Managing Risks in Design Professional Contracts

Managing Key Risks for Design Professionals in the Construction Industry

Design and construction services come with significant risks and the key to mitigating many of these risks is through Identifying and addressing them at a contract level. Below is an overview of key risks that could increase a firm's exposure:

Uninsurable Risks

Professional liability insurance typically serves as the primary source of protection for design professionals against claims alleging damages due to negligent acts, errors, or omissions. To avoid claims that may be uninsurable under this policy, it is essential to remove contract language that could potentially invalidate coverage. Uninsurable risks generally fall into two categories: contractually assumed liabilities and warranties.

Contractually Assumed Liabilities

Unlike other types of insurance, professional liability policies only cover the negligent acts, errors, or omissions of the insured professional. This means that broad or intermediate form indemnity language is not insurable under such policies. In simpler terms, any obligation to indemnify beyond a design professional’s proportionate share of fault is not covered (I will delve deeper into this in a subsequent post). Additionally, a duty to defend (i.e., an upfront defense obligation) is not covered by professional liability policies, although defense costs can be recovered later as part of damages.

Warranty Language

Professional liability policies are underwritten with the assumption that the design professional will meet the customary standard of care expected in the industry. The policy does not cover contractually assumed liabilities beyond this standard. Therefore, agreeing to any warranty beyond the customary standard—such as guaranteeing that services will be free from defects or fully conform to construction documents—can render claims uninsurable. Professional liability policies are designed to protect against the negligent acts, errors, omissions or non-conformities in services and agreeing to provide a warranty beyond this may expose the firm to uninsurable risks.

Delayed Damages

Owners and developers often seek to impose penalties for delays in construction schedules. It is essential to identify and negotiate these penalties upfront to ensure they are:

1. Limited to damages directly caused by the design professional,

2. Supported by an excusable delay provision covering delays outside the design professional’s control,

3. Tied to specific milestones that the design professional has agreed can be reasonably meet, and

4. Capped at a reasonable percentage of the fee.

Whenever possible, delayed damages should be removed entirely from the contract, and if they must remain, they should be the client's sole and exclusive remedy (i.e. they should not be cumulative to other remedies available to client)

Broad or Ambiguous Contract Language

Finally, broad or ambiguous language in contracts—whether related to scope, professional obligations, change order procedures, schedule/notification requirements or any other obligation—can lead to costly disputes. It is critical to ensure that the scope of work is clearly defined. Vague terms such as “all services necessary to” and “services incidental thereto” should be avoided, as they may result in non-payment for additional services that were not anticipated by the original scope.