Multi-family housing: How to slow the A&E claims flow

By Gerald Farquhar | June 5, 2006

Would architects or engineers accept a fee of $70,000 knowing that it would result in a $1 million loss? Probably not, yet that’s exactly what they are likely to be faced with when designing a multi-family use project.

Current claims statistics in the Schinnerer and CNA program reveal that while multi-family projects constitute only 4.5 percent of all design fees, losses from such projects account for 18 percent of the total program losses. When the individual firm’s deductible and the non-billable time spent defending these claims are added to the losses, the resultant total loss is even more severe.

So what’s wrong with multi-family housing projects? It is important to recognize two basic statistical facts about multi-family housing projects.

First, who brings these claims? Project owners initiate 81 percent of multi-family housing, or condominium, claims. Second, what is the alleged failure? The four most frequent failures alleged are, in order of severity: ultimate cost, waterproofing, HVAC, and foundations and roofs. In these statistics, the project owner may be either the client of the architect or engineer, the subsequent purchaser of a unit, or a homeowner’s association.

What can architects and engineers do to reduce losses when working with multi-family housing projects? Keeping in mind that risk management begins with risk identification, following these guidelines may offer some improvement in the adverse loss experience of multi-family housing projects.

Recognizing significant risk factors: Project Selection
The client of the architect or engineer. Any risk evaluation necessarily begins with an examination of the client. Is this client concerned with their own reputation? Does this client simply want to develop this project for a quick sale and then depart? What is this client’s prior experience? Does this client recognize that the architect and/or engineer are assets rather than a necessary burden? Does this client recognize the importance of a substantial amount of construction phase services allowing the architectural and/or engineering firm to determine whether the project is being constructed in accordance with the design? Noticing whether the client exhibits these risk factors can be the first step in identifying a risky project.

The project. Having ascertained just what kind of client an architectural or engineering firm is going to contract with, architects and engineers next need to examine the proposed project.

Multi-family projects are often like restaurants. Some either have bad service with good food or bad food with good service; either creates dissatisfaction. A beautiful exterior with an inferior interior or a beautiful interior with an undesirable exterior will also create dissatisfaction. Dissatisfaction is what drives litigation. Transplanting a successful design to a different site without proper site adaptation is likely to be disastrous. Sloppy or indifferent site adaptation can be the engine that drives claims. Comprehensive consideration of the project site and project orientation is critical to a successful result.

The subsequent owner. While architects and engineers have no control over or even knowledge of just who will be the ultimate owner of individual units comprising a condominium building, it is nevertheless prudent to at least recognize some general characteristics.

The people who purchase these units are often refugees from the cares of upkeep and maintenance of a single-family dwelling. Thus, having purchased a luxury condominium they may be shocked and disillusioned when assessments for repairs and maintenance are imposed. Their initial reaction is often that something is wrong and that things like this should not happen. Their growing dissatisfaction evolves into a search for blame. This leads to the retention of “experts” who begin a microscopic examination to search out even the most minor defect or deficiency.

From this scenario, it does not take much imagination to project the formulation of a substantial claim — a $2,000 problem times 200 units equals $400,000. The point is these are risky projects for architects and engineers.

Reversing the loss trend: Project Management
After project selection, there are three readily available risk management tools by which the disproportionate relationship between fees and losses can be reversed. They require architects and engineers to manage their role in the selected project and include:

  1. attention to the contract;
  2. an examination of the scope of services; and
  3. implementing systematic documentation.

Attention to the contract
The contract is the primary source for understanding the responsibilities of the architect and/or engineer on a given project. It’s very important that the proposed contract is reviewed carefully. Each word is important. It should be read for what it says, not for what the parties want it to say or what it’s supposed to say.

In examining the contract, there are three fundamental rules, which, if violated, will inevitably lead to bad results.

  1. Is the responsibility assigned to the party in the best position to carry it out?
  2. Is the responsibility accompanied by authority?
  3. Is the responsibility assigned to more than one party?

