A risk-based perspective on the procurement of intellect

By Bruce G. Matthews Special to Ontario Construction News What are you buying when procuring engineering or architecture services? It’s not the report, plan, or drawing, that you receive at the end. That’s just the deliverable. What you’re really contracting for is the knowledge, skill, and judgment of the design professionals. You’re buying their intellect, gained through extensive education, training and experience, to be applied to your specific needs and challenges. Procuring the intellect of designers on major projects is unlike procuring other services and nothing like procuring goods. Infrastructure projects have competing challenges of timeliness, fiscal responsibility, and quality/innovation, all while trying to meet a defined societal need. Problems with project delivery have created a separate, overarching consideration:  the desire for certainty – certainty about cost, schedule, and quality. Certainty is negatively correlated to risk. Certainty is maximized when risk is minimized. Risk management is a well-understood concept. ISO 31000 details a risk management approach that is applicable to a broad range of circumstances. The bulk of the process is about developing a proper understanding of the risks – identifying, analyzing, and evaluating them. Only with that understanding can appropriate risk treatments be selected. Risk treatments can range from avoidance to modification, transfer, or acceptance. Contract language has been used to create wholesale risk transfer from the project owner to the design firm. Broad and unlimited indemnification clauses, clauses that specify liquidated damages or include consequential damages, clauses regarding insurance requirements, and clauses addressing the standard of care all serve to shift the risks to the designers. Unfortunately, this creates a false sense of risk mitigation for the owner. Engineers and architects are regulated professionals. Their regulatory bodies set the standards of qualification and standards of practice for the practitioners. They require professional liability insurance (PLI) to be carried by those offering services to the public. PLI is itself a form of risk transfer for the design firm that enables them to accept certain risks from the client. The nature of this insurance is not a blanket, however, and where wholesale risk transfer language exists in a contract, it may void the PLI coverage. Broad indemnification clauses that are not tied to negligence are the biggest culprits in this regard. PLI coverage is predicated on provable negligence on the part of the engineer or architect. Nonetheless, some public-sector clients include terms and conditions that seek indemnification for losses “arising from, or related to, either directly or indirectly, any act or omission” by the designer, without the act or omission equating to negligence. With this language, the designer’s PLI generally will not cover a claim. Similarly, contract language that seeks to impose a higher standard of care than that required by the regulator can also void the PLI coverage. A designer who agrees to work to “the highest standards of the profession”, or to use “best efforts”, will find their PLI coverage invalidated. When risk is transferred under contract, but that risk is not covered by insurance, it creates a serious problem for the project owner. Uninsured risk transfer does not actually mitigate risk and hence will do nothing to enhance certainty in project delivery. Another adverse trend in the procurement of engineering and architecture services is selection based on low price. This approach commoditizes these services and confuses “lowest cost” with “best value”. Intellect cannot be commoditized and value for an infrastructure project can only be measured over the lifecycle of the asset. Best value doesn’t come from spending the least amount possible on each of design, construction, and operations and maintenance. Those costs aren’t independent – design decisions can significantly impact the cost of construction, operations, and maintenance. The lion’s share of the lifecycle cost of an infrastructure asset is in operations and maintenance. The most impactful time to influence those costs is during design. Unfortunately, low price selection of design services results in proposals with minimalist interpretations of requirements and penalizes firms that properly anticipate project complexities and can best design for operability and maintainability. The consequences of a failure to achieve best lifecycle value is higher operating and maintenance costs, which typically lead to future deferred maintenance and the asset failing to meet its intended function or service life. So what’s the solution? Project risks are best minimized when that risk is apportioned to the party best able to manage it. Fair and reasonable contract terms that respect the realities of the designers’ PLI coverage must be used. There are multiple standard forms of contract that provide fair and reasonable terms and balanced risk, including the CCDC 31 contract introduced a few years back. Even before a contract is entered into, using a qualifications-based selection process will mitigate risk. The best qualified firm is unlikely to be the highest cost firm. However, the best qualified firm will provide the lowest risk and the best opportunity to maximize lifecycle value.
Bruce G. Matthews, a professional engineer, is the  former executive director of the Association of Consulting Engineering Companies (ACEC) – Ontario.


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