April 1, 1996
By Stephen A. Melcher
The design-build method of project delivery, in which the project owner contracts with a single entity to both design and construct a project, has grown in popularity in recent years. Proponents of the design-build method claim that it offers owners several distinct advantages over the traditional design-bid-build method, including the following: the project can be more reliably fast-tracked, with construction beginning while the design is developed, thereby shortening the time between concept and completed project; the design-builder’s construction expertise can be utilized early in the design process to incorporate cost-saving construction techniques and materials; the owner will not find itself caught between the designer and the contractor should questions about the design’s accuracy, completeness or constructability arise during construction, and such questions are resolved on a more congenial basis with less disruption to the project.
As more owners continue to be drawn towards the design-build approach, the opportunities for performing design-build work continue to increase. For those contractors who are willing and interested in performing design-build work, this trend represents a growing market. Whether a contractor is just beginning to take on design-build work or has been doing design-build work for some time, it can increase the profitability of such work, and avoid some unpleasant surprises, by becoming familiar with the risks involved in the design-build approach and planning ahead to minimize these risks.
One of the most critical issues to consider, and one that is often unfortunately overlooked, is whether you are properly licensed to perform the design portion of a design-build contract.In Minnesota, contractors wanting to perform design-build work must either (a) have in-house design professionals who are licensed to practice architecture or engineering in Minnesota and who personally supervise the design work, or (b) contract with design professionals licensed in Minnesota to furnish the design services. Not only is performing design-build work without this licensure unlawful, it may even be unlawful to simply market your firm as a design-builder if it does not have a license to provide professional design services.
Other states in our region are not as accommodating as Minnesota when it comes to having in-house design professionals. Many states require that some (in certain states, a majority) of the shareholders, officers and/or members of the board of directors of any corporation offering to perform design services must be licensed design professionals in that state. Careful planning of how to structure the delivery of design-build services is required before entering these markets.
In Minnesota, electrical contractors and master plumbers are allowed to “plan” and “lay out” as part of their licensed trades, and they may perform some design work without the services of a licensed design professional. On many design-build projects, however, an electrical contractor’s license and master plumber’s license will not qualify a contractor to perform all of the necessary design work. The precise boundary between permissible and impermissible design work for electrical contractors and master plumbers has been a subject of much speculation and debate for decades. The Minnesota attorney general has declined to attempt to delineate just what design work electrical contractors and master plumbers can and cannot do, leaving it up to the licensing authorities and the courts to work it out. Wary contractors, therefore, are well advised to enlist the services of a licensed design professional for those portions of the design work that fall on the fringes of the contractor’s licensed occupation.
Engaging in design-build work without proper licensure opens the contractor up to numerous risks. Licensing boards can levy fines, issue cease and desist orders, and obtain court orders suspending further performance of unlicensed design work.Moreover, the owner may be justified in terminating the contract, making a claim for damages, and even refusing to pay for any of the work already performed. More importantly in the long run, such actions could tarnish a contractor’s reputation.
A contractor interested in taking on design-build work needs to make sure that it is adequately insured to cover the additional exposure. Until recently, the standard commercial general liability (CGL) policy was often interpreted as providing no coverage for design liability. Beginning this year, however, many CGL insurance carriers are offering a choice between two new endorsements which are intended to provide at least some design liability coverage.
One endorsement preserves coverage for damage arising out of design-related work performed by a contractor that is incidental to the contractor’s construction operations. This endorsement would cover the contractor’s preparation of shop drawings, for example. Because of its narrow coverage, this endorsement would not be appropriate if you perform design services with in-house design professionals because most (if not all) of that design work would not be incidental to your construction operations. On the other hand, if you utilize outside design consultants to perform all “non-incidental” design work, you would choose this endorsement to preserve coverage for your in-house incidental design work. In the latter case, you would rely upon your design consultant’s insurance to provide basic design liability coverage.In that event, you should also determine whether your design consultants carry adequate insurance and, if not, purchase additional coverage yourself.
