Go or No-Go? How A&E Firms Can Use Client Selection to Minimize Risk

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Webinar Agenda

• Talk about professional liability insurance, claim classifications and root causes of claims
• Dig into the due diligence process of clients, project and business considerations

Architects, Engineers & Environmental Consults at Risk

SmartRisk – I worked as a risk manager in the design and construction side of the industry. 

Then with insurance carriers prior to starting SmartRisk. We do risk analysis, risk assessments and develop risk profiles for design and construction professionals. Do contract review services, work as a part-time risk manager for firms, do training and consulting and have additional guidance information and newsletters. Our overall objective is to improve overall performance and profitability through firm specific risk management solutions. 

SmartRisk was selected by CIO as a top 10 risk management consulting firm based on the risk analysis, risk assessment process processes that we have developed. 

On the agenda today, we’ll talk about professional liability insurance, claim classifications, root causes of claims, and getting into really the due diligence process of clients, project and business considerations. 

A&E firms, environmental, multiple types of risks and related to that can lead to litigation alleging negligence against you as a designer environmental firm. Your professional liability insurance is a very important component of your risk management program. It absorbs claims in exchange for the premium that you end up paying, and it’s really the safety net if things do go wrong. Your primary overall risk management program and practices should be your first line of defense. 

Negligence Against Design Environmental Firms 

You establish a duty and that there’s an obligation that’s through your contractual agreement. You breach that duty and that causes harm or damage because of that breach. It’s all established by the agreement that you have with your project owner or the prime design firm on the project. Most claims continue to come from a project owner.  

Claim Classification 

Look at claim classification. They’re either technical, where a technical error or omission within your design documents resulted in a lost claim or demand for money. Or non-technical breakdown in business project management, risk management practices that cause the claim demand or money. 

Root Causes of Claims 

75% of most of claims are driven by the non-technical business practices of design firms.  70% of those are filed by the project owners. The clients, the individual that selected you, hired you, contracted with you to provide those services. 

The root cause we continue to see is that out of those 19%, there’s a lack of project and client selection process, a due diligence, a go/no-go of design firms. Just because a client wants you to work for them and to support their project efforts, doesn’t mean they are the right client for you or the project, or it aligns with your overall business practices, processes and procedures. 

A&E Claims 

As I mentioned, 70% of claims are filed by the owners. The person that owns the project, that really hired the design firms. Just because they’re knocking on your door, requesting your services doesn’t mean that you should be working for them. Sometimes the best decision if they are a bad client is really to walk away. 

The only way you can really do that is there must be some upfront due diligence process that’s being put in place. Asking the right questions related to that project, the client, your firm, the current situation and your overall business objectives. Make sure that this is the right project and client for you and your firm. 

Selection Process  

A&E’s, you really control over the clients that you work with. The due diligence must be of clients, of projects and related to business considerations as to how that really aligns with your firm. The advantage is that if you’re picking the right client, the right project and how it aligns with you and your firm and your services that you’re offering, it reduces the chance of litigation. It improves the performance and profitability of your firm. The bottom line, because it reduces the chance of problems that do occur. Or if you’re picking the right client, they’ll work through certain issues because no project is ever perfect. And with that, if you reduce litigation and claims, it reduces your overall insurance cost. 

Client Claims 

When we’re looking at, based on claims and claims data, the root causes of these claims, really, it starts off with, there’s no due diligence evaluation of this client, of the project based on the design firms. That client had unrealistic project expectations. This client had poor communication skills, methods, or the client, or you as the design firm weren’t communicating clearly with this client. 

Price driven client is not a quality selection process of the other design team members or the contractors. The overall client’s knowledge or lack of knowledge of that project and project type or the services of a design firm. 

Unfair contract terms. A client that had a history of filing claims against design firms as a cost recovery method for a project didn’t have the financial means to complete those services.  That’s leading into overall financial capability. They’ll end up not paying and paying for services related to clients. 

