1architecture.com.au/pals Module 14: Risk Management

NOTES FOR MODULE 14:

RISK MANAGEMENTThis module examines the issue of risk management. Risk management can be classified as being either proactive - undertaking action to identify, minimise and allocate risks and their consequences prior to an event - or reactive - taking action after an event to minimise any adverse consequences.

OBJECTIVES• Toestablishaframeworkforthedevelopmentofriskmanagementstrategies

• Toemphasistheneedforcontinuingprofessionaldevelopment

PREREQUISITE READING (www.architecture.com.au/acumen)

Risk management and Insurancehttp://acumen.architecture.com.au/apps/notes/view/11

Office manualshttp://acumen.architecture.com.au/apps/notes/view/478

Quality control checklisthttp://acumen.architecture.com.au/apps/notes/view/479

Quality control for working drawingshttp://acumen.architecture.com.au/apps/notes/view/480

Architects' liabilityhttp://acumen.architecture.com.au/apps/notes/view/421

Architects standard of carehttp://acumen.architecture.com.au/apps/notes/view/428

Duty to correct and warnhttp://acumen.architecture.com.au/apps/notes/view/426

Agreementshttp://acumen.architecture.com.au/apps/notes/view/94

In Construction industry terminology (Standen 2000) risk management is defined as:

“The management of the likely effects of financial and legal risks, in a risk-prone activity such as building construction,byaimingtohaveunavoidableriskcarriedbythosewhocanmosteasilycarryitandbyeliminating conditions that cause avoidable risk. Risk management is a broader concept than either risk avoidance or risk minimization.”

Thisdefinitionmakesanimportantdistinctionbetweenavoidableandunavoidablerisks.Theavoidablerisksarise from shortfalls in the performance of those directly involved. Unavoidable risks arise from circumstances outside the control of those directly involved.

AVOIDABLE RISKSExamples could include:

• omissionsintheClientandArchitectAgreementleadingtorecompensebeingunreasonablylimited

• errorsoromissionsincontractdocumentationleadingtoadditionalcosts

• incorrectorincompletebriefinginstructionsfromtheownerleadingtochangesduringconstruction

• lateorderingofmaterialsbythecontractorleadingtodelaysduringconstruction.

UNAVOIDABLE RISKSExamples could include:

• changedrequirementsofauthoritiesleadingtoextraworkandcosts

• industrialaction(notemanatingfromtheprojectsite)leadingtodelays

• disruptiveweatherbeyondwhatisreasonablyallowedfor,leadingtodelays.

Theconsequencesofavoidablerisksliewiththeresponsibleparty.Theconsequencesofunavoidablerisksshouldbeallocatedtothepartybestabletodealwiththerisk.

2architecture.com.au/pals Module 14: Risk Management

RECENT TRENDSRefer to:

Profesisonal Indemnity Insurance for Architectshttp://acumen.architecture.com.au/apps/notes/view/77

The prerequisitereadingidentifiesthefollowingcausesofincreasedpotentialforlitigationagainstarchitects:

• publicawarenessofacivil(orcontractual)righttosue

• lawfirmsmarketingtheirexpertiseinspecificbranchesofthelaw

• consumer-orientatedlegislation

• greaterexpectationsoftheperformancelevelsofprofessionals.

Towhichcouldbeadded:

• theincreasedcomplexityofbuilding

• theincreasedlevelofstatutorycontrolofbuildings,theirconstructionandtheirperformance

• thetendencyforownerstotransferriskstothearchitect,usuallybyincludingtermsinemploymentagreementsdesignedtospecificallyprotecttheinterestsoftheowner.

Againstthisbackgroundthepractisingarchitectmustbeaware,knowledgeableandvigilant.Asanarchitect,youneedtobebothproactiveandreactivewhenmaintainingyourriskmanagementstrategies.

Hereisonewayofcategorisingtherisksandhowtodealwiththem:

RISK MANAGEMENT CLAIMS MANAGEMENT

Proactive: before the event.Risk identification and actions taken to avoid or minimise the risks.

