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Managing risk in an engineering and environmental company.

Like other environmental firms, GZA GeoEnvironmental Inc., a geotechnical and environmental consulting firm founded over 25 years ago, is subject to the vagaries of environmental and other engineering risks. GZA entered the environmental field from "the ground up," providing soil and foundation engineering services to companies. In the mid-1970s, this traditional eotechnical work evolved to include assessments of the fate and transport of groundwater contaminants. Later, the company added to its scope of services activities such as the extraction and treatment of contaminated groundwater and other remediation activities, site assessments and environmental audits.

Early in its history, the company's principals recognized the need for a comprehensive risk management program. GZA's program has evolved over the years as new risks became evident and the company's practice grew. However, risk management can be particularly vexing in the environmental field due to a number of special problems not the least of which is the fact that the field is still in its infancy. Currently, there are few universally agreed-upon cleanup standards, and environmental or public health effects of contaminants remain poorly understood. Another problem is the legal framework in which environmental companies must operate, in which strict, joint and several liability is being applied even to firms that may be trying to correct a problem. These legal difficulties are further compounded by the overall societal problem of everincreasing third-party lawsuits. However, while many of these risk management issues are unique to the environmental industry, many others are similar to the risk problems that confront other organizahons.

INSURANCE IS NO SAFEGUARD

Like many other companies, GZA must purchase traditional insurance coverages such as workers' compensation and directors' and officers' liability. However, unlike many other companies, insurance does not constitute the company's major form of protection against the dangers of risk. The use of insurance in risk management normally follows a rational approach: risk identification, quantification, evaluation and risk financing. However, for various reasons in the world of environmental engineering it is difficult, if not impossible, to identify many of the key risks, much less to quantify them. For example, subsurface conditions are difficult to evaluate and may be determined only after a project has begun. Also, experience shows that courts may apply standards of practice that were not in place at the time a project was ended. As a result, claims are likely to be made years, or even decades, after a project has been completed. Finally, environmental consultants may also be subject to application of strict, joint and several liability and susceptible to third-party actions.

All of these factors have resulted in the very limited availability of insurance for companies in the environmental consulting field. When insurance is available, it is costly, has high deductibles and is available on a claims-made basis only. Although GZA has been able to obtain some insurance coverage, the foregoing factors signaled the need for an aggressive and extensive risk management program.

MANAGING RISKS

GZA's risk management program was initiated by the company's chief financial officer and is led by an active risk management committee. This committee comprises the chief financial officer; general counsel; operations managers of the consulting, engineering and remedial divisions; a health and safety officer; senior representatives for the company's professional practice and loss prevention training programs; and selected senior personnel who over the years have expressed a strong interest in the risk management program. The committee endeavors to link legal, financial and technical practice with day-to-day activities.

Although the concept is simple, GZA struggled to define risk management for the company and to define the role of the risk management function. Here is its most recent attempt, as set forth in the committee's mission statement:

* Identifying and managing risks, both financial and technical, that could pose a threat to the long-term viability of the firm." Although a consulting firm's real assets are the technical skills of its people, GZA has financial assets that also need to be protected.

* "Risks are constantly evaluated based on our experience and the experience of others, and by identifying emerging issues of concern." GZA accomplishes this evaluation by monitoring day-to-day activities that could signal problems, by conducting formal dlscusslons of risk management issues with professional peers and by focusing on industry events that suggest future issues of concern. The company strives to connect its realworld, day-to-day activities with sound risk management principles.

* "The risk management committee establishes risk management priorities, plans and recommends policies and programs to reduce exposure, and responds to incidents as they occur." Communication is key; writing something on a piece of paper doesn't make it happen. Therefore, risk management committee members must bring their special responsibilities into play as active participants in the ongoing policy-making and prctive of the company.

ESTACLISHING STANDARDS

Producing a quality product is the first principle of a risk management program. If the company does not produce such a product, all other risk management efforts will be aimed at minimizing damage to the firm resulting from this lack of quality; this is akin to fighting the risk management battle with no bullets.

