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Economics Increasing AE's Risk
The economic climate has dramatically changed the landscape for many A/E firms. Industry surveys indicate 92% of all design firms have been negatively impacted by the economic downturn. Firms have been forced to reduce overhead and implement cost-cutting measures including reduction in staff, reduced workweeks, changes in business practices, operations, explore new markets and service segments in an effort to stay afloat and increase revenue. All realities in today’s economic environment, however in many cases is altering the risk characteristics of the firm. Many firms are unknowing implementing change that is increasing their risk and liability exposures. When making business decisions, risk management needs to be at the core of those decisions. Firms that are not considering the risk verse rewards and implementing effective strategies for mitigating exposures are increasing their chance of liability claims. Adding fuel to this fire, during slow economic conditions, claims and litigation rise due to alleged negligence, error and omissions as claimants try to recoup financial losses.
Identifying Risk Characteristics
SmartRisk has performed Risk Assessments of A/E firms for over four years and conducted several surveys to identify industry trends and risk-factors. Risk Assessments evaluate key categories of risk and liability for firms as well as identify methods for mitigating risk. Information on SR Risk Assessments can be found www.smartrisk.biz/report. Recent conducted SmartRisk’s survey of 17 Professional Liability (PL) insurance carriers specializing in A/E firms; 82% stated firms are accepting more risk today driven by the economic climate. Another survey (posted shortly on website) was conducted of 20 A/E Law Firms across the United States specializing in design and construction litigation; 85% also stated A/E’s are taking on more risk. Surveys can be found at: www.smartrisk.biz/products.
Information obtained through these surveys and risk assessments performed of A/E firms indicates the increased risk-factors driven by the economic climate very clearly.
Increased Areas of Risk
The following are key areas of increased risk for design professionals driven by economic conditions. The majority of risk is related to inadequate contract provisions, reduction in staffing levels and improper business practices impacting operational performance.
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Not negotiating contracts adequately, not pushing back to reduce risk particularly on indemnities, scope and services and fee provisions.
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Reduction in staffing levels negatively impacting operations performance; eliminating more experienced and expensive mid and upper level employees in an effort to reduce overhead.
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Lack of experienced staff available for performing peer reviews of design documents
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Risks increasing related to low margins and firms using less experienced staff to support project efforts; all leading to owners dissatisfaction and claims.
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Taking on projects outside of normal regions and areas of expertise to obtain work.
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Not performing adequate due diligence of clients and accepting inexperienced and problematic clients where under normal conditions, they would pass upon.
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Not asking for adequate fees for services and becoming less motivated to provide detailed and quality work.
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Not pushing back on clients in providing construction phase services. Also if offered at no or reduced cost, assign inexperienced, less costly staff to perform the service.
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Lack of coordinate and review of design documents with project consultants.
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Merging, acquiring or partnering with firms without performing an in-depth analysis of experience, performance, staff, operations, culture and claim history.
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Selecting professional liability (PL) insurance based on premium cost alone, not using a quality selection process of the carriers policy features, experience and services.
Do You Have the Right Risk Management Practices in Place?
The following are 8 critical questions A/E firms should ask themselves in todays climate and when making adjustments to their firm. Answering these questions will help identify risk and areas that need attention.
1. Are you lowering your acceptance standards (clients, projects types, fees, schedule, contract terms, etc.) to obtain work during this challenging period?
2. If you have changed your standards, have you evaluating the additional risk and implemented practices mitigating those exposures?
3. Are practices in place for evaluating the project team (owner, consultants and contractors) including; financial capability, experience, insurance, past claim history, reputation, etc.?
4. If your gross revenue has changed by greater than 20%, has a formalized analysis been performed of business practices ensuring effective operational performance?
5. If staffing levels have adjusted by greater than 20%, has a formalized process been performed ensuring proper levels of qualified and experience staff has been maintained to support project efforts?
6. When expanding into new regions, project types or service segments, has the proper due diligence analysis been performed? (qualification and experience needed to be successful, legal and insurance requirements, licensing requirements, capabilities, etc)
7. Do your contracts identify adequate fees for services, additional services, billing and invoicing schedule, suspension and termination, limitation of liability (LOL), indemnification and mediation provisions?
8. When selecting Professional Liability (PL) insurance, do you look beyond premium costs evaluating carriers policy language, underwriting experience, claims handling practice and risk management program?
Conclusion
The economic downturn has forced many design professionals to make very difficult decision in an effort to survive. Based on those changes, firms today look very different than they did just a few years ago regarding staffing, services and operations. When those adjustments are combined, the risk characteristics of the firm also changes. To adequately manage those new risks, firms need to know where those new exposures are and implement effective strategies for mitigating those risks. A properly implemented risk management strategy not only reduces risk, it also improves the performance and profitability of the firm.
If you have any questions regarding this article, or would like to discuss how SmartRisk could help your firms or project efforts, please contact us. Thank you.
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artRisk LLC