Reactive: after the risk has occurred.Dealingwiththeeffectsoftheriskhavingoccurred.

Form of practice

Sole practitioner, partnership or company.

Awarenessofpotentialdisputation

Ensure early input by senior management.

Continuing professional development

Encourage a staff culture of developing skills and expertise.

Continuing professional development

Involve staff in the claims management process at the same time as explaining the process.

Client and Architect Agreement

Define and deliver services, fees etc.

Client and Architect Agreement

Continue to deliver services.

Contractualandcommonlawobligations

Understand and maintain these obligations.

Contractualandcommonlawobligations

Continue to understand and maintain these obligations.

Procedures

Developandreviewprocedurestoensuremorethan competent outcomes. Establish a current and reliable office manual. Ensure faulty procedures are rectified for the future.

Procedures

Developandmaintainproceduresfordealingwiththeconsequencesofriskshavingoccurred.Reviewat the end of the matter and ensure the proactive proceduresareadjustedasrequired.

Insurances

Maintaininsurances(includingPII)tocoverrisks.Notify of possible claims earlier rather than later.

Insurances(PII)

Notify of possible claims, do not admit liability and continuecontactwiththeinsurers.

Personnel

Employ staff to a pre-determined profile based on expertise and experience.

Personnel

Encourage professional development and make changes if and as required.

Conduct

Abide by the relevant state or territory Architects regulations and the Institute’s Code of Professional Conduct.

Conduct

Continue to abide by the relevant state or territory Architects regulations and the Institute’s Code of Professional Conduct.

3architecture.com.au/pals Module 14: Risk Management

RISK MANAGEMENT AND ThE SMALL PRACTICERefer to:

Risk Management and Insurancehttp://acumen.architecture.com.au/apps/notes/view/11

Dutytocorrectandwarnhttp://acumen.architecture.com.au/apps/notes/view/426

Smallpractices(thosewillannualbillingsoflessthan$500,000)havelimitedtimeandresources,andoftenlimited access to particular expertise, to assist in managing risk. Once risk is identified, architects tend to ignoreit(apooroption),transferit(viainsurance)ormanageit.

Rememberthatbeingasmallpracticeinnowayreducesthedutyofcaredemandedofarchitects.

ChECKLISTS AND ThE OFFICE MANUALRefer to:

Qualitycontrolforworkingdrawingshttp://acumen.architecture.com.au/apps/notes/view/480

Construction drawingshttp://acumen.architecture.com.au/apps/notes/view/295

Checklistsareanimportantpartofriskmanagementstrategies.Allstaffmembersworkingonaparticularprojectshouldbemadeawareoftheavailabilityofthechecklistsandinstructedonhowtousethem. Theprojectarchitectshouldbeinstructedthatpartoftheirjobistoensurethatcheckingoccursbothcontinuallyandatidentifiedstages.Thenanexperiencedstaffmember(or,betterstill,anexternalarchitect)should be asked to check the documentation before it goes out to tender. A reasonable amount of time needs tobeallocatedtoallowforthecheckingtooccurandtheshortfallstoberemedied.Theseinitiativeswouldconstitute good risk management strategies.

However,astimetendstobeshortatthisendofthedocumentationprogram,checkingmaynothappeninanysystematicway.Theresultcanbethaterrorsandomissionsarenotcorrectedandareonlydiscoveredduring construction. These errors/omissions can then lead to extra costs and time, and make it uncomfortable for the architect!

OFFICE MANUALRefer to:

Office manualshttp://acumen.architecture.com.au/apps/notes/view/478

An office manual can be defined as an in-house document describing policies, standard office procedures, the authority of people in the practice and the expected standard of documents. It should contain a series of checklists.Theyshouldbeaddedtowhenshortfallsinthechecklistitselfareuncoveredthroughexperience.