Based on claims and claims data, this is what we continue to see as the root causes of bad clients. When you’re looking at, asking certain questions in a due diligence of clients, you know, its basis, you’ve got to start looking at claims and claims data. This is where it continues to cause claims. Let’s make sure that we’re doing our due diligence. Asking the right questions, making sure we’re picking the right clients to avoid the potential for litigation. 

Clients Business Intelligence 

It’s really understanding the overall client’s project expectations, their overall objectives, and they’re aware of the overall challenges on this project, type in completing it in a certain timeframe. Asking the right questions of these clients has said, you know, is this a primary business of the client? What’s the overall objective of this project for them in meeting that overall primary business? 

Who else are their other key stakeholders involved in the decision making? Maybe somebody behind the scenes that may be impacting the overall decisions and the expectations and the overall objective of this project.

What are their aspirations, their fears, maybe their biases for this project? 

Is the project really funded? Is the money already available or are there certain stipulations or is it a public project where we are still waiting for funds to be approved? Or again, who are the key stakeholders that are going to be involved.

Feasibility concerns? Maybe you have, are there any property rights or environmental concerns, or is there certain resistance to this project related to the public perception or zoning issues? Is the client really aware of all these things or is that something that we still really need to do and ask some more questions to find out about? 

Client Communication 

Within any relationship, communication is essential and key. With one third of all claims, where a majority of claims are coming from the project owner. 70% of all claims against design firms, 1/3 of those are driven by improper, incomplete communication and documentation efforts. 

What you want to make sure is that one, you have the right communication skills, asking the right questions, but watching and listening to a client in their overall communication style. And ensuring that you’re getting the right information from them. Good clients, you continue to see in depth discussions of their project. They identify realistic project expectations. That comes from an experienced project owner that realizes that there are going to be certain issues that are coming up and they explain how the project fits into their overall business strategy and approach, and why this project is important to us, important to our business, in moving forward and how your services are going to help us to get there. 

Identifies their project experience and knowledge and said we’ve worked on these other projects. Yeah, this one went very well. Here’s the one that really was somewhat problematic. We know why. Here are the things that the lessons learned that we’re moving forward with this. They’re knowledgeable of you as the design firm. They don’t expect perfection, and they know there’s problem on certain projects. They’re collaborative in identifying certain alternatives. They’re very aware of the challenges and risks of all these projects, and they identify some of the alternatives when those things come up. They really are fair about negotiating contract agreements. Contract agreements that don’t ping you in a hole and then push you back and continue to put you in an unfavorable position. 

Client Questions 

Those certain questions that you want to be asking a client related to, is this a new or previous experience with this client on this project type? 

If it’s previous experience, you know, how was that project? How did it work out? Was it successful? Was it profitable? If it’s a new client, you’ve got to be asking, you know, what’s their current financial condition? It always comes down to money and these issues. Is there money currently available for this project? 

A new client, again, what’s their overall reputation? Talking to others, asking them a question, if you work with other design professionals or specifically related to your services, who are those firms? How did the services work out? How was that project? Is that schedule and budget realistic? I mean, you’re just asking some very basic business questions. 

The client’s experience on this project type and what is their claim history and what other design firms have they worked with? Again, successful projects as we mentioned, and then why are they considering changing firms or not working with that other firm? It may be that they’re already working on another project with them, or they’re moving into a new region, they’re looking for another design firm. Just being frank about these questions is very fair. 

Project Questions 

When we’re looking at the project and questions that you want to be asking with every client comes a project and your firm’s capabilities consistent with the project requirements and really what they’re looking for in the support. You’re looking at that project and the current workload that you have and the current project and making sure that your workforce will not be strained.  

Then look at the track record of this project, type in that region. Was it successful? And if not, why? And have we made changes within our organization and our processes and procedures to make sure we are going to be successful related to this project and project type.  

Available staff, including experienced project managers, is essential to making sure that we can provide quality design services. Has this project been evaluated and can we, and have we developed a well-defined scope? Is the schedule reasonable for the portion of services that we will be providing? Then, are we familiar related to the permits and the overall approval process? Are we knowledgeable of the laws, the regulation, and the technology that will be used for this project? 