The other endorsement is intended to preserve coverage for damage arising out of all of the contractor’s design services as long as the contractor actually performs (through its own forces and/or subcontractors) the construction work pertaining to the design services. This endorsement has been developed for the design-build contractor that intends to perform design work with in-house design professionals.
In either case, you should consider whether you ought to obtain additional design liability insurance above and beyond the coverage provided by consultants’ policies or by your CGL policy. Depending upon the amount of design-build work you perform and the risks to which your design consultants are exposed on their other work, your exposure could greatly exceed the available insurance limits. One new insurance program unveiled this spring offers significantly higher insurance limits in the form of an umbrella policy. The policy requires a $1 million “retained limit” which can be met through self-insurance or underlying insurance, including professional liability insurance purchased by you or your design consultants.
3) Design-Build Liabilities.
You have no doubt occasionally found yourself in the position of requesting additional payment for changes to your work that were necessitated by changes or corrections to the original design. Similarly, you may have occasionally had to defend your workmanship to an unhappy owner, only to find in the end that the owner’s dissatisfaction really arose out of some aspect of the design that did not meet the owner’s expectations.In either of these situations, you rested safe with the assurance that the design was someone else’s responsibility and all you had to concern yourself with was proper construction in accordance with that design.
In the case of design-build work, since you are the designer, design liability rests with you. The owner has hired you to provide single-point responsibility for construction and design and will predictably be unsympathetic to your suggestion that anyone else is responsible for extra costs required to provide a satisfactorily completed project.
Nevertheless, to the extent your design or construction assumptions are based upon information provided by the owner, you should not have to shoulder the responsibility if that owner-furnished information was incomplete or inaccurate. For example, the owner may conduct its own soils investigation and provide the report to you, and you may later encounter differing subsurface conditions during construction. Your contract with the owner should clearly spell out who is responsible for conducting the soils investigation and whether you are entitled to additional compensation should an owner-furnished soils report prove to be inaccurate or incomplete.
Another problem concerning owner-supplied information can arise out of the fast-track nature of design-build projects, which are particularly time-sensitive and typically provide for substantial liquidated damages in the event of late project completion. Delays can occur if the owner fails to provide information or make decisions in a timely fashion.Your contract with the owner should clearly indicate the amount of time within which the owner must act and should provide you relief if the completion date can not be met for reasons beyond your control.
Owners commonly want various written assurances from design-builders, such as warranties that the project will meet specific performance standards when completed.While many of the owner’s requests may initially sound very reasonable, be careful to consider all of the ramifications of making these assurances. Take the request for a warranty of your design, for example. Designers ordinarily promise to perform their services with reasonable skill and care, but they do not warrant their design. You should not warrant your design, either, since such a warranty is typically uninsurable.Instead, promise to perform your design work with reasonable skill and care.
An owner may also want assurances that the completed project will meet certain performance criteria. You should ensure that these criteria are stated in objective terms, avoiding subjective phrases such as “to the owner’s satisfaction. “Moreover, your achievement of these criteria should be conditioned upon factors that are beyond your control, such as climatic conditions, owner-supplied materials and equipment, and other inputs.
Your contract with the owner should also include reasonable limitations on liability for such potentialities as consequential damages, harm to third parties, design errors and omissions, and the impossibility of meeting the owner’s performance criteria.
If you decide you want to pursue a greater number of design-build projects, consider having an individualized contract form prepared which you can present to owners during your initial meeting. This added level of professionalism and preparedness will not go unnoticed and may help you not only to secure the work, but also to secure the work on terms more favorable to you than would otherwise be the case.
When considering taking on design-build work, you should answer the following questions: Are you able to perform all of the design work in-house, or will you need to hire professionally licensed design consultants to performsomeofthedesign? Do you have adequate insurance coverage, from your own policies and those of your design consultants, to protect you from the additional exposure? Have the additional areas of liability been adequately addressed in your contract with the owner?
If you are uncertain about the answers to any of these questions, obtain professional advice before you sign the contract. With a little advance planning and the assistance of a knowledgeable attorney who is familiar with the design-build approach, you can minimize your risk and increase the profitability of design-build work.
This discussion is generalized in nature and should not be considered a substitute for professional advice. © FWH&T