Our website has several articles on  “observation”.  When claims are based on building failures, inevitably the role of observation comes under scrutiny.  This article is the combination of thoughts from four NZACS Directors:  Peter Marshall, Alec Couchman, Michael Davis, and Colin Orchiston.

Observation versus Contract Administration

The current standard forms of engagement and contract intermingle observation with contract administration, and whilst they are interdependent, they are also separate.  This separation of roles is likely to increase, and the NZIA is actively involved in current MBIE consultations around establishing the contract administration role as a stand-alone.

If you are engaged for observation you can report on what you have observed, but the duty to administer the contract – including ruling on variations, certifying payments and completion – rests with the contract administrator. 

A consequence of separating the roles might be that rectification needed as a result of the observation role cannot be enforced because the leverage obtainable by with-holding payments is at the discretion of the separate contract administrator.

The role of Observation by the Architect primarily arises out of the terms of engagement between the Principal and the Architect.  The role of Contract Administration arises out of the (building) contract between the Principal and the Contractor.  If a building contract provides for independent observation (as does NZIA SCC at 8.8 and NZS3910 at 6.4) then those terms will provide the scope and rights/obligations applicable.  If the building contract does not provide for independent contract administration or observation, and/or is inconsistent with the architect’s terms of engagement, the scope and terms will need to be agreed elsewhere, failing which they will be uncertain.

In a larger practice, the roles of designer, contract administrator and observation can be parcelled out to different staff, and the bigger projects suggest repetition of some site activities;  when the same person does all three roles, the familiarity with the project suggests that critical aspects for observation should be known.

Partial Observation is a high-risk option

Any hint that the terms of engagement include observation will lead to assertions that building failures are the result of the architect failing to correct the work at the time it was done. 

This makes the provision of “partial services” or “limited observation” or “site attendance on request only” or some fixed (eg weekly or monthly) site visit frequency a risky proposition which should be resisted.  These arrangements may remove or diminish your control over the sufficiency of your observation, and yet you may still be held responsible for the full weight of “proper” observation. 

It would be nice to just say “don’t do it” but the reality in the market is that it is necessary to view it as an unwelcome option that requires careful risk management. 

• Who is to say what you could or should have seen when you went on site? 
• Or whether you were on site sufficiently? 
• Or for the right reasons or at a critical point in time? 

Our website has several articles on “Partial Services” and they are not the focus of this article, but it is difficult to defend an allegation of inadequate observation on the basis that only “limited” oversight was intended, or was possible. 

One of the early WHRS claims considered the defence offered by a Building Inspector that he was over-worked and the available resources provided by his employer meant that he could not adequately carry out the level of inspection necessary:  unsurprisingly the Court took the view that the regulatory duties were not diminished because of management failures by the provider! 

Against that background, there has to be a very thorough defence to justify why an architect engaged for observation did not – or could not –instruct rectification of observably defective work.

The Observation role should be whole-hearted, with attendances as and when required, with fair and commensurate fees, and with scope and fees sufficiently flexible to deal with changes in the circumstances of the project. 

How much is “enough”?

The Project Architect should assess the level of observation and the frequency of site visits at time of agreeing the terms of engagement.  It is (possibly) more important to set out what you won’t do, than to say what you will do;  and essential to provide for changes to reflect the changing circumstances of the project.  The architect’s risks are compounded if the level of observation as agreed in the original terms of engagement does not correlate with the level of observation later required or sought. 

In smaller projects this may arise because the client removes observation and contract administration from the architect’s scope during the procurement process. 

In larger projects it would not be unusual for the architect to be appointed early in the process and then later a project manager arrives who then appoints and instructs the consultants;  the architect is removed from the contractor procurement process;  contract administration is undertaken by others;  the architect’s role is limited to clarifying the documentation and restricted site access for monthly reporting;  the consultants remain responsible for observation but do not have the power to obtain rectification;  yet on completion the funding agencies look to the architect to certify completion.

