P3 and Potential Losses

Governments are increasingly turning to alternative financing and procurement methods to deliver large capital construction projects, commonly referred to as public-private partnerships, or ‘P3.’

P3 projects help transfer risk from the taxpayers to the private sector by relying on consortiums of financiers, developers, contractors, professional consultants and other private sector experts to design, build, finance, and in some cases maintain and operate infrastructure projects. P3 development allows public sector project owners to harness the expertise and efficiency of the private sector to procure infrastructure projects with a high degree of certainty over project costs, delivery timelines, and project quality.

Private sector P3 project consortiums are usually project specific special purpose joint ventures (‘JV’) or special purpose vehicles. When a P3 project is awarded, the JV assumes all financial, technical and operational risks. This creates unique challenges for professionals working on P3 projects: information utilized for pre-bid design is often very preliminary data, which can affect bid-pricing and design elements. If this leads to underestimation of materials, or design changes discovered during the construction phase, the designer can face claims from the design builder, even though “errors” may have flowed from incomplete preliminary data. Of course, design professionals also regularly face allegations of “errors” unrelated to this issue.

Design services agreements

Design professionals selected by the JV are usually required to execute a Pre-Bid Teaming Agreement for design services furnished during the bid stage of the project. Services provided during this stage are used by the JV to develop the bid for presentation to the project owner. In addition to outlining the scope of services, this document usually defines the required professional standard of care. Contracts we have seen require that professional services “conform to professional standards and principals accepted as standards of care customarily observed by professional consulting firms providing similar services at the same time and location.”

If the JV’s bid is accepted and the project is awarded, design professionals usually execute a Design Services Agreement, which includes a very detailed scope of work and services to be provided during each phase of the project. Design Services Agreements we have reviewed include a definition of the professional standard of care as noted above, and also define “liability of consultant” as “consultant’s negligent acts, errors, or omissions in the performance of services or in connection with any of its other obligations under this agreement.”

Architects, engineers, geotechnical consultants, surveyors and “any other firms which have or will provide professional services in regard to the project” are covered by the P3 project specific professional liability policy. This coverage is primary, but most professionals maintain their own E&O coverage as well, which may apply to claims below any applicable deductible or self-insured retention, or in excess of the project specific policy limit.

The insuring agreement covers the professional’s negligent acts, errors and omissions, and breach of contract or agreement resulting from negligent acts or errors and omissions in the conduct of professional services.

Professional services are defined in the policy as “those the insured is legally qualified to perform for others;” a description of services is often contained in the application for insurance, if in doubt. Day-to-day supervision of manual operations, labour, or physical construction work usually undertaken by building or engineering contractors is not considered professional services under the policy.

Standard of care

It is beyond the scope of this article, and my expertise as an adjuster, to provide an in-depth analysis of the court’s interpretation of the standard of care applicable to professionals.

However, generally, professionals are expected to faithfully execute the terms and conditions of their service agreements by diligently doing their best professional work.

E&O claims arise when professionals fail to exercise due diligence, or they perform their duties in a substandard way. When projects exceed budget, fail to be delivered on time, or defects in the finished project require repair or modification, professionals can be held financially responsible if it is proven they failed to meet the standard of care.

To confirm whether the standard of care was met, claim investigations need to focus on whether the involved professional possessed the requisite skills for the project undertaken, and whether they conducted professional activities with due diligence and the reasonable care necessary. On large infrastructure projects, it is essential that professionals do not take on projects beyond the technical capabilities of the individuals assigned to the project, or those of the firm.

Claim investigations must also consider what information was available when decisions leading to alleged “errors” were made, and whether similar professionals with similar information would have made the same decision. What appears to be an error with the benefit of “20-20 hindsight” may have been a reasonable decision at the time.

It is important to note the standard of care is not perfection. Experts are retained because they have special skills. When retained, they have a duty to exercise the ordinary skill of a competent member of their profession; failure to do so equals negligence. Those retaining experts for their special skills cannot expect infallibility, only reasonable care and competence.

Professionals must conduct their activities with the same or superior expertise to similar professionals in similar circumstances, given similar information. In other words, professionals are required to do what’s normal, reasonable and customary and refrain from doing whatever similar professionals would not do in similar circumstances.

Professionals must also ensure all contractual obligations have been met, but needn’t do more than contractually obligated, as long as professional services meet the ordinary standard of care.

If professionals have not violated the standard of care, they should not be held financially responsible in the absence of negligence, recklessness or intentional misconduct.

Example

A recent claim investigation undertaken by our firm involved allegations an engineering design consultant on a P3 infrastructure project underestimated the amount of reinforcing steel required for the construction of a number of caissons supporting an elevated rail line.

During the pre-bid design phase of the project, the consultant estimated 100kg of reinforcing steel was required per cubic meter of concrete for caisson construction. During the construction phase, it was determined 300kg of reinforcing steel per cubic meter of concrete was necessary to meet caisson load specifications, given soil conditions. This caused significant cost overruns for supply of reinforcing steel, and fabrication of reinforcing steel cages for caissons.

The insured acknowledged the “error” when the issue was discovered and brought to their attention by the JV, and agreed 100kg reinforcing steel per cubic meter of concrete was insufficient. As such, the JV asked that a claim be submitted under the Project Specific Professional Liability Policy.

Our claim investigation revealed that the consultant had been provided with instructions from the JV during the pre-bid design phase of the project to use 100kg of reinforcing steel per cubic meter of concrete for preparation of the bid, pending receipt of geotechnical testing data that would confirm soil conditions where the caissons were to be installed. It was anticipated that once this information was on hand, it would be possible to evaluate the actual amount of reinforcing steel required for the
caissons. Unfortunately, this was not addressed prior to submission of the bid.

As the engineering consultant followed instructions from the JV, professional negligence was not proven, and our investigation confirmed the standard of care was met. The engineering consultant did not have sufficient information to calculate an accurate amount of reinforcing steel during the pre-bid design phase, and followed instructions to the letter.

Conclusion

To confirm whether professionals meet the necessary standard of care, it is essential to determine what information was available when decisions were made, and whether a similar professional in similar circumstances would reach the same conclusion. Negligence can only be proven if the professional failed to exercise due care in the circumstances, or was not reasonably competent.

When dealing with P3 projects, the temptation exists to use coverage available under the Project Specific Professional Liability Policy to address any cost consequences relating to design. As such, each alleged error must be investigated and scrutinized to confirm whether the standard of care was met.

Sean Forgie, BA, CIP, CFEI, is national director of casualty/liability for major loss services (MLS) at Cunningham Lindsey. He oversees the handling of complex liability claims conducted by the executive general adjusters, senior general adjusters and general adjusters that make up the MLS team in Canada.