Fixed-Price Issues Affect Engineers Too!
The article “Fixing Construction’s Fixed-Price Conundrum” definitely identified a critically important issue that materially impacts continued successful utilization of design-build and P3 approaches in North America.
The demonstrated negative impact on construction of DB and P3 fixed-price procurement, exacerbated by unreasonable and imbalanced contractual risk allocation, has another important negative by-product—the frequency and severity of professional liability claims asserted by design-builders against consulting engineer subconsultants. Significantly, many derive from the same problems and challenges discussed in the article. The trickle-down effect of fixed-price and imbalanced risk allocation on consulting engineers warrants equal attention.
In the last decade, design-builder professional liability claims against consulting engineers in P3 and DB projects have risen dramatically.
The trend is extraordinarily concerning. I am extremely cautious generalizing as to cause, but what underlies or motivates claims often is unfair risk allocation between owner and concessionaire in P3s or owner and design-builder in DBs. The design-builder’s inability to seek recourse against its upstream contracting partner produces the mechanism of a professional liability claim against its consulting engineer.
The concerning claims experience for engineers in P3s and DBs derives directly and significantly from the same root causes that underlie the fixed-price problem addressed.
The converged realities and negative consequences of aggressive and highly competitive pre-award pricing (with inadequate design development contingency) in the context of fixed-price/imbalanced risk typically are disguised and transposed into a professional liability claim. The engineer’s conceptual or preliminary pre-award design or studies, investigations or recommendations did not meet the standard of care, resulting in cost overruns that the design-builder is not able to recover from the owner.
The design-builder’s pre-award failures to identify and assess design development and related risks (and adequately price and carry contingency for them) often provides an important part of the defense or explanation of claims, but it is equally true that fixed-price and uneven risk allocation are significant underlying factors and reasons impelling them.
Despite recent court victories for consulting engineers in this claim context, this trend is simply not sustainable for contractors and engineers; the ENR article provides compelling and convincing evidence to that effect. I
ndustry should not look to courts as the primary solution. It mainly rests with owners. Contractors, typically the design-build lead, and consulting engineers often are adversaries in this context, but they share a common concern about unfair risk allocation in the fixed-price P3 and DB contractual setting.
For the past decade, owners have had the advantage and benefit of significant competition among contractors and artificially low fixed-price cost for P3 and DB projects. The recent trend obviously moves decisively in a very different direction.
Owners need to get the message about the importance of balance in risk allocation and recalibrate procurement and contract practices. For the last several years, I have predicted that unless something fundamentally changes in DB and P3s, there will be design and construction casualties. Public awareness is an important step in averting that consequence. Thank you for an excellent article that increases that awareness.
David J. Hatem, PC
David J. Hatem is a partner in the law firm of Donovan Hatem LLP and chair of its professional practices group. He also teaches at Northeastern and Tufts University engineering schools and is author of several books on project risk management and liability risk exposure. Hatem can be reached at DHatemPC@donovanhatem.com.