Professional Liability Insurance: 6 Critical Safeguards for Value Engineering

In 2011, an emphasis on lean operation and expenditure has led the phrase “value engineering” to become synonymous with “cost cutting.” This trend is problematic from a risk management perspective. It shifts the pure intent of value engineering and puts into practice a less judicious methodology focused more on saving money than optimizing the project. Such practices can affect a company’s reputation with prospects and clients, as well as its ability to find reasonable rates on professional liability insurance.

Value engineering can be an effective strategy among design professionals with clients like government, whether local, state or federal. It is the practice of examining a project to achieve successful completion while obtaining the greatest value for each dollar spent. Regrettably, the idea of value engineering is often shirked until designs have been complete, bids have been placed, and the bids have returned over budget. The owner then approaches the design professional, most often the architect, to attempt cost-cutting by asserting value engineering upon the project. This typically means the project owner wants the design professional to use less expensive materials and products or to do away with “extras” in an effort to save money while still achieving the same results. Cheaper ingredients however, seldom result in a product of equal quality. So, in countless situations, the owner is dissatisfied and may even go back to adding the “extras” the design professional was asked to eliminate in the process of “value” engineering.

Professional liability claims can evolve from value engineering performed by the design professional when making an effort to reduce project costs to comply with the owner’s request. This is where skirting integral costs can damage more than the project at hand. Consenting to such strategies can drastically alter the availability of professional liability insurance at low premiums, considerably altering the criteria for profitability in a design firm. When an architect performs “value” engineering after design rather than in conjunction with it, the owners may suppose that the architect was excessive in their original design, possibly because the architect’s fee was based on a percentage of construction costs. Or the owners may assume that value engineering is equivalent to an acknowledgment that the initial designs were not prepared in agreement with the owner’s budgetary limitations. Owners might also view value engineering as a process by which the scope of the design, rather than the application of unique materials and finishes, functions as the true starting place for a reduction in cost.

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In one claim example, an architect achieved what seemed to be a successful value engineering outcome, removing specific extras from the project in an effort to reduce costs. However, the owner requested for certain items to be reincorporated into the project after previously requesting that they be removed to meet the budget. The end result? The contractor requested a change order for the extras, the owner declined to pay, and a lawsuit was initiated. The owner named the architect in the lawsuit, alleging the architect’s design was lacking and that the design should have incorporated the materials that were removed during value engineering. Another drawback is the probable domino effect where value engineering can run into construction delays and sequencing problems on a project. What can a design professional due to effectively manage this exposure to risk?

1. If the design professional of record on a project is requested to perform value engineering in an effort to cut costs, detailed explanation of the process to the owner is a necessity. Effective communication and credible documentation are also crucial. Verify the owner’s expectations and requirements, and get it in writing. If something wouldn’t function appropriately after value engineering altered the designs, inform the owner in writing. Bear in mind: If something goes wrong, the owners will certainly point to the design professional.

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2. Include a condition in each professional services contract that all final decisions about redesign will have to be made by the owner and agreed to by the design professional of record.

3. If the owner might employ their own value engineer to evaluate construction documents for the project, it is prudent to insert contract language that states the value engineering should be performed in a timely manner to avoid delays in the project. Include a provision that requires the owner to indemnify the designer of record against any and all claims attributable to the value engineering.

4. Incorporate a stipulation that provides for the opportunity to examine and respond to all suggestions made by the value engineer.

5. If a firm is not the designer of record, but is being asked to provide value engineering recommendations, it is imperative to include a stipulation in the agreement that they are only recommendations and that the original design professional of record should have the chance to review and respond accordingly to the suggested changes.

6. If there is a perceived risk to public safety or health, document concerns and follow up with the owner.


by Ashley Hurd