The Fire Extinguisher in the Room: Independent Engineering

How often do you walk past a fire extinguisher at work or home without noticing its existence? In an emergency, such as oil on the stove reaching its flashpoint and setting the curtains ablaze, the first thing you reach for is the fire extinguisher. It's available, dependable, and supplies peace of mind. The extinguisher is an object that can save everything that matters.

Independent Engineering is much the same. It is a project’s reliable peace of mind that mitigates risk.  You have an Engineer of Record, you say? Have you ever met an engineer who does not err or applies a strategy that ends up costing millions in operations and maintenance (O&M) down the road? Are there projects that are done well? You bet! But are you willing to forgo an IE review to discover after a great deal of investment that the technology is not proven, your contractor is not qualified, and your project is inviable. Let’s deep dive into why you should not.

Independent Engineering: Not Just a Formality

An independent engineering report ("IE") is more than just a requirement for the finance folder. Independent engineers offer technical due diligence for project viability from an impartial, third-party perspective. A team of process, mechanical, civil, electrical, and structural engineering experts opine on permitting, design, major equipment selection, cost, schedule, financeability, overall system production and adherence to the pro-forma, and so much more. In-house engineers or outsourced engineering firms may not be developers or skilled in project finance. This may result in overly optimistic pro forma expectations and overlook cost-saving technologies, current code compliance, and/or environmental impacts. Independent engineers present the underlying truths that Building Information Modeling (BIM) and integrated designs hide. Inherent risks are present in every project, but through collaborative, rigorous review, the IE report delivers an invaluable evaluation worth pursuing.

What Do IE Consultants Offer?

Owners, key stakeholders, developers, financiers, and insurers should expect a complete review of a project’s lifecycle and the anticipated O&M costs. But what type of projects need an IE review? Generation technologies, power delivery, battery storage ("BESS"), solar, oil, gas, clean hydrogen, data centers, and all hybrid technology facilities can all benefit from an IE review. The client directs the expectation, and each report is tailored to deliver the proper analysis.

Assembling a team is an orchestrated effort, resourcing each task to the most experienced team members. Support through innovative, multi-disciplinary collaboration produces the comprehensive findings. The client receives the deliverable as ordered with recommendations to improve the project’s performance. The following list shows the variety of reports available from an IE.

Qualified Reports:

• Independent engineer’s reviews and reports
• Fatal flaw analysis
• Technology review
• Power and fuel market pricing and assessment
• Pre-finance due diligence
• Resource and fuel assessment
• Equator Principles compliance
• Grid integration and transmission review
• PPA review and timeline compliance
• Energy production review
• Procurement/material cost estimates, logistics, and assessments
• Environmental and regulatory compliance and monitoring
• Pro forma reviews of technical inputs
• Project execution plan reviews
• QA/QC plan
• Cost estimates and critical path
• Engineering, procurement and construction (EPC) contract and warranties review
• Communication system review
• Start-up and commissioning
• Performance verification, Mechanical and Substantial review

Do You Need an IE Report or Owner’s Engineering Support?

Owner’s Engineers ("OE") are an asset owner’s advocates. Their oversight of the project during the development and construction phases is a critical second opinion that the owner values. Defining project scope, evaluating EPC agreements, analyzing budgets, post-construction performance, conducting site and feasibility studies, supplementing resources, reviewing technologies, and creating suitable solutions to maximize performance.  An OE review and assessment through the financial lens, can reduce OpEx and CapEx for greater ROI. The OE’s system performance review will drive continuous improvement through every project’s milestones by eliminating design discrepancies and inefficiencies through construction. The Owner’s Engineer are the eyes and ears, a solid pillar in the asset owner’s corner.

An IE is the financier’s reliable resource for evaluating the projects viability through due diligence. By de-risking the project, the IE models the financial security of the asset. The IE determines that the project's value exceeds the financed loan. Should the IE report conclude a financial impairment, the asset would not meet the closing requirements. The IE report opines reducing the project's financial risks through liability exposure assessments, equipment mismatch, fatal flaws, code and regulatory compliance, permitting, and scope gap.

