Risk Identification & Contract Risk Management In the world of geospatial
Presenters Bob Hanson Senior Vice President, Michael Baker International Geospatial Practice Leader 717 221-2005 rhanson@mbakerintl.com www.mbakerintl.com Justin R. Klein President, Klein Agency, LLC Professional Liability and Business Insurance for Design Professionals 410 832-7600 jklein@kleinagencyllc.com www.kleinagencyllc.com
MAPPS Member Firms know a bit about risk Risk Mapping, Assessment and Planning (Risk MAP) HAZUS
And all around us there is product risk
And around us is the issue of personal financial risk
Business Risk https://www.youtube.com/watch?v=lakprx-hp94
Risk Committee and Risk Identification What is the overall execution strategy What is the work breakdown between Divisions Who are our named teamed members Are there SB goals and how do we respond Cost/Schedule Control Managing Profitability Scope/Cost Change Management Communication Procedures Throughout All written communication is discoverable in event of a Claim!
Risk Committee and Risk Identification 2016 Winter Conference Have a plan before you pursue any major opportunity Be ahead of the risk to manage the risk Others: Cost Controls Scope Creep Health and Safety Personnel Security Legal Authorizations Etc.
Risk Committee and Risk Identification Still things can go very wrong The Big Dig 2016 Winter Conference
Risk Identification 2016 Winter Conference Contract Risk and project risk are inseparable considerations: Document any events and/or conditions that might affect the services project/product requirement It s wise to develop a Risk Register for your company to record all risk-related assumptions Use a risk register to reduce risk and improve the contract s and project s performance
Risk Register 2016 Winter Conference What can go wrong on a project and what s the risk impact with: compliance with the law and regulations, scope of work expansion or contraction, design and/or specification changes, quality standards and requirements, schedule, and changes of your, or your suppliers costs
Overview of Common Contract Clauses Definitions Ensure you fully understand the definitions of all the terms used Variants in definitions are found from agreement to agreement (e.g., contract renewals) Beware of broadening terms/superlatives like highest, best, to meet Owners objectives, time is of the essence Standard of Care Avoid onerous criteria or specifications that which does not apply Consider a standard that defines a degree of skill and diligence normally employed by professionals or consultants performing the same or similar services
Overview of Common Contract Clauses(cont.) Standard of Care Cont d Include a definition (example below) in the contract in lieu of other warrantees or guarantees Important that you include this in proposal and/or contract so that it becomes contractual benchmark for liability claims. Standard of Care: 2016 Winter Conference All services performed by Professional shall be conducted with the same level and skill exercised by members of its profession practicing in the same location at the same date and under similar conditions. Under no circumstances shall any other representation (express or implied) or any type of warranty or guarantee be included or intended by the Professional during the completion of its services under this Agreement. Disclaimer: All examples of boilerplate contract language are for illustration purposes only and may not be incorporated into any Agreement without the advice of counsel
Overview of Common Contract Clauses Access Ensure your access to the customer s site or facility is specifically granted as to not delay your work Your customer may request access to your employees, facilities or work areas of inspections and auditing, necessary vs. merely intrusive? Phase Responsibility Avoid unnecessary responsibility for any phases of work outside your control and/or involve other contractors Make sure you are not responsible for another s failure to perform their work in accordance with their contract
Overview of Common Contract Clauses(cont.) Payment and Taxes Payment is a primary issue with most contracts Fully understand the nature of the payment conditions Know tax collection and payment issues Obtain a Credit Report on your customers, subconsultants or key suppliers Ensure your business developers are taking a very hard look at the customer s payment cycles and all requirements for each opportunity-- payment is a serious Go or No Go consideration
In combination, the negative effects of payment conditions will greatly increase your risk: Paid when paid conditions Fixed price, lump sum without progress payment conditions Time and materials or cost-plus fee that includes long invoice review periods by the customer Seeks mobilization payments for project imitation or scaling Auditing compliance Retention and accumulated retention
