Navigating Risks in Collaborative Environments

High performance has a close link with collaboration. Engaging and relying upon each party performing their own specialist function ensures that the sum is greater than the parts.

For the Quantity Surveyor, in a multiparty project the default consideration is one of “what is my role?” However, when assessed from a risk management perspective that one consideration is sandwiched between two other key questions;

1. How am I being engaged and by whom?

2. What is my role?

3. What or who else am I responsible for?

The nature of both your contractual engagement, as well as who else you may engage, are important leading factors to gain perspective on how liabilities may be shared across multiple parties.

Navigating the risks involved in collaboration ensures an understanding of each interaction, and gives the Quantity Surveyor perspective on how to best align their Services, Contracts, and Insurances all the while focussing on what they do best, and providing high quality specialist services.

Projects can often tend towards one of two ends of the sub-contacting spectrum, with either a very flat structure, or a much longer “daisy chain” structure.

In either structure the actual activities undertaken by the Quantity Surveyor do not significantly change. However, the nature of your interaction and the chain of liability changes dramatically.

Figure 1 outlines an example of a flat project structure for example in a tender or feasibility environment preconstruction. Under a flat structure, each consulting professional has an engagement and reporting line back to the Principal or Project Manager. Any liability for the conduct of others is limited, as there are not multiple layers of sub-contracting.

In this environment, a Quantity Surveyor provides their own services, and only carries responsibility for their own work.

INSIGHT

While collaboration will occur, and in order to accurately cost a prospective job the Quantity Surveyor will be relying on information from other parties such as the Architect and Geotechnical Engineer, this information is being supplied as an independent third party and the Quantity Surveyor does not carry responsibility for appointment or quality of the other professionals.

Comparing this to the daisy chain example, the responsibilities of the Quantity Surveyor change significantly. Figure 2 highlights an alternate project structure where the Quantity Surveyor is not only providing their own services, but they are also engaging other professionals on a sub-contract basis.

As soon as you engage a sub-contractor outside your own area of expertise, you not only take on vicarious liabilities for their actions, but you also take on deemed project management responsibilities ranging from the timeliness of your sub-contractors work through to their expertise and suitability for the role. All of this risk is added while the services being provided by the Quantity Surveyor are fundamentally unchanged.

Even though you may take on the subcontractors either because you feel it will be easier or enable you to do your role better, or commercially to bill a margin for the project management and subcontracted services, is this within your own capability, and is the additional remuneration commensurate to the additional risk?

If we return to the links between high performance and collaboration, an ideal scenario may be that a Quantity Surveyor’s output is linked solely to their area of specialisation; let the Project Manager manage, so as to avoid vicarious liability or project management risks associated with sub-contracting other related professionals. This ensures that you can focus on what you do best, and in turn, ensure your risk is limited to what you do best.

This is not to say that the Quantity Surveyor may not rely on the work of others, of course in a construction environment the detail provided by the Architect and Engineer will be imperative to the output of the Quantity Surveyor. The key point is that by not being the one to directly engage or sub-contract their services, the Quantity Surveyor ses contractual responsibility for their work.

We inherently think about things from a common sense perspective; I am only responsible for my own work, and I can only be held responsible to the extent that I caused or contributed to a loss.

In the contracts you sign, and more importantly in the potential outcome of multi-party litigation, this is rarely the case. So why does this matter?

SHARING THE WORK – SHARING THE RISK

Collaboration in work should be met with collaboration in risk, but onerous contract terms can see a Quantity Surveyor being held to account for liabilities greater than their own through three key areas;

1. Contractual Liabilities greater than common law (such as agreeing to pay ALL costs; courts often award costs on a percentage basis).

2. Contractual Liabilities that remove or reduce proportionate liability rights (such as a failure to reduce liability to the extent that you were responsible only).

3. Contractual Liabilities that remove or reduce recovery rights (such as Hold Harmless or Waiver of Subrogation clauses).

Below are three different indemnity clauses taken from sub-contractor agreements, with vastly different legal implications despite no change in the activities undertaken by the Quantity Surveyor.

Poor

The Quantity Surveyor must indemnify and keep indemnified the Client, its related bodies corporate and their respective employees (“Indemnified Parties”) from and against all loss, damage, or expense (including legal fees) incurred by an Indemnified Party arising directly or indirectly out of the Contract.

Issues:

• Responsible for “all” loss, damage, and legal fees.

• Courts unlikely to award 100% costs.

• No reduction in liability for proportionate contribution.

• Very broadly responsible for loss “indirectly” arising out of the contract.

Average

In addition to this indemnity clause, the following write-back is offered;

The Quantity Surveyor’s liability will be reduced proportionately to the extent that a negligent or wrongful act or omission of the Client, caused the loss, damage, or expense.

