Editor's note: In late August, nine representatives of New York and Boston's finest engineering and legal firms gathered at the Grand Hyatt in Manhattan to discuss the major issues facing engineering firms on the legal and management fronts. The roundtable discussion will continue next issue, delving into mergers and acquisitions as well as human resource issues, including employee owne...
CSE: Many of the engineering firms polled in our recent "Giants" survey (CSE 8/01 p. 24) expressed that one of their top concerns is speed of schedule. Owners are asking for a lot more, in a much more demanding manner with projects being delivered much faster, even on non-design-build or fast-track projects. This, obviously, has sparked a lot of concern, not only because of the issues involved in putting together an effective design in a compressed time period, but also because they're afraid of being sued, as owners are increasingly becoming more litigious about errors and omissions. In other words, owners want perfect designs in 75% or even 50% of the time of a normal project. Is this the case? And if so, how do you deal with the situation?
MAGLIANO: It's a product of the electronic age. The fact is if you can communicate, you will. For example, (fellow panelist) Mark (Zweig) has his little Blackberry (wireless communications device) here, so you can get in touch with Mark 24 hours a day, seven days a week. And if our clients know that, they expect us to be working 24 hours a day, seven days a week.
CSE: If that's their attitude, do you ask your clients if you are going to be paid for working 24/7?
ZWEIG: Ask Cahal (Stephens), they've been able to get paid for that.
STEPHENS: We have, but we are in an unusual situation in that we just bucked a trend in that rather than merging, we separated into two companies. One of the reasons was because one of our companies was in the 24/7 business. But more so, it was because their clients were so different from the clients that the rest of us were dealing with that we didn't have those same tremendous plans of delivery in terms of weeks or even days. There were truly two cultures serving two different client groups, so we split to focus on our respective core businesses.
WALLER: It's amazing how the electronic age has people thinking they can simply throw bodies at design and get the job done faster. Maybe it's an extension of the construction manager mentality, who are now representing more owners and clients, and think in terms of pure construction, where if you want that wall up faster, you just throw more bodies at it. But in design it's much harder to do that.
DERECTOR: It definitely depends on the situation. If you want me to fast track, you have to pay. The way things are happening today, you now often get an owner's representative who sends out a request for proposal. If the RFP says this is a fast-track job, and the rep provides you with a schedule where you'll clearly have to cram in whatever hours you need to meet the deadline, then your response should include whatever time you need to get it done on time. If, on the other hand, they say, "here's a project and you submit a response," then they come back and say, "by the way, I forgot to tell you, you have to be done in two weeks," one of two things can happen. You either have the backbone to go to the client and say you have to give me more money, or you don't. There are a lot of reasons for the latter—ongoing business, maintaining a relationship or creating a relationship.
ZLOTKOWSKI: There are many aspects to speed and schedule; some are contractual, some involve understanding that from a client's perspective, time is money. Typically most of us work for architects, maybe directly for corporations. If you exercise some degree of client management, and become part of the process of developing the schedule, you then have the ability to control expectations, or at least to tell somebody that if they want me to make this date, I need information on this date. By being a part of that process, eventually you start educating the client as to what it takes to produce a job. I have no problem telling a client I can give it to you in 75% of the time, but your change orders are going to be up. As long as he understands it going in, he becomes educated and the process happens as part of the design process; as you monitor the schedule, you monitor the budget and design process.
In terms of speed, we all realize that business changed dramatically with the change from slide rules to calculators and electronics. Probably the most valuable engineer in my office is in my MIS group. If he is not around, everything stops and we're all on cell phones, e-mail and pagers. It used to be that you got a letter, and you could respond in two or three days. Then it was a fax in one day. Now it's an e-mail in an hour. CAD is even faster, and CAD on a web site is faster than that. So everybody expects speed. I think you can provide the proper service with appropriate client management and education.
CSE: How about from the legal side? Are firms asking for advice as to how to protect themselves from these sort of expectations, especially in an atmosphere of litigiousness?
WALLER: In our instance, I would agree that client education is the first tactic. They have to understand our design process and how we can give them a better design if we take a little more time. Or, if we expedite it, we're not going to have the quality or detail of design. By educating them, I think they understand there is going to be some errors or omissions on the drawings.