Overview of Common Contract Clauses(cont.) Time of Performance Time is of the essence Delays by others Penalties and liquated damages Force majeure Modifications and Revisions Cause or fault that is related to any modification Change management approaches Written change orders Opportunity cost and impacts vs. payroll and overhead costs, expenses and profit
Contractual Clauses for Payment 2016 Winter Conference Preserve the contractual right to stop work and withhold all deliverables until paid This is only effective if you are willing to call attention to this provision then act upon it Consider incorporating contract language obligating Owner to pay your firm s additional costs incurred while pursuing collection Example on next slide Warning be careful and do not accept prevailing party language to broader liability claims when included in Owner contract
Payment: 2016 Winter Conference Upon receipt of an invoice from Professional for services as described in Exhibit A, Client shall pay the invoice, in its entirety within 30 calendar days. In the event that Client disputes Professional s invoice, it must notify Professional, in writing, within 7 calendar days from the date of the invoice. Interest shall accrue on any balances uncollected after 30 days at a rate of 1.5% per month. In the event that the Client fails to pay within the initial 30 day period, Client is deemed to be in default of this Agreement and Professional may immediately stop work and withhold all project deliverables until the balance due, including any accrued interest, is paid in full. Client shall also reimburse Professional for all collection costs, including but not limited to legal or collection agency fees, court costs, travel and other related expenses. Client s obligation to pay all collection costs shall survive this Agreement. Disclaimer: All examples of boilerplate contract language are for illustration purposes only and may not be incorporated into any Agreement without the advice of counsel
Overview of Common Contract Clauses(cont.) Suspension or Termination This can really happen Equitable payment equitable and proportional to the services and expenses rendered Indemnification A major issue for risk and liability and professional insurance Indemnify Owner for Negligence Based acts arising out of but only to the extent determined to be caused by Mutual Indemnification for negligent acts Avoid common trap to expand definition of Indemnified Parties to expand your duty to others (i.e. other design professionals, contractors, agents, construction managers, etc.) Defense obligations are tricky and most likely uninsurable under professional liability coverage
Example of Unacceptable Indemnification 10. INDEMNITY. For purposes of this Section 10: "Claims" means claims, demands, suits, or causes of action, whether at law or in equity, and whether based on statute, regulation, rule, ordinance, code, or standard or on theories of contract, tort, strict liability or otherwise; and "Losses" means any and all losses, liabilities, fines, penalties, or damages, including the costs of settlements, judgments, and direct expenses including reasonable attorneys' fees (including reasonable attorneys' fees incurred in establishing the right to indemnity hereunder). Contractor shall indemnify, defend, and hold harmless Company Parties against all Losses related to Claims brought against Company Parties by or on behalf of: a) Persons other than Company Parties or Contractor Parties, including without limitation Claims for injuries or damages to Persons or property, whether arising from or in any manner relating to the negligence of Contractor parties under this Contract, of the negligence of Company Parties, or the negligence of both Contractor Parties and Company Parties. Contractor shall defend such Claims at its own expense, with counsel acceptable to Company. * * * * * Contractor's duty to defend arising under this Section 10 shall be with counsel reasonably acceptable to Company, and such counsel shall consult with Company on all major decisions relating to Claims. Company reserves the right to defend itself at its own expense. Contractor's monetary obligations under this Section 10 shall (x) not be limited to the amount of insurance coverage carried or required to be carried by Contractor hereunder, and (y) be reduced only to the extent the fault or negligence of Company Parties in causing such Losses is established by final adjudication or mutual agreement of the Parties; provided, however, that Contractor's duty to defend Company Parties against Claims hereunder shall not be affected.
