Today’s consulting engineers are being asked to accept far more risk against insurance policies that provide less cover. Ian Jones and David Irving discuss the implications.
From an early stage, the parties involved in construction projects have formalised their relationships by a contract. But these have become increasingly complex. For example, in the 1840s, the Box Tunnel on the Great Western Railway was the most important structure on the project. Yet the bill of quantities for its construction consisted of just six items.

Moving closer to our own times, the 1976 Department of Transport Specification for Road and Bridge Works was a single document that fitted neatly into the pocket of a young engineer. Ten years later, it was published in two A4 ring binders – far too bulky and heavy to be used for ready reference in the field.

The way we were
During the 1980s, general practice was for consulting engineers to be contracted to their client on ‘industry standard’ terms such as the Association of Consulting Engineers’ (ACE) Conditions of Engagement. In essence, these terms did not seek to extend the responsibilities of consulting engineers beyond the statutory obligations laid down by the Supply of Goods and Services Act (1982). Clients were mainly public sector bodies such as local authorities or central government. As long as consulting engineers delivered a service that complied with the agreement, they would generally be paid in full, and clients would frequently provide repeat business.

The intervening 20 years have seen a dramatic change in procurement methods and in the obligations and liabilities imposed upon consulting engineers. Successive governments have encouraged competition and the use of private sector finance to construct infrastructure for the public benefit. This is now manifested in many PFI and PPP projects. Many clients are now private sector contractors or developers, who have a very different attitude to risk-sharing than public sector clients.

As a consequence, consulting engineers are now increasingly employed on bespoke terms which seek to offload substantial risk on to them. Experience suggests that contractors now treat consulting engineers as they would domestic sub-contractors – as a mechanism to carry project risk.

Limitations of insurance cover
Most consulting engineers rely solely on their professional indemnity insurance policies to cover their liabilities in the event of their breaching the Agreement. This type of insurance will generally only cover obligations that do not exceed those laid down by statute and common law. Many clients seem to pay scant regard to the limited provisions of insurance.

To compound matters, the insurance market has suffered the effects of the terrorist attacks of 11 September 2001 and the catastrophic floods in Central Europe in the same year. Consequently, while premiums and excesses have increased significantly, the coverage provided has reduced. As an example, most policies will not provide cover for breach of copyright or time-related delays which are not linked to the negligent performance of the consulting engineer.

There is a divergence between the terms offered which are increasingly more onerous and the insurance cover provided which is increasingly costly and of reduced benefit in terms of coverage. Some consulting engineers now employ full-time specialists to review consultancy agreements to ensure that the obligations do not expose them to uninsured risks. But the authors have evidence of certain consulting engineers ‘signing up’ irrespective of the terms – presumably on the basis that if the obligations are not covered by insurance, in the absence of other assets, their client is very unlikely to pursue ‘men of straw’.

There is a strong feeling in the industry that if this divergence continues, insurance will cease to be available at commercially reasonable rates or terms, a situation which is to the disadvantage of both the client and the consulting engineer.

This damaging divergence can only cease when clients provide more reasonable terms. To achieve this, consulting engineers and architects must collectively and proactively try to mitigate the increasingly onerous and uninsurable terms to which they are being asked to agree. And to propose fair and reasonable agreements which reflect the services provided, and the risks involved.

Some of the onerous and uninsurable terms contained in bespoke agreements

  • Consulting engineers are employed on a ‘back-to-back’ basis so that they provide their services in such a way as to avoid placing the contractor in breach under a main contract. Such clauses would invoke uninsurable obligations of a fitness for purpose design duty and liquidated damages. Indemnity clauses which expose consulting engineers to losses and a liability period beyond common law and which are not covered by insurance.

  • Entitlement to additional fees is restricted to situations where the additional work undertaken is ‘substantial’.

  • Prescriptive notification procedures in respect of additional works. The failure to follow these resulting in loss of entitlement to additional payment.

  • Obligations to provide warranties to numerous third parties and to provide the same level of liability irrespective of their status.

  • Obligation to provide unrestricted right of assignment to client and third parties.

  • Obligation to novate the original appointment to a third party with whom the consulting engineer may have no desire to be contracted. Appointments are often of unlimited liability irrespective of the size of the fee.

    • Source

    Building Sustainable Design

    Postscript

    Ian Jones is associate director and David Irving is director at FaberMaunsell.