Best Practice in Engineering Consulting Contracting

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Monday, June 29th, 2015
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Back around the middle of last decade, the Australian arm of US architecture and engineering giant AECOM no doubt thought it had secured a good win when it bagged a contract to provide traffic forecasts for Brisbane’s Clem Jones tunnel.

Unfortunately, those forecasts – which project operator RiverCity Motorways Group quoted in the prospectus for an initial public offering which raised $724 million in 2006 – turned out to be short by almost four-fifths by the end of the tunnel’s first year in operation. AECOM has since spent several years fighting lawsuits with damages claimed by plaintiffs amounting to a total of $1.84 billion, according to an Australian Financial Review report.

While this is an extreme example and one in which the issues in question revolved around the performance of the contract as opposed to any issues or concerns in the making of the contract itself, it is nevertheless important to consider what constitutes best practice when engineering firms enter into contracts for consulting work and what type of issues consultancies should be aware of when negotiating a contract.

According to Mark Waddell, a partner at Norton Rose Fulbright, agreements for consulting on the design of a new building or piece of infrastructure are much more straightforward compared with those that involve the actual construction of the asset in question. Nevertheless, there are a few important issues to be aware of.

First, there is intellectual property. Under the majority of circumstances, consultants retain ownership of any IP relevant to the project’s design and simply allow for the principal to use this for the project in question via a licensing arrangement. This arrangement allows for the consultant in question to use that intellectual property on future projects without restriction.

Were the consultant to instead assign ownership of the IP in question to the principal rather than merely licensing it for an individual project, they would not be able to use that IP on other jobs without first obtaining permission from the principal to whom it had been assigned.

Because of this, Waddell said it is important to understand exactly what you are agreeing to and that consultants should not agree to assign ownership of IP unless they were prepared to give away ownership of that intellectual property.

“Consultants should be careful to understand what it is they are asked to give away in terms of intellectual property,” Waddell said. “If they assign it rather than licence it, then the ownership of that belongs to somebody else and they are not then free to continue to use that on the next job unless they have got a license to do so, which is pretty unusual.”

“They obviously need to be careful about that.”

Further issues revolve around liability caps and insurance. Generally speaking, the principal will only agree to the insertion of caps on the contractual liability of a consultant whom they engage in cases where certain things which are reasonably within the control of the consultant in question are ‘carved out’ of those caps, such as liability which arose out of the consultant impinging on the intellectual property rights of a third party in the project design or engaging in misconduct or fraudulent behaviour.

While such ‘carve-outs’ are not generally unreasonable, things become tricky when it comes to insured liabilities, where the principal might want liabilities which the consultant can claim under insurance to fall outside of the agreed liability cap. From the viewpoint of consultants, any claims made out of their insurance policy impacts upon their premiums, and some can be inclined to push back in this area as a result.

For those who do agree to an insurance carve-out, caution should be observed as to how this is worded. A firm which has a worldwide professional indemnity policy worth billions of dollars, for example, but is only required under the contract to have $5 million worth of PI for the purpose of that contract would want to limit the value of the carve out in question to the amount of insurance they are obliged to carry under the contract as opposed to the value of their entire global PI insurance policy.

Likewise, the carve-out should also be limited to the amount of insurance proceeds the consultant actually receives as opposed to the ‘insured amount.’ This would leave the consultant protected in the event that the insurer became insolvent or refused to pay.

Further issues can revolve around civil liability legislation. In New South Wales, for example, where Part IVA of the Civil Liability Act seeks to make subcontractors responsible for the proportion of liability work they do when they get it wrong, the principal might attempt to contract out of that section of the Act and have the consultant assume responsibility for any sub-consultants they engage. This is an understandable measure since any situation of having consultants not responsible for their sub-consultants is understandably problematic from a project owner’s viewpoint. While some consultants agree to this, others may push back on the basis that any contracting out of these provisions would lead to them assuming an additional liability over and above that which was legally specified under the legislation.

All up, Waddell says the majority of consultant contracts are relatively straightforward, albeit with the amounts involved being more significant on projects of larger scope.

“In terms of those massive projects, the issues are roughly the same (as small projects), but if you get it wrong, the effects are amplified enormously,” he said.

“But at the end of the day, most consultancy agreements are relatively vanilla.”

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