L'ABBATE: The education that he's talking about is important, but it has to translate itself into the contract. You can't educate your client after you signed a contract with limited time specifications. Speed for the sake of speed—not one person has said I do a better job because I do it faster. We caution our clients to make sure that they have sufficient time periods to do the work they are contracting to do and that the client understands it. This may mean you have to put specific time periods in the contract.
DERECTOR: But don't some insurance policies exclude fast-track projects? Isn't there some language in professional liability projects that specifically excludes working on fast-track projects?
L'ABBATE: Not that I have seen.
MARGULIES: We've actually found that some projects are better off being accelerated. In our office, for example, sometimes the schedule can get so protracted that it gives everyone an opportunity to figure out what they don't have to do. And a lot of times we do have a very good understanding of the schedule and we know what it takes to get the project done.
If we foresee that we'll have difficulty meeting a schedule, we present that to our client to make them understand what the trade-offs are as far as product completeness and quality. To protect ourselves, we have very much stepped up our quality-control systems and we start reviewing projects from the schematic design phase to the design development phase, to all the issuances of documents, and that's actually saving us a lot of money. Without a doubt, it's a big effort, but we're finding that we're producing a better product and we're also limiting our risk.
MAGLIANO: Part of the initial question that faded into the background, was "are you being paid for it?" We're finding that by a process of what we call client selection, we can look and work for clients who understand the value added either through accelerated schedules or specific expertise in what we have to offer, and we can get significantly higher fees. Admittedly, a lot of this is in the mission-critical area. There, we find many clients who understand the value of the service we provide. And there are at least two different ways to look at accelerated schedules. First, is your typical project, that is simply compressed. Second is your non-typical project for which you have a very good fee, an understanding client and a compressed schedule, but under the latter terms and conditions, an atmosphere where you can do fairly well. You have a mutual understanding of what it's going to take to get there, he is willing to pay you to do that. The former is very often a recipe for disaster.
CHRISTODUOLO: Aren't there enough of your competitors that will go into the former?
MAGLIANO: Be my guest, that's their problem, not mine.
CHRISTODUOLO: For a firm of your size, that's an option, but I get calls from clients who say, "I really don't want to [compress the schedule], but I want to play and I don't have either the size, security or the confidence to walk away.
ZWEIG: That's a good point. We're talking about unreasonable demands and something I think firms don't factor in is marketing. For example, if you over-fund marketing and drive to make it beyond your ability to service the work that comes to you, then you need to become more selective of the clients and jobs that you're going to take on. Our business views marketing as a cost to be minimized. We spend maybe 3% to 5% of our revenue on marketing. Other industries laugh at this because we are then forced to accept what comes through the door and that's a huge deal right there.
The other thing is specialization. You can talk all you want about maintaining quality, and I do think that having a good process certainly is critical, but my experience is that you have to focus on specific client types and specific job types. This way, you really do have credibility when you start talking about how long it's going to take or what goes into this, as it shows you've been there before. Yet certain people in our industry—and I think a lot of the firms in this room already understand this—still think specialization stifles creativity. Some engineers want to work on hospitals today and mission-critical facilities the next day and tenant improvements the day after that. But that's where you get yourself into all kinds of trouble, when you start mixing your staff up in these different job types and client types.
WALLER: You do have to have the strength to know when to walk away or when to say that's unreasonable. We utilize a go/no-go process every time a project comes about, making sure that we have the knowledge to do those kinds of projects. We find that we serve our clients far better and that's why they come back for repeat business.
ZWEIG: When the workload falls off, all of a sudden there are criteria, it's like ability to pay. Well, the last time it took the client days to pay. When the market goes the other way, those criteria start to go out the window.
MAGLIANO: They don't necessarily have to go out the window. You can make a conscious decision to say I will accept the risks that go along with it. If you do that, then you will inform the rest of your team that we have taken on this increased risk and we need to do something about it. And if we don't, we're going to wind up in the tank at the end of the year.
L'ABBATE: But at that point, doesn't the exception become the norm? Right now you're saying you'll do a non-typical project and compress it, but you keep doing it and that becomes the expectation. It's just like the fax machine; the first people who had it paid extra money to have a fax sent. You also paid extra money if you received a fax on your behalf. Now faxes are the norm.
