Professional Liability/Risk Management Brief: Using Independent Reviews to Manage Exposure
The likelihood of design deliverables being released for approval or actual construction while containing negligent errors or omissions is higher than most firms would like. This is due to projects becoming more complex and design times being severely constrained. As such, more projects involve design input from a wide range of consultants and other entities. Design fees do not always compensate for the level of service that design firms feel are appropriate.
Using Project Peer Reviews
For decades, engineering and other design firms have used peer reviews. Some have used an organizational peer review where outside practitioners evaluate the business operations of a firm. Now, more design professionals, led by the structural engineering discipline, are seeing the advantages of routinely using a project peer review process.
In the past, peer reviews were often used on projects where performance was considered critical or when innovative materials or techniques were being incorporated into the design. The project peer review effort provided an evaluation of design concepts to meet performance objectives. On larger and more complex projects, reviews gave design firms and their clients increased confidence in design and in the documentation of the design through the deliverables. Now, that confidence is being provided on a wider range of projects.
The effectiveness of a project peer review is that it is performed by an independent team or individual not associated with the original design team. While a separate firm often performs the review—perhaps a firm trading review services with a peer—the reviewer can also be a separate, experienced individual or studio within the same firm. Whether the review is performed internally or externally, the key is that the assessment be conducted by an entity that did not participate in the original design and is unlikely to miss some deficiency or possible problem because of time or budget constraints.
The review assesses the likelihood that the instruments of service—the deliverables—would satisfy the client’s stated objectives and would be in conformance with good professional practice. A project peer review is not meant to shift or spread exposure for professional liability claims. The goal is to provide feedback to reduce the probability of claims and to make any filed claims easier to defend.
A key ingredient in the recipe for the successful completion of a project is a thorough and independent constructability review. On projects where the construction team is engaged during the design phase, there is a much greater chance that the design firm and client will benefit. A structured and well-documented constructability review process provides for the timely integration of construction input into project planning, design, and field operations. Clients are better served because considerations for the fabrication, installation, operability, and maintenance are addressed by representatives of the client, those responsible for construction, and other project stakeholders.
Because a constructability review should be an interactive process, the investigation should take place throughout the design process. In many instances, however, the actual construction team may not be identified until the design is nearly complete. Still, a constructability review performed by a consultant can achieve many benefits.
As more projects are delivered through a building information model rather than through two-dimensional plans and printed specifications, the incorporation of a constructability review can be an automatic procedure in the integrated design and construction process.
Meeting the Standard of Care
Every project is unique, meaning that each is an exercise of professional judgment. Modifications to the instruments of service and adjustments during construction are expected. As a result, the law does not require faultless performance from a design firm, complete and error-free deliverables, or a perfect project. Design firms are not product vendors, and neither the deliverables nor the project is required to meet product liability standards. If professional services and the projects they lead to are to meet client expectations, however, care has to be taken to minimize problems that could lead to disputes and claims. Using project peer reviews before deliverables are released and incorporating constructability reviews into the design process are two techniques with proven records of minimizing professional liability exposure.
© 2008, Victor O. Schinnerer & Company, Inc. Statements concerning legal matters should be understood to be general observations based solely on our experience as risk consultants and may not be relied upon as legal advice, which we are not authorized to provide. All such matters should be reviewed with a qualified advisor. Victor O. Schinnerer & Company Inc. is managing underwriter for the CNA/Schinnerer Professional Liability Insurance Program, commended by NSPE/PEPP since 1957.
Seven Deadly Sins of Financial Reporting
Herbert M. Cannon, President of AEC Management Solutions Inc.
7. Underestimating the Bad Debt Expense
Yes it is certainly tempting to be overly optimistic and hope beyond hope that somehow we will ultimately collect that open invoice from December 2001. But let’s face it: it is never going to happen. We aren’t fooling anyone (other than ourselves) by keeping it on the books. Make it a policy to take a reserve against bad debt after 120 days and to remove it from you books after one year.
