Commentary: The Added Risk Considerations of Design-Build Delivery
The design-build project delivery system, which dates back to the master builders of ancient Greece, continues to gain in popularity. The appeal of design-build is that it provides the project owner with a single point of contact for both design and construction. This can lead to both lower costs and compressed construction schedules.
A recent study by the Federal Highway Administration determined that on average, design-build projects were completed 14% faster than traditional design-bid-build projects. Design-build projects, however, expose contractors to risks that they don't have under the traditional delivery method. The additional exposure arises out of what is known as the Spearin Doctrine.
The Spearin Doctrine traces its roots back to a 1918 U. S. Supreme Court decision (United States v. Spearin [248 U.S. 132]). Basically, when the project owner provides plans and specifications to build a project, the owner impliedly warrants that they are acceptable. The contractor will not be liable to the owner for loss or damage that results from the insufficiencies or defects in the plans.
When the contractor takes on responsibility for design, the protection provided by the Spearin Doctrine is taken away. Since the contractor is responsible for design, it is also responsible for damages and costs arising out of inaccurate or flawed design documents. Although a majority of the risk can be transferred contractually to the design professional, the contractor still retains additional exposure.
Risk Management Considerations
Because of the increased potential liabilities arising out of design-build projects, the contract between the parties takes on added significance. Careful attention needs to be paid to each party’s work scope, indemnification clauses, insurance requirements and dispute resolution provisions. The Design-Build Institute of America has done a thorough job of drafting appropriate design-build contract documents. The AIA, EJCDC and AGC have also published standard form agreements for this project delivery method. These template documents are good starting points but need to be amended to fit each specific project.
Defining Work Scope
To maximize the benefits of design-build, it’s essential that each party’s responsibilities and obligations be clearly defined under the contract. This applies to both the owner/contractor agreement and the contractor/design professional agreement. A well-written scope of services agreement will spell out what each party will and will not do, and what they can do for an additional fee.
It is critical that this be clear at the outset; if it isn't, you should spend some time and get it right. If you can't agree on who is supposed to do what at the start of the project when everyone is on good terms, you certainly won’t be able to figure it out at the end of a project when relationships may have deteriorated.
Indemnification
The indemnity agreements are critical—both the contractor’s obligation to indemnify the owner and the design professional’s obligation to indemnify the contractor. In many cases, the owner will require the general contractor to execute a Type I indemnity in the owner’s favor. With a Type I indemnity, the indemnitor (in this case, the contractor) is responsible for everything that goes wrong on a project unless the indemnitee (the owner) is solely (100%) negligent. While this isn’t fair, it is legal, and for the most part, insurable under a contractors general liability policy.
Insurance
An integrated insurance program is critical to any construction project. The project owner, contractor and design professional all have insurance issues to deal with, and these should be clearly spelled out in the agreement.
Builders Risk Insurance
Builders risk insurance, also known as course of construction insurance, is a first-party property insurance that covers the real property during construction. Whether this is secured by the owner or the contractor, several elements should not be overlooked: 1) Coverage should be written on a “special peril” basis; 2) hard costs and soft costs should be carefully evaluated to make sure the limits are appropriate; and 3) all stakeholders should be named insureds on the policy.
The Contractors Insurance
Insuring a design-build project from a general liability, automobile and workers compensation standpoint is not much different from a design-bid-build project. The challenge is the professional liability exposure that the contractor assumed when taking on responsibility for the design. Certainly, the contractor should ask the design professionals to indemnify it from the design professionals’ negligence. Most, if not all, design professionals will be agreeable to this.
Dispute Resolution
Identifying potential problems and resolving disputes in a timely matter is critical to the success of a project. Stakeholders should be encouraged to discuss concerns before they become claims. Ideally, these issues are worked out among team members. If, however, this is unsuccessful, the next step should be mediation. If mediation is unsuccessful, you have to consider arbitration or litigation.
On smaller dollar items, arbitration may be appropriate. On larger issues, however, unless both parties agree to arbitration, the default should be litigation. Regardless of whether you have to resort to arbitration or litigation, whenever you use a form of adversarial dispute resolution, it gets very expensive and it destroys relationships. This is why, if it is at all possible, the dispute should be settled by the parties to the dispute.
There are pros and cons to the design-build delivery system. The pros, however, seem to be winning out as design-build becomes more popular. Effectively managing risk on a design-build project requires identifying exposures to loss, figuring out ways to reduce the frequency and severity of those exposures and then arranging appropriate insurance.
Jeff Cavignac is president and principal of Cavignac & Associates, a leading commercial insurance brokerage firm providing a broad range of insurance and expertise to design and construction firms, law firms, real estate-related entities, manufacturing companies and the general business community. The firm employs a staff of 40 at its office headquarters in San Diego. More information about the company can be found at www.cavignac.com.