• Liability reduced to the extent that your Client contributed.

• Liability not reduced to the extent any other third party or collaborator contributed – Quantity Surveyor can still be held contractually responsible for 100% of the loss where another collaborating party was partly at fault.

Good

In addition to this indemnity clause, the following write-back is offered;

The Quantity Surveyor’s liability will be reduced proportionately to the extent that a negligent or wrongful act or omission of the Client or any third party for whom the Quantity Surveyor is not responsible, caused the loss, damage, or expense.

• Liability now reduced proportionately to the extent that a loss was contributed to by any other third party the Quantity Surveyor is not responsible for.

• Contract terms now reasonably reflect common law, and insurance coverage.

While these clauses are examples only, they show the breadth in potential liability faced under contract irrespective of the services being offered. Other useful clauses to consider in conjunction with your legal counsel include a clear definition of Services, a “reasonable” not a “high” standard of work, and Limitation of Liability clauses, whether a monetary cap, or types of losses e.g. no responsibility for consequential losses.

ALIGNING THE WORK – TRANSFERRING THE RISK

Professional Indemnity Insurance is the cornerstone tool for Quantity Surveyors to transfer risk on to an Insurer. As a risk management tool, it is both prudent to carry and also in many cases a compulsory purchase, both under contract and also under professional registrations e.g. the Victorian Building Authority.

Ensuring there is a tripartite alignment between your Services, your Contracts, and your Insurances, as shown in Figure 3, will minimise potential exposures to the Quantity Surveyor that would be uninsured and commercial risks directly impacting on the business.

Between your Insurance and your Contract, alignment of coverage ensures sed commercial gaps. Relevant to the various indemnity clauses highlighted, one of the biggest commercial risks lies with contracting into liabilities above and beyond your common law liability. In most cases your Professional Indemnity Insurance will exclude any liability above and beyond your common law liability, so the alignment is best managed by seeking reasonable and equitable contract terms, and where appropriate seeking advice from your Insurance Broker that terms align with your Insurances.

Between your Insurance and your Services, an understanding of your professional services is the most frequent issue we see arising for Quantity Surveyors.

The skills of a Quantity Surveyor are aptly applied across a broad range of related business activities such as Project Management, Contract Administration, Asset and Facilities Management but it is important to note that while a Quantity Surveyor may perform these activities, they are not Quantity Surveying.

This is a common trap which will see a Quantity Surveying practice only insured for “Quantity Surveying” despite performing a far broader range of services. These ancillary business activities are not viewed as particularly high risk by the Insurance market however, so alignment of Services and Insurance is a matter of working with your Insurance Broker to ensure a full and accurate description of your services are being covered and the risk transferred to your Professional Indemnity Insurance policy.

EXAMPLES IN PRACTICE

Build Stage and Progress Payments.

A New South Wales (NSW) council appointed a Quantity Surveyor to manage progress payments, variations and defects in relation to a new institutional building.

Under the contract however the Quantity Surveyor was not only responsible for certifying progress payments (acceptable) but also responsible for certifying building completion (not acceptable).

While the Quantity Surveyor is reliant on submissions in conjunction with site inspections regarding stages of completion, certifying the construction states is of itself the role of a Building Certifier in NSW. The Quantity Surveyor had no intention of doing this role and was relying on the Principal Contractor’s appointed Certifier to provide these services, however, under their contract with the council body, the Quantity Surveyor was also liable for the Certification services.

This was a clear example where the Contract did not align with the Services being provided by the Quantity Surveyor, resulting in contractual liabilities above and beyond their role.

In a separate matter, a financier was able to successfully claim a sum of around $2.000.000 from a Quantity Surveying firm due to alleged negligence in assessing the builder’s progress claims independently and advising if works were complete to the extent claimed.

Compared to other professionals operating in the building and construction industry, Quantity Surveyors seem to feature less frequently in litigation however, this was a timely reminder that all professionals need to ensure they have appropriate quality assurance systems and processes, a written terms of engagement (preferably including a limitation of liability), and only take on work for which you are experienced and qualified to do so.

Ensuring you take on work which you are experienced and qualified to do sits at the forefront of high performing collaboration; the art of bringing together a range of experts in their respective to achieve a superior outcome.

Following on from this, ensuring you comprehend and align both your contracts and insurances with the services you provide will se the potential risks faced in navigating multi-party engagements.

This article has been written by Matt Kuc. Matt is the Professional Risks Manager at Member Advantage Insurance Broking, the preferred partner for Insurance & Financial Services of AIQS.

30 - JUNE 2018 - THE BUILDING ECONOMIST