6. Inflating Billable Hours
Make it a habit of only invoicing the hours you actually worked. Resist the temptation to inflate the actual hours because of the “extraordinary value” you have created under your hourly agreement. It is unethical to invoice phantom hours, not to mention fraudulent. Follow the industry trend and negotiate more fixed fee contracts. These contracts allow you to capitalize on your intellectual property and be fairly compensated for the value you create.
5. Invoicing for Work Not Under Contract
You know what I am talking about. After working on a project for a year or so and being substantially over budget, you finally dust off the contract to review the scope of work. To no one's surprise, you find that you have attended extra meetings, the program has changed, the construction budget has increased by 50% and the project is now four months behind schedule. You quickly put together some numbers and send the client and “additional service” invoice for $125,000. While I am all for getting paid for our work and we should definitely approach the client, please don’t recognize the revenue until the client agrees to pay you. This would be wishful thinking at best.
4. Recording Work in Progress that is Questionable
Item #5 (above) would fall into the questionable category. If you don’t have a contract for the scope of work, don’t record the revenue. As a matter of fact, I am not a fan of recording work-in-progress on a regular basis for most (not all) firms. I prefer to have a system of issuing invoices at the close of every month and posting them in the period the work was performed. The only work-in-progress entries should be for those contracts that call for milestone invoices (e.g. 100% schematic design, 50% design development).
3. Not Accruing Consultants
I have seen many firms that do not recognize consultant expenses until they receive an invoice from the consultant. This is a huge mistake and can cause wild fluctuations in net income. If you are invoicing a client on a fixed-fee contract through 80% design development, you had better be sure to recognize 80% of your subconsultants' expenses on your books. The profit (or loss) implications can easily exceed $100,000 or more depending on the size of the contracts involved.
2. Intentionally Not Recording Legitimate Expenses
It is far too easy to “forget” to enter an invoice in the proper month or year. If the current month or year seems a little bit weak, don’t be tempted to defer the expense and record it several months after the fact. Nobody wins and we are only deferring the day of reckoning.
1. Invoicing in Excess of the Actual Percentage of Completion
Don’t juice up the current revenues by invoicing in excess of your percentage of completion. In the short run, the most difficult thing to face is the truth. If revenues are down, so be it. Armed with the truth, we can take the action that is needed. Disarmed by deceit, we wander aimlessly towards disaster.
Herbert M. Cannon, president of AEC Management Solutions Inc. and publisher of AEC Managing Partner Newsletter, is a management consultant, seminar provider and speaker exclusive to the A/E industry. He is available to speak at company meetings and conferences. For more information, contact Herb via e-mail or visit his Web site.
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Sustainable Design Risk Management
Victor O. Schinnerer & Co., underwriting administrator of NSPE's commended professional liability insurance program and sponsor of the NSPE Milton F. Lunch Summer Fellowship Study, explores some of the legal and insurance implications of the "green" movement, as well as developments in common rating systems in a new white paper Sustainable Design Risk Management.
Once you've had a chance to review the white paper, give us and your fellow engineers your thoughts on the "green" movement and the implications for design engineers by providing your comments below.
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Resources for All Sides of the Generational Divide
PEPP continues to focus on the future of the profession and firms. A big part of that is cultural trends. Cultural and generational trends are key to coming to terms with the future and being relevant in the next ten years rather than watching the past in the rear view mirror.
Are you a baby boomer trying to understand Generation X and the Millenials? Looking for a resource to decipher the myths and truths of keeping your young, valuable workforce committed, motivated, and productive? Check out the free Motivation Factors of Young Engineers Report produced by NSPE Gen Xers and Millenials—the PEPP Young Engineers Advisory Council. Member Price $0.00
Are you a young engineer on the road to success?
Bernard R. Berson and Douglas E. Benner discuss their book Career Success in Engineering: A Guide for Students and Young Professional in this free Web seminar. College engineering programs focus primarily on the technical skills and requirements of a career in engineering, devoting little time to real-world matters of employment, on-the-job performance, project management, leadership, ethics, licensure, project delivery systems, and professional liability. This will help young engineers make the transition from an academic environment to the professional world with the development of these essential skills.