However, for the environmental field, which is a service- and peopleoriented business with rapidly changing regulatory and technical standards, defining a quality product can be particularly difficult. For example, how can quality be measured when the standards of practice are constantly changing? How can a company integrate changing standards into its practices? Still encourage creativity and responsiveness, but not open doors to lawsuits? And how can a company maintain, in widely dispersed office locations, the necessary expertise and consistency needed to understand extraordinarily complicated technical issues? For example, the regulations under the Resource Compensation and Recovery Act (RCRA), which governs the management of hazardous and solid wastes, are viewed by many as being as complex as the Internal Revenue Service Code and Federal Acquisition Regulations. Indeed, how can a company meet the challenge of undertaking international projects when standards, laws and traditions in other countries differ, and are on occasion less stringent, than those encountered in the United States?

For GZA, the first line of defense in developing and maintaining standards of quality was to assign a senior technical person to oversee each of the company's specific technical service areas, such as geotechnical engineering, groundwater hydrology, environmental compliance and laboratories. This person is responsible for following the "state-of-the-practice" in that particular technical discipline by serving on national committees in appropriate professional associations, and by participating in standards development on a state level. This person is also responsible for communicating the "state-of-the-practice" throughout the company, establishing internal standards of practice in his or her area of expertise, providing technical assistance to others within the company and recommending corrective action where needed.

As an additional line of defense, GZA requues all project reports to be evaluated and signed by an independent project reviewer with the appropriate expertise in that particular area. For very complex projects, the company requires this consultant/reviewer to be involved at the proposal stage.

POLICIES AND GUIDELINES

Based on the monitoring of internal operations as well as external trends, the risk management committee also develops recommendations or guidelines for making changes in company policies and practices that range from changes in operational strategies to the altering of contract terms. For example, drilling to install groundwater observation wells is a common task in the environmental business. However, poking holes in the ground could result in the rupture of an underground water line, or even an underground tank. Although standards exist that require firms to alert utilities of their intent to drill, utility lines are marked only outside private property boundaries, and even then not always accurately. Therefore, rather than relying solely on the utilities' information, GZA tries to meet a person knowledgeable about the site to indicate in the field where borings will take place.

Another example involves the way that electronic communications have changed the industry. The new reliance on electronic communications has created new risks, particularly as they pertain to transfer of reports and specifications by

electronic media. Should someone change data, specifications or recommendations, GZA could become the subject of a suit. While many firms disregard this possibility, the company prefers a cautious approach, and has made it a policy to specifically note what the document of record is, and to store it securely.

GZA has also made changes in company policies that deal with client communications issues. For example, when contaminants are found on a property, clients desire specific answers to questions such as how extensive the cleanup should be, how long the project will take and how much it should cost. Although it is possible to provide a reasonably detailed evaluation of cleanup costs, the process of developing this estimate is technically difficult, time consuming and often quite expensive. Therefore, when making more general estimates, it is necessary to clearly communicate the estimating parameters and variables. GZA does this by attaching a list of "limitations" to reports that point out to clients caveats such as that when conducting projects, significant data gaps may exist that can be filled only by more extensive study; that cleanup standards that exist today may change in the future; that there are differences in regulatory agency demands from state to state, region to region and even regulator to regulator; and that technologies for investigation and remediation are changing constantly. Other examples of these caveats include differentiating between an engineer's preliminary cost estimate and final construction bids, and poinhng out the uncertainties as to the length of time it can take to accomplish any given cleanup, which affects both the operating and management costs of the process.

A final example of where changes in policy may be necessary involves the risks associated with record maintenance. When faced with discovery during litigation, recovering files can be extremely time consuming and costly. Project files, as well as financial and personal records, can be subject to discovery; GZA has found this particularly frustrating when it is not even a party to a suit, but its records are being used by other parties. Although the company has a file retention policy, any system that is dependent on the cooperation of individuals has its limitations. For example, the firm must deal with files maintained on personal computers that are not stored in the office, as well as with free-thinking professionals who persist in maintaining personal backup files.

INTERNAL COMMUNICATION

A key responsibility of the risk management committee is to make it clear that everyone should be involved in the risk management function. Since, for technically oriented people, it is particularly important to communicate the "whys" in addition to the "whats" of risk management, transmission of this idea must be specially developed and very detailed.

