Choosing a Consultant Part 4. Legal Considerations and Insurance
A good selection process should lead to a consultant who can meet the local government's substantive needs and mesh with its style of doing business. However, the relationship between the planning agency and the consultant has legal implications for both parties. Thus, the relationship should be made formal through a contract.
Many local governments have their standard agreements for contracting for services. However, it is particularly important for local governments to understand that a consulting relationship is quite different from most matters for which a local government contracts. The contract forms that a local government uses to hire contractors to install sewer lines or to hire the engineers to supervise such work are simply not suitable for the somewhat fluid professional relationship between a planning agency and a consultant. For local governments that use outside counsel, the consulting agreement should be more like that agreement than any other. Both relationships involve professional services and a degree of professional trust. More important, in both cases, the primary "product" under the contract is professional advice that becomes one piece of a complex equation through which the local government sets public policy. The relationship involves a great deal more interaction between the parties. It also involves far less predictability than typical local government contracts, a fact which makes it somewhat difficult to define the "work" with great precision. Appendices A and B of Selecting and Retaining a Planning Consultant by Eric Damian Kelly, Planning Advisory Service Report No. 443 (Chicago: American Planning Association, 1993) contain sample formal agreement forms with commentary that are useful for contracting with a consultant.
Consultants sometimes use a simple letter agreement for small projects with a short schedule and a single payment. Although there are certainly times when it is most expedient for both sides to use a simple letter agreement, it is not an advisable approach. If anything goes wrong, each side will wish that it had a more formal agreement to help in addressing the problem. If a consultant is simply flying into town for a day to conduct a workshop, the chances of something going wrong are not great; in those cases, a short-form or letter of agreement will generally be adequate. A simple letter of agreement is also sufficient in cases where the consultant and the agency have worked together before and each knows that there are unlikely to be any surprises. However, even on a short visit or a simple project with a well-known client, a consultant may be involved in an automobile accident that raises questions of liability for her or his own injuries as well as for injuries to local residents, or a consultant may encounter unanticipated difficulties in completing the project. Some consultants have successfully conducted business for many years using primarily letters of agreement. Nevertheless, a reasonably complete and formal agreement is always desirable, if not always expedient.
Types of Agreements
Time-and-expense (or cost-plus) contracts provide maximum flexibility. They are particularly appropriate where the scope of services is impossible to determine in advance. Litigation services, both from attorneys and expert witnesses, are a typical example. In the design fields, the professional services for supervising building or facility repairs are typically provided on a time-and-expense basis, because there are many unpredictable factors in the proposed work. A continuing contract for a variety of services may also be based on time and expenses rather than a fixed-price, again because there are too many unknown factors to allow either side to develop a reasonable cost estimate. An agency can build controls into such a contract, requiring advance approval for certain types of work or for work beyond a certain level of effort.
There are two different forms of time-and-expense contracts. Some firms build their overhead and profit into billing rates. For such firms, a time-and-expense contract is exactly that — a bill for professional time at stipulated rates plus a direct pass-through of expenses. The other form of contract, which is more properly called "cost-plus," uses a billing rate that does not include profit and that, in some cases, does not include overhead. Under such a contract, the consultant bills the client the actual cost of personnel and expenses and then adds a profit factor (sometimes called an "administrative fee" or something besides "profit") and, in some cases, an overhead factor on top of the basic rate. Federal agencies often require billing for actual costs but then allow billing of both overhead and profit factors.
There is not a significant difference between the two types of contracts other than custom and practice. Clearly the gross billing rates of firms that simply bill time and expenses include both overhead and profit figures, regardless of whether that is itemized. The more detail that the agency seeks, the more accounting work will be involved for both parties.
Public agencies typically prefer fixed-price contracts. The advantage of the fixed-price contract is that the agency knows exactly what the project will cost in advance. Some consultants also consider that an advantage, although others prefer the time-and-expense approach. A public agency may experience problems with a fixed-price contract under two different circumstances. If there are unexpected developments in the project, beyond the control of either the agency or the consultant, the consultant may be willing to adjust the scope of work to address those developments only with a significant cost increase. The second type of problem occurs when the scope of services does not adequately represent what the agency expected from the consultant. Although many consultants go to a good deal of trouble to ensure that all clients are happy clients, and thus will occasionally provide a moderate amount of work beyond what is absolutely required by the contract, few are willing to provide substantially more services than the contract calls for without some additional compensation. If the consultant finishes the work required by the contract and the agency still needs help, the agency will have to find a way to pay for it.