Business Considerations 

Business consideration is again very important related to looking at the client and project, but business considerations is essential. Evaluating business considerations and how it aligns with your firm. Does this project fit your overall strategic objectives for overall growth or project types or expansion, and then really, which ones? Then do we have a strong message that really is going to be de be differentiating your firm in providing this service for this project? 

Identifying what is the unique value that we are going to be bringing? We don’t want to be just this commodity driven design services. This is a specialty; this is the project type. We’re very successful in this region. We’re the type of design firm that’s in demand for providing this service and that’s the reason why we’re hired.

Are you going to really have the right team available to win this job? This may be a specialized project and services that you offer, but is that A team that you have really going to be available to really win this job? You don’t want to be overextending and stressing your current staffing level. 

What’s the chance of us really being selected? Is it really worth our time and effort? Putting together a proposal takes a lot of time and effort and making sure that what’s the chance of us winning? 

Are there going to be future opportunities for similar projects in other clients? This may be a project that you’re looking at that’s maybe not profitable at this time, but it’s going to create other project opportunities for us and other clients. From a business perspective, you may be looking at a contract agreement. Are they fair balance, including the indemnity provision? 

You have to be looking at that, and that’s a good method to identify is this client being fair? But related to business considerations, you always have to be looking at that. Is the owner willing to fund unexpected contingencies? There’s always issues that are coming up and there’s a certain percentage related to contingencies on putting some design changes that must come up later in the project. 

Are there very specific or unique insurance requirements or outside additional insurance requests that are outside of what we currently carry? Who is going to be paying for those? Or is that at a reimbursable expense?

Project fee? Again, can we make a profit on this project the way it’s being priced? Or are there other business considerations? We’ll be taking it and lowering our price because of other future business opportunities or gaining experience. Is this the best opportunity for us at this time? 

External Competitive Analysis 

Do we know the competitors? You know, who else are we going to be competing with? What’s their relationship with this client? Is this just an exercise or is this a really true opportunity? How would those competitors differentiate themselves related to their project? How well do we match up and our ability to win against the competitors that are there? 

Go/No-Go Scoring 

When we start looking at a go/no-go scoring, it’s helpful to create some type of scoring system. Let’s just say related to client, project and business considerations, you have 35 questions. And 35 questions, you’ll end up saying one point for every yes answer. If there’s a no, you get no points. 

It’s easy to game this process or not really be honest with it, but really that only hurts you and your firm and maybe you don’t have an answer to certain questions at the time. Just making sure that, well, let’s make sure we get some answers to this. Related to the project and business considerations or the client. It’s going to help you, making sure you’re asking the right questions and is this a project that we really want to move forward to. 

Count up your ‘Yes’ answers. So, if you had 35 and you have 30 or more, hey, looks good, go for it. If you have 25 to 30, okay, you know, maybe we must ask some additional questions. Think this through. Yes, maybe we want go through this. This is a project that we want to take on because of the potential opportunities. But you know, when we look at 20 to 24, this may not be the right opportunity to look for another project. Or less than 20. Don’t walk but run away from that project. 

You’ve got to identify some type of scoring system, whether it’s acceptable, non-acceptable. It’s really, this is a very helpful exercise for some of the more junior staff and project managers, that they end up knowing the reasons why we end up selecting certain projects. 

The due diligence process. It’s a good training effort. This is a good risk management as well as a performance management and profitability tool for your firm. 

In conclusion 

The majority of claims are filed against design firms are from project donors. So, asking the right questions of project donors makes a lot of sense. 

Important before taking on any project, you establish some type of go/no-go or just some decision-making process is conducted. 

Clients don’t measure up; project doesn’t match your overall capabilities or business goals. Really, the best decision maybe is to decline and walk away and look for another opportunity. 

Making the right choices helps ensure overall project success and really preventing unnecessary losses because again, most claims are driven by or coming from project owners and avoiding those problematic owners is going to help reduce the potential for litigation. 

By selecting the right projects and clients, it’s going to improve your overall profitability.

Thank you very much. I hope you found this program helpful. Have a great day.