Alternate project delivery brings risk with rewards

June 2012 » Features » BUSINESS STRATEGIES
Manage and mitigate risks from design-build and public-private partnerships.
Dan Knise

The April 2012 issue of CE News included the annual "Transportation Projects Roadmap" listing of major U.S. transportation projects. Interestingly, among these projects "alternate project delivery" (defined as design-build or public-private partnerships) predominates as the project delivery method. Increasingly, state departments of transportation and other project owners are turning to design-build or public-private partnerships (P3s) to help deliver projects at lower cost and in less time.

Such projects represent real opportunity for engineers concerned about possible downturns in state and local infrastructure spending. Many of these design-build and P3 projects have price tags in the billions of dollars and project timelines stretching 10 years or longer.

The potential rewards, in terms of keeping staff busy, increasing fee revenue, and earning profit are very real. Just as real, however, are the risks that come with undertaking projects via alternate project delivery systems.

Potential risks
There are a variety of risks that can either arise from or be exacerbated by utilization of an alternate project delivery approach such as design-build or P3. Not all of these risks are insurance related, as the relationships among the parties to the project can also have an impact on how a firm gets paid, the likely profit margin, etc. In any event, engineers should be careful to distinguish between the way a venture is structured and led, and how this affects risk.

For example, Victor O. Schinnerer, the leading underwriter of professional liability insurance for architects and engineers, found that engineers involved in designer-led design-build projects were likely to have fewer insurable claims. However, they also found that, in some cases, this structure resulted in significantly greater business risk that must also be taken into account. Meanwhile, some feel that contractor-led design-build projects are higher risk because contractors who don't meet their profit objectives will look to their engineering firm partners to make up any shortfalls.

Firms contemplating P3 or design-build projects should consider the following risks:

Possibility of an expanded scope – One immediate concern for civil engineers working on P3 or design-build projects is how the contractual relationship with the contractor expands their scope of work (or at least their perceived scope of work) and the corollary risk. An example would be an interpretation of the contract that somehow makes the engineer responsible for oversight of means and methods of construction. Such responsibility can be a problem at various levels including the fact that engineers typically aren't expert in this aspect of the construction process. Secondly, the engineer's professional liability insurance policy contains a specific exclusion for "means and methods," so there is no coverage for such activities.

Shared design responsibility – Another complication is the "shared" design role that often comes with design-build or P3 projects. Often, the contractor's staff will be actively involved in "value engineering" the project and the lines of responsibility are blurred. Whenever the lines of responsibility are unclear, this creates the potential of more risk being shifted to the engineer. Be sure that contract documents clearly define responsibility and accountability and ensure that by your actions you don't muddy the waters. Also, it is a good idea to require the contractor to carry Contractors' Professional Liability insurance to insure his or her risk.

Warranties/guarantees – Contractors are accustomed to providing express warranties and guarantees as part of delivering a project. While it may be necessary for a design-build or P3 team to do the same, you need to recognize that typically the engineer doesn't enjoy the same reward as the contractor and therefore shouldn't take on the same risk. In addition, the engineer's professional liability policy explicitly excludes coverage for warranties and guarantees that go beyond the standard of care.

Jobsite safety – This is a sticky area that can create real problems for an unsuspecting engineer. As part of executing the design-build or P3 agreement, the team takes responsibility for ensuring a safe jobsite. While contractors are equipped to handle this undertaking, most engineering firms don't have the expertise or resources to be responsible for jobsite safety. The potential risk of injured worker claims from subcontractors and owner personnel is significant, and engineers need to be careful to avoid taking on this risk, even on a proportional basis.

Expanding liability to third parties – Engineers have long enjoyed protection under "privity of contract" concepts from claims by third parties for so-called economic loss (delay or additional cost over-run claims). Claims have been limited to only the engineer's employer – typically the project owner or, in the case of a design-build project, the contractor. By joining a design-build or P3 team and becoming signatory to contracts with other parties (e.g., subcontractors or the owner), engineers need to be careful that they don't expand the pool of potential claimants against themselves. Particularly troublesome are so-called "skip over" claims from the owner, who bypasses the design-build entity or contractor and sues the engineer directly.

Technology risks – Many P3 and design-build project teams are working to gain efficiencies by using collaborative technology such as building information modeling and FTP sites. Often, the engineer is tasked with maintaining these systems and ensuring their security and availability to all. This "hosting" creates the potential for more risk, including so-called cyber-risks, that need to be addressed through effective security protocols and adequate insurance protection.

Longer tail exposures – An area of potentially significant exposure is post-design, post-construction roadway accidents that an engineer may now be held liable for as part of a design-build or P3 team. One example involved a woman killed while jogging past a post office that had undergone an expansion. The allegation was made that prior to the expansion project there was a wider shoulder along that stretch of roadway. The expansion allegedly encroached on the shoulder, eliminating part of the walkway and leaving insufficient room for pedestrians.

In conclusion, note that the opportunities presented to today's civil engineers by alternate project delivery are very real. There is no reason not to capture these opportunities provided appropriate risk mitigation and management efforts have been taken and necessary insurance is in place. Working with their attorney and an experienced insurance advisor, engineers should be able to thrive in this evolving market.

Dan Knise is president and CEO of Ames & Gough Insurance/Risk Management, (www.amesgough.com) a specialty insurance broker serving engineers, architects, and construction professionals from offices in Washington, D.C., Boston, and Philadelphia.


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