Risk related to PPP tunneling projects for design professionals

Tunnels and underground projects are inherently more risky than vertical projects, which typically utilize more conventional design and construction approaches and are undertaken in the context of relatively ascertained and defined conditions. On tunnel and underground projects, there are a host of special risk factors, including unknowns and uncertainties as to the physical and behavioral characteristics of the ground, the inextricable interdependence and necessary interaction of design decisions and construction means and methods with those ground conditions as well as the manner in which risks are allocated among project participants for unanticipated subsurface conditions. Public-private partnerships (PPP) projects, in their own respects (and independent of any major subsurface component), pose significant risk for all private sector participants.The main driver of owners to procure projects using PPP is financial, as often all, or substantially all, of the design and construction risk are transferred to the private sector consortium, including the design-build (D-B) team. For a concerning number of those public owners, that risk transfer regime includes rather onerous and aggressive contractual terms that allocate to the private sector participants substantially all risks associated with the encountering of unanticipated subsurface conditions.These aggressive risk allocation provisions, while directly impacting project participants upstream of the consulting engineer, have an indirect and corresponding risk intensifying effect upon consulting engineer professional liability exposure.

There are many factors that result in increased professional liability exposure for consulting engineers involved in PPP projects.The more prominent and prevalent of those factors fall into the following categories:

Subsurface conditions risk allocation: Increasingly, project owners on major D-B and PPP subsurface projects are seeking to transfer substantial risk for subsurface conditions to the private sector participants (i.e. the concessionaire and the design-builder). Subsurface conditions, beyond any doubt, are a significant source of risk exposure, disappointed expectations, default and claims. For that reason, it is generally recognized that in order to ameliorate those concerns, the principles of fairness and balance in risk allocation should be adopted and implemented in the specific context of subsurface conditions.

Unfair risk allocation between the project owner and the concessionaire and/or design-builder will increase the risk of professional liability exposure for the consulting engineer. There appears to be no published empirical data conclusively establishing that use of these types of aggressive risk allocation provisions and related contracting practices in D-B and PPP agreements increases the risk of professional liability exposure for the consulting engineer. However, logic (and the experience of the authors) supports the conclusion that a design-builder is more likely to transform what would have been a contractual differing site conditions claim against the project owner into such a third-party professional liability claim - to recover costs incurred by the design-builder but not recoverable against the project owner due to aggressive risk allocation and disclaimer provisions in its prime contract.

Design development risk: For the consulting engineer, design development in D-B and PPP projects moves at an accelerated pace, and this schedule compression may often lead to liability exposures. The schedule compression of the design process of tunnels and underground projects places special pressure on the geotechnical design discipline on which the design depends. The consulting engineer may be under significant pressure to produce work product resulting in insufficient data or inadequate levels of completion or coordination with other aspects of the design, thereby creating the risk of redesign during post-award or construction and the attendant increased costs and delays experienced in the construction process.

In addition, prior to contract award, the design-builder may look to the consulting engineer to provide quantity estimates and may seek to hold the consulting engineer accountable for overruns in cost or quantities. Although the concessionaire and the design-builder each assume (directly, or ultimately, to the project owner) the contractual risk and financial obligations associated with cost overruns due to "excess" quantities or other consequences of the post-award design development process, in many instances those parties regard the consulting engineer as a de facto risk partner and pass down these obligations. There is a further risk that the public owner may attempt to dominate the design review process, thereby resulting in delay and in the imposition of owner design preferences beyond the contractual requirements. Owner domination and imposition of preferences and judgments in the design development process in PPP and D-B projects is especially problematic in tunneling and underground projects in which the ability of the consulting engineer to make appropriate judgments and exercise discretion are critically important.

In a related vein, it should be noted that statements or descriptions of anticipated or assumed subsurface conditions, characteristics, or parameters in a geotechnical baseline report (GBR), as a general matter, are provided for the purpose of facilitating the allocation of risk between the project owner and the concessionaire and/or the designbuilder. These types of statements or descriptions should not be understood by the design engineer as constraining, defining, prescribing or otherwise limiting (or, worse yet, relieving or substituting for) the engineer's obligation to exercise sound and independent judgment in the development of the design.

