In this episode international business consultant Mariana Idiarte discusses what she learned negotiating architectural contracts for small and large firms.
In today's episode we discuss:
- The important clauses that go in to an architectural contract and how they protect your firm.
- Win-win! How understanding your clients and their worries affect the creation of your contract.
- What are the different factors that affect the clauses in your contracts?
- The first step in creating your contract: Determine why the project is important for your firm.
- How knowing your personal and professional goals determine which clauses are important.
- Common difficulties/issues in setting up a contract with your client.
- Why your relationship with your clients is still #1 priority.
- Transferring of rights vs giving license and the big mistake in not knowing the difference.
- Want to keep your firm's doors open? Limit your liability.
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Interview Transcript and Members Only Resources:
Enoch: Welcome back Architect Nation. This is the Business of Architecture show where we talk about what they don’t teach us in school, which is how to run a great business so we don’t have to worry about paying the bills.
Now, today I’m going to welcome back my guest Mariana Idiarte. She’s an independent business consultant specialized in the business and client relationship management of the International Creative Industry with a focus on Architecture, design, and cultural organization.
So, Mariana, welcome back to the show.
Mariana: Thank you, Enoch. Thank you for having me back in the show.
Enoch: Last time we talked, which was a few episodes back, we had a great conversion. You talked about the work you’ve done with Rem Koolhaas’ firm, OMA, on contract negotiations and talked about some of the different things that architects, especially those larger firms, find are more important.
Could you tell me about when negotiating a larger contract like that? What are some of the most important clauses that architects don’t like to back down on?
Mariana: Well, whether it’s a large or a short contract, the clauses that are always most important for architects are those relating to author rights, copyrights, and limitation of liability, and then, you have also the clauses related to the termination of the contract, or delay in the work, or if the project is suspended for some reason and how to deal with those situations. After copyrights and limitation of liability the financial conditions are of course important, and the clauses related to the termination of agreement, or how to deal in the case a project is delayed or suspended.
Enoch: Okay. So, let’s talk about the financial conditions. Can you give me example of some financial conditions, and let’s talk a little bit about the different scenarios that you’ve seen in the past and maybe things that have been sticky?
Mariana: Well, when it’s about financial conditions, you asked me some scenarios, I always say: the possibilities are endless.
To give you an example, I teach architecture students here in the Netherlands. Sometimes they do an exercise. I ask them to come up with at least ten options to negotiate fees without the bargaining of, “Okay. We’ll settle between 1% or 2% lower the price.” First, they were totally surprised, like, “How are we going to do that?” Once we start talking and they start thinking, there’s not only ten. Sometimes there are twenty options coming out of the working tables.
You have to consider a lot of things when negotiating financials. First of all, you have to know, as a firm your finances very well. You have to know your fees. Architects working independently or smaller firms have, sometimes, especially when starting, they set their fees, their hourly rates, or something without actually knowing how much they need, how much your time cost, how much cost your firm does to be just running, basically, or if you have personnel, etc., etc. So, first you have to get in to the insides of what your fees are, what your costs are, and then you can think about, okay, how you negotiate something else.
Secondly, another very important part is knowing what a project costs to be realized. People more experienced in project management will have a very fairly good idea of how much time, etc. a project may cost and therefore how much time you’re going to charge eventually.
Finally, you also have to look at the market – what your competition is charging, all external elements that have to do with negotiating financials. Having said that, you have also to consider the client, of course – what type of client it is.
Something that in other business sectors is very usual is doing a financial check of your client, for instance, to know whether they are actually financially strong enough to undertake the project and pay you in the next two, or three years, or how long you’re going to be working with them. It’s very usual in other sectors, but architects, somehow, at least those that I’ve worked with from large or smaller firms, just forget that. Most people get simply so excited about a new project and once you get the agreement to go ahead or at least you send a proposal, nobody starts thinking about, actually, “Is my client solvent to undertake in this?” So, that wouldn’t hurt, at least in some cases.
You have to observe your clients and determine based on experience, but also take a step back, have a broader perspective and analyze the situation of your client, of the environment, etc. Working for governments, for instance, they typically, depending on where you work, they tend to be reliable, but they’re also very structuralized in terms of their conditions, their processes, and sometimes with payments, for instance.
