Improve the bottom line, strengthen client relations and reduce risk?
January 1, 2000
By Canadian Consulting Engineer
Ensure that you have properly scoped the work to be performed and that you articulate areas of responsibility in a clearly written contract. These are the principal recommendations offered by ENCON, h...
Ensure that you have properly scoped the work to be performed and that you articulate areas of responsibility in a clearly written contract. These are the principal recommendations offered by ENCON, having recently conducted a review of claims performance.
Of the claims handled by ENCON, about 20% relate to situations where there is no written contract and the parties are relying on either oral or past written agreements for the definition of roles and responsibilities. The courts recognize the legality of an oral contract but very rarely do parties agree on the terms of the contract — it very often comes down to their word against yours. Below are some examples that illustrate this scenario.
A specialty engineering firm received a fax from a client for whom they had often worked in the past. It was a one-page document showing a sketch of a high performance turbine blade. Dimensions were given as well as material specs, and across the top a hand-written note declared: “Bill, could you check out this design?”
The insured proceeded to perform a calculation to verify stresses in the blade leading to a general approval of the design. Cost for services: $750. Subsequently, the blades were manufactured and installed. The turbines failed after seven hours of use.
Further information revealed that given an unusual setting, the design was not adequate. The mechanical verification would not turn up this condition. It would only have been discovered had a complex, and very costly, finite element analysis been performed. The client had in the past refused the more expensive approach, trusting in the traditional methods. The insured’s client now complains that the more costly analysis should have been done. He would have paid for it and the engineer is liable for the more than $250,000 claimed for not performing the finite element analysis.
Due to the absence of a contract, the court was left to decide the engineer’s responsibilities vis–vis “checking out” the design. There was a very good chance that a court would determine that it was up to the engineer to dictate what would be required in order to adequately “check out the design.” There was a significant payment on this file principally due to the lack of a contract, more accurately the lack of an adequately drafted contract, which defined the roles and responsibilities of the parties and provided for adequate compensation for these responsibilities.
In those claims cases where parties have signed a contract, ENCON has found that approximately 30-50% provide inadequate definitions of the scope of work to be performed. This factor almost always hampers the insurer’s ability to settle the claim and ultimately drives up the total cost of settlement. Therefore, it is imperative that all contracts provide a clear indication of what you intend to do for the client and also what you are not responsible for.
1. If you are to provide design only with no field review, your contract must state this. A recent Alberta case stated that “in the absence of contract language to the contrary, you will be charged with a full site inspection mandate.”
2. If you are to provide mechanical services, the contract must define who is to be responsible for the seismic requirements.
ENCON offers good advice from its experience with design/build contracts through the following example:
An engineer was hired to provide design sketches so that a contractor could tender a D/B project. No mention was made of the contingencies or allowances. The engineer expected the contractor to account for the items not put on the drawings; the contractor is now claiming it was relying on the engineer to provide everything required to bid the job. This resulted in a multi-million dollar lawsuit, which was very expensive to settle. Inadequate definition of the scope of work resulted in 65% of the ultimate settlement.
ENCON has developed a helpful checklist of questions that should tell you if your contract is doing its job. It is also useful to add a scope of work discussion as an agenda item prior to beginning the project to ensure both you and your client are clear on roles and responsibilities.
Visit also the ACEC web site where non-members can purchase the standard contract documents referred to in this article and members can download free electronic versions. Go to www.acec.ca, click on the “E-Shoppe” button and follow the on-screen instructions.