Some contract forms include the strengths of both approaches. Time-and-expense contracts often include a "not-to-exceed" figure, or "upset price," guaranteeing the public agency that the total project will be completed for an amount that does not exceed the specified figure. Although that might sound exactly like a fixed-price contract, it is not. The "not-to-exceed" figure is usually set somewhat above the total amount that the agency expects to spend on the project, whereas, in the fixed-price contract, the price represents the agency's assessment of the value of the work. The "not-to-exceed" approach is appropriate where the agency anticipates that through effective project management or through offering the assistance of agency staff to the consultant, it can reduce project time or costs.
Another type of contract that includes some of the strengths of both types of contracts is one that establishes a fixed price for the professional services but allows the consultant to bill the agency for specified out-of-pocket expenses. Such expenses always include travel costs and outside printing costs. Whether they also include routine photocopies, postage, and long-distance telephone charges is generally subject to negotiation between the parties. This type of contract is appropriate when the parties know basically what services will be required but for some reason are unable to predict the exact level of expenses. Consultants asked to travel outside the 48 contiguous states often ask for such contracts, because of the lack of predictability of airfare on such routes.
Some fixed-price contracts include additional, extra-cost options. Those may be priced either on a unit-cost basis or on a time-and-expenses basis. For example, the basic scope of services may include six trips to the community by consultant personnel with the option for the agency to require extra trips either for a specific price per trip or on a time-and-expense basis at specified billing rates. Many fixed-price contracts include the option for the agency to purchase extra copies of reports or maps on this basis. An agency should always consider including such additional- cost options in a fixed-price contract, because it offers the agency a way to deal with contingencies at a predictable price and it also avoids the need of going back through a fully competitive process in order to obtain supplemental services on the same project.
Doing Business with Teams
Some RFPs expressly seek response from multidisciplinary teams. Others, while not explicitly suggesting submissions from teams, define project goals or work programs that clearly require planners, designers, attorneys and experts in economics, finance, and traffic. Although a few large firms attempt to provide all of those services, a planning agency seeking such multidisciplinary services is likely to receive some responses from "teams," each team consisting of several separate firms.
There are two possible ways for an agency to do business with a team. It can hire each firm in the team separately, or it can contract with one entity for the services of the whole team.
Where licensure is involved, it will often make sense and will sometimes be essential for the agency to contract with the firms separately. Licensing laws and the structure of malpractice insurance both make it difficult for an agency to contract with one type of firm for professional services that the firm does not offer but which it will obtain from another firm. Even where it is legally possible to structure such an agreement, the firms involved may resist it, in significant part because of the malpractice liability issue. The planning agency should also be concerned with the malpractice issue. If an agency contracts with a planning firm for the services of a professional engineer employed by another firm and the engineer makes a design error, the agency may find that it will encounter significant legal difficulties in recovering damages from the engineer due to a lack of "privity of contract"; a direct contract with the engineering firm avoids that issue.
When there is no licensure involved and all of the firms are simply contributing to the development of public policy, it may make sense for the agency to contract with the team. There are some advantages to the agency in doing so. If an agency contracts separately with a planning firm, a law firm, and an environmental firm to work on the same project, there is a substantial opportunity for some work item to be omitted. An agency can minimize that risk through careful preparation of each of the contracts and complete coordination of the respective scope of services, but it is difficult to do that. For example, if a planning agency contracts with an architecture firm to do an urban design study, and with a landscape architecture firm to prepare an open space plan, and with a planning firm to prepare economic development and housing plans, it may be quite satisfied with the contracts. However, that list has a serious omission. Who, under that arrangement, will prepare the summary and synthesis? Who will resolve conflicting recommendations? If the local government simply contracts with one firm to prepare a "comprehensive plan including urban design, open space, housing, economic development, and land use components," the responsibility for preparing the summary and synthesis is clear, even without identifying those specific work items. Although it may be unlikely that a planning agency would forget that particular work item, the point is that making a group of integrated lists is much more difficult and much more susceptible to error than writing a description of one end product that will require a number of interim products.
Even if the agency's contracts are clear, in case of any dispute in an arrangement involving separate contracts with multiple firms, it will only be natural for one firm to blame another. The agency may be left trying to sort out the mess. If the agency has a contract with only one firm, the responsibility is clear — that firm is accountable to the city for all of the work included in the scope of services. If a subcontractor fails to do its part, the lead contractor--not the agency --must solve the problem. When the agency plays a role in designating individual team members, it may not be reasonable to require that they contract with each other. On the other hand, where a group of firms bid as a team, it is entirely reasonable to expect them to be willing to do business with each other.