MAGLIANO: If you are going to continue to work under those conditions, you will find someone who is going to pay you handsomely to do it and be a partner with you.
L'ABBATE: I think there will come a point in time when they are not going to pay handsomely because they can get anybody to do it, and that's going to become the norm.
CHRISTODUOLO: I don't know. If you look around, maybe you'll find clients not as good or maybe not as experienced, but you'll find someone else.
CSE: That's an interesting issue. In cases where you do walk away, are you finding owners saying, "Fine, we'll go get 'Joe Small' who says he can do the job." Isn't this opening the door for hungry firms who'll step up to the plate to make a name?
ZWEIG: It's always been an issue. To me it's like when you go out to the grocery store—do you buy Coca-Cola or do you buy generic cola. There is a market for generic cola, but there's a lot of people who don't want to take the risk, so they buy a brand name. In a sense, the brand names in this room represent the Coke market. It doesn't mean there is not a market for generic cola, but that's not the market this group necessarily pursues. Is there a difference? It's packaging, it's longevity and it's previous experience with the product. All these things go into making a less risky decision on an owner's part. If the client doesn't see it as risky, they will hire Joe Small.
ZLOTKOWSKI: I seldom find myself sitting in a reception area with people who are outside my realm of professional service. I don't find myself going to compete for a project and some two-man outfit from Pennsylvania is the next guy being interviewed. Clients know the value of their project and what they are attempting to build, and I'm not going to go to Pennsylvania to compete with that two-man firm to do a shopping center or someone's garage. Yes, speed and compromise and contractual issues are at issue. Everybody who negotiates a contract, at least when we do, has a walk-away point, and it may be a contract clause or it may be a fee issue, but there are certain things that we're not going to agree to. We either work closely with people like George (Christoduolo), or if we get to that point we have attorneys involved and we're not going to put any of the partners' houses at risk or put our business at risk.
CSE: We've talked about fast-track projects. How about the design-build market, where in many cases it's the contractor driving the project with more black-and-white, bottom-line expectations. For example, maybe he says, "I don't want a marquee design. I'm going to go with whoever is the cheapest guy." Do you just ignore this market and say, "Well, you get what you pay for? Or do you try to educate these players or clients who've become convinced that this delivery method is the way to go?
ZLOTKOWSKI: If you are part of a design-build team that's being pulled together by a developer or a construction manager, you're part of the team to help them get the job. Again, he's looking to pull together a professional architectural and engineering team. So from the get go when you're forming that partnership, you have the opportunity to negotiate the arrangement and the understanding. What we've found as a challenge over the last 10 years is educating or re-educating those engineers and contractors about the design-build concept, right down to the draftsmen and the field superintendent. Design-build is totally different from the traditional process. For example, if there's concern about claims or litigation from errors or omissions in the design, you can build that into the contract as part of the design process, because contractor and owner are there from the get go. At the same time, I have to remind my engineers to make sure they call the contractor when they are making such decisions.
CSE: Are you talking about a relationship that's a joint venture or are you talking about a situation where you are a subcontractor? In the case of the latter, a firm might not have as much of an equal say.
ZLOTKOWSKI: Even in joint-venture design-build arrangements you are, in effect, a subcontractor.
DERECTOR: So far, we have been a subconsultant to the contractor. In all of the design-build projects that we have been doing so far, the contractor has been awarded the project and he retains us to do the engineering portion. Despite this dynamic, we're still negotiating our contract in the same terms as if we were being retained directly by an owner. So our contract with the person who is buying our services is exactly the same in either event and the product that we're turning out is the same. It's not as though we're saying we don't have to do so many details because the contractor is going to build it and he knows what to do. In all the instances we have been turning out exactly the same contract documents, irrespective of whether it was design-build or direct retention.
STEPHENS: We have found there are two very different markets in design-build: The jobs Robert (Derector) just mentioned and those just preparing the RFP, which for complex projects, can actually be quite a project itself. In that case you are contracted to the owner and you prepare the RFP that goes to the competing design-build teams. We have found quite a lot of work there and very satisfying work, even the most creative parts of the job.
CSE: Are you talking about just RFPs or bridging situations, where the design team is providing about 35% of the design before RFPs are sent out?
