If you’re an owner who's been involved with a major construction project, this question isn’t hypothetical. Yet while this situation is extremely common, many owners don’t have a strong grasp on their contract’s terms and conditions or the relevant case law that forms the underpinnings of a defensible answer.
To many, the obvious answer is, “Heck no! They can pay for their own errors.” Unfortunately, the well-informed answer is seldom so straightforward.
When performing owner’s representative services, we often navigate these waters on our client’s behalf. We’ve learned how you can address these issues after they arise, but we’ve also learned there are measures you can take to minimize the chances of errors occurring in the first place.
In order to determine who has to pay for what appears to be a consultant error, you will need to answer the following two questions.
Q1. Did the Service Meet the Standard of Care?
Professional services, such as design, survey, and others, are held to a certain Standard of Care, generally defined as performing services in a manner that is consistent with other competent professionals in their community of practice. In other words, reasonable and ordinary care is required, but not perfection. When one procures a professional service, one accepts the risk, and the liability, of that professional making a mistake similar to mistakes other competent professionals in their community of practice make, using reasonable diligence and their best judgment.
The courts have settled on this definition because A/E industry work products are often creative and sometimes one-of-a-kind endeavors - the results cannot be guaranteed. Only the level of care used in performing the work can be guaranteed. Therefore, determining the Standard of Care can be challenging.
Past court cases provide some guidance. Essentially, expert witnesses provide testimony, explaining what other competent professionals actually did in similar circumstances. Determining if the Standard of Care was met often comes down to these two key questions:
- Did the professional possess the learning and skill possessed by other, reputable professionals practicing in the same or similar locality and under similar circumstances?
- Did the professional actually use this learning and skill, combined with care, to accomplish the purpose for which the professional was employed?
The Tacoma Narrows Bridge collapse is a well known example to help illustrate where a design error led to a costly failure, but no professional negligence was found. Even though at the time of its construction many other suspension bridges had been successfully built, the Tacoma Narrows’ longer and more slender span created wind oscillations that far exceeded anything previously seen. Because this state-of-the-art bridge’s response to wind was considered sufficiently different from earlier suspension bridges, and other professionals were making similar design accommodations for wind on similar bridges, the designer was found to meet the Standard of Care.
The Hyatt Regency elevated walkway collapse is a well known example that illustrates where the design professional fell below the standard of care. In this example, the contractor changed a design element for constructability reasons, using a formal process to seek approval from the engineer prior to making the change. It was deemed that the engineer did not exercise the level of care ordinarily applied by other engineers because they failed to review the change for adequate structural performance.
Q2. Which did the Consultant Commit: an Error or an Omission?
Next you need to determine if the consultant made an error or an omission. This is an important distinction. In a nutshell:
- An error, once corrected, provides no additional benefit beyond what was originally bid.
- An omission, once added, generally provides some additional benefit that was not part of the contractor’s bid. Since omissions are ‘betterments’ that were not originally paid for, it is generally up to the owner to pay for them rather than the consultant.
Professional Liability Insurance May Not be Enough
Some owners assume that all they need to do is make a claim against the consultant’s professional liability (E&O) insurance for negligence. If only it was that simple.
The presence of E&O insurance does not alter the definition of negligence. To be negligent in the performance of their work, thus triggering possible E&O coverage, the consultant must have fallen below the Standard of Care for their profession.
Warranty clauses are an option, but may not be as effective as you think. E&O insurance covers negligence only, generally excluding coverage for warranties or other clauses requiring the consultant’s work to be ‘free of defects’. While this doesn’t mean a warranty clause is unenforceable, it does produce uninsurable risk, potentially complicating or even barring recovery of insurable negligence. It can also be tough getting consultants to sign contracts with warranty clauses that go beyond one year to re-perform the defective work for free. If you decide to include a warranty clause in your professional service contract, keep in mind that a three year warranty from the date of completion is more realistic, as the time between design completion and discovery of an error during construction is often longer than one year.
Honorous warranty clauses, such as liability for consequential damages, pose huge uninsured risk for the consultant and do little to provide the owner with real relief. You may successfully argue the warranty clause, only to find there is no insurance coverage to help recover the damages.
Of course, if you’re lucky you may be able to simply negotiate an acceptable outcome. Some consultants are willing to negotiate in order to preserve the relationship. But it’s not safe to bet on this scenario.
A Better Approach: Minimize the Risks of Consultant Errors
So far we’ve discussed how to address errors after they happen. While that is important, a much better approach is to enact measures early in the process that minimize the likelihood of non-recoverable errors happening in the first place. I will discuss two good options.
Utilizing a design-build approach shifts professional design risk to the design-builder. This can be a very effective strategy to avoid the difficult Standard of Care hurdle. However, owners still pay for the same design risk, they just do it at the time of the bid. Additionally, the design-build process can lead to the owner losing control of the design content. Change orders that might have been issued by the owner for their designer’s errors and omissions are often replaced by change orders for modifications to the scope and/or quality.
Another approach is to employ a firm qualified in performing third party reviews, such as constructability, biddability, and operability. While these services will initially add cost, they generally pay for themselves many times over in savings during construction. Sometimes these services can be more easily incorporated into a project by shifting a small portion of the contingency budget line item versus creating a new budget line item.
Dealing with what you believe is a consultant’s error can be frustrating, to say the least. You’re busy enough without adding another headache. Always know your contract and the laws that govern responsibility. But remember that, while there are remedies for enforcing payment after the fact, you’ll be doing yourself a big favor if you take steps early in the project to minimize your risks.
How have you addressed errors made by your consultants, and what steps do you take to minimize their likelihood?