First it’s important to distinguish between the two most basic Developer / General Contractor business models, Design, Bid, Build, & Design Build. In Design, bid, build the owner typically has an architectural design done for the project, at which point they solicit bids from various general contractors to build the project, also referred to as lump sum bidding. Clearly, we are not breaking new ground here pardon the pun.
In a Design Build business model, the owner contracts with one entity for both the design and the construction of a project. The design builder can be a contractor, a design firm, or collaboration between both. The common philosophy here is the integration of design & construction.
If you are still questioning which model fits some or all of your projects, the question I would ask is who is paying the design/architectural firm? If it’s the owner, then you have less risk (Design, Bid, Build). If it’s the G.C., then the risk profile dramatically increases and it would resemble a (Design Build) model.
A Design Build project delivery offers significant change and imposes new risks upon the participants. To understand the nature of these risks it is necessary to understand the fundamental differences in the roles and relationships of the parties to the design and construction process. Under Design, Bid, Build there are separate duties, separate responsibilities, and separate goals. Under the Design, Build model, you have the paradigm of mutual duties, shared responsibilities and goals. Those of you in the industry are well aware of the distinct differences, however I wanted to clarify the point to establish a clear definition between the two, ultimately highlighting the difference in the risk profile of the two business models which is really the point of this article.
Under the Design, Bid, Build model, a project owner provides the contractor with completed design specifications for the project. These documents set forth measurements materials, methods, and processes or other specific information needed to construct and produce the desired building. In keeping with the United States Supreme Court ruling in United States v Spearin, the project owner who furnishes plans and specifications warrants that they are sufficient for their intended purposes, and that if the contractor adheres to the specifications, the desired result will be achieved. Any design-related omissions, errors, or deficiencies in the specifications and the drawings are the responsibility of the owner.
In Design, Build the owner provides the design builder only with performance specifications that lay out the operational mechanics of the project and provide the standards the contractor’s work must meet in order to deliver the owner’s desired result. Here is the critical difference in risk between the two business models; unlike pure construction contractors, design builders cannot invoke an implied warranty that the specifications and plans provided by the owner, if followed, will produce the desired product without defect. The Design Builder accepts the responsibility for the design and construction that will produce the product set forth in the owner’s performance requirements. The ability to transfer much of the liability for the adequacy of the design to the design builder is one of the greatest advantages to owners of the Design Build method.
Although in most cases the design work is often provided by an external design firm, the design builder has little common law protection from its design consultant. The criteria applied to design professionals in determining liability for design deficiencies is whether the party met it’s legal standard of care. The traditional standard of liability for the design professionals is one of “negligence, which is a much lower standard of care than the implied warranty the design builder provides to the owner. As a result, the Design Builder has a huge potential gap between its liability to the owner, and it’s ability
to seek protection and reimbursement for the defective design from the design consultants.
Design Builders can seek to impose a higher standard of care on the Architects & Engineers contractually, but most will resist. In addition most architectural and engineering firms have a minimal net worth and no real assets, so any attempts to contractually impose a higher standard of care on the designer are of diminutive value. Lastly, Architects & Engineers professional liability insurance typically only covers negligence, and almost always excludes contractually assumed liabilities that exceed this standard. The bottom line is that Design Builders often face a perilous gap between the design liability they accept for the project, and that, which can be transferred to the design professionals.
Now that I have raised the question, what’s the answer? What we espouse is a well-crafted Construction Errors & Omissions Insurance policy that will contemplate these additional exposures, and more importantly provide a pool of capital to tap in the event in your Design Build model results in a design deficiency that results in either physical or economic damage due to poor or inadequate design. In absence of this insurance contract, or pool of capital, the G.C. or Developer will fund the design remediation, and reimburse owner for costs and expenses.
We urge our clients to vet the Construction Errors and Omissions policies carefully as they differ dramatically in coverage, and pricing. Please consult an educated broker or insurance advisor that is both conversant on the exposures you face, and the placement of these specialized insurance contracts.
Should you have specific questions on this post, you my email directly: mstoop@bncagency.com
