these risks, many of them are highly project- specific and dependent on state registration laws, tort liability concepts, and statutes such as anti-indemnity laws. Many firms seek a simple solution through waivers of claims related to the prior firm’s design and defense and indemnity by the client for claims related to earlier services. Such provisions may have little value depending on the nature of the client and state laws. In addition, there might not have been a clear recognition in the original professional services agreement of the issues of copyright, use, and ownership of intellectual property. The replacement design firm might find that the use of a design and design documentation might be restricted. Any unauthorized use could result in legal and ethical problems that cannot be readily solved through client waivers or contractual indemnity obligations.

If there is no need for an entire redesign, the actual contract for the replacement services should specifically state that the design firm shall:

*  have no responsibility for the components of the project designed by the client’s other consultants;

*  conduct a review of the original professional’s drawings and other instruments of service solely for a general review of consistency with the design concept and stated design parameters;

*  be entitled to rely on the technical sufficiency of the documents already prepared; and

*  not be required to review or verify those computations or designs for compliance with applicable laws, statutes, ordinances, building codes, and rules and regulations.

In this type of a situation, the original design firm could remain as the designer-of-record.

If a replacement firm is going to conduct a sufficient review to become the designer-of-record  as the state defines that obligation, the level of services increases (as does the firm’s risk), but many of the contractual and legal protections are the same. The client should recognize that not everything can or will be recalculated or redesigned. If the subsequent design firm’s services are minimal in redesigning the project and most of the services are going to be provided to get the project built, the client should be even more protective of the replacement firm’s exposure.

The issues faced by a design firm providing construction contract administration services on a project designed by another should be carefully addressed in negotiations with the client. Such issues include the possible responsibility as an administrator for the negligence of the designer-of-record—a situation which is clearly inequitable. In addition, the firm serving as the client’s agent in administering the contract for construction is exposed to direct causes of action by construction contractors and individual construction workers, and also to claims from the client for negligence in the administration of the construction contract, as well as suits from third parties, such as building users. There is even the possibility of a suit from the designer-of-record  unless the client has clearly negotiated a reasonable termination and transfer of the documents. These disputes often result from the subsequent firm’s responsibility for interpreting the design or making necessary changes in the design. Often, the effort of the replacement professional to interpret or modify existing contract documents for a project generates delays and additional costs.

Joining a Project After Design Stage

When a design firm joins a project after the design stage, it usually is in a very good bargaining position and should attempt to develop a very clear scope of services and a limitation of risk to only those direct damages resulting solely from the firm’s negligence. When providing services directly to a client, the design firm is solving a significant problem—getting a project built. This assistance should be recognized, as should the limitations on the ability of the administrative design firm to have an impact on the project at the level of the designer-of-record.

As a replacement for the original professional, a subsequent licensed professional would be responsible for meeting the standard of care of similar professionals

in similar circumstances. If the most significant efforts are during the construction phase, risk can be reduced by:

*  qualifying any stated determination during the construction process;

*  redesigning to meet specific site conditions only with an understanding by the client that the accompanying risk should be limited; and

*  clearly indicating that there is no assumption of the risk that the prior firm was negligent in providing design services.

A waiver of possible claims from the client and indemnification by the client for all claims (such as those by a contractor), except for those resulting solely from the negligence of the firm taking over the project, is reasonable.

The replacement design firm should attempt to limit its liability so that it is clear that only in the case of its sole negligence is it retaining liability. This should be paired with a provision in which the client agrees to release the replacement firm from any claims related to the earlier services, and indemnify and hold the firm harmless from and against claims, damages, losses, and expenses, including but not limited to attorneys’ fees arising out of the services performed by the former design firm or other consultants to the client. Such a provision, however, is only as good as the longevity of the client and the financial assets behind the commitment. Third parties, of course, are not limited by the contractual language in such an agreement.

One provision that might be used to provide such protection is as follows:

(The Client), its officers and representatives, waive any claims against (the Replacement Firm), as a firm or individual, and agree to defend, indemnify, and hold (the Replacement Firm), as a firm or individual, harmless from any claim or liability for injury, loss, or damage allegedly arising from or in any way connected with the use of any documents or other information provided to (the Client) for use on this Project to the extent such documents or information is based on the services provided by (Terminated Design Firm).  Further, (the Client) agrees to compensate (the Replacement Firm), as a firm or individual, for any time spent or expenses incurred in defense of any such claim or liability, with such compensation to be based upon the fee schedule and expense reimbursement policy then in effect.

Providing Construction Contract

Administration Services

When a project has been designed and construction documents prepared, a replacement firm providing construction contract administration services must be sure that the services required in the general conditions of the contract for construction are the same services that are being commissioned in the professional services agreement. In addition, the professional service firm and the contractor must know that the firm has the authority as well as the responsibility to carry out the duties of the professional services agreement. More importantly, the replacement firm should not be a party to the contract between the client and contractor; the firm is only an agent of the client providing a well-defined set of services on behalf of the client.

The situation is different with many engineering and technical inter-professional consultants. A replacement firm acting as the prime may provide services involving the coordination of the services of the consultants, such as their involvement with shop drawing review, observations and inspections, and other field and office services during the construction phase. However, the replacement firm will have no power over the consultants if they are hired directly by the client after the earlier prime firm’s termination. While this minimizes the vicarious liability of the replacement firm, it does not completely negate the firm’s responsibility for their services if the firm’s duties include a coordination role.

If the client only wants the replacement firm to serve as a conduit for payment rather than to actively manage the services of a specific subconsultant or subcontractor, the firm and client should face the issues of structuring a contract to protect the replacement firm from activities over which it has no real control. Care must be taken

to keep the subconsultant or subcontractor solely responsible for the services or the work for which the subconsultant or subcontractor has total control. The dangers that accompany the apparent authority and real responsibility that exist if the replacement firm is put in the position of billing for subconsultant services might be addressed by the replacement firm’s contract stating that one of the services being provided is to authorize payment to the subconsultants only by serving as the conduit for that payment. It makes the most sense to have the professional services agreement clearly state the replacement firm’s separate status and that it has no responsibility for services or work performed by, or billed to the client on behalf of, the subconsultants.

Design firms that simply step into the position of an earlier professional service firm must be able to balance their obligations under state registration laws that often make them a target for litigation from many parties for many years with the limited authority and limited fee they are assigned in their role as a replacement professional. They must be concerned that their contracts recognize the specifics of the project situation and include valid waivers and indemnity provisions. And to do so they should work closely with jurisdictionally competent legal counsel.

If you have additional questions please contact your Professional Underwriters, Inc. agent or contact us here.

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