Legal: The risks of scope creep (Part 1 of 2)

Kailey Sutton (left) and Patrick Pinho (right). Photos courtesy MacMillan LLP.

Consulting engineers may be all too familiar with ‘scope creep,’ sometimes referred to as ‘requirement creep’ or ‘feature creep.’ This insidious problem occurs after the consultant embarks upon a relationship with a client with a certain understanding of the extent of services to be provided, only to discover the client’s expectations and interpretation of the services agreement expanding as the project progresses, requiring increasingly more input than originally anticipated. Unlike contractors, who have more tangible measures of output, the intangible nature of consultants’ services exacerbates the potential for scope creep.

This would be much less of an industry issue if consultants were paid for their services as rendered on a simple basis of time, but unfortunately, such a compensation structure is not common in the Canadian construction market. Instead, current conditions drive a market where consultants must compete for a project award, often necessitating fixed-price or lump-sum pricing structures, which rest on their best estimates of what level of effort will be required.

Clear drafting is paramount.

Project proposals often see consultants lock themselves into fixed-price bids with narrow margins and small (if any) contingencies, in the hope their price is lower than the competition’s. The project may then evolve from the original bid into a new, insufficiently priced undertaking.

Key issues

Scope creep tends to emerge gradually. As project work progresses, expectations of the scope of services may diverge—or it may become clear the contract documents poorly define the project or scope. The consultant may then find the client insisting certain services, which the consultant considers ‘additional,’ are to be performed as part of the original agreement terms; unanticipated services must be provided as a matter of professional responsibility, due to a gap in the contract documents; or, at the very least, extra services must be performed to maintain progress and avoid claims of project delay, whether warranted or not.

Scope creep tends to emerge gradually.

By its nature, scope creep will rarely improve as the project progresses. Consultants may find themselves past a point of no return before even recognizing the issue.

Scope creep is less likely to occur in a smooth, well-functioning project. Rather, it often emerges as serious problems develop, such as persistent consultant underperformance, client indecisiveness or unresponsiveness, unforeseen circumstances or delays.

Inevitably, parties argue each other should be responsible for the resultant costs. Notably, claims for resultant additional consulting services, such as contract administration, redesign or co-ordination, tend to receive less attention from the client due to their intangibility and, therefore, are less frequently accepted as ‘additional services.’

Further, the obligation of the client to pay for ‘additional services’ may be unclear. While it might not be problematic for consultants to perform such services if they are to be compensated fairly, the dispute often lies in whether such services are in fact additional to the original scope, given poorly drafted terms or vague catchall language in the services agreement (e.g. “all other activities as reasonably required”).

Such language can unfairly shift additional financial burden onto consultants, who may have left themselves little to no margin or contingency, just to get the award in the first place. Clear drafting is paramount in ensuring the parties’ expectations are aligned.

Drafting the contract

A number of steps can be taken to mitigate the impact of scope creep, both before it occurs and once it is discovered, by drafting and negotiating a fair services agreement:

1. Ensure the scope is accurately defined.

Consultants should ensure the scope of services set out in their services agreement is as detailed, clear and comprehensive as possible, including a list of what is exempted. An excellent example is Schedule A of Canadian Construction Documents Committee (CCDC) 31 – 2020, Service Contract Between Owner and Consultant, which sets out in considerable granularity the various elements of scope typically included within engineering engagements. Schedule A forces the parties to consider whether each item is included in the scope and how each is to be priced. Even when parties do not choose to use the CCDC 31 standard form, it should be considered as a reference source for detailing contract scope.

2. Avoid overly broad catchall language.

Consultants should be extremely cautious about catchall language insofar as it refers to scope. It often acts as a trap for the unwary and leads to disputes. It is essential to review proposed contract terms carefully and negotiate away—or at least limit—any open-ended obligations. The following are some common examples:

• “The scope shall be as set out in Schedule “x” to this agreement and shall include all services necessary and incidental thereto.”
• “The consultant shall provide all services necessary to achieve the owner’s requirements for the project.”
• “Without limiting any other provision of this agreement, the consultant shall perform all such tasks as are required so as to prevent any delay in the execution of the project.”

3. Address additional services.

Ensure the services agreement contains provisions identifying and addressing additional services and changes to scope, including compensation. The CCDC 31 standard form provides a good model for this in section GC 3.2. The basic principles should include:

• A clear definition for additional services.
• An obligation to give prompt notice when the need for additional services is identified by either party;
• A requirement for the parties to endeavour to reach agreement on adjustments to remuneration and/or time, recorded in writing (a best practice is to agree beforehand on hourly rates for provision of additional services).
• A provision that if the client does not object to a consultant’s notice of the need for additional services in a reasonable time, then the consultant is entitled to proceed with performance of such services with compensation by the client.
• A stipulation that if there is no agreement on remuneration and/or time extension for additional services, then the consultant is under no obligation to perform them;
• A requirement that if there is disagreement about whether or not something constitutes an additional service—or if the client requires such services before agreement is reached—then the client must give a notice to proceed, identifying the services in question, following which the consultant must give notice of its position. The parties may thereafter either reach agreement or address the matter using the services agreement’s dispute resolution provisions.

4. Include contingency for additional services if using a fixed-price structure.

A contingency is a widely recognized and accepted risk mitigation tool. The parties should have no issue negotiating its inclusion, though market forces may make it more difficult to include in the price or may affect the amount. Nonetheless, it should be considered, particularly in circumstances where it is difficult to specify scope in sufficient detail in advance. This provision should specify the amount of contingency and the mechanism for payment.

(Note: An upcoming second part of this feature will discuss additional best practices to ensure the services agreement is followed and scope creep is kept at bay.)

Kailey Sutton is an associate, Patrick Pinho is a student-at-law and Geza R. Banfai is counsel with McMillan LLP’s construction group. For more information, email kailey.sutton@mcmillan.ca.