Professional Liability Insurance: 6 Critical Safeguards for Value Engineering

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2011 saw a lot of emphasis on efficiency and spending, which has made the term “value engineering” synonymous with “cost cutting.” This is a problem from a risk management standpoint. This practice changes the intent of value engineering, and places more emphasis on cost savings than optimizing the project. These practices can negatively impact a company’s credibility with clients and prospects, as well as its ability find affordable rates for professional liability insurance.

Design professionals working with government agencies, such as local and state governments, can use value engineering to their advantage. This is the process of looking at a project in order to ensure that it succeeds and you get the most value for your dollar. Unfortunately, value engineering is often overlooked until the designs are complete and bids have been submitted. The owner approaches the architect or another design professional to try to cut costs and assert value engineering on the project. The project owner will often ask the architect to use cheaper materials or products, or to eliminate “extras”, in order to save money and still achieve the same results. However, cheaper ingredients rarely result in products of equal quality. In many cases, the owner may be dissatisfied with the product and decide to add the “extras”, which the designer was asked to remove in the process for “value engineering”.

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Value engineering, which is performed by a design professional to lower project costs in order to meet the owner’s request, can lead to professional liability claims. Avoiding integral costs can cause more damage than the project itself. These strategies can dramatically alter the availability and cost of professional liability insurance, which could lead to a decrease in profitability for a design firm. The owners might believe that an architect is doing “value engineering” after a design has been completed. This could be because the fee for the architect was based on a percentage construction costs. Owners may also assume value engineering means that they acknowledge that initial designs were not created in accordance with their budgetary constraints. Value engineering may also be viewed by owners as an approach to reducing costs that focuses on the design’s scope rather than the use of unique materials or finishes.

One claim showed that an architect had achieved a value engineering result by removing certain extras from a project to cut costs. The owner demanded that certain items be incorporated back into the project, after having previously requested their removal to keep the budget in line. What was the end result? The final result? In the lawsuit, the owner named the architect as the plaintiff. He claimed that the architect’s design was flawed and that it should have included the materials that were removed from value engineering. Another problem is the potential domino effect, where value engineering can lead to construction delays or sequencing problems. How can a designer manage this risk exposure?

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1. It is essential that the project’s design professional records explain the process to the owner if they are asked to do value engineering to reduce costs. It is important to communicate effectively and provide credible documentation. Get written documentation to confirm the expectations and needs of the owner. Inform the owner if something doesn’t work properly after value engineering has changed the designs. Keep in mind that if something goes wrong, owners will most likely point to the designer.

2. In each professional service contract, include a condition that the owner must agree to all final decisions regarding redesign.

3. It is possible for the owner to hire their own value engineer to assess construction documents. To avoid any delays, it is prudent that you include language in your contract that requires value engineering to be done promptly. In the contract language, the owner must indemnify the designer of the record for any claims arising from the value engineering.

4. Include a clause that allows the value engineer to review and respond to any suggestions.

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5. It is important to specify in any agreement that a firm is not the design professional of record but is asked to make value engineering recommendations.

6. If you believe there is a risk to public safety, or health, report it and follow-up with the owner.