Liability: How Concerned Should You Be?

"The Professional Liability/Errors & Omissions Insurance market is substantial and growing. As of 2023, it was valued at approximately $45.6 billion and is projected to reach $81.2 billion by 2032, growing at a CAGR of 6.7%¹." In the United States construction sector, contractors, architects, and engineers are protected from professional negligence, errors, or omissions in the services they provide through costly professional liability insurance². In 2022, catastrophic insurance losses of $84 billion led to increased insurance premiums and new requirements. Rework is expensive. Claims arise from material mismatch, design flaws, project management, engineering practices, and a myriad of issues.

Change orders or litigation due to rework impact projects commercial operation dates (COD). Design and construction phases are impacted by wastages, quality, schedule, and budget. “Rework costs in large projects might be anywhere between 5% and 20% of the contract value”². An IE report will identify the flaws before construction begins. Recommendations, corrections, and redesign are articulated in a comprehensive report. The IE extinguishes the rework smoke before a fire begins and litigation is imminent. 

Here are a few notable cases involving energy engineers or EPCs (Engineering, Procurement, and Construction companies) being sued for design errors or negligence:

1. FPL Energy Cape Wind, LLC v. U.S. Army Corps of Engineers (2011).  This case involved a dispute over the design and environmental impact of the Cape Wind project. FPL Energy alleged that the Army Corps of Engineers failed to properly evaluate the project's design and its implications on the environment. FPL Energy Cape Wind, LLC awarded $150 million.

2. Bechtel Power Corp. v. L & N Coal Co., Inc. (1990). Bechtel Power was sued for design defects related to a coal-fired power plant. The plaintiff alleged that design errors led to significant operational inefficiencies and increased costs. Bechtel Power Corp. awarded $57.5 million.

3. Dura Global Technologies, Inc. v. TSI, Inc. (2010). In this case, a manufacturer of energy-efficient products sued an EPC contractor for design flaws that resulted in failures in the products, claiming negligence in the design and construction phases. Dura Global Technologies, Inc. awarded $18 million.

4. Kiewit Infrastructure West Co. v. City of Los Angeles (2013). Kiewit was involved in a lawsuit concerning design errors in a wastewater treatment facility. The city alleged that Kiewit’s design failed to meet required standards, leading to significant cost overruns and project delays. Kiewit Infrastructure West Co. awarded $45 million.

5. Southwest Power Pool, Inc. v. City of Harrison, Arkansas (2017). The city sued an EPC firm for design errors related to a power generation facility. The suit claimed that the design did not meet the regulatory standards, leading to compliance issues and financial losses. Southwest Power Pool, Inc. awarded an undisclosed sum.

These cases highlight the importance of IE due diligence. Accuracy in engineering and construction through the third-party impartial IE review, eliminates errors or negligence that can lead to significant legal and financial consequences.

How To Evaluate IE Consultants?

The scorecard matrix is an alignment of experience with the technology, resources, reputation, education, credentials, and innovation. Well-qualified consultants offer a team of experts who can advise and analyze collaboratively. By providing an assemblage of more than just experts, innovators with a history of identifying project flaws can increase performance revenue. The selection must evaluate the consulting firm's resources to supply prompt deliverables. The coupling of education and credentials provides an expert analysis supported by an unwavering industry reputation.

Constructing without an experienced IE team is not only a mistake; it's watching assets and finances exposed to an environment without a fire extinguisher. No one wants to watch the metaphorical burn.

 

¹LandesBlosch: This resource provides an in-depth look at contractors’ E&O insurance, detailing the types of contractors who need it and what it typically covers. ²J.E. Brown & Associates: This document offers insights into E&O insurance for architects, engineers, and construction managers, highlighting the importance of coverage for professional errors and omissions. ³Victor Insurance: This application form for contractors’ professional, E&O, and pollution incident liability coverage provides a practical example of how such insurance policies are structured.