Due diligence requirements in PFI contracts have created a lucrative role for consultants: checking. The only problem is that if anything you checked goes wrong, you may be liable for 100% of the damages.
The private finance initiative has created opportunities and challenges for the construction industry over the past few years.

The roles and contractual networks do, of course, differ job by job, but interesting new “checking” roles have come into play in certain PFI projects. These may go under the banner of “due diligence adviser”, “independent certifier” or such like, and are generally performed by consultants.

Just what is expected varies, but the roles tend to be described in contracts along the following lines. The advisory roles will often involve checking the work of other consultants – for example, checking that the design and life-cycle requirements have been met, or that the environmental impact assessments have been carried out properly. The adviser may even be asked to check that the client’s own requirements are correct, which could mean verifying the accuracy of surveys, plans, dimensions and so on that were supplied by the client.

The independent certifier (so called because it is not the contract administrator with the usual certification role) may have to check that the construction, the design and/or other services meet the client’s requirements, and to confirm that the works have been correctly certified by the contract administrator as having reached the identified stages of completion.

In effect, these roles tend to involve checking that the work of third parties is up to scratch – a good deal more onerous in law than the old bread-and-butter inspection that consultants have been performing as contract administrators for as long as anyone can remember.

If you are a consultant taking on such a role, and you really do intend to perform the checking duties as described, all well and good. The danger arises when a consultant does not understand the scope of a checking role or the extent of the liabilities attached to it, possibly considering it jolly good money for relatively little effort: you give someone else’s work the quick once-over without going to all the trouble of producing it yourself. Sadly, like almost everything else in life that seems too good to be true, it is just that.

If you check a third party’s work you are, in effect, taking responsibility for its accuracy. The client could sue you as checker just as well as the primary performer. More alarming still, it could sue you instead of suing the primary performer, and for 100% of the damages it suffered (known in law as the joint liability principle). If the primary performer has less comprehensive professional indemnity cover than you, or has gone into liquidation, that is just what any smart client would do.

You may at this point have gained the impression that you have as much chance of coming out of a due diligence role unscathed as a Morris dancer in a minefield. Nevertheless, any consultants who found themselves clinging on to the construction world by their fingertips in the early 1990s will know better than to turn their noses up at a new source of business.

Nor, indeed, is there any reason to do so – provided, of course, you go about it in the right way. I have set out a few pointers that may help you on your way:

  •  When checking consultants’ work, have a schedule in the contract setting out the extent of your job
  •  Have professional indemnity insurers who fully understand the role

  • First, read through the services very carefully to ensure that they reflect exactly what you intend to do, both in scope and degree
  • Try to have set out in the contract, perhaps in a schedule, the agreed resources to be applied, the frequency of inspections and so on. This may be just an approximation, but it will be useful to have some indication, so that the extent of your job – and your liability – is not open-ended

  • In assessing your fees, you will need to ensure that they will enable you to apply adequate resources to the job. That may sound desperately obvious, but it is worth remembering that in checking a third party’s work you are, to some extent at least, repeating that work yourself – it may take just as long and just as much manpower to check the work properly as it took the primary performer to carry out in the first place. That could cut into your anticipated profit

  • Be sure you have reliable professional indemnity insurers that fully understand the role

  • Certain industry standard appointments contain a net contribution clause (sometimes called a proportionality clause) that, put simply, aims to relieve the consultant of the joint liability problem referred to previously, whereby you can be sued for 100% of the damages even if you only caused part of them. Most bespoke contracts do not include a net contribution clause in the appointment but, for such a role as this where your entire job is checking, a net contribution clause may greatly reduce your risk

  • There is no reason why you should not agree a maximum cap on your liability for claims relating to a particular project if that is the only way to reduce your liabilities to something proportionate to your fee.

It is worth noting that the Legal and Technical Committee of the British Venture Capital Association has negotiated a “memorandum of understanding” following talks with the Big Five accountants. This provides a framework for private equity due diligence contracts: it recommends a cap on liability for transactions up to £25m, and both a cap on liability and a proportionality clause for larger transactions. It also proposes that liabilities should be reduced to reflect any limitations in time or information. Can there be any good reason why the protection afforded to accountants should not also apply to construction consultants carrying out the role of verifying information supplied or work performed by others?

If not, you have to question the commercial sense in taking on liability for the work of third parties while receiving only a fraction of their fee.