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Owner, Engineer and Contractor Risk Responsibility

January 20, 2008  |  from From the Top

    Every owner, engineer and contractor in the industry is passing through a period when it seems almost impossible for all parties to meet their respective cost, schedule and quality goals. In the vast majority of instances it has nothing to do with the physical process of designing or constructing a project but with the systems by which each party attempts to manage those physical processes.

 In a society that has become more litigious with each day of delay and each dollar of cost overrun, parties are attempting to shift more and more risk to other parties. Owners look to engineers to design projects and construction managers to manage projects and believe that through their contracts with each of these parties that they have shifted the responsibility for the design and construction of their projects. Engineers who design the project and prepare the construction contracts attempt to further shift the responsibility for the quality of installation and for performance of the project to the contractor. However, at the end of the day, can risk really be totally shifted from one party to the next or are their certain risks that each party is going to have to bear responsibility for? Are there other risks that could be minimized through more risk assessment and risk allocation?

Public owners have an ethical responsibility to provide accurate, clear and consistent specifications that allocate risk in a manner that limits the cost to the taxpayers. They also have a responsibility to respond in a timely manner to contractors in order to minimize the impact of change and problems when they arise and to fairly negotiate change when change occurs.  The engineer has an ethical and legal license responsibility to assure that the design is complete, accurate and constructability-simple as that.  If an engineer is aware that there are errors or omissions in the documents, the engineer cannot simply hide behind the guise of limited or depleted funds available to it, or the owner’s directive to do so. If the design is not constructible in the first place, then the engineer faces the risk of not having carefully evaluated the design before its release.  Whether it is an errors or omissions issue or a standard of care issue, the risk will remain with the engineer and the owner will look towards the Engineer for recovery.

Once the contractor has decided to tender a bid it has, in effect, accepted the risk elements that exist within that project scope of work as established within the contract document set. A risk identified during preparation of the bid or proposal, but forgotten during execution is essentially a disaster waiting to happen. It is not enough to identify the risks which exist in a contract or project. The project execution must be monitored constantly to ascertain whether those risks identified do emerge and then to assure project management is addressing the emerging risk reasonably and timely. The contractor does not have an option to off-load any of that accepted risk, even if he chooses to subcontract a portion of the work. In every contract situation the contractor is solely and directly responsible to the owner for the risks assumed under the contract document set. If the contractor determines that the risks transferred within the owner scope of work exceed the potential for profit, then he should not bid the work. Any change to the agreement has the potential to introduce new risk elements into the body of the project. Every change - whether formal, informal, major, minor, early, late, easy or difficult - contains risk elements, and those risk elements may have both a direct and indirect opportunity for loss associated with them.  

The contractor bears an ethical responsibility to immediately notify the engineer/owner when plan errors or changes exist to limit the losses to both parties.  It is simply unacceptable for either side to take advantage of plan errors or unknowns. Like the owner, the contractor must also fairly negotiation changes and provide information that is needed by the owner to substantiate the change being requested. Obviously, not all risks can be identified or managed to minimize or eliminate their impacts. 

Nonetheless, the process can be extremely effective and many risks can be avoided, minimized and transferred if identified early and continuously monitored throughout the project execution. Once all the project participants recognize that there is risk inherent within the project and the execution of their scope of work, the process of managing that risk can become part of an effective method in reducing disputes and achieving project goals as originally intended. As professionals, we are ethically responsible to do what is fair and consistent with the contract. If a loss is caused by one party, that party must take responsibility and work with the other side to correct the problem and limit damages. Designers must provide clear, easy to bid and constructible plans and contractors must provide a quality product.

Way too often, though, although we are professionals, we forget our ethical obligations to our profession and instead revert to finger-pointing. What we really need to focus on is our accountability, professionalism and ethics.   

Filed: Design-Engineering Risk-Insurance