Managing risks associated with design/build
by Joseph Nawa
November 16, 2016

After an exasperating few years, many experts are predicting a robust, healthy commercial building environment for 2016 and beyond. Fueled by the growing integration of sustainable and energy-efficient features, which are now viewed more as essentials than commodities, as well as contractors’ continuing reliance on technologies, predictions for the coming year alone range from extremely hopeful to booming.

According to the Dodge Data & Analytics 2016 Dodge Construction Outlook, the industry is expected to grow by 6 percent in 2016, with “the value of construction starts reaching an estimated $712 billion.” This was previously reinforced by a representative of the American Institute of Architects (AIA), who commented on last summer’s semiannual Consensus Construction Forecast, “Buoyed mostly by the red-hot commercial sector, spending on nonresidential buildings should … approach $390 billion in 2016.” This includes projections for an 8.2 percent increase in expenditures throughout the year.

As a combination of all these elements, the commercial construction environment remains an industry influx. Technology and an increased emphasis on sustainable building have joined with enhanced financial conditions and the need for faster delivery to drive new building models shrouded by the potential for professional liability.

Traditionally, projects were developed and delivered almost exclusively under a design/bid/build method. In this process, the project’s owner contracts with a design professional (DP) or the DP team. The DP performs and completes the design plans and specifications. The completed design specifications are then advertised by the owner for bid. General contractors (GCs) compete for the construction contract and, once awarded, are responsible for constructing the project according to the completed plans.

In an attempt to speed the entire construction process from end to end, owners have embraced design/build methodologies to conclude projects at increasingly faster rates. Under this model, the owner of a project contracts with a single entity, the design builder, who accepts total responsibility and control of the project’s design and construction.

As a result, the use of design/bid/build processes have greatly declined, with only about 60 percent of all commercial projects utilizing this method in 2012. Conversely, design/build projects continue to rise. In fact, many in the industry have suggested that projects delivered through design/build will outweigh the utilization of the traditional design/bid/build by 2020.

Design/Build Risks

In many cases, general contractors have enjoyed numerous design/build benefits. This includes greater overall project control, in addition to the rewards afforded through direct design team collaborations.

However, with the added responsibility comes increased risk. The acceptance to not only construct, but also provide design services, lends a far higher degree of professional liability exposure for the GC engaged by the owner. This is true even if the design work is subcontracted to an experienced firm that also possesses professional liability insurance. Under the design/build contract, the ultimate responsibility for errors and omissions lies with the primary party contracted for the designated services. In this case, it is the design builder who will most likely bear the most significant amount of vicarious exposure, even when the agreement with the design professional contains all the proper risk transfer strategies.

So how do GCs engaging in the design/build delivery method deal with the heightened exposures? When subcontracting design work, the core method for protecting GCs against liability is contracts. It is also extremely important to select competent DPs with proven track records before going forward.

Further, the GC should require its DP subcontractors to possess an adequate professional liability insurance policy, given the nature of risk associated with the project type and size. The scope of work should be clearly defined in the contract, with alternatives clearly embedded for resolving disputes between the GC and DP.

CPI Coverage Advantages

Financing design/build risk is another common alternative on projects rendered under such a delivery method. This is made possible through a contractor’s professional liability policy (CPL) featuring contractors protective indemnity (CPI) coverage.

In today’s extremely litigious environment, CPI coverage has increasingly become an ideal insurance form for protecting GCs from the damages caused by the subcontracted design professional’s acts, errors or omissions during the rendering of professional services. This includes damages that sit in excess of the design professional’s own liability insurance policy limits.

Although it is recommended that all GCs retrieve and astutely review the certificates of insurance (COI) from design subcontractors before beginning any project, there is no guarantee that this information will reveal enough to ensure GCs are properly indemnified from third-party design problems.

For instance, what do these certificates really show? They typically evidence the insured’s policy number, effective/expiration dates and per claim/aggregate limits of liability at the inception of such a policy.

The key takeaway is that such limits really only reveal the terms in effect on day one of the policy. They certainly don’t illustrate the limits that may have been eroded as a result of other claims against the design professional as a result of further challenges on other projects.

When purchasing contractors protective indemnity coverage, GCs should carefully consider the size and complexity of the project, the integration of the appropriate limits given the project’s financial scope and expertise, experience and credentials of the designers utilized. It is also important to research the advantages of difference in conditions (DIC) terms that provide “drop down” coverage for the design subcontractor above and beyond its own professional liability policy. Another consideration is ensuring that the CPI coverage sits in excess of the design professional’s available insurance limits and not just what is shown on the COI.

In addition, never assume. When in doubt, seek the advice of professional advisers. It is never overkill to review the sufficiency levels of such policies, while ensuring they are not loaded with extremely costly exclusions.