It’s not strange that some governmental institutions are very lengthy procedures to process payments. When you’re accounting, “Oh, I’m going to get paid within two weeks or within a month,” it may actually take three times longer. So, it is worth looking in to how the process naturally works for the client and maybe arrange something that accommodates your necessities better and that you make sure that you are going to manage your cash flow accordingly.
On the other hand, you can never look in to a clause of the contract independently. You have to look at the negotiation process as a whole on determining why the project important for your firm. Is it a question of “I need the project because it pays the bills?” or is it a strategic project because the client may mean that you’re going to get a lot more work further on, or is it a very prestigious job that you want to do that will help you build a great reputation in the sector you want to work, so, you maybe have the room and possibility to be more flexible in other areas?
So, looking at the overall goals of you, personally, or your firm professionally is key to determine what clauses are important and how to deal with them.
Enoch: Sure. At the beginning, Mariana, you mentioned a couple of things that are important in these kinds of contracts: The first one being copyright, the second one being liability, and the third one being the termination clauses.
I want to talk to you for a minute just about the copyright clauses. What kind of difficulties are you seeing architects run in to with the copyright clauses? Is that important for clients and do clients really even care about the copyright clause?
Mariana: I think they do. Definitely they do. I am making something very clear here. I’m not a lawyer, so I don’t have law degree and I don’t know exactly the whole law. I do have experience enough in the contracts and I’ve worked with fantastic lawyers next to me, so I know quite a lot to understand the broader picture about what the situation with the copyright is for architects and for other creatives for that matter.
Put very simply, someone who creates an original work owns the rights, the intellectual property rights of their own work without having to set anything in writing. That applies for most of the countries in the world. There are exceptions, but that is the case.
However, there’s typically a clause relating to copyrights in contracts which doesn’t hurt to have it. That means that even if you don’t have anything clarified about copyrights in your contract, you as an author have intellectual property rights over your creation. How you work with that is what is different and may vary from one situation to another. That is why it’s worth checking what a contract says.
One of the main issues that architects come up with about copyrights is when a client states in your contracts that the architect will transfer or renounce his rights so that he transfers all rights to the client. Well, that is typically an issue because that means clients are typically worried about having to ask the architect for every single little thing that they need to fix in their building once it’s ready. They’re afraid about having to do that and therefore paying the architect for anything that could be or not infringement of the architect’s rights.
There is a big difference between transferring of rights or renouncing your rights and providing a license to your client. You can compare it with when you have a car. If you rent a car, you have the right to use the car for a certain amount of period, maybe in determined territory under certain conditions, but the car remains a property of the company you rented the car from.
If you buy a car, you own all the rights of your car. This is the same with author rights and the copyrights. You, as the owner of the rights, have all the authority and all the freedom to determine and you may allow someone to use the license or your right for a determined use.
This is what I always say to architects: Typically, when you find a clause and the client says, “Oh, we want all the rights of the project,” ask them what they’re worried about and you can, in most cases, offer the client a license as broad as needed to comply with their requirements without you transferring the rights to the client.
Enoch: What would be some typical rights that the clients might request or things that they might want?
Mariana: Well, one of the typical things is, of course, one’s right to, for instance, publication. When it’s a, maybe, a public building, or some commercial building, or something that may be featured in magazines, or something, or commercial, or something related to a commercial project, so therefore the images of the building may be shown in magazines or marketing campaigns, communication campaigns. So, they want to have the right to do that. Again, the architect can provide license to the client to allow that use for marketing purposes, communication purposes, publications, and Internet or otherwise, so it can be as broad as needed.
Then, the other thing is that the clients typically ask is the exclusivity as well. This is something where there’s a lot of interpretations or confusion about because the clients think, “Well, it’s our design. We wanted unique and exceptional design. We don’t want to be repeated so we want the exclusivity of that.” Well, while that may be the case, if you provide exclusive rights to someone, that means that you cannot provide license or rights to someone else.
