We had a discusssion about this during the 010323 Work Session - tagging you per your suggestion so you may be able to research more about the topic. This may entail more Insurance involvement but it will be helpful to see how it is being addressed. Thank you for being such a great coachh!!
PS. this is Part 2 #2a. which the firm will need “Access to a large Emergency Funds”. Also, please include your explanation about not using AR Contingency $$$ for Emergency Funds relating to increasing the Standard of Care,
Thanks for the question, and being an active participant in the workshop! Here are my thoughts:
There are typically two types of contingency funds. One is a fund set aside by the owner and the other is a fund set aside by the contractor during the bidding phase. The contingency that contractors work into a bid is intended to protect themselves (the contractor) from issues that arise from incomplete documents, pricing errors, possible costs related to dispute resolution and errors made by the contractor during construction. The fund is to protect themselves (the GC) in a traditional design bid build contract and if they don’t end up using the contingency fund they (the contractor) keeps the money as profit.
The owner’s contingency is separate from the construction contingency and is intended to protect the owner from costs that are generated by the owner. These costs might include unforeseeable site conditions, and errors and omissions by the architect that fall within the standard of care. Which means the architect made understandable mistakes that could have been made by other architects working on similar projects in the same or similar location. For example, the architect for got to specify a flooring in one hallway. If these errors fall within the standard of care it’s unlikely that they would go to litigation, the owner would just use their contingency fund to pay the cost of fixing the errors or omissions.
To protect the architect, the architect should make sure the client has a clear understanding of betterment and that the owner has a contingency fund in place to cover any errors and omissions that fall within the standard of care. With communication, the owners contingency fund can help protect the architect, in the sense that the owner has funds available to pay for minor mistakes. However, this is not the architect’s money to use. If the client were to decide that they believed the errors and omissions went beyond what the standard of care accommodates for, and decides to pursue litigation against the architect, the architect does not have access to the owners contingency fund or the construction contingency fund to cover any litigation costs.
Architects work contingency into their fees by providing additional hours to allow for any variations in design schedule. These additional hours are added to each design phase to accommodate for any mistakes, or mis-calculations. Hours translate to fee based on billable rates of the staff working those possible additional hours. Planning for a contingency of ten percent of the overall hours is a good starting point. Since these are added in per design phase, the architect doesn’t have access to the extra contingency money all at once. So if the architect were sued by the client somewhere in the middle of the design phase, the contingency would not serve as an emergency fund because it is not money the architect already has, because the client hasn’t paid it yet. If the architect was to get sued during the construction phase, it’s not guaranteed that the architect hasn’t already used up the contingency built into their fee with mistakes that arose earlier, so it cannot be counted on as an emergency fund.
Having access to a separate ‘emergency fund’ before a project begins is a good way to ensure an architect firm can pay for costs of litigation at anypoint in the design and construction process.
I hope this answer helped, and I apologize for the length! I found this information in the Architect’s Handbook of Professional Practice pages 705, 963, 971, 1122
I’ll just chime in with one point - when you obtain insurance, the carrier provides you with a policy that outlines what they will and won’t cover. They won’t cover things like taking on the contractor’s means and methods, talking about site safety, opining about hazardous materials, and agreeing to a standard higher than the typical AIA standard of care. If you raise the standard of care, either in writing or by your actions, it doesn’t matter what your liability insurance limits are because the actions you’re doing aren’t covered by your policy.
It’s similar to home insurance, for example. When you obtain home insurance, your carrier researches your home and determines the level of risk that it poses to them. If you buy a policy for a home without a fireplace, for example, and then you install one without letting your insurance company know and it causes a fire, it’s not likely to be covered because the policy probably excludes fireplaces. You could have a $10mm policy or a $1mm policy; it doesn’t matter because the specific cause of the incident isn’t covered.