Click to view the Web seminar. Use the pass code "nspepw." Member Price $0.00
Ready for the solution to generational differences in your office? Purchase the recently reduced in price Future Leader Focus report. With charts and graphs, explanatory text, and verbatim quotes, the Future Leaders Focus report will help you tackle the never ending challenge of finding and keeping talent, which is critical to your success and profitability. Member Price $175.00
Or view the free two-part PEPP Council of Principals video on Leadership and the Emerging Generations. Member Price $0.00
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Economy Likely to Increase Construction Litigation
This article from the Kansas City Business Journal on rising construction disputes may be something you are already experiencing. Hard economic times mean an increase in construction litigation. In fact, as the economy slows, construction litigation is one of the few areas expected to expand.
In times like these, risk management becomes even more important. Recently PEPP's Professional Liability Committee surveyed and intereviewed insurance carriers. All were asked what is the #1 controllable risk for engineering and architecture firms. The top three answers were:
Internal and external communications take on new meaning. Employees and clients want to know how the economy will affect them and projects. Open dialogue helps everyone understand changes that need to be made.
Many firms will be looking for different clients in the coming months. Some may turn to government contracts or take on contracts they wouldn't have previously.
Be sure that you have a written contract for all work. We encourage using EJCDC standard contract documents as a starting place.
Stay tuned —Some of these upcoming NSPE Web seminars should provide additional insight:
January 13, 1:00–2:00 p.m. (Eastern)
Controlling Project Design Costs (1.0 PDH)
January 29, 12:30–1:30 p.m. (Eastern)
Thriving in the Economic Meltdown (1.0 PDH)
February 4, 1:00–2:00 p.m. (Eastern)
EJCDC Documents (1.0 PDH)
February 11, 1:00–3:00 p.m. (Eastern)
Recent Contractual Issues of Important to Engineers (1.0 PDH)
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NSPE Education for You and Your Firm
With the holidays coming, NSPE is spreading good cheer by offering a 50% discount on all online courses with certification.
Use discount code "holiday" at checkout to receive this offer, available until December 31.
Good for online courses only.
[ return to top ] NSPE Partners to Present NEW Web Seminar Events!
From WPL-Publisher of Construction Claims Online
Construction Scheduling for Profit 2008 Web seminar series:
Scheduling Traps, Pitfalls, and Swindles–The Dark Side of Scheduling (Session 3)
Challenges and Lessons-Learned with Primavera’s Project Management Software (Session 4)
Click here to register for the Construction Scheduling for Profit 2008 Web seminar series. Missed a session? Order the CD.
Polish Your Professionalism to Get the Respect You Deserve
December 4, 2008 12:00–1:30 p.m. (Eastern)
A critical success factor for anyone's career is a professional image that helps earn people's respect. Are you dressing, speaking, and working to your best advantage?
Power Prospecting That Gets You Results
December 10, 2008 12:00–1:30 p.m. (Eastern)
Learn how to sharpen your competitive edge and close more business with the latest prospecting strategies that will get you solid results.
CLICK HERE to register.
2009 New Product Award Call for Entries
Don't miss an opportunity to get national visibility for your product by entering the 26th Annual NSPE PEI New Product Award competition. The competition recognizes any process, machine, or material developed in the U.S. that improves the public’s standard of living.
Winning products will be honored with the NSPE PEI New Product Award crystal and are entitled to use the coveted NSPE PEI New Product Award logo. Winners will also be recognized in a “Winners' Circle” ad in PE magazine, within NSPE's Web site and print communications, and through significant media coverage.
All 2009 NSPE PEI New Product Award entrants will have the opportunity to showcase their product during the 2009 NSPE Annual Conference in July. Winners will receive two complimentary tickets to the NSPE PEI New Product Award presentation. Submit your entry by February 15, 2009! For an application and list of past NPA winners, visit the NSPE PEI New Product Award Web page. [ return to top ]