ThE CONSEQUENCES OF DISPUTATION Thearchitectshouldbeawarethattransferringriskbywayofprofessionalindemnityinsuranceshouldnotleadtotheviewthatmanagingtheriskisnolongerimportant.Inotherwords,professionalindemnityinsurance,andotherinsurances,evenifmandatory,innowayreducetheneedforriskmanagementstrategies. This is for a number of reasons:

• thetimespentindefendinganactionagainstyouisbothcostlyandstressful,andcanhaveanadverseimpactonotherjobsintheoffice

• thedisputemayresultinyourfuturepremiumsbeingincreased

• yourprofessionalreputationmaybedamaged

• ethically,youdonotwantthesituationtoarisewheretheclientoranotherpartyfeelthattheymusteithertake action against you or suffer the consequences of your negligent actions.

4architecture.com.au/pals Module 14: Risk Management

CONCLUSION

Risk management requires consistent, detailed and ongoing strategies that exist alongside everything a practising architect does. Risk management has to be ever-present in the practising architect’s mind and this awarenesstransferredintoprovidinganappropriateservice.

Avaluableexercisewouldbetoreviewthereadingsandconcentrateonthecontentthatdealswithriskmanagementstrategies.Finally,considerthefollowing:

Of great concernisthedegreetowhichparticipantsintheconstructionindustryactivelytransfer risk to consultants such as architects in an effort to gain the benefit of their professional indemnity insurance. Thus risk management for architects must not only focus on avoiding errors and omissions but must also defend the architect from the direct transfer of risk by others in the construction industry.

and:

Self analysis along the lines suggested is essential to improve practice management for any professional, andthisisthebestdefencetopreventlegalaction.Theanswerdoesnotliewithsmartlawyers,itrestswithsmart practice.

STUDy PLAN• Reviewtheprerequisitereadingandthesenotes.

• Reviewallpreviousmodules

• Reviewthequestionsrelevanttothissessionassetoutbelow

• ReviewthequestionsandanswersfrompreviousAACANationalExaminationPapers.

• Review the 2016 National Standard of Competency for Architects

QUESTIONS AND ANSwERS

Q1. what are the five principles that were developed by the construction lawyer, Max Abrahamson, for allocating obligations (or risks) arising from a construction contract?

Thefiveprinciplesthatdictatewhatpartytoacontractshouldbearariskarethat:

1. Theriskiswithintheparty’scontrol

2. The party can transfer the risk, e.g. through insurance

3. Themaineconomicbenefitofcontrollingtherisklieswiththepartyinquestion

4. To place the risk on the party in question is in the interests of efficiency, including planning, incentiveand innovation

5. Iftheriskeventuates,thelossfallsonthepartyinthefirstinstanceanditisnotpracticableorthereisnoreason under the above principle to cause expense and uncertainty by attempting to transfer the lossto another.

5architecture.com.au/pals Module 14: Risk Management

Q2. why do pre-purchase inspections of buildings prove to be of high risk to architects who do not specialise in such services? Prepare notes that set out the reasons.

Refer to:

Inspection pre-purchasehttp://acumen.architecture.com.au/apps/notes/view/217

Forspecificcommentsundertheheading‘pre-purchaseandotherinspections’andreviewyouranswer.

Q3. you have agreed to provide some limited architectural services on a pro bono basis, that is for no fees. how does this affect your liability?

Your liability is not affected by the level of your fees.

Refer to:

Architects' liabilityhttp://acumen.architecture.com.au/apps/notes/view/421

Thedutyofcareremainsunchanged,unlessyouhavespecificallylimitedyourliabilityinwriting(andhopefully)withlegaladvice.

Q4. Review the section ‘Recent trends’ of these notes. what is meant by the advice given in the table headed Risk management/Claims management, ‘Ensure early input by senior management’?

Seniormanagementcanmakebindingdecisions.Theycanviewtheissuesmorebroadlyandrespectthecommercial reality that, should disputation arise, the legal and other costs are likely to be a considerable proportionoftheamountthedisputationisabout.Theyalsoknowthatthereisnocertaintywhenothersadjudicateonconstructionmatters.Furthermore,theyknowthatdisputescanarisebecauseofpersonalitydifferencesbetweentherespectivestaffrepresentingthepartiesonaneverydaylevel.Thisallmeansthatapromptsettlement,withbothsidesgivingsomeground,isoftenasensibleoutcome.