Overview of Common Contract Clauses(cont.) Limit of Liability Who are potential claimants? Depends upon jurisdiction and contractual language. Know to whom you owe a duty to perform and contain this to OWNER Liability is expanded beyond Common Law by contract What does it mean to be legally liable? Establish a cap Establish limitations for injuries, claims, losses, expenses, or damages arising out of or in any way related to the Project or an Agreement Include limitations that are directly for cause or causes or related to your own negligent acts, errors, omissions, strict liability, breach of contract, or breach of warranty Eliminate any personal liability too Eliminate your liability to the OWNER for any consequential damages, including but not limited to loss of use or rental, loss of profit or cost of any financing, however caused, including your fault or negligence By offering a Mutual Waiver of Consequential Damages this can often be accomplished in contracts without much push back Waiver of consequential damages is a key component to reducing time and cost of potential claims
Mutual Waiver of Consequential Damages: Notwithstanding any other provision of this Agreement, and to the fullest extent permitted by law, neither Client nor Consultant, their respective officers, directors, partners, employees, contractors or subconsultants shall be liable to the other or shall make any claim for incidental, indirect or consequential damages arising out of or connected in any way to the Project or to this Agreement. This mutual waiver of consequential damages shall include, but is not limited to, loss of use, loss of profit, loss of business, loss of income, loss of reputation or any other consequential damages that either party may have incurred from any cause of action including negligence, strict liability, breach of contract and breach of strict or implied warranty. Both the client and Consultant shall require similar waivers of consequential damages protecting all the entities or persons named herein in all contracts and subcontracts with others involved in the Project Disclaimer: All examples of boilerplate contract language are for illustration purposes only and may not be incorporated into any Agreement without the advice of counsel
Overview of Common Contract Clauses(cont.) Beware of flow down provisions if you cannot work directly for Owner This phrase describes incorporation by reference of terms of an upstream contract Caused by recent shifts in project delivery methods & financing sources What is acceptable among Prime and Owner may not be acceptable or economically feasible to you Common provisions allow for change to be negotiated at Prime level which intend to legally bind you very dangerous
Overview of Common Contract Clauses(cont.) Compliance with Law Be sure you understand applicable laws and possess appropriate licensing and permitting Severability An invalid clause usually should not terminate the entire agreement Defense of Claims 2016 Winter Conference If you must assist in defending a claim, ensure you are compensated for your efforts
Overview of Common Contract Clauses(cont.) Others. License requirements Jurisdiction Containment Clause DBE/MBE requirements and goals, and subcontracting plans and programs Performance bonds, payment bonds Safety Insurance Drug and Alcohol Testing Confidentiality Rate, material and equipment rates
Project Risk Assessments A risk assessment should be the first step to identifying risks on a project Document Reviews A structured review should be performed of project documentation: contract,» Use available resources like professional liability insurance agent & carrier as well as legal counsel plans and all assumptions, Constraints effecting the project, project files of similar completed projects and/or for the same client, and lessons learned from other projects
Risk Register Score your risk against criteria Rank the importance of criteria 2016 Winter Conference Rank the impacts (individual score) of a risk element within a criteria Project Manager s Experience Project Manager s Technical Experience Project Team s Competence and Commitment Project Schedule Scope of Work Budget Stakeholders-agreement on desired outcome(s)
Risk Register(cont.) Expertise with required technologies Customer relationship 2016 Winter Conference A high total score will require a full and detailed risk register A high single criteria score will require a risk assessment on that criteria
Quantifying Risk (Tools) Qualitative Analysis Expectation for a risk Probability that a risk occurs Prioritization of preventive actions 2016 Winter Conference
Quantifying Risk Tools (cont.) Quantitate Analysis Expected monetary value (EMV) Impact measured in dollar Probability measured in percentage
Quantifying Risk Tools (cont.) Decision tree Analysis http://www.mindtools.com/dectree.html http://www.vanguardsw.com/dphelp4/dph000 74.htm http://en.wikipedia.org/wiki/decision_tree Monte Carlo Simulations Computer simulation model Can deal with multiple risks aggregated to the project A tool for very large projects
Risk-Response and Control Risk Avoidance-Discussed above Risk Transference Project owner and sharing 3 rd Parties and sharing Mitigation Reactive Proactive Acceptance 2016 Winter Conference No modification to scope, schedules or deliverable Establish contingency reserves Modify schedule if necessary
Discussion and Questions?? Thank you!