At a glance

  • The NSW Government has proposed a practice standard for engineers, which includes imposing a new obligation to ensure that designs for professional engineering work are “fit for purpose”.
  • However, the existing regulatory framework for professional engineering work within the Design and Building Practitioners Act 2020 NSW (DBP Act) and Regulation already deals with the problems identified in the Regulatory Impact Statement, which the proposed change responds to.
  • While the practice standard will not create a statutory duty, its introduction as a condition of registration will create a de facto statutory ‘fitness for purpose’ obligation on engineers.
  • This article discusses the content of the proposed change, its likely consequences, and whether it is really needed.

 

 

Introduction

The NSW Government has proposed a practice standard for engineers, which includes imposing a new obligation to ensure that designs for professional engineering work are “fit for purpose” (the Obligation). The consultation period for feedback on the draft practice standard closed on 18 August 2023. It is now currently under review by the Department of Customer Service.

The practice standard is proposed as a condition of registration for NSW engineers and it is an offence to contravene a registration condition. The Regulatory Impact Statement says that “the fitness for purpose obligation would be enforceable by the building regulator as a condition of registration”.

While the practice standard will not create a statutory duty, its introduction as a condition of registration will create a de facto statutory ‘fitness for purpose’ obligation on engineers.

The practical effect of the Obligation

The Regulatory Impact Statement says that the Obligation is intended to “… sit separately from the duty of care established by the DBP Act and would not operate as an extension or expansion of that duty.”

However, the Obligation will impose a higher duty on engineers than the usual tortious duty to exercise reasonable skill and care. This is because it will create an obligation to achieve a specified result – a breach of which will not require proof of negligence. This is in contrast to the standard of care set out in section 50 of the Civil Liability Act (NSW) 2002, which is based on competent professional practice. The Obligation is a departure from that standard.

The Obligation’s practical effect will be to expand engineers’ liability beyond the scope of liability governed by the statutory and common law duties of care. This is because:

  • the practice standard will require engineers to include a “statement of purpose” in client contracts – this involves including an express term, a breach of which will expose engineers to breach of contract claims, and
  • the Obligation will require engineers to ensure that designs for engineering work comply with the National Construction Code and the ‘design brief’. The Regulatory Impact Statement states that the design brief “defines and clarifies the project requirements to the proposed building work” and “…should set out any elements considered essential or desirable by the client for the project”.

The consequence of requiring engineers to contractually agree on a “statement of purpose” will be their increased liability.

Guarantee of end result?

The Regulatory Impact Statement says that: “The proposed practice standard does not place an obligation on the Professional Engineer to ensure that the construction or end product is fit for purpose”. However, when assessing whether engineering work is fit for purpose, among other things, the following factors will be considered:

  • whether the work complies with contractual requirements that define agreed outcomes, and include a “statement of purpose” for which the engineer’s services are provided
  • whether the engineer has taken steps to co-ordinate with other designers working on the project to deliver the intended outcome, and
  • whether the engineer has provided guidance to the builder on how to implement the engineering works.

While the Obligation is not intended to place a duty on engineers to ensure that the end product is fit for purpose, the reality is that it is unlikely to be confined in that way. This is because the criteria for assessing whether an engineer’s design is fit for purpose includes the engineer taking steps to:

  • identify and agree on the intended purpose or outcome
  • co-ordinate with other designers to achieve the intended outcome, and
  • guide the builder to achieve the intended outcome.

Those requirements will likely result in engineers being much more actively involved in the construction phase. The draft practice standard confirms that:

“… it is expected that Professional Engineers play a proactive role in all stages of the build process and will attend sites as necessary to see that work is being carried out in accordance with designs. ”

This may result in more disputes between engineers and builders about where the responsibility to achieve the intended outcome lies.

Currently, the rationale for imposing fitness for purpose obligations on builders is that they are akin to sellers of goods because they produce the finished product. In contrast, professional advisors provide a service.

If the Obligation is imposed, more of the builders’ responsibility and risk will become shared with engineers who will not have the same close and day-to-day familiarity with projects. The Obligation could relieve builders of some liability, or at least provide builders with another way of sharing liability.

Uninsured exposure

Insurance in Australia for construction professionals does not cover all liability. Professional indemnity insurers are generally not willing to offer cover for the full range of contractual liabilities, regardless of the profession.

In principle, a professional indemnity policy is not intended to be a fund guaranteeing the intended outcome of professional services. Where a professional nevertheless binds themselves to achieving a result, insurers commonly exclude such undertakings from cover. This is achieved by excluding cover for assumed contractual liabilities that increase a professional’s exposure to a level that would not otherwise exist.

Contractual liability exclusions in professional indemnity policies almost always expressly exclude liability assumed by an insured for the fitness for purpose of its professional services. Specifically, any liability arising from a “statement of purpose” included in the relevant contract is not likely to be covered.

Accordingly, the Obligation will likely create insurance problems for engineers that are disproportionate to the regulatory policy objectives.

The current framework and the fitness for purpose obligation

The Building Confidence Report[1] found that, among other things, inadequate design documentation and compliance of designs with the National Construction Code was a widespread problem. The NSW Government embraced the report’s recommendations, which resulted in the wholesale regulatory overhaul of the NSW building industry. The changes included the DBP Act and Regulation, including the requirement to produce regulated designs and design compliance declarations.

The current framework in the DBP Act requires:

  • regulated designs to be prepared for building elements, and
  • design compliance declarations for regulated designs to be provided to a builder for the purpose of construction.

Arguably, these requirements adequately resolve the issues the Obligation seeks to address.

By declaring a regulated design, a design practitioner (i.e. an engineer) declares that the design contains the final level of detail necessary to support the building work. Design compliance declarations must cover whether:

  • a regulated design complies with the Building Code of Australia (BCA)
  • the regulated design complies with the regulations, including integration with other aspects of the building/other regulated designs to which the regulated design relates
  • other standards, codes or requirements have been applied in preparing the design, and
  • any building product referred to in the design would, if used in a way that is consistent with the design, comply with the BCA.

Building work cannot start until the builder has lodged the ‘for construction’ regulated designs. This set of designs must contain the detail necessary to produce building work that will comply with the BCA, including specifying the proposed dimensions of the completed building, the characteristics and materials comprising the proposed building, and the location of building elements.[2]

The NSW requirements for regulated designs and compliance declarations are the most precise and stringent in Australia. Those requirements have been carefully developed following a review of the recommendations in the Building Confidence Report, and a thorough industry-wide consultation process. It is worth noting that these changes have only been in place for two years (since 1 July 2021).

If engineers follow the current requirements for regulated designs and design compliance declarations, they will comply with the relevant standards. As a result, the issues identified as creating the need for the Obligation fall away.

Conclusion

The proposed Obligation will likely result in increased liability exposures for engineers. These exposures are unlikely to be covered by most insurance products currently available in the Australian market. This means the Obligation will create an extra layer of liability and insurability issues that may be disproportionate to its intended purpose.

Given the new regulatory framework implemented for professional engineering work within the DBP Act and Regulation adequately deals with the problems identified, the Obligation may not be necessary at all.

The Department anticipates that the practice standard will be published shortly, with a transitional period before it becomes mandatory. We will continue to monitor how this progresses and will keep you informed of developments.

[1] Report entitled “Building Confidence” by Peter Shergold and Bronwyn Weir dated February 2018.
[2] Clause 7.3 of the Design Practitioners Handbook.