STEPHENS: Bridging. For a simple industrial building or something like that, that's a pretty small task. But for a complex building, such as a laboratory, there are a lot of bridging opportunities. It's quite an interesting job and you don't get involved in a lot of the liability that follows later in a straight design-build scenario, but you do get the most creative part of the work. We see a potential there.
MAGLIANO: I certainly agree that bridging can be very satisfying, but we've found design-build in all forms to be beneficial to us. By and large, we have had success. If you are going to bid yourself against two other engineers, that's a recipe for disaster. But if you have a friend in the business, or a few friends, who want to come to you and will deal with you as a professional, knowing they are going to get value for what you are providing, that's a different story.
WALLER: By being selective about whom you go into those relationships with?
MAGLIANO: As Alan (Zlotkowski) said before, if it's not selective then it's education: educating the team, contractors, the owner on the process that you're going to go through and being sure that everyone understands the risks and the rewards and the value the team members are adding to the process. If you begin that process, to a certain extent like the Corps of Engineers does with their partners, that's an attempt to establish a relative position for everyone on the team. If you are going to throw a proposal into the hopper and hope you're the low bidder, then it's a recipe for disaster.
ZLOTKOWSKI: John (Magliano) mentioned the Corps of Engineers. A lot of the federal work today is going design-build. Developers are actually competing; so they will put together a team to help to try to win the job. Over the years we have found that the architect and ourselves have become valuable players in helping these people win the job; that's when you negotiate your arrangement, quite honestly.
DERECTOR: We've had the opposite experience. The contractor is coming to us and saying we have this job, and we want you to be our engineer on it and we can propose to them a fee. Now, they are expecting a certain quality, and they want us to do it because we have a relationship. We actually find that those projects are more profitable. Where we're not bidding against anybody, the contractors typically make more money than we do, so they can afford to pay for our services because all they want at the end of the day is the right job.
CSE: It seems like everyone has very positive things to say about design-build. How about the other side of the coin?
ZWEIG: I think design-build is best from the end user point of view if you're dealing with an experienced client—that really has a huge impact on how successful a project is. At the same time, if you have a client who is not a repeat buyer of these types of facilities, then you are much more likely to have problems. The same thing applies to dealing with contractors. The right contractor is one that treats you like a team member—someone you trust and respect and who values you.
MAGLIANO: We actually do design-build where we're the prime and we are extremely pleased with it. It's a different kind of work, requiring a different kind of education in-house. There is no one to look for to blame when somebody makes a mistake. With design-bid-build, if you frame it right, you can often go back to the owner and say, "it's your cost if you don't fix it." When you're the prime and you have the entire team working for you, there's no place to go. Every mistake comes off your net income line.
CSE: Obviously many designers would like to be the lead, but what about risk mitigation and getting the bonding to go out and lead these jobs? In a lot of cases, firms simply don't have the capital that a major contractor can provide for the insurer. How do you deal with those issues? What about risk in general? Even in a subcontractor position, are engineers being asked to take on some risk?
MAGLIANO: You have risk no matter what you do, frankly. I'm not a believer in getting crazed over risk. Risk is there, you have to manage it, mitigate it and deal with it. But you can't avoid it.
ZLOTKOWSKI: You have a professional liability no matter how the arrangement is set up. You have to know what to avoid. We're not going to get involved with a contractor who is looking to buy a stamp; it's too dangerous. As long as we have the right process, where we have the ability to control the design, the proper professional responsibility, and be allowed to perform with due diligence, that's how you control it. For everybody in the industry—designers, architects and engineers—there is risk there, it doesn't go away. It doesn't necessarily have to increase with the design-build process.
MAGLIANO: Our design-build work is almost exclusively mechanical/electric. In other words, we're talking about projects that are 70% to 80% percent M/E. Where we know that work, we do it every day, so we might as well build it.
CSE: Let's get back to the legal side of design-build. When setting up contracts for clients in a design-build situation, how do they differ from a traditional contract?
L'ABBATE: Technically in New York, design-build is illegal.
CSE: On public projects?