D-B and PPP design optimization and value engineering typically allow for input and collaboration from various professionals (including owner, concessionaire and design-builder) with the design engineer in the design development process in order to reduce project cost and/ or to facilitate the construction process. While those are salutary objectives, the design engineer should be careful not to allow such input or collaboration to intrude upon its exercise of independent and sound professional judgment in the design process.

Cost overrun risk: A potential major risk for consulting engineers in D-B and PPP projects arises out of cost growth (above the guaranteed maximum price) due to the design development process. Typically, this type of claim arises when there are material differences between the design-builder's pre-award bid estimate assumptions (bid estimate) and the actual cost of designing and constructing the project. As a general observation, the design-builder's professional liability claims against the consulting engineer often seek recovery for some or all of its cost overrun.

A typical cost overrun involves some or all of the following factors:

* Aggressive, unrealistic and opportunistic preaward cost estimating or bidding.

* Inadequate information or design definition prior to the submission of the bid.

* Imposition of the project owner's design preferences that exceed contractually mandated design criteria or standards.

* Project owner's unwarranted intrusion into, or restriction of, the design-build team's discretion, judgment, or innovation or design responsibility (as engineer of record).

* Unanticipated or unreasonable application or enforcement of code or other public regulatory requirements or standards in the design development process.

* Inadequate design-builder contingency for cost growth due to design development.

Most of these factors have nothing to do with deficient service performance of the consulting engineer. Depending upon the terms of the prime design-build agreement, the design-builder may have limited, or no, opportunity to obtain an equitable cost or time adjustment from the project owner when some or all of these factors occurs.This situation often leads to a professional liability claim by the design-builder against the consulting engineer.

The bottom line is that unless the design-builder plans for, and is prepared to fund contingency for design development, in tunnel and underground projects there will often be gaps between pricing or bid assumptions and available financial resources required to address cost growth due to design development. The consulting engineer potentially will be exposed to significantly increased risk in D-B and PPP projects due to design development cost growth than in design-bid-build. In the contractual negotiation process, the design-builder may "flow down" various terms, the effect of which would be to transfer design development risk to the consulting engineer. These terms typically provide that:

* The design-builder has the right to rely upon the "accuracy" or "completeness" of conceptual or preliminary design and any quantity surveys, cost estimates or other work product prepared by the consulting engineer during the preaward phase.

* The consulting engineer will share in cost growth due to variations between pre-bid cost and quantity estimates and post-award actual costs and quantities based on the final design.

* The design-builder has the opportunity to influ- ence or constrain design development cost through "design to cost," "design optimization," "collaborative design processes" and "value engineering" approaches.

The consulting engineer certainly should endeavor to manage its liability risk exposure for design development cost growth through provisions in its subconsultant agreement with the design-builder, such as those excluding or limiting responsibility for cost or quantity estimates. While these provisions, if contractually accepted, will likely provide the basis for an effective defense to professional liability claims arising out of cost overrun risk, the reality is that many design-builders, especially in current economic conditions and competitive market, do not agree to such provisions.

An alternative approach to managing design development risk is for project owners and design-builders (and/ or concessionaires) to each carry adequate contingency for cost growth due to design development and prudent risk sharing including the utilization of GBR and contingency funding plan as was demonstrated by the Port of Miami and the Alaskan Way (SR99) tunnels.

Heightened performance standards: On most projects, a consulting engineer is required to perform its services in accordance with reasonable skill and care required under the circumstances. However, in many PPP projects, the design-builder and, by extension, its consulting engineer are obligated to provide certain services in accordance with a "fitness for purpose" obligation. Under the latter obligation, the engineer is required to produce a design that meets specific client requirements, and adherence to reasonable skill and care will not necessarily provide a defense or justification for failing to meet those requirements. In addition, "fitness for purpose" performance standards raise issues as to whether liability determined to exist under such a standard falls within the scope of coverage afforded under standard professional liability insurance policies.

Conclusion

PPP of tunneling and underground projects represent the potential for substantial risks for consulting engineers. The same salutary principles of fairness and balance in risk allocation should apply in the context of PPP projects. *

David J. Hatem and Nasri Munfah

David J. Hatem and Nasri Munfah, members UCA of SME, are partner Donovan Hatem UP and executive vice president and vice president HNIB Corp. email, [email protected], [email protected].