If you give exclusive rights to your clients to publish photographs of your project that means that you can’t do that the same to provide, for instance, to an architecture magazine without asking the client for permission. So, it is very technical, it is very tricky. Sometimes, if it’s a very important project or if it’s a very tricky client that gets very technical. It’s definitely worth considering consulting a specialist, an intellectual property lawyer for instance or your local, like the AIA in America, your local architectures organization for advice, or other architects that that may have gone through that.
Having said that, I’ve also seen, recently even, a very large firm, important firm, with a very prestigious project for a government organization… Like I said before, being a government organization they have very straight contracts and they’re not very flexible, willing to change, because that means that they may need to change it for all their service providers, so the architects agree to work on the project even when they were obliged to cede some rights referring to copyrights.
Mariana: It wasn’t their typical… But, again, it was a very prestigious project. They didn’t have any reason to mistrust the client being a government organization…
Mariana: …so they took the risk.
Enoch: Okay. Mariana, the audience here that listens to Business of Architecture is primarily people that work for or that own smaller firms. So, the question that come to my mind, when you’re working with these larger firms… I know that my architectural contract is may be four or five pages long, maybe four. I like to keep it very simple for them. I know the standard AIA contract is – I don’t have – I haven’t looked at one in a while, but 20 pages may be, you know, the standard depending on all the different documents that you add to it. Just in terms of thickness of these larger contracts, what are we talking here just to give me an idea of how comprehensive these contracts are? Are we talking 100 pages, 250?
Mariana: It’s interesting that you mentioned that because I always said a good contract is not a large contract.
Mariana: You’re absolutely right to work with a short, just a few pages contract if it contains just the few things that are very important for you. My standard terms and conditions are half an A4 for instance. To start with that, I have never had to use them in the sense of having to say to someone, “Hey, remember these conditions are because they work on…” My relationship with my clients is much more important. I hardly ever, with maybe one exception, have the problem of no one paying me for instance or something else. So, it’s much more important than that.
Like I said, spending the time understanding, we talk about it in our previous sessions, but spending the time understanding who your client is, you get a feeling of what our potential risks or not of entering in to a working relationship with someone. If you spend enough time getting to know your client, you’ll be more comfortable in taking some risk, and also the negotiation may also be easier if you just take time to understand why they are so worried about protecting a clause or another, or making specific points about that.
I always said if a client is very strong about keeping a certain clause that you may find a difficult one, that’s like a red light telling you that there may be an issue down the road, or he may be worried about that, or he may be considering a risk that I’m not seeing and it’s worth talking about it and trying to see how you solve it or how you potentially manage that risk together before entering in to the work, actually.
Enoch: Okay. So, these larger contracts for these larger projects are just order of magnitude…
Mariana: Yes, sorry. You said… Yeah, it could be anything. You said the AIA contract is like 20 pages. Well, the standard conditions, only the terms and the conditions from the standard Dutch contract are like, I think… Nowadays they changed it. I think it’s like 40 pages or so.
Mariana: So, I think [Inaudible] at all. Having said that, I know that every state in the U.S. also have different laws applying to architects and the architectural profession, and some more architect-friendly than others – I don’t know. Maybe you have more experience in to that, but it depends. I’ve also seen contracts for super large projects that are, like, 300 pages, so everything in between, yes.
Enoch: Okay. Well, I’m sure I’m going to get some people writing in to say, “Enoch, it’s not 20 pages. It’s 17 or it’s 13.”
Enoch: But, I just want to get an idea of…
Mariana: That’s right.
Enoch: …of the kind of contracts that these other firms are working with.
So, let’s talk about liability, Mariana, because that’s something that, as architects, we do worry a lot about that. There’s a lot of personal liability involved with designing a project.
You did mention that in your work with other architects that that is one of the things that they will not back down on or that they hold very tightly to. What are some of the pitfalls in liability or some of the exact clauses that architects should be thinking about in terms of liability?
Mariana: Well, the one pitfall is not limiting our liability. In many cases, you should always limit your liability unless you’re willing to lose your business and/or your private house, even, if you don’t limit that. So, if a client is very, very strong about keeping a liability clause, I would say that’s a [Inaudible] to worry about. How to deal with that? Again, limited, and there are several ways to limit your liability.
Enoch: Well, what are the ways you’re seeing architects limiting liability?
