Engineering Inc. - July/August 2015 - (Page 42)

Guest Column B Y PA U L J . N AVA R R O The Importance of Risk-Balanced Sub-Consultant Agreements T he engineering profession has become much more specialized over the last few decades, resulting in a significant increase in the number of firms needed to complete a project. Projects now involve a multitude of engineering disciplines under the direction of a lead firm directly engaged by the project owner.Since the lead firm is typically larger and more financially stable than the sub-consultants, owners often require the lead firm to carry a higher level of insurance (in case the project fails to meet production or quality targets) as well as unfavorable indemnification provi- Paul Navarro sions, extensive guarantees, and heavy liquidated damages penalties. Lead firms often seek to mitigate accepted contractual liabilities by transferring these risks to the supporting cast of sub-consultants through sub-consultant agreements. Indemnification One of the more potentially penalizing requirements common in sub-consultant agreements is the indemnification clause. For example, a recent contract entered into by a geotechnical sub-consultant contained the following language: "The Consultant(s) shall indemnify and save harmless the Department of Transportation, The Administration, their Officers, agents, and employees from and against all claims, suits, judgments, expenses, actions, damages and costs of every name and description arising out of or resulting from errors, omissions, negligent acts, negligent performance or nonperformance of the services of the Consultant or those of his subcontractors, agents or employees under this Contract." By accepting this clause, the sub-consultant is indemnifying the project owner's attorney, lender, and others who are not directly part of the project owner entity. Most insurance policies contain language that would render acceptance of this liability uninsurable, making the sub-consultant firm responsible for any damages resulting from a claim filed by an agent and possibly even a third party. Schedule Another prime contract requirement regularly imposed on sub-consultants includes strict language regarding project schedules, which can be burdensome and lead to the sub-consultant being liable for 42 ENGINEERING INC. JULY / AUGUST 2015 damage penalties should the project be delayed-even when such delays occur through no fault of the sub-consultant. A recent assignment by a prime consultant to a sub-consultant contained the following language: "Time of Essence: Time shall be deemed to be material and stated time limits are of the essence of this AGREEMENT. The SERVICES for the PROJECT shall be completely performed by the SUBCONSULTANT on or before the day that (name deleted) may direct." The language here gives the prime firm excessive authority over the timeline for the sub-consultant to perform its services. A more acceptable schedule clause should contain specific language acceptable to both parties, such as: "TIME: SUBCONSULTANT recognizes that the services of PRIME and others involved in the Project are dependent upon the timely performance of the SUBCONSULTANT'S services. SUBCONSULTANT shall perform such services in the same character, timing and sequence as PRIME and is required to perform services per the Prime Agreement and in accordance with SUBCONSULTANT'S proposal to PRIME." Payment Terms of payment clauses in sub-consultant agreements can also be problematic, such as the "paid-when-paid" contract language in the section below, which is becoming prevalent in the industry and can extend a sub-consultant's payment cycle. "PAYMENTS: Consultant shall bill OWNER monthly on account of SUBCONSULTANT'S services and expenses and shall pay SUBCONSULTANT within fourteen days of the time CONSULTANT receives payment from OWNER on account thereof. Payment to SUBCONSULTANT is contingent on CONSULTANT's receipt of same from OWNER." In smaller firms, paid-when-paid language can result in cash flow problems or increased costs due to interest incurred from drawing on existing lines of credit. Since there is no such thing as a perfect project, it follows that there is no perfect contract. For this reason, sub-consultant firms that want to avoid potentially catastrophic claims would be wise to pay close attention to the project scope, project owner, prime firm requirements and the other fine-print language in both the prime agreement as well as the sub-consultant agreement. Paul J. Navarro is president and CEO of Navarro & Wright Consulting Engineers, Inc., in New Cumberland, Pa. He also is a member of ACEC's Land Development Coalition Executive Committee.

Table of Contents for the Digital Edition of Engineering Inc. - July/August 2015

Engineering Inc. - July/August 2015
From ACEC to You
Market Watch
Legislative Action
Secrets of the Centenarians
State of the Industry
Reshaping Cities
2015 Professional Liability Insurance Survey of Member Firms
Girl Empower
2015 Fall Conference
Guest Column
Guest Column
Guest Column
Business Insights
Members in the News
Mergers and Acquisitions

Engineering Inc. - July/August 2015