Luxury hospitality and mixed-use developments rarely follow a straight line from concept to construction. Owners refine the guest experience, hotel brands and operators provide input, interior designers develop finishes and furnishings, and specialty consultants coordinate increasingly detailed systems. Even after major design milestones have been approved, the design may continue to evolve.
That evolution is often necessary to deliver a premium project. But it can also create significant costs—not only for the construction itself, but also for the architectural services required to revise, coordinate, and administer the evolving design.
For owners and developers, the architect agreement is an important tool for allocating those costs before design begins. When negotiating an architect agreement for high-end hospitality or mixed-use development, owners should consider several areas where greater clarity in contract drafting can help prevent ordinary design evolution from becoming an unexpected source of additional fees.
Not Every Design Revision Should Be an Additional Service
On a luxury project, certain selections and details may intentionally remain unresolved as the design progresses. The architect may also be required to coordinate with interior designers, lighting designers, food-service consultants, technology consultants, landscape architects, and other specialty professionals whose work develops alongside the architectural design.
AIA B101–2017 § 4.2.1.1 treats certain services necessitated by changes to the Initial Information, previous owner instructions or approvals, or material changes in the Project’s size, quality, complexity, or schedule as Additional Services. Owners should clarify with precision when a revision rises to the level of a compensable change and when it represents the normal development, refinement, or coordination of the design already included within Basic Services.
For example, an owner’s decision to add a rooftop bar after design development may appropriately constitute an Additional Service. Developing the details necessary to execute an already-approved luxury lobby concept—or coordinating that concept with the lighting and interior design—presents a different question.
The architect agreement should also distinguish owner-directed changes from revisions necessitated by errors, omissions, inconsistencies, or coordination deficiencies in the architect’s or its consultants’ services. Those corrections should not become compensable Additional Services merely because additional design effort is required.
Address Budget and Redesign Obligations Before the Project Is Over Budget
Budget compliance deserves particular attention on luxury developments because seemingly isolated design decisions can have a significant cumulative impact.
Article 6 of AIA B101-2017 establishes a framework for designing to the owner’s budget, including cost estimates, contingencies, and adjustments to the design when necessary to reconcile the project with the budget. Section 6.7 generally requires the architect to modify the Construction Documents without additional compensation if bids or negotiated proposals exceed the owner’s budget, subject to an exception for market conditions the architect could not reasonably anticipate.
For a complex hospitality development, owners may want to address budget compliance much earlier in the process. The architect agreement should be drafted to require the architect to evaluate available cost information at designated design milestones, promptly identify material variances, and work with the owner, contractor, and cost consultant to address potential overruns before they become embedded in the design.
This is particularly important when a construction manager or independent cost consultant is preparing cost estimates. The architect agreement should establish what the architect is expected to do with those estimates—including evaluating proposed cost-saving measures and revising the design when required—rather than allowing third-party estimating to become disconnected from the architect’s obligation to design to the owner’s budget.
Treat Design Contingency as a Tool—not a Substitute for Accountability
A design contingency can be particularly useful on high-end hospitality projects because some degree of refinement is inevitable. But the parties should understand what the contingency is intended to cover and what is required for it to be used.
A design contingency might appropriately account for anticipated refinement as drawings become more detailed or certain selections are finalized. It should not automatically become a fund for absorbing costs attributable to errors, omissions, coordination failures, or other design deficiencies.
The architect agreement should therefore address how the design contingency is established, when it may be used, and how it is reduced as the design matures. Just as importantly, the existence of a design contingency should not inadvertently operate as a risk management tool against the architect’s contractual responsibilities.
Anticipate Brand and Operator Review
Hospitality projects introduce another participant into the traditional owner-architect relationship: the hotel brand operator.
Brand standards and operator requirements can influence guestrooms, food-and-beverage concepts, back-of-house operations, technology, signage, amenities, and public spaces. Multiple rounds of review and coordination are therefore entirely foreseeable on such a project.
The architect’s scope of services should therefore identify anticipated brand and operator review processes, establish the architect’s responsibility for participating in those reviews, and identify the applicable brand standards and design requirements. If multiple rounds of review are expected, the architect agreement should also clarify how many are included within Basic Services.