GZA's internal communication program consists primarily of extensive loss prevention training. The company strives to conduct periodic loss prevention seminars for project managers and field personnel. Loss prevention is also a key component of the internal project manager training program. These programs are based on a model program developed by the American Society of Foundation Engineers (ASFE), a peer trade organization consisting of engineering firms that specialize in the geosciences. GZA's flexible program consists of training modules to address such issues as deciding who its clients are and under what circumstances it will accept assignments; dealing with concepts such as duty of care and professional negligence; and maintaining strict documentation of all communications, including verbal interaction as well as written reports. The program also addresses issues such as evaluating liability insurance limits and their consequences to the practice; making decisions with clients in regard to risk allocation; determining ways to recognize early symptoms of potential problems and how to handle them; and overseeing site activities, including all issues pertaining to health, safety and construction monitoring. Finally, the program also deals with indemnification issues; the differing risks among the various types of projects and clients and how to handle them and what to do when your advice is not followed; suits, depositions and trials; conflict of interest and business ethics; and contract terms and conditions, the reasons for each and the dangers associated with oral agreements.

The training modules include case studies based on GZA's experience and the experience of other firms aimed at illustrating the importance of risk management issues. Short audiotapes are also made available to educate staff personnel about these matters.

EDUCATING THE CLIENT

Besides providing this education to staff members, GZA has found that it is also important to have clients understand why the company is so concerned about risk management issues. This is also a matter of communication. Government clients are a particular concern in this regard; because concern over environmental issues is relatively recent, government contract officials find it difficult to appreciate the risks encountered in the field. In most cases, clients do act rationally, but there are circumstances when a client is obviously attempting to transfer its risk to GZA. When the company recognizes this situation, it reevaluates whether it should accept work from this client.

GZA attempts to communicate its concerns about risk to clients by openly addressing any questions they may raise; by producing explanations in plain English of the terms and conditions of its contracts; and by defining a scope of work in project proposals that includes an explanation of the exact tasks that a given project entails, as well as the work that will not be done. By precisely defining the work to be accomplished in a particular project, the company endeavors to improve client understanding and avoid future claims.

Also, when discussing a project with a client, GZA avoids the use of vague terms to describe tasks. For example, a "Phase I Study" could mean an assessment, conducted without any chemical data analysis, to evaluate whether contamination is present in soil or groundwater; a detailed check to see whether an organization is in compliance with all environmental laws; or a detailed investigation of the nature and extent of contamination required by a state law.

It is also important to establish lines of communication in legal and client trade groups in principal geographic areas to improve mutual understanding of the issues that drive these contractual terms and conditions. This open communication improves acceptance of terms and conditions that may, to an unsophisticated client, seem harsh and unnecessary, especially with respect to limitation of liability and indemnification.

CONTRACTS MANAGEMENT

As a logical outgrowth of its attempt to provide clear communications and a specific scope of work, GZA has instituted a policy that all work be conducted in accordance with a signed contract that must include a specific statement of work and detailed terms and conditions. The contractual terms used are based on 25 years of hard experience. Some may seem pedantic, especially to the technical staff, but they have been proven to be an essential component of the risk management program.

Some of the terms that must be included seem enormously obvious to staff members, but not always to clients. For example, GZA needs to be assured of right of entry, especially when working on property not owned by the client. To prevent clients from being surprised by truck wheel ruts in their lawn, the contract must mention that property may be disturbed in the process of a subsurface exploration. GZA has also found it necessary to require clients to disclose in writing any hazards that they know of on the site, and that GZA retains the right to terminate work upon discovery of unanticipated hazards.

Other issues are legal in nature. Although as a matter of law and policy GZA does not assume the responsibility of reporting its study results to public agencies, it requires clients to acknowledge that, if GZA is legally required to do so, it will not be held liable for damages resulting from such reporting. GZA also retains ownership of documents. Another key issue is standard of care: this entails always explaining to clients that the approach the company will use is appropriate to the time and place where the work is done, and that it shall not be held liable for not meeting higher standards that might be imposed at a later date.

A third category of issues is specific to the environmental industry. The company makes it very clear in contracts that its insurance is limited, and requires acknowledgement from clients of that fact. This means that GZA requests indemnification against third-party claims and general indemnification for work performed. GZA recognizes that some of its competitors may agree to contract terms and conditions that it would find unacceptable. Clients of these competitors may not see beyond the words of the contract terms; if the firm a client hires does not have the necessary financial assets to back up the indemnification agreements, then these agreements are not worth very much. In fact, individuals providing engineeringbased professlonal services who take a cavalier approach to contract terms do so at their own peril. Licensed practitioners accept a responsibility to the general public, as well as to specific clients. They can be held personally liable for their acts, and may find it difficult to hide behind the corporate shield.

