- Direct hire. As noted, owners often hired certain consulting firms and then forwarded any resultant reports, etc. to the architect or engineering firm. An example is the owner’s retention of the geotechnical engineer. More contracts now require the prime engineer to retain these consultants, shifting the liability for their work product to the engineer/architect.
- Designated by owner. The owner requires its prime design firm to hire certain subconsultants named by the owner.
- Hired by owner, which “designates” responsibility to the design firm. The owner retains certain specialty consultants, but the prime design contract stipulates the architect or engineer assumes responsibility for their work product (and, often, for processing their invoices on a “pass-through” basis at no mark-up).
Professional Service Pitfalls
Aug 30, 2016
Even minor changes in contract language can create major liability and insurance issues for design firms, so be aware of what’s out there and act accordingly. Today’s contracts involving design firms and owners, project managers and other participants, are increasingly subject to the dynamics of how projects are run; in particular, more owners now realize that “minor” changes in contract language may significantly shift risk allocation. In this context, let’s examine some emerging situations and contract language that may create expanded liability and potential insurance issues for design firms. Identifying these issues is the first step; offering your clients possible alternative language is the second step. The third? A successful, profitable project! Municipal advisor and scope of work. Engineers are excluded from the SEC’s definition of municipal advisor “to the extent that the engineer is providing engineering advice.” The provision of engineering feasibility studies that include certain projections – such as output capacity, utility project rates, project market demand, or revenues based on engineering aspects of a project – generally fall under this exception. Even so, the exemption may not encompass situations where engineers provide advice to a municipal entity pertinent to financial products or the issuance of municipal securities. This raises not only the issue of whether the engineering firm should be registered as a “municipal advisor,” but also if “standard” professional liability insurance policies actually will cover any related claims. For example, an engineer’s insurance company denied a recent claim involving the firm and a municipality, deeming the engineer’s deficient services to be “… outside the definition of professional services … i.e., financial impact and revenue estimating services.” In such instances, design firms should ask their legal counsel whether they need to register as a “municipal advisor;” similarly, they should check with their insurance advisors on if their professional liability insurance policy needs to be amended. In its standard Owner-Engineer agreement, one firm uses language disclaiming any municipal advisor status, defining such services as “engineering related analysis.” “Owner’s” consultants. Owners traditionally hire an architect or a prime engineer to design their project; this firm then hires subconsultants covering various service disciplines. However, some services typically retained by the owner, such as geotechnical engineering and environmental investigations, are outside the prime designer’s responsibilities. Many owners now seek to have the prime consultant retain all subconsultants on the project, shifting all related risk to the prime designer. Here are changes to watch for:
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