Mariana: One important rule, and that applies for everybody, is, again, like in the case of negotiating fees or financials, knowing their insurance. Check your insurance terms. As an architect you must have professional liability insurance, but insurance providers also are different and they may vary, again from one state to another.
Here in Europe, distances are shorter from one country to another and there are differences. So, if you work in a broader territory, it’s worth spending the time, again, going to ask firms that are doing the same thing or they may have experience, or contact your local architectural organization, and doing some search definitely rewards. So, knowing exactly what are you covered for.
If you work for a lot of projects, you can always consider limiting liability to whatever your insurance covers for. That is already a good start. Even better is limiting your liability to the amount of fees that you’re receiving for such a project and anything in between. It may be just a random figure that [Inaudible]
Enoch: Okay. So, those are a couple of applications that you see in architectural contracts.
Enoch: Alright. Then, termination, you talked about that. Have you ever been brought in to any sticky situations with termination where maybe the contract wasn’t worded correctly and it really was a problem?
Mariana: Yes. Recently, actually, someone consulted me. This was a collaboration project between architects and designers for something that was supposed to be designed for a temporary exhibition in a particular location as part of a project with multiple designers.
The organization that signed the contract with the architects and designers was the curators’ organization that in turn had a contract with, again, a government organization who hired them to do this project. The project was due last summer, and the contract that this curator set with the architects wasn’t a great contract. There was a clause there saying that after the project was finished, there was, kind of, cooperative to be created to manage the work, the creative work that had been done and potentially [Inaudible] further.
Now, what happened is that the government terminated the contract with this curator, so this intermediate person. This person just decided to terminate the contract, but it wasn’t reflecting the conditions of termination that the curators’ organization had agreed with the government, so the architects and designers suffered a lot from that.
The conclusion of this intermediate organization was the cooperative that was to manage the work after was never created. The argument of the curator organization was, “Well, the contract was terminated, so that doesn’t apply. We just retain all the rights on the project.”
So, it’s a shame when this kind of consultation, and that’s a typical case, just comes very late. Your negotiation power is minimum because work has been done and getting all the people involved together to figure out how to deal with that is extremely difficult. So, again, this is a good case. There were a lot of unclear things, but in the enthusiasm of the designers to get in to the project, they just signed the contract…
Mariana: …and went on with the work.
Enoch: What are some typical termination clauses that you think architects need to be including in their contracts if you’re thinking about smaller firms?
Mariana: One of the most typical issues is that if the contract is terminated for any reason that is not the fault of the architect is that any rights or license to use the rights that the client may have are returned to the architect. So, that is one of the most…
Enoch: [Inaudible] rights of license or are we talking, once again, about publication rights and everything that we… [Inaudible]
Mariana: No, even the rights… No. For instance, suppose you do a concept design. You get up to the develop a design phase with the project and the client says, “Thank you very much for your services, goodbye.” Then, they go on and continue, and implement the project, and build it with a cheaper architect without you even knowing it, and you’re not going to have the control of the project.
This doesn’t mean that you always have to do it that way. You may have agreed to do that work, and you may totally be happy with allowing someone else to go and carry on with your work, or change it, or realize it in whatever way you please, but that is not the typical way architects I’ve been working with want to work. So, they pretty much want to protect their rights up to the completion of the project because it’s the only that you can guarantee the client that is going to end up looking at what you envisioned and what they agreed having, and because, again, it’s your right as an author. So, that is one of the most difficult things.
The other situation, of course, it has to do with a notice for termination. If you enter in to a project and therefore you have to hire a team of people to work with, and the project is suddenly terminated but you have contracts with the people that you hired to work on the project. I always advice architects: if you have subcontracts, if people have coverage with you, always place a clause saying that you’re going to pay after you get paid from the clients and that if the contract is terminated that you have the right to terminate the contract under the same conditions, for instance. Those kinds of things are important to think of.
Enoch: Excellent. Well, Mariana, thank you very much. I think that it’s been a great conversation about contracts and about some of the things that we’ve touched upon today. So, thank you for joining us on the Business of Architecture. I look forward to continue the conversation next week.
Mariana: You’re welcome, Enoch. It was great to hear that you enjoyed my ideas too. Thanks.