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Architects Anne Marie Lubrano and Lea Ciavarra, principals of Lubrano Ciavarra Architects, were asked about the challenges of getting back to near-normal levels of activity, and they described the shortage of building materials as “having a major impact on project schedules and prices.” This article shines a spotlight on that challenge and its potential for increasing your risk.

Michaela Kendall, Esq., Underwriting Manager for AXA XL’s Design Professional unit, has been fielding calls from insureds concerned that building materials shortages may put them at risk. “Contractors are facing rising materials prices and shortages, and they’re looking for ways to pass on the resulting costs to the design team,” Kendall says. “A/Es are worried about delay claims, blown budgets, and last-minute substitutions.”

Our insureds are not alone. Responding to an April 2021 American Institute of Architects (AIA) questionnaire, design firms reported problems with increasing costs of basic construction materials and finished construction products—if they’re even available. Related higher construction bids and project budget overruns were major issues, as were project delays. Similarly, 40 percent of respondents identified the need for materials substitutions as a serious or moderately serious problem.

“Some contractors want A/Es to approve products that are not ‘equal to’ or ‘as specified’ for the sake of avoiding delays,” Kendall says. “Insureds worry that if they wait for the material, there will be a delay and the item will be more expensive.”

 

For want of a nail

A convergence of forces has brought us to this point, underscoring the interdependence of critical resources. With the arrival of COVID-19, factories and ports shut down and orders were canceled. A subsequent, unprecedented global demand for things overwhelmed a supply chain in chaos. Extreme weather events, shipping container shortages, port backups, and a high rate of cargo losses added to soaring costs and delays.

These delays and rising costs are making life difficult for builders and owners. Wood, plastics, metals, and gypsum have seen steep price increases the past year. For example, the producer price index for lumber and plywood more than doubled over one year; the index for steel mill products was up 75 percent.

 

Managing the risks

Kendall worries that the supply issues will translate into added risk for the design team. “Once there are delays and cost increases on a project, a claim against the design team—or at least the threat of one—usually follows.”

Managing risks involves near-term and long-term strategies. In the short-term, Kendall says, “A/Es will have to find better ways to clearly communicate and work with contractors and owners, while doing everything they can to reduce the chances of claims.”

A/Es should start by being realistic with the owner. “Make sure clients understand it’s impossible to predict cost increases and delivery delays in the current situation,” Kendall says. “For issues you can’t control, it’s critical that expectations are appropriately and clearly set, and communications are documented.”

In addition, designers need to understand their duties and obligations. “Examine your contract,” Kendall says. “What are your obligations and those of the owner and contractor, especially regarding delays, change orders, and substitutions?”

Standard owner-designer agreements (as well as owner-contractor contracts) from the AIA, Engineers Joint Contract Documents Committee (EJCDC), and Royal Architectural Institute of Canada (RAIC) address these issues in detail, but owner-written contracts may not, or they may have clauses that push some of the risks and duties to you.

Although contractors may pressure you to accept substitute materials or equipment, try to discourage late substitutions. Explain to the owner that substitutions often don’t create the hoped-for savings because of associated service costs and fees. However, if an extended delivery time of the material you specified would seriously delay the project, if a specified item is no longer available, or if the cost has skyrocketed, then a substitution may be the better course. Require the contractor to justify the substitution and to provide the information necessary for you to evaluate the request. “It’s crucial to get the owner’s buy-in,” Kendall says. “And document everything.”

If faced with a substitution that, while not harmful, is something you’re not comfortable with, put your objections in writing. If the owner overrules you, confirm this in writing as well. Kendall says you can even go further, by asking the owner to agree to waive any claims against you arising from the owner’s decision and to defend and indemnify you against any third-party claims arising from that decision.

If the substitution in question involves health or safety, however, that’s another matter. If you cannot convince the owner of the possible risks, you must look to the termination provisions of your contract. Your professional and ethical duty to protect the public’s health and safety overrides any obligation to your client. (See “Resources.”)

Don’t obligate yourself to design for free unless you’ve made an error.

Managing the process

Kendall says it’s important to have clear procedures for substitutions and change orders and to follow those procedures to the letter. Here are some other suggestions:

  • Insist that all parties use standard substitution and change-order forms (the AIA and EJCDC publish change order forms: AXA XL’s Contract Guide offers a sample Substitution Request Form; see “Resources”).
  • Require that all owner-approved substitutions and change orders be made in writing—no exceptions.
  • Keep the owner informed, reminding them of the need for, or cause of, project changes and the progress in implementing them. Document these communications.
  • Advise the owner in writing of any abuse by contractors of the substitution process and of any reservations you have about proposed substitutions.
  • Stay on top of the substitution review process. If you take too long to review a request for substitution, you could give the contractor an excuse to accuse you of delaying the project.

 

Managing your contacts and looking ahead

Going forward, Kendall says, work with your lawyer to make sure your contracts address change orders and delays to your satisfaction. “Steer away from any ‘time is of the essence’ language,” she says.

Don’t accept a project if you believe the budget or schedule is unrealistic, especially given today’s supply issues. Insist the budget include adequate contingencies. “Don’t obligate yourself to redesign for free unless you’ve made an error,” Kendall says. (You may need to revise the AIA agreement.)

Your contracts should set forth procedures for dealing specifically with substitutions and provide for additional compensation and time to handle such requests.

Make sure there’s a changed-conditions clause that allows you to renegotiate your contract if unanticipated changes in circumstances or conditions result in significant changes in the scope, extent, or character of the project. In addition, your contract should include a mutual waiver of consequential damages. Finally, Kendall recommends that you talk to your lawyer about including a force majeure clause or clauses that provide similar protections. (See “Resources.”)

 

Be patient

Supply chain disruptions aren’t going to be resolved in days or months. Experts say that it will take time before supply and demand are rebalanced and that some bottlenecks will extend well into 2022. “In the meantime,” Kendall says, “be proactive and protect yourself as best you can.”

Resources
“For more information and sample contract language, see the “Change Orders,” “Changed Conditions,” “Consequential Damages,” “Delays,” “Force Majeure,” “Public Responsibility,” “Redesign Obligation,” “Specification of Materials,” “Substitutions” (including Exhibit 12 – Substitution Approval Request Form), and “Timeliness of Performance” chapters in AXA XL’s Contract Guide, available on the EDGE.

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