Potential Liability Arising from Value Engineering

Value engineering (VE) is intended to be a shared effort among the design professionals, the construction team and the project owner to enhance the performance and efficiency of a project during the design process. In true VE, the project’s lead design professionals carefully vet, compare and incorporate good ideas from others into the project’s final design.

In contrast, change proposals, motivated by the need to reduce construction costs or construction schedules, and that occur near or after a project’s design is complete, may present unforeseen risks, especially for the proponent of the change.

Sadly, this second type of "last-minute" VE often fails to provide the intended result. Instead, last-minute design changes can lead to:

• Project delays
• Unanticipated and supplementary cost increases
• Reduced project quality and
• Bitter disputes between project participants.

When such problems arise during or after construction, one key issue is who bears the responsibility for the affected elements of the design and the financial liability for resulting costs.

A common scenario for VE "gone bad" in a traditional design-bid-build project may start with:

• The construction team posing options in their initial bid
• Responses to the owner’s demand to reduce construction costs or
• Changes suggested during the submittal process.

The project owner is, of course, receptive to cost reductions or project enhancements. So, they accept the alternatives and force the changes upon the principal design team.

So far, no problem.

The problems arise when the owner fails to direct (and pay) the principal design team to do an appropriate analysis of the proposed alternatives and coordinate all resulting changes into the final design. Sometimes, this happens because of time limitations or because the project’s design budgets are already spent. Depending upon the type of proposed changes, this failure may result in an incomplete design without interface details or conflicts within the design documents.

In practice, changes to one part of the design often require other changes that may be beyond the scope of work, expertise or control of the party suggesting the change.

Unfortunately, the “reward” for even a superb alternative design, material or equipment change can be the liability for any problems that arise related to the change.

Keep in mind, just because the project's principal design team "accepts" or "approves" the change, does not necessarily mean they accept responsibility for the change. Most often, the principal design team’s "acceptance" of an alternative proposal is limited to "general conformance with the design concepts in the contract documents." What that phrase actually means, however, is debatable. And when problems arise, its meaning is not resolved until an arbitrator or judge says so.

Unless the principal design team specifically agrees otherwise, its "approval" likely will attempt to disclaim any responsibility for the changed work and leave all liability for resulting problems with those suggesting the change. While there are limits to such disclaimers, such issues can lead to costly legal disputes.

Some design teams have addressed this situation by labelling the work related to the alternative proposal as a "design-build" component of the project. And then, they assign all liability for resulting problems to the party (and its design professional) that proposed the change. While this might insulate the principal design professionals for liability for work that they were not paid for or perhaps not qualified to do, this “quick-fix” does not deal with the critical issue — making sure all changes are optimally integrated into the overall project design.

Another problem is that a performance specification label may not correctly define the changed work. Just identifying the change as a "design-build" component does not mean that a court or arbitrator will later agree that the proponent of the change had the necessary design discretion to guarantee the result.

These problems can be reduced by:

• Recognizing the risks associated with late-design VE and
• Coordinating and clearly delegating such risks to the appropriate party.

Owners need to accept the reality that proposed cost reductions and/or enhanced features to an already completed design almost always requires additional investment in design costs, coordination and time.

Those proposing design changes can reduce their potential liability by having qualified design professionals review and properly incorporate the changes into the project design. Insurance coverage may also be an issue for contractors using independent design professionals. While often difficult to negotiate, the best solution for the change proponent is to have a written release from liability for the "accepted" change proposal from the owner.

Lead design professionals must be aware of the law’s limits on liability disclaimers. They must also make sure qualified professionals with appropriate insurance coverage are performing the design work upon which they plan to rely.

While it may not be true VE, innovative proposals often are necessary to reduce costs and/or improve the performance of otherwise completed project designs. Those who can identify and implement such ideas set themselves apart from their competitors and should be rewarded. Such proponents, however, must be careful and make certain good ideas do not become liabilities.

Please contact William J. Tinsley, Jr. or any member of the Phelps Construction/Design team if you have questions or need advice or guidance.