The timing matters as well. Revisions necessary to satisfy brand requirements known when the architect agreement was executed present a different allocation question than revisions resulting from new or modified brand requirements imposed later in the project. Addressing that distinction at the outset can help prevent every round of brand comments from becoming a potential Additional Service.
Define Foreseeable Services Before They Become “Additional”
Additional Services can become a significant source of fee growth on a long-duration luxury project. Owners should therefore pay attention not only to what qualifies as an Additional Service under AIA B101-2017 § 4.2, but also to the assumptions used to establish the architect’s Basic Services.
A mixed-use hospitality project, for example, may contemplate separate turnovers for the hotel, branded residences, restaurants, retail spaces, amenities, and parking facilities. If the architect’s fee assumes only one Substantial Completion inspection and one Final Completion inspection for the entire Project, the owner may incur Additional Services simply because the Project is being completed in the manner contemplated from the outset. The same principle applies to mock-ups, brand reviews, value-engineering exercises, redesign iterations, and other services that can reasonably be anticipated when the architect agreement is negotiated.
Owners should also consider contractually requiring any Additional Services requests from the architect to identify the reason for the additional work, the contractual basis for treating the work as additional, the proposed fee, and any anticipated schedule impact. Except where immediate action is genuinely necessary, written owner authorization should be required before additional fees are incurred. The rationale is not to prevent the architect from being compensated for legitimate changes in scope. Rather, it is to define the anticipated scope accurately enough that ordinary project execution does not gradually become a series of unexpected Additional Services.
Align the Design and Construction Agreements
The architect agreement should not be negotiated in isolation. The architect agreement must be negotiated with the construction agreement in mind because the construction agreement may separately address design development, allowances, contingencies, value engineering, substitutions, changes, submittals, RFIs, and phased completion. Each of these provisions in the construction agreement must align with the architect’s responsibilities. Otherwise, the owner can find itself in a contractual gap: the contractor is entitled to additional compensation because the drawings changed, while the architect is entitled to additional compensation for making the same change, even though the underlying issue was never intended to constitute a change in the owner’s requirements for the design or construction of the project.
Administrative timelines should also align. If the architect agreement requires RFIs or submittals to be reviewed within a particular period, the construction agreement should impose a corresponding obligation. Otherwise, the owner may face the choice of paying the architect for expedited review or potentially confronting a compensable contractor delay claim because the design team did not respond within the contractual timeframe. For hospitality projects with aggressive opening schedules, these seemingly administrative inconsistencies can have significant consequences.
Plan for the Design to Evolve
The goal of the architect agreement should not be to prevent a luxury project from evolving. Refinement is often precisely what transforms a conventional development into a distinctive hospitality experience. Owners should recognize design evolution as a foreseeable project risk and establish the rules for allocating that risk before design begins. The architect agreement should distinguish owner enhancements from ordinary design development, establish meaningful budget and redesign obligations, anticipate brand and operator reviews, define foreseeable services and turnovers, and create appropriate controls around Additional Services.
On a project where the smallest details may be central to the guest experience, the design should have room to evolve. Luxury is built through refinement. The key is making sure the architect agreement properly allocates who pays for it.
Contacts
Kristen Sherwin I 214.745.5390 I ksherwin@winstead.com
Kristen Sherwin is the Chair of Winstead’s Construction Practice Group. She advises owner and developer clients with respect to construction, design, and professional services contracts, contract administration, lien and bond claims, and project close-out. Kristen’s representation of clients spans the entire lifecycle of a project. Her approach to handling complex transactional and disputed issues is informed by years of representing owners and developers—as both plaintiffs and defendants—in a variety of complex construction disputes. She brings extensive construction-industry experience across a broad range of project types, including health care, multi-family, mixed-use and residential condominiums, along with hospitality, industrial, data center, aviation, office, and entertainment developments
D
akota Brewer I 214.745.5396 I dbrewer@winstead.com
Dakota Brewer represents owners and developers in the planning, development, and construction of sophisticated commercial projects across a broad range of industries, including sports venues, hospitality, entertainment, mixed-use, multifamily, warehouse and manufacturing facilities, land development projects, and special purpose districts. His practice emphasizes proactive risk management through the strategic negotiation of design and construction contracts and the efficient resolution of construction disputes.
The post Who Pays for Luxury? Allocating Design Evolution Risk on High-End Hospitality Projects appeared first on Winstead Real Estate Forward.