Engineers have a structured approach to determining the level of observation and frequency, but it does not take into account the issues we face as architects carrying out observation.  It is not really about how often one visits the site, but whether the site visits capture the critical issues:  that suggests that the project architect should be keeping an eye on the site progress, identifying what issues are likely to be critical if not performed as required, and planning site visits around those issues.  Subject to ongoing review, an initial assessment might be on the following basis:

OL1        Intermittent Site Visits:  small & simple projects                 fortnightly visit

OL2        Periodic Site Visits:          medium complexity & size           weekly visit

OL3        Regular Site Visits:           larger or more complex                 twice weekly visit

OL4        Constant Site Visits:        major complexity and scale          every second day

This may or may not suit the project, the potential risk, or the fee, and is complicated by:

• Construction activity varying over the duration of the project, from site mobilisation and excavation through to a myriad of trades finishing works.
• The skills and experience of the contractors and sub-contractors, which may require more observation to mitigate risk.
• Progress on site varying from programme or expectations.
• Sufficiency accuracy and reliability of design and as-built documentation, and the level of co-ordination between consultants, may lead to more on-site queries and site visits.
• Substitutions or redesign sought by contractors;  client and/or project manager changes, demands, expectations;  similarly, from incoming occupants/owners and their funders, and overlaps with fitout requirements.
• Critical technical and programme issues, specific design complexities, perhaps where the risk of non-compliance varies disproportionally in relation to cost, scale and complexity.
• The need to exhibit to the contractor and client that you are “on top of things”
• The number of site visits not reflecting the duration of the visit, eg 1 hour; 3 hours, etc.

There is also a “bell-curve” which is typical:  for smaller projects especially, a lot of attendance is necessary at the start of the job while the builder is grappling with what is required (and the architect is gauging how much hand-holding or vigilance may be required);  in the middle of the project when there is a lot of repetitive work the only reason to visit might be for the purpose of valuing a progress claim;  at the closing stages monitoring of finishing items may be to the level necessary to keep the client happy.

Observation does not mean inspection, or supervision

Lawyers and the courts do not appear to recognize the fine hair-splitting implied in this statement, and lawyers seemingly make no distinction between undertaking one site visit a month as opposed to a permanent site presence when it comes to blame.  But that doesn’t make the distinction incorrect.  It suggests that we need to do more to communicate the distinction. 

Supervision is the control and direction of the work;  Observation is a review of the work done. 

Observation of a typical installation versus every installation

We are judged against what is deemed to be the actions of a reasonable architect in those circumstances at that time.

If you observe a representative quantum of a particular aspect of work to confirm that it matches your documentation and make the assumption on reasonable grounds that the remainder of that work will be similar, those are the actions of a reasonable architect.  If a client wants more than that they need a clerk of works, and even then there’s no guarantee of perfection.

It is reasonable – in absence of evidence to the contrary – that an Architect assume that the contractor is competent:  if a typical item of work is acceptable, and there was nothing to suggest that the remainder of that type of work would be executed any differently, then those other instances of that work may be assumed to also be acceptable.   

But if a window is leaking because of an obvious and observable fault, and the architect did not notice the poor installation when there was the opportunity and need to do so, then they will be dragged into the issue, regardless.  To claim that inspecting one window is sufficient for all windows would be a weak defence if 90% of the windows subsequently leaked (even if the one window the architect did inspect was perfect). 

If you review an item of construction in detail and it is aligned with the documentation and complies with NZBC you can accept it, but you cannot then step back and not carry out observation of those repeating elements.  At the very least you would need to review the repeated elements to the extent necessary to conclude that they were consistent with the item reviewed in detail.  If the review of several such items revealed a variation in installation quality, the conclusion would be that site quality control is lacking, and more follow-up is required. 

The question is whether what was observed was representative of that part of the construction:  inspecting a window “type A” may or may not inform about the installation of types B,C etc.  If there are 100 similar items then a reasonable assessment has to be made whether to observe in detail 1,10, or any number of them to be satisfied that the work is being done as required.  Were they installed by the same persons at a similar point in time?  By skilled or unskilled staff?  What quality controls were in place?  What are the consequences of failure?  Who is likely to respond – and how – in the event of failure?  For marginally acceptable items, how does the installed item compare to independent benchmarks or to supplier’s requirements?