L'ABBATE: No, on all projects. The Office of Professional Discipline has taken a position that any time a partnership exists between a design professional and anyone else there is fee splitting, which is illegal, and therefore the design professional has violated the rules of practice. But they have taken a position that they will not discipline the design professional at this point. But a bigger issue has come up questioning the legality of design-build in New York. It had to do with a case in which a design-builder sued the owner for the fee because they weren't paid. The position taken by the owner was that he didn't have to pay because the design-build contract was illegal under state law. The court said as long the designer, in this case, an architect, is specifically identified in the contract, and is the only party doing the professional work, the contract would not be considered illegal, and therefore the architect was entitled to collect their fees. So there is still that touchy element. Design-build contracts are not easy to draw in New York and not easy to deal with.
CSE: Aside from the state of New York, on a more basic level, as an attorney protecting the client, how do you protect the designer in these types of roles?
CHRISTODUOLO: Let's ask John some questions first. You say you are the prime, you are going beyond the professional risk.
CHRISTODUOLO: So you have the general liability?
MAGLIANO: Yes, we're bonded.
CHRISTODUOLO: So you are taking a financial risk beyond your services and you're taking the general liability risk beyond your professional liability, the normal professional liability.
MAGLIANO: We're insured.
CHRISTODUOLO: Is there a different set of insurers, different set of concepts, are you betting on more than just you?
MAGLIANO: Yes, but we're making smart bets because this is work that we know. We're not going to go out and build a hospital, or go out and build something that is 70% non-M/E. We're going to build, as I said before, something that has a major component of mechanical/electrical work.
CHRISTODUOLO: It sounds to me, if you're a design professional and you're doing just the design in your discipline on a job, that's the liability. If you're a prime, you're expanding the liability, you're expanding the bad and you're relying on others. So it goes back to what you said, if you have the right partners, it's a very different kind of bet than if you are just the winner of some kind of bidding lottery and you wake up and say here are my new partners.
L'ABBATE: The only other thing you have to be careful of is you have a new set of risks that you have to deal with. You can mitigate, transfer them or avoid them. The easiest way is to transfer them to an insurance company by getting the insurance. But be careful of not getting caught in the middle. It's not inconceivable that you might report a claim and the general liability carrier says no. The insurer will claim you did that as a professional so you're not covered. The professional liability carrier also says no, claiming that's general liability because you are the contractor. You fall between the cracks. Eventually it does get squared away, but sometimes you wind up not only battling your prime plaintiff, you are also now battling two insurance companies.
CHRISTODUOLO: It's two different markets, two different kinds of insurance companies.
MAGLIANO: We use one insurance company.
CHRISTODUOLO: That's the key.
MAGLIANO: You can't walk in with a blindfold on.
CHRISTODUOLO: I think that's the problem. A lot of people have walked into design-build without a full understanding and have learned the hard way. If you call your insurance agent, you're dealing with just your professional liability carrier, as long as you're only being an engineer and architect, we can cover you. Once you start doing this stuff that is off limits, good luck.
ZWEIG: Design-build's got a lot of people scared in this business. I think a lot of people have just walked away from it.
CHRISTODUOLO: What do you mean? It's scared people not to try it, or to try it in such a manner that they were behind their competition because they weren't ahead of the curve? It sounds to me that those companies missed the window of opportunity to jump in.
Game Date: 08/09/01
Played At: Grand Hyatt, NY
GEORGE CHRISTODUOLO, ESQ. head of business practice
Lawson & Weitzen, LLP, Boston
ROBERT DERECTOR, P.E. managing partner
Robert Derector & Associates New York
DONALD L'ABBATE, ESQ. partner
L'Abbate, Balkan, Colovita & Contini, LLP, Garden City, N.Y.
JOHN MAGLIANO, P.E. president and chief engineer
Syska & Hennessy, New York
STEVEN MARGULIES, IES, IALD chief administrative officer, director of lighting design
Cosentini Associates, New York
CAHAL STEPHENS, AIA, P.E. president/CEO
A/E Einhorn Yaffee Prescott, Boston
STEPHEN WALLER, P.E. director of engineering, HVAC and plumbing
CUH2A, Princeton N.J.
ALAN ZLOTKOWSKI executive vice president, New York director
Flack & Kurtz, New York
MARK ZWEIG president/CEO
ZweigWhite Associates Natick, Mass.
Manager: Jim Crockett