Project Cost Management – Not Snakes and Ladders

Recent claim notifications relating to the architect’s alleged failure to manage their client’s reasonable expectations as to project cost estimates include those which have been dealt with as an NZRAB complaint. NZRAB’s Code of Ethics identifies professional negligence as an ethical infringement: their decisions relating to project construction cost estimation, and the cost awards attached to them, provide some precedents.

The background relates specifically to residential projects, and those that proceeded in reliance on a client-appointed QS for budget estimation purposes; or on the architect’s notional square meterage rate; or on a builder’s cost estimate.

Part way through in some cases, or nearing the end of project documentation in others, the client’s QS or builder’s estimate identified a likely construction cost which significantly exceeded the client’s expectation as to project cost by 50 – 80%.

In Snakes and Ladders, we sometimes encounter “go back to start”, but this is not always possible in architectural services. The client may have already paid for some design fees, various consultants and a Resource Consent application. The architect may also have outstanding documentation invoices to recover from a disgruntled client.

A standard PI insurance policy does not respond to fee recovery claims. The architect may be contractually entitled to their early design-stage fees, but in the event of cost over-run, there may be a conflict over their entitlement to the construction documentation fee. The client will naturally plead that had they known the true construction cost in a timely manner, they would not have proceeded with the project and accordingly have saved themselves that expense. In effect, the architect proceeded without the client’s fully informed consent.

Not only will the architect face difficulties in collecting fees, there may be a potential claim against them for recovery of documentation fees and alleged negligence in project cost estimation. Whilst the PI cover may respond to some or all of this, it will also trigger the need for payment of the excess on that policy.

If there is doubt about reliance on cost estimations, it may be prudent for the architect to obtain (and meet the cost of) a cost opinion from a QS, whether or not it is disclosed to the client. This legitimate business expense would be preferable to the potential adverse alternative.

If it was only so easy.

Architects have a duty to keep their client informed about the nature and quantum of project cost estimates for contractual and ethical reasons, but equally for their own commercial protection. In such circumstances, a little ink is better than a good memory.