Be very wary of providing any sort of statement as to quality/completion/compliance

Your observation role is to report on whether the work done complies with the contract requirements;  your reporting can only be on the basis of what you have seen, and what you can reasonably infer from what you have seen.  Your reporting will be dependent on the conditions under which the observation took place:  the weather, the available access, whether the item was complete or in progress, and what information was provided to you by those on site who directed the work.  If your reporting is based on assumptions, make those assumptions known. 

Your observation reports will be used for two purposes:  to inform the contract administrator about the progress and compliance with the contract requirements, and to provide ammunition to those who want to pin liability on you for subsequent shortcomings.

Most of us will be aware of the problems builders are having in getting materials onto sites at reasonable times and costs.  This will have a consequential risk for design practices:  your Risk Management should be looking beyond the short term and thinking about the effect that these problems will have in the future.

If you had any doubt about the seriousness of these issues, take a look here:  https://www.eboss.co.nz/supply-chain-report-2021/background

These delays and costs have the potential to create problems, particularly in claims for fluctuations or cost increase claims, and extension of time claims.  We urge members to keep clients informed, and to encourage contractors to be open and transparent.  Good-faith negotiation should always be undertaken ahead of escalating competing views to the level of a dispute.  Whilst the contract terms may or may not “properly” allow for the contractor to recover the time or cost consequences of the current difficulties, the parties to a contract can always agree to a change in the contract terms, or one party can unilaterally waive some rights (for example, liquidated damages). 

Where such changes are contemplated, be sure to document them clearly and specifically, so that they do not create more problems than the original situation.  The beneficiary of the changes should be the project, not one or more of its participants.

These issues will impact on client/designer/builder/funder relationships.  The material cost changes of 5% to 25% in the past year or so are the harbinger of more upward movement.  Labour costs are being driven up by tight labour resources and contractors well booked into the future.  The supply chain problems are disrupting site progress, leading to project delays and pressure on contractors’ margins. 

The problems are not ours alone:  America and Europe are also troubled by shortages of materials and labour, slow and expensive shipping and varying lockdown measures.  Covid is driving up inflation generally, and the size of our economy (and construction industry) means we have ineffective leverage on material supplies.

Clients with projects at design stage may be unable to accommodate these costs and delays within their budgets.  Others will continue but with resentment adding stress to the project.  Still others will be looking to continue but with cost cuts which may compromise the design and add to design costs.  Procurement strategies may favour early contractor design involvement, movement away from lump sum contracts to an arrangement which redistributes the risk of delays and cost increases, staged consenting and contracting, and design-stage identification and ordering of items requiring long lead times.

Projects under construction will come under stress if builders cannot complete within the time and cost parameters understood when the project was priced.  If increased costs cannot be recovered, performance on site is at risk or perhaps may be abandoned.  Where costs can be recovered, they will not be welcomed by clients.  Arguments from delays beyond those directly related to Covid lockdowns will be unpleasant.  All of those circumstances represent increased risk to you:  both additional (and perhaps unrecoverable) attendances, and the potential for dispute and negligence claims.

In order to manage those risks, please take the time to assess how these issues will affect all the projects you have underway, in particular where reliance has been placed on pre-Covid cost/time estimates, and to communicate appropriately with each client. 

Members will be aware of assertions that architects show bias in contract administration, and are not up to the task.  A recent working group has reported to MBIE on the issues.  There has been an argument put forward to create a separate professional service specifically for contract administration. 

The “closed claims” analysis does not support that proposition.  Only 0.5% of the claims relate to contract administration, and the reality of any claim is that the architect may have done nothing wrong, but was caught in a dispute of others’ making.  The experience of the Claims Committee emphatically indicates that architects perform the role well. 

Overwhelmingly, the perceived contract administration failures are the result of the contractor not providing the necessary information, of the client misunderstanding the role as one of contract management, or they arise out of the observation role.  It is natural for the contractor to assume that the architect cannot be independent as long as they are paid by the client.  Clients often confuse the role of contract management with contract administration, and therefore the architect should take responsibility for the contractor’s performance. 

In smaller projects, or with clients unfamiliar with the process, members should – in their own best interests – take extra effort at an early stage to educate clients on the independence of the contract administration role, and the distinction between contract administration and contract observation. 

The separation of contract administration from contract observation has led to many disputes. NZACS is firmly of the view that – especially for small to medium-scale projects – architects should retain the contract administration role if they are also engaged for contract observation.