Be Certain Before Certifying

The project must be coming to an end because you—the engineer—have just received a phone call from a subcontractor demanding approval of his final requisition. In fact, he wants to know what the hold up has been. After all, he faxed the document to the general contractor this morning, who in turn faxed it to the architect, and by his reckoning it’s been on your desk for at least an hour. It doesn’t make any difference that you can’t distinguish between the 3’s, 5’s, 6’s and 9’s on a third-tier fax of a document in six-point type, because you haven’t had a chance to look at it anyway. That’s because the phone—with the subcontractor on the line—rang just as you walked in the door from a project meeting where the architect distributed affidavits from the local building department mandating that all involved designers sign and notarize the documents or they won’t issue a certificate of occupancy. You look down at your desk. Today’s mail has already arrived. The first envelope is from a surety with yet another form for you to sign certifying that the job is complete and everything was installed per plans and specifications.

What’s an engineer to do? Don’t panic, and certainly don’t sign anything without being aware of the facts.

Paragraph 4.5.7 of the American Institute of Architects’ Architect-Consultant Agreement (Form C141) outlines the obligations that engineers customarily accept with regard to issuing certificates for payment:

Certifications for payment by the Consultant to the Architect of the amounts due the Contractor shall constitute a representation to the Architect, based on the Consultant’s evaluation of the Work as provided in Subparagraph 4.5.3 and on the data comprising the Contractor’s Application for Payment, that the Work for This Part of the Project has progressed to the point indicated and that, to the best of the Consultant’s knowledge, information and belief, the quality of the Work is in accordance with the Contract Documents. The foregoing representations are subject: (1) to an evaluation of the Work for conformance with the Contract Documents upon Substantial Completion; (2) to results of subsequent tests and inspections; (3) to correction of minor deviations from the Contract Documents prior to completion; and (4) to specific qualifications expressed by the Consultant.

Duties to the architect

Now for the English translation, starting with obligations to the architect. Architects rely on the consulting engineer’s judgement to evaluate subcontractor applications for payment. Owners, in turn, rely on the architect’s certifications, which are based on the engineer’s certifications. Despite this reliance on the engineer’s expertise, architects and owners worry that the engineer might certify a payment exceeding the value of the work in place. The fear is that if an overpaid contractor walks off the job, the owner might not have enough money to finish the rest of the work.

With this in mind, an engineer’s certification should simply state that it is based on the engineer’s knowledge, information and belief. Only make statements that are of personal knowledge, including knowledge obtained indirectly, as from employees. This protects the engineer in case liability is established, for whatever reason, so claims based on the certification process will be judged by the negligence standard of care that customarily applies to the engineer’s other professional activities.

Remember that making a certification implies a duty to investigate. Engineers cannot get off the hook by arguing that they had no knowledge or information about the subject matter of the certification.

Duties to specialty contractors

Subcontractors whose payment requisitions have been reduced, or those who the general contractor does not pay promptly, might file a claim against the engineer based on the notion that part of the engineer’s job includes some sort of duty to ensure that the subcontractor gets paid.

The best defense against such claims is to use language that limits the scope of the certification. Both the engineer’s contract for services and the certifications themselves should state that the purpose of the certification—a representation that the work has progressed to the point indicated—is a professional judgment, not a guarantee or statement of absolute fact, and that it is based on the engineer’s knowledge, information and belief.

This is important, because subcontractors for other trades might also bring an action against the engineer if they are not paid. For example, the electrical contractor might sue the mechanical engineer, claiming the engineer certified too large a payment to the mechanical contractor, leaving the general contractor with too little money to pay the electrical contractor. These claims can be defended on legal theories like the economic loss doctrine and on the language in the engineer’s contract for services. But those defenses work only if the language of the certification tracks the contract language and is limited to a professional judgment based on the engineer’s knowledge, information and belief.

