7th International Conference on Bulk Materials, Storage, Handling

and Transportation. V.2, pp. 633-637

Designer’s Potential Liability, Development

Contingents and the Representation of Risk

Helmut Mayer1, Hugh Stark1 and Hans P. Mayer2

The University of New South Wales, Sydney, Australia
1
2
HM Industrial Design & Equipment Pty. Ltd., Sydney, Australia

Summary: Professional liability has become a perennial problem for the independent designer, particularly
the one-off designer who provides the design services for cranes and bulk materials handling machines. Part
of the problem can be seen to be the way engineers have been representing the risk associated with their
work. This has lead to the distressing notion that a bid price does not need to include a development
contingent when the design is sub contracted.
A form of representation of risk is proposed in terms of permissible error rate associated with a particular level
of development contingent. It is suggested that for a 5% (of purchase price) contingent to be adequate, the
designer is allowed no more than 1 error in 300 design decisions. This representation could be used to argue
for the provision of such a contingent, and to let the designer share in the residual of that contingent on
completion of the job. Should the contingent not suffice, then a claim could be made against the professional
indemnity insurer, but that claim be reduced by the contingent.
This allows the developer to budget and be properly protected by insurance, allows the designer to share in
the benefits of the risks he is expected to take, and allows for the insurer to see a substantially larger excess than
is noted on the policy.

1 INTRODUCTION
Engineers have come to face a situation where the law, and the community at large, misunderstand,
misrepresent, or ignore an underlying aspect of the engineering method. This aspect being the ongoing
endeavour to balance risk with cost without which development is either not acceptably safe, or not
economically feasible. Although it could be argued that the consumer himself drives the need to be
economical by pressuring for goods at minimum price, it can equally be argued that engineers have brought
this problem upon themselves by never speaking in terms of risk. Instead, they speak in terms of solutions,
thus implying rightness, and also in terms of factors of safety, thus implying a decision is safer than safe [1].
Although most engineers would probably understand that these implications are quite incorrect, the
misunderstanding in the non-engineering community continues, perhaps because engineers do not recognise
that the misunderstanding exists. It has been suggested that engineers should represent risk more directly to
their clients and the community. For example, one alternative is to adopt the approach of the doctor, who
states that there is an 80% chance of success.
While much can be said about the validity of comparing the engineering and medical professions, it seems
entirely reasonable that the engineer should take care to ensure that the client, and the community at large, are
aware of the nature and extend of risks taken by engineers in the design process.
More particularly, designers of machines for the continuous handling of bulk materials face the problem that
fabricators - to whom the designer is subcontracted - have recognised an opportunity to be more competitive
by reducing the development contingent, which is made possible by out sourcing the design with the notion
of recovering that contingent from the designer’s professional indemnity insurer. Although this method is
readily supported by law, this is clearly not a tenable position for the designer, or the insurer, in the long run.
Whether or not such a ploy is deliberate and very ruthless, designers now need a good argument to influence
their potential clients to reinstate a proper contingent. More likely, such influence is needed at the level of the
purchaser to convince them that a contingent is needed for an optimal contract, and that it is in their interest
for a bidder to demonstrate the provision of a contingent appropriate to the complexity and uncertainty
inherent in the machine.

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2 HOW DID THE INDEPENDENT DESIGNERS END UP IN THIS POSITION?

Though all in the industry dream of repeatable use of a design, this very rarely happens since each purchaser
has a more or less unique set of requirements as outlined in their specifications for the machine. As a
consequence, each machine (even if many basic systems are repetitions from previous experience) is taken
through the entire design process from concept through calculations to detail design and drafting. It is
therefore a one-off design, and the development risk must be fully funded and recovered over that single
machine. Accordingly, given that the production of prototypes is not viable for a one off machine, the design
engineer is under considerable pressure to achieve a more or less fault free design at the first attempt.
This pressure has recently been further confounded by an increasing competition and the ability of fabricators
to out-source the professional liability together with the design. In effect, the fabricator transfers a great deal
of the development risk to the designer, and there is the irresistible temptation to not allow for the inevitable
development contingent. Though this contingent has, in the past, been set at 10%-15% of purchase price, it
was recently quoted at 2.5% for a machine that featured a number of completely new concepts! In another
machine it was stated explicitly to have been zero and that the protection was to come from professional
indemnity (PI) insurance held by the external designer.
Inevitably, the fabricator who has not allowed for an adequate development contingent, will seek to recover
costs of all major and minor re-workings, and will see the designer’s professional indemnity as an appropriate
target. Though the purpose of that insurance is to cover the designer for just such claims, it is unreasonable to
ask the insurer to cover a development cost. Eventually, the insurer must recover the expected cost in the
form of premiums, which will then necessarily increase the cost of design, and it will do so by roughly 100%
(since the typical contingent needed is approximately the same as the design costs).
To achieve the claim with the insurer, the litigant may use a number of arguments to bring the law to his side.
Primarily, the definition of a negligence does not help the cause of the designer. Under Australian law, a
negligence is any act, error or omission that has lead to a cost and is distinct from a willful negligence. Under
the law anyone is liable for the cost due to their negligence. As is discussed below, it is extremely difficult to
provide a one-off design that is error free. However, the fabricator can, with ease, construe such errors to be
instances of negligence.
Of particular concern is the trend to consider that a change in design that prevents a problem proves that a
design error has been made, regardless of whether the original problem was due to design, or some other
cause such as operations, or fabrication methods. The experience of such arguments by a litigant will have a
profound influence on the way the designer will work with the other parties in leading the machine through
commissioning and the warranty period. Instead of being proactive in finding solutions for problems from all
sources, as they all must clearly pass over his table, he will tend to act in a way that best protects his own
interests. Back covering design engineers are not optimal.
The law says, it’s okay to make errors, but you have to pay for them. The reality is that some errors and
reworking must be expected. The designer must at least have the possibility of getting access to contingent
budgets in order to be able to provide a solution oriented service for the successful conclusion of the machine
development.

