Vol. 2 No. 12		December 1983

Your negotiations seem to have reached an impasse. As accommodating as you and your client have been throughout the negotiation process, there remains a serious problem. At issue is insistence that you design against a "guaranteed maximum cost" for construction.

From your client's point of view, the need for accurate, reliable, construction cost information is critical: Borrowing capacity may already be stretched to its limit; return on investment projections may be borderline, at best. By looking to you for your guarantee, the fervent hope is that you will assume a substantial portion of the risk of financial failure.

Your problem is that you are in no position to offer the assurances your client is seeking. Beyond exercising your best professional judgment during design and providing expert advice as construction progresses, there is not a great deal you can do to control construction costs. Nor can you secure insurance protection against the risk that those costs might somehow soar through the ceiling your client has in mind.

You may have considerable negotiating leverage and skill. Nevertheless, you and your client both know there are General Contractors waiting in the wings, eager to don the mantle of Construction Manager and more than willing to guarantee (subject, of course, to changed conditions) not only the costs of construction, but the design costs, as well. A certain amount of additional flexibility on your part may be your only viable option.

If so, how can you agree to work against what your client chooses to refer to as a "guaranteed maximum cost" without assuming unacceptable risks and depriving yourself, at the same time, of the protections afforded by your professional liability insurance? You cannot. But, there are alternatives you might propose and accommodations you can make which may produce an acceptable balance between your client's concerns and your own. Consider these suggestions:

1. Face the "guarantee" issue first.

   You are going to have to be prepared to explain to your client that your knowledge of construction costs is based on past events; that you are in no position to provide assurances about events in the future. You cannot control the methods by which contractors may choose to determine their prices, and your crystal ball is no more reliable than anyone else's when it comes to predicting competitive conditions in the marketplace. What you can do is put forth your best professional efforts to help to keep costs within budget.

   The reality is, it makes little sense for your client to insist on your guarantee in the first place. Because your insurer will not stand behind the assumption of liability it represents, its principal effect is to deplete your financial capacity to respond in the event of a loss. This leaves your client holding something of an empty promise--your drafting tables and a few automobiles pitted against the risk of financial disaster. It is not much of an assurance, and he or she would be well advised to look elsewhere for the protections being sought from you.

2. Suggest other sources of greater assurance.

   If the intent is to proceed on the basis of a negotiated contract for construction, you might recommend bringing the contractor in early. It will enhance the contractor's understanding of the design as it evolves, and it will give the owner an independent source of reasonably reliable cost information on an ongoing basis. It may even result in improvements in the construction cost effectiveness of the design itself.

   If, on the other hand, the project is to be put out to bid, you might suggest that the owner obtain estimates from an independent cost estimator at major milestones in the design process. You might also establish your own right to rely on the accuracy and completeness of those estimates. Then, at least, should your client later seek to recover damages alleged to be the result of faulty estimates, the attention (and the heat) can be directed elsewhere.

3. Place clear limits on your responsibility.

   What you might be willing to concede is a readiness to modify your design in the event the lowest responsible bid for construction exceeds the agreed-upon budget by more than some reasonable amount, say 10 or 15 percent. If you choose to make this concession, however, be certain the owner understands that redesign may have important time implications, and that there is a direct relationship between the cost of construction, on one hand, and the scope and quality of the project, on the other.

   Program requirements may well have to give way to cost cutting, and you will want to build an acknowledgment of this reality into the language of your agreement. You might do so by including a statement of your client's willingness to cooperate in reducing square footage or eliminating such amenities as may be necessary to bring costs into line.

   You might also want to work with your attorney to make certain your agreement is clear on two, other, important points: 1) that the one-time provision of redesign services prior to the award of the construction contract (within some reasonable period of time) will be the limit of your responsibility for any budgetary ceiling that may be established; and 2) that you will be paid in accordance with the terms of your agreement--whether the project proceeds at some reduced scope, or whether it proceeds to the construction phase at all. Clarity on these issues at the outset can preclude a great deal of misunderstanding later on.

4. Know where you have to draw the line.

   What happens if you should fail in your efforts to persuade your client to agree to reasonable limitations on your responsibility for construction costs? You have a serious business decision to make. The risk may well outweigh any conceivable gain you might stand to realize in doing the work.

   Before you step forward with further concessions, step back and reassess the situation. Take a hard look at the financial constraints on the project. Are the owner's expectations consistent with what might reasonably be accomplished within the dollars available? Does the budget include adequate contingencies, both for bidding and for the inevitable changes during construction? Does it provide for the nearly always unbudgeted costs of special testing and inspection? Is there anything about the project (or the site) likely to increase the risk that costs may escalate out of control?

If you are satisfied with your answers to these questions you just may have a basis for negotiating further. But sometimes it makes more sense to be prepared to walk away from a project than to take risks you know you cannot live with if the worst should happen. You may even be surprised to find, in expressing your intent to do so, that your client is not as intractable as his or her attorney would like to have you believe.