Also, architects and engineers should review the proposed general conditions to ensure they are properly coordinated with their professional services contract.

Examination of scope of services
Since the contract defines responsibilities, how the scope of services is defined in the contract deserves careful attention. This revives an earlier question: Does the client appreciate the value of the services provided or is the client simply using the architect or engineer to satisfy the minimum legal requirements for their design services?

If the answer is that the client views the architect or engineer as a necessary burden rather than an asset, then beware. A very clear indication of the value of the services can be gleaned from the amount of fee allocated and the services expected within that fee. A very broad scope of services for an inadequate fee is a sure prescription for disaster. By the same token, failure to provide for an adequate scope of services will also result in problems.

Consider for a moment the effect of a lack of opportunity for construction phase services. Without an adequate opportunity to observe the work of the contractor, architects and engineers have no way of knowing whether what is built is in fact what was designed. A provision requiring an architect or engineer to “visit the site once a month or as necessary” can have, and has had, disastrous consequences.

What does such a provision mean? We believe it means the client is willing to pay for one visit per month but wants the architect or engineer there all the time. Architects or engineers should ask themselves, what does “as necessary” mean? How many visits will be required? The answer is not obvious when a contract is signed. The architect or engineer should not agree to a provision so ambiguous.

Additionally, architects and engineers should look carefully for adjectives, especially the superlative kind, which tends to modify the scope of services. Some examples may include: Provisions that require services to be performed in “accordance with the highest standard of professional practice;” provisions requiring “best effort;” and provisions requiring “assurance” of one thing or another. These are all expressions of indefinable performance.

Architects and engineers should also be mindful of aggressive scheduling requirements. Can schedules be met? Do they and their consultants have sufficient staff to meet the agreed upon deadline? When pressed for time, does their firm abandon quality control and quality assurance measures? Will the proposed schedule result in inordinate pressure on the staff, creating stress that results in uncoordinated documents, omissions and errors?

Implementing systematic documentation
Every project requires that hard decisions be made. Budget scope and quality constraints are variables that can and will, over time, dramatically influence the overall acceptability of a given project. Architects and engineers make recommendations, but their clients make decisions. As professionals, their ability to influence a project is limited.

Take for example a doctor’s prescription. It is really only a recommendation; it is the patient who decides whether to take the medicine. The same is true of design recommendations. The architect or engineer recommends; the client decides. Given this reality, it is essential that the most effective risk management tool available to them is consistent documentation of their recommendations and their clients’ decisions.

Documentation requires discipline and consistent application. Our best advice on this issue is to adopt the mind set “if it’s not written, then it did not happen.”

Documentation rules to follow
There are also three rules of documentation that must be observed and consistently followed:

Documentation must be systematic. You cannot do it sometimes and not other times. You cannot allow some members of the firm to deviate from this requirement; it must be consistently followed by all.

Documentation must be contemporaneous. It should be made at the time of the observation, event or conversation. It is best to form a habit of always including date and time of the documentation.

Documentation needs to be objective.Record objective facts, not opinions or conclusions. Remember that you can develop conclusions from facts but you cannot develop facts from conclusions.

There is no single way for those in the design field to practice their profession and no single way to manage the risk involved. It has always been our policy to support practice, not dictate it. We have tried to alert you, the broker, to the elements of your clients’ service that have shown to be contributing factors in high claims frequency and severity. Architects and engineers have been trained as problem solvers. We believe that if you can help your design industry clients identify problem areas, they will be in a position to determine how to manage their risk factors most effectively.

Gerald Farquhar is a risk management consulting attorney for Victor O. Schinnerer. Farquhar received the 2003 PEPP award from the Professional Engineers in Private Practice Committee of the National Society of Professional Engineers (PEPP/NSPE).

Topics Claims Risk Management

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Insurance Journal Magazine June 5, 2006
June 5, 2006
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