3 CAN REPRESENTATION OF RISK BE USED TO MAKE A DIFFERENCE?

How will a change in representation of risks make any difference in the particular commercial situation of the
independent design engineer? The answer is not at all straight forward, nor is it even clear whether such a
representation can make a difference.
Legal opinion asserts regularly, that representations made prior to award of the contract are very weighty
factors in deciding liability for claims made after project completion. This makes sense, since the contract will
be a reflection of the representations made by both parties, and how each can protect the expectations they
have of the project. The expectations are the product of the transactions, or representations, made between
the parties prior to award. Logically, if a good description of the nature of risks involved can be made, then
the contract should reflect a fair and equitable distribution of those risks and, hopefully, the benefits associated
with them.
Unfortunately, fairness and practical behaviour seem virtues frequently restricted to pre contract periods.
Once legal wrangling begins, in order to settle claims after the project, these virtues are generally regarded as
weaknesses and any means will justify the end of receiving payouts.
In Australia, when contract law does not help the claimant, companies have recently drawn upon the Trade
Practices Act, in order to achieve their aims. The Trade Practices Act takes precedence over contract law and

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may therefore invalidate the provisions in the contract. Legal opinion, once the Trade Practices Act becomes
involved, takes on a very different tone.
Under the Act, there is for example, no limit to the liability for costs incurred. Since no insurance will provide
unlimited professional indemnity, the independent designer can neither transfer a significant part of the risk,
nor does he have command over the funds to finance those risks.
Because of the general definition of negligence, if an event has occurred, and there is no proof of any other
negligent act and the claimant says, either directly or through the instrument of an independent report: “The
design could have been done differently to prevent this event from happening, or from incurring a cost.”,
then the designer can be held liable for the cost. That is, the onus of proof, effectively, is on the designer to
point the finger at someone else for his defence. Hindsight does the trick for the claimant, and no
representations of risk before award, no matter how sophisticated, will come into the equation.
So, why bother about representation? There are two things that should be achievable with good
representation of risk. One is that representation, together with genuine risk management, will prevent such
legal wrangles from making it to any lawyer’s offices in the first place. It should be possible to achieve that by
bringing about recognition of the risk-cost of reworking in the first place, then allowing budgets to deal with
those risks as a development cost, and then to define how those moneys will be distributed depending on
whether or not such costs actually arose. Errors with major costs can then be claimed against, without threat
to the insurance premiums since they should be rare.
Secondly, if lawyers have a good understanding of the problems of designing, then it will be much easier to
point out the fallacy of hindsight.

4 HOW CAN REPRESENTATION OF RISK BE MADE TO MAKE A DIFFERENCE?

The nature of the risks need to be very clearly specified, in writing, before the process of design begins. No
one can ever be perfect in making such an expression, but every expression made will help.
Any representation of the risks needs to achieve for the design engineer:
1. An understanding that no solution is perfect and that there is therefore always a residual
risk. Hence, contingent planning is always required.
2. An understanding of the level of effort required to achieve a particular level of residual
risk.
3. An understanding that there is an upper limit to the level of effort possible in the
pursuit of perfection in the design and, accordingly, since economics dictates that such
effort is not boundless, perfection cannot be expected by those viewing the design in
hindsight.
What does a machine designer have to do to achieve commercial viability with a development contingent of,
say, 5% or 10%?
The designer makes intellectual decisions. He makes many of them for each item specified on the drawings.
There is an opportunity here, in that an event has been identified that is repeated many times. That is, the
decision event is performed thousands of times for each design. Although the machine is designed only once,
and therefore does not lend itself to statistical analysis, the decision event is repetitive and can be used, together
with the contingent, to calculate probabilities.
That is, if the number of independent decisions made for each item can be counted before a drawing of it is
delivered for detailing, or even fabrication, then an estimated maximum decision error rate which we can
afford before our expected reworking costs reach the contingent can be calculated.
Critical to this count is the question of what constitutes an independent decision. Let us say that we count
groups of decisions, each of which does not influence the next group. That is, we need to count the decisions
made after any results have been carried forward from a previous step, and count those decisions closely
related as a single group. The appendix shows one such count for the design of a single item as a part of a
large number of items on a machine, which, in Australia, complies with the bulk materials handling code
AS4324.1.
This particular count shows that for each item to be designed and drawn, ready for detailing1, approximately
34 independent decisions are made. Next, an educated guess is needed to decide the development cost due to
the failure of a single item. Assume that the average cost of reworking is the replacement cost of that item.
1
i.e. This count does not include the decisions needed for detailing from the engineering drawings.