Building officials

Engineers increasingly receive requests from building officials to certify that a project has been designed and built in accordance with applicable codes. Often, it appears that these officials want the engineer to do part of their job. And while engineers have little to gain by providing these certifications, some building officials will not issue a certificate of occupancy without them. Therefore, as a practical matter, these certifications might be impossible to avoid. If the jurisdiction requires them, the only choice might be to build a cost for the associated risk into the fee for services.

As with other certifications, those provided to the building officials should state that they are based on professional judgment to the best of the engineer’s knowledge, information and belief. Also, the engineer’s certifications should be limited to the design, because even with a full-time representative on the job, an engineer cannot know that the contractor installed all the work in strict accordance with applicable codes or the design. A building official’s request for certification of the contractor’s work should be to refer directly to the contractor, as a certification about the construction work needs to come from someone who did the work.

Duties to lenders and sureties

Finally, an owner might want the contract for professional services to include language that obligates the engineer to satisfy a lender’s requests for certifications. Lenders sometimes want these certifications before they release funds for the project. These requests raise some thorny issues, so they must be considered with great care. Does the engineer want the lender as a client? Can the engineer fairly serve two clients who might have competing interests—the owner, who wants money released as fast as possible, and the lender who wants to hold back enough money to finish the job if problems arise or a contractor defaults? Even engineers whose professional and personal integrity let them make fair, objective decisions should consider whether they want to be exposed to the potential pressure that clients with competing interests might bring to bear.

Such “status inquiries” often include provisions that the engineer sign a statement that the lender or surety can rely on the engineer’s report or certificate of payment. The only reason why lenders and sureties make such requests is to have some legal mechanism to sue the engineer if something goes wrong. Remember that engineers are not the only source of the documents that lenders and sureties are required to make their evaluations by. Lenders and sureties can also get documents from their clients, including the owner and contractor.

A lender or surety who obtains an engineer’s reports or certificates of payment does not need the engineer’s permission to rely on them, and are fully capable of making their own business decisions about whether—and to what extent—to rely on any documents that cross their desks.

Unless the contract for engineering services dictates otherwise, engineers generally have no duty to respond to inquiries from sureties. In fact, by responding to such inquiries they could incur uncompensated and unexpected liability.

Recommendations

Certifications are a double-edged sword for the engineer. It is a consistent fact that making certifications creates liability, but it is an aspect of providing professional services that many clients expect.

The keys are to identify up front the certifications that will be required; to craft contract language that defines the scope and purpose of the certifications; and to only make certifications that are consistent with that contract. Most importantly, certifications, when required, should be the product of professional judgment based on knowledge, information and belief.

Bigger Firms Means Bigger Profits

What is a more profitable venture—operating a small or large firm? The answer, of course, depends on your perspective, but in terms of value to profit, large firms win hands down.

According to the recently released 2002 Valuation Survey of A/E/P & Environmental Consulting Firms , conducted by Natick, Mass.-based management consultant ZweigWhite, companies with 500 or more employees have higher firm value figures than their smaller counterparts before taxes and pre-bonus profits. But smaller firms clearly lead the pack when it comes to value/employee, value/net revenue and value/backlog.

Indeed, the survey, based on a consolidated three-year sample of consulting firms, reports that operations with fewer than 25 employees have the highest value/net revenue ratio—0.48—compared to a 0.38 ratio for firms with 250 to 499 employees. And companies with staffs between 25 and 49 employees also rank highest in value/employee and value/backlog.

These indicators traditionally have been associated with premiums, but Colvin Matheson, CFA, a vice president at ZweigWhite, says such indicators are measures of the size of a firm, not its performance.

“Profit is the measure of a firm’s performance,” says Matheson, who heads the consultant’s business valuation, internal ownership transition and merger and acquisition consulting practice. “The ratios that correspond to these measures show that contrary to previous beliefs, the highest premiums aren’t necessarily placed on the smallest firms.”

According to the survey data, firms with at least 500 employees have a median value/profit ratio of 5.53—significantly higher than any other firm size. In fact, only one respondent in the small firm category even reached 4.0.

The lesson, according to Matheson: “When considering value, it’s important to recognize performance, not just size.”

For more information on the survey, contactinfo@zweigwhite.comor visit

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