For professional practice issues, GZA manages claims internally and attempts to deal with issues as soon as they are identified, and preferably before they become claims and lawsuits. GZA can do this because it recognizes that there is a natural human tendency to avoid, or even hide, problems and an equally human tendency to point fingers. To counteract this trend, the company consciously strives to establish an environment where recognizing, reporting and taking reasonable action on problems is considered a positive achievement. Receiving an early report of a possible problem can provide a more thoughtful response, hopefully preventing lawsuits.

PEER REVIEW

GZA undergoes a periodic review by outsiders of all of its operations. Rather than retaining consultants, whose advice is easy to ignore, the company allows itself to be carefully reviewed by senior professionals from other firms of similar size in the industry. GZA receives this review through its participation in the activities of ASFE. Peer review is a well-established and highly respected aspect of the ASFE Loss Prevention Program.

These reviews are particularly helpful because they are objective and conducted by people with many years of experience. They are also grueling, and there is a price: GZA's senior management must return the favor by conducting similar reviews of other firms in the industry. The company has also recently begun a program of conducting its own internal peer review. Over a period of time, each office and function will be reviewed by a team consisting of a risk management committee member and a line manager.

This list of environmental risk management issues, while daunting, is only a partial enumeration of the risk faced by an environmental company. Other areas of potential risk include trademark infringements involving the choice of names for subsidiaries, implied warranties in company literature and even patent infringement if an environmental company adapts a published technology for use on a site. Many of the issues faced also affect clients, from records management to stormwater management, and from compliance with Occupational Safety and Health Act (OSHA) laboratory requirements to training staff in corporate risk management policies.

GZA's risk management techniques are not unique, and some of its procedures are imperfectly implemented. However, by establishing lofty goals and paying persistent attention to their accomplishment, the company hopes to instill a consciousness of the importance of risk management concerns at every level in the organization and, ultimately, to better serve clients.

There are significant federal and state mandates relating to hazardous waste sites that affect environmental companies. Regulatory compliance is an increasing concern for companies because of a growing governmental trend to apply significant financial and even criminal penalties to the highest level of management for violations. Some of the areas where regulations are most stringent include:

Training Issues: Occupational Health and Safety Act (OSHA) health and safety training requirements for work on hazardous waste sites indude a program for basic grounding in the procedures, annual updates, special training for supervisors and even annual medical monitoring. GZA's policy is to train everyone who has the potential to face a hazardous waste field situation. Since this requires training virtually the entire technical staff, this policy proved to be costly to the company. However, the company has converted this cost into a profit center by offering its clients the very training program it had developed to train its own people. Therefore, the program's start-up costs have been recovered.

Operations Issues: GZA conducts internal spontaneous health and safety audits. As could be expected, some staff members think these audits are overly exacting, but they are an absolute necessity. This is because OSHA inspectors have been known to make hazardous wastes sites, and even a minor, insignificant deviation from a written health and safety plan could effectively prohibit the firm from doing government work.

Laboratory Safety: GZA maintains its own environmental chemistry laboratory. Avast range of OSHA and Resource Conservation and Recovery Act (RCRA) issues are brought to the fore by this activity, induding air quality, handling of waste, health and safety procedures.

Waste Management: When does an environmental sample containing hazardous material, which is exempt from regulation, become a hazardous waste subject to regulation? How should such waste be managed? While the quantities of contaminants GZA actually brings into its facilities are relatively small, the RCRA regulations dealing with them are lengthy and strict.

Water Issues: Like other businesses, GZA must be concerned with the Clean Water Act regulations covering stormwater runoff from parking lots at company facilities. Clean Water Act requirements also necessitate sewer discharge permits and pretreatment of environmental chemistry laboratory wastewater.

Air Permits: Some in-house process equipment, as well as the remedial programs GZA develops for clients, results in discharges of gasses into the atmosphere, therefore requiring extensive permitting procedures in keeping with the provisions of the Clean Air Act.
COPYRIGHT 1993 Risk Management Society Publishing, Inc.
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes article about federal regulations affecting environmental service companies
Author:Balco, John J.
Publication:Risk Management
Date:Jun 1, 1993
Words:3651
Previous Article:Emergency assistance for international risks.
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