The contract with the team should not be with the team at all. It should be an agreement with a strong lead firm that has both the ability to manage the project and reasonable financial stability. Other team members should be subcontractors under that firm. Any other arrangement creates problems for both sides. The firms involved are also better served by doing business through subcontracts. For instance, if they form a "joint venture" or seek to perform the contract "in association with" one another, they are likely to fall under statutory or common-law partnership laws in most states. In other words, by joining together for a project, they create a new legal entity. If there is a new legal entity, it needs its own taxpayer ID and it must file its own tax returns. Thus, it needs its own set of books. It needs insurance. One of the firms may be able to add the new entity as an additional insured on existing policies, but there may be a surcharge for doing so.
However, the biggest risk for the firms that become involved in such a venture is the unlimited legal liability of a partner for the acts of the partnership. Thus, if an employee of one of the firms runs a school bus off the road, leading to claims that exceed the available insurance, not only that employee and the firm that hired him or her will be liable--so will all of the other firms and, possibly, their principals. The "partners" in such a venture are similarly liable for financial misconduct or irresponsibility carried out by anyone in the course of the partnership's business.
A partnership is, at best, a risky form in which to do business. Although there are reasons for using partnerships for certain undertakings, one should never stumble accidentally into a partnership. A partnership should be used only with the thoughtful advice of an attorney and a tax accountant, and then only for a good reason. The desire to "work together" or to "associate" for a particular project is not a good reason to enter into a partnership. The subcontracting alternative is much more attractive for all parties involved.
In short, a subcontract arrangement will be less risky, less expensive, and simpler for the team members than any sort of joint contract or joint-venture arrangement. The only two arrangements that either a planning agency or proposing team members should consider on a multifirm contract is a contract with a lead firm and subcontracts under it, or a series of separate contracts.
Insurance and Bonds
Many local governments require that their contractors, including consultants, have certain forms of insurance coverage. When the contract is handled through an office that normally administers construction contracts, the insurance requirements are often extensive. Insurance is less of a problem with a contract administered by a planning department. Nevertheless, the issue arises. Planning agency officials seeking consulting services need to understand the basics of insurance as they affect the consulting business. Consulting firms also need to understand these basic principles, so that they know what requests are reasonable.
Every employer should have workers compensation insurance. State laws require it of almost everyone.
The only exception to the need for workers compensation coverage is for a sole proprietor with absolutely no employees; with such an individual, a simple indemnification or "hold harmless" clause will generally offer the local government adequate protection. Even with a sole proprietor, there is the risk that the sole proprietor may hire employees to help with the work specified in the contract with the local government. Thus, a sole proprietor who does not furnish evidence of workers compensation insurance should sign an express representation that he or she will not hire any employee for any purpose for the duration of the contract.
Workers compensation coverage is extremely important. A local government might be held liable for an accident or injury to a consultant's employees if the consultant does not have workers compensation coverage. Although the protection of the workers compensation system is not always complete for a third party that contracts with the insured employer, it helps.
A planning agency should require that the consultant provide a certificate of workers compensation insurance from its insurer, which in many cases may be a state agency. Such certificates are readily available, generally without charge. The local government should ask for the certificate at the time of executing the contract. If a firm does not have workers compensation coverage, it may be an indication that the firm is in poor financial condition or has inept or inexperienced management--problems that ultimately may affect the firm's ability to perform the work.
Every business should have a comprehensive general liability insurance policy. Unlike workers compensation insurance, however, such a policy is not required by state law. And, unlike workers compensation coverage, even a sole proprietor should have liability insurance. In today's litigious society, a business cannot function without it.
A planning agency may reasonably seek indemnification from a consultant for acts of its agents and employees resulting in bodily injury or property damage, but the indemnification will not be very meaningful if not backed by a comprehensive liability insurance policy. However, governmental immunity laws in many states provide sufficient protection to local governments that they do not need the indemnification. Further, they may not want to weaken their governmental immunity defenses by suggesting the potential for liability in a contract, as they would do by asking for indemnification against it. Thus, many local governments will not require such indemnification or evidence of supporting insurance. Further, some consulting firms may be unwilling to grant broad indemnification to any local government agency or other client.
If a planning agency is concerned about indemnification from a consultant for risks that may arise in the course of the contract, the local government should also verify that the consultant has insurance covering both owned and "non-owned autos." Most automobile owners carry basic insurance coverage, and many state laws require it. Although not all businesses have non-owned auto coverage, all consultants should have it. That coverage, usually an endorsement to the comprehensive general liability policy or one part of a small business package, covers liability of the business for accidents of its employees while driving rental cars, personal cars, or any other vehicles that do not belong to the business. If there is any risk of liability on a planning consulting job, it is more likely to arise from an automobile accident than from anything else.