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Hence, on average for a 5% contingent, an item failure rate of 5% can be afforded. An item fails if one, or
more, non-conservative errors have been made. Conservative errors do not affect the function or safety of
the item. If the design is calculated reasonably tightly, then assume a 50:50 distribution of conservative and
non-conservative errors. Hence, on 5% of items we can have 2 of the 34 decisions erroneous. Or, on 10% of
items, we can afford 1 error.
That is, for a 5% contingent,
P(34 correct independent decisions) = 0.9
1
Or, P( decision correct) = 0.9 34
= 0.99691
Or, = 1 in 323.
The risk representation that can be made from that figure is that to make a 5% contingent adequate to cover
the design risk, the engineers are allowed only 1 error in 300 decisions during the design stage. That is
analogous to saying that, if this designer sits regular open book engineering exams, and is given time to do the
exam plus a little extra for checking, then he can expect to drop only 1 mark in every 3 exams (i.e. Two
perfect scores of 100% and one not so perfect at 99%)! Similarly, the allowable error rate for a 10% contingent
is 1 in 150.
To achieve such a performance requires an extraordinary effort by any design office! There are arguments to
reduce this figure somewhat. Particularly, given that an individual designer can influence the error rate
allowable, in the way his judgements are made with conservatism. However, there are restrictions on this
method given the costs involved for the fabricator in terms of the final mass of the machine.
There is no doubt, however, that no matter what the error rate can be argued down to, it will always be finite
and difficult to achieve in practice.
On the basis of this representation of the risks, it will be difficult to continue arguing for reduced contingents.
Indeed, the representation can be called upon to demonstrate to the purchaser that all bidders should be
budgeting a contingent. Otherwise, the purchaser will be exposed to an increased risk of contractor default,
an unfortunately frequent event.
In an example recently, the designer used this representation to successfully argue for the provision of a
contingent, the payment of a bonus out of the remainder of that contingent at the end of the commissioning
period, and the reduction of claims by that contingent, should reworking costs be greater and a claim be made
against the insurer. This result was a three way win. The fabricator was able to budget his costs without
losing recourse to professional liability. The designer was able to manage properly the risks, as well as being
able to share in the benefits. Finally, the insurer sees an excess that is far greater than that noted on the policy,
and more accurately reflects development cost.
To conclude, there are clear benefits to be had from reviewing the representation of risk for the independent
machine design engineer and also the engineering profession at large. In the case of the one-off designer, such
as a machine designer, a representation in terms of allowable error rate in making design decisions can be used
to aid in the recognition of the difficulties faced by the designer and to give credence to negotiations for an
appropriate sharing of risks as well as of benefits, but without attempting to counter the provisions of the
Trade Practices Act and without asking for the professional indemnity insurer to cover for development cost.
Without question, however, any such argument must be underpinned with a continuing effort to improve
the quality of the final design. Without such effort, all credibility for the argument will be lost.

5 REFERENCES

[1] Are you at Risk?, The Institution of Engineers, Australia, November 1990, pp 24, Canberra

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 APPENDIX - DECISION COUNT FOR BULK MATERIALS
HANDLING MACHINE DESIGN

Concept Design, AS4324.1 No. Comments

Establish the layout of the 1 This defines the function of the single item. A
machine, decision is made for each item to fit it into this
layout.
Decide the value of each load 22 There are 38 load cases. 22 will typically be
case, e.g. Dead load, live load, considered
etc.
Establish the load case 0 There are 22 load case combinations, but these
combinations, including safety are compiled only once per machine. If a
factors and combination factors machine has 10,000 items, then the count is
only 10-4. Therefore neglect it.
Establish the various 1 Each configuration is modelled. The function
configurations of the machine of each item across these configurations are
related. Therefore count as a single decision
group.
Define member sections; select 1 Member material is generally only 1 or 2
each proprietary item from the decisions per machine, therefore neglect this.
series available
Member design parameters to 2 Only effective length, and restraints are decided
AS1250, or AS4100 - Test for and entered individually for each item.
strength
Modify and rerun the process 0 This may happen the first time. Never will all
until all members pass the test members need to be remodelled. Therefore, do
not count.
Check for stability, fatigue, and 1 Typically, at least one of these needs to be
serviceability checked.
Total Concept engineering decisions 28
Engineering drawings
Orientation and location 3 May be as high as 6, including rotation, but
typically only 3-D position. Includes decision
to locate part correctly in projections
Clearance, Accessibility 1 One of these typically applies
Definition label 1
Surface treatment, joint type, 1 One will always be needed individually.
joint dimensions, tolerances,
limits and fits.
Engineering drawing decisions 6
Total Decisions 34

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