Called "Errors and Omissions" coverage within the insurance industry, professional liability ("malpractice") insurance provides coverage in case of an error or omission by the business in carrying out its normal work. Such insurance is essential to architects, who design buildings, to engineers, who design bridges and highways, and even to landscape architects, who sometimes face claims based on traffic accidents allegedly caused by errors in site planning. Lawyers, doctors, and dentists all typically carry errors and omissions insurance to protect them against claims for errors in their own work.
The work of planners, however, is quite different. Planners are basically policy advisors. There are few wrong answers and even fewer right ones in the business of planning. Thus, proving that a planner was somehow wrong in his or her advice would be difficult at best. Planning agencies generally should not require professional liability insurance from a planning consultant unless the work to be undertaken by such planners requires signed or sealed drawings or other specifications of a design, engineering, or scientific nature. It is noteworthy, however, that, in most states, planners who lack other credentials cannot legally perform such technical work, anyway. Planners who are also architects or landscape architects will generally have errors and omissions coverage in that licensed profession. Although it is likely that most errors and omissions coverage for architects and landscape architects will be broad enough to include planning services, a firm should ask its insurer that specific question.
A comprehensive general liability policy may or may not include coverage for libel, slander, or other forms of defamation. Some small business packages do include such coverage. This is a matter of concern only to the consultant. The laws of governmental immunity should clearly protect a planning agency from libel or slander claims arising from the development of plans, as will the basic principles of free speech and open debate on public issues. However, while reviewing its insurance coverage, a consulting firm may want to review the desirability of including such coverage in its total package.
Every business needs some sort of insurance on its business property. A planning agency has little stake in that and should not ask for evidence of it. It is discussed here because a review of insurance and the consulting business would be incomplete without it and because there is one area of risk that does affect the agency client of a consulting firm. As suggested above, the consulting firm may purchase property coverage as part of a small business package. The form, amount, and exact provisions of such a policy should be reviewed with a commercial insurance agent.
Both planning agencies and consultants should be aware of one important exclusion from virtually all property insurance — "work product." A consulting firm's fire insurance policy will replace desks, chairs, and equipment, but it will not pay to recreate a plan that was 98 percent complete but was destroyed in a fire. Lost work product will affect the agency as well as the consultant through inconvenience, delay, and, in the worst-case scenario, a loss so catastrophic that the consultant cannot afford to recreate the work. Although it is possible to obtain coverage of valuable papers, including some work product, under a special "inland marine policy," such coverage is not included in standard business packages and can be very expensive.
The best insurance for a work product, whether on paper or electronic media, is an extra copy. That extra copy is of little value if it remains in the same building (or vehicle) with the original. Every business should have a system for periodically removing copies of important work in its current state from the business premises.
When a contract administration office handles a consulting contract, the issue of bonding sometimes arises. Bonds are not pertinent to planning contracts. It may be helpful for consultants and public planners to understand the basics of bonds so that they can explain to a contract administrator why bonds are not necessary for consulting services.
The most common type of bond used in public contracts is a performance bond that essentially guarantees that the contractor will finish the specified work for the specified price. Such bonds are common on construction projects, in which a community cannot risk having a contractor fail to complete a job (e.g., by digging up the street but then not refilling the hole and patching the pavement). On a planning contract, a planning agency should rarely if ever advance money to the consultant; few agencies do so. Thus, the agency always maintains a degree of control because it can refuse to pay. If the scope of services is carefully drawn, the agency should receive value for its payment at each stage. In the unlikely event that a planning firm did not finish particular work, it should have been paid only for the work that it did. A carefully prepared scope of services will allow for the fact that part of the task of completing the job is putting all of the pieces together. Thus, if a consultant leaves the planning agency with only some pieces of the work completed and another consultant has to prepare other pieces and assemble the final project, there should be a remaining budget available to pay for that.
A planning agency and a consultant should enter into a contract only with the advice of their respective attorneys. It may not be necessary to consult an attorney on every contract if the firm's or agency's attorney reviews and approves a standard contract form. However, both the firm and the agency should have available the general advice of an attorney familiar with its respective needs and operations. A consultant should also review its insurance package with an insurance agent capable of handling business insurance, and the consultant should check with the agent whenever an unusual insurance question comes up in a proposed contract. A planning agency should review the insurance aspects of proposed contracts with its local government risk manager.
This material is a revised and edited excerpt from Selecting and Retaining a Planning Consultant: RFPs, RFQs, Contracts, and Project Management by Eric Damian Kelly, AICP. It is Planning Advisory Service Report No. 443, published by the American Planning Association, February 1993.