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The Risks of a Design-Build Project

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How to manage liability and insurance needs when taking on the responsibility of both designing and building.

A traditional construction project relies on the talents of a designer and a builder. Both bring unique talents to the task, and their collaboration can help ensure a finished structure that is at once aesthetically pleasing and functional.

However, some contractors choose to enter into design-build agreements, taking on the responsibilities of both designing and building.

In fact, according to some reports, more than 40% of nonresidential building projects are design-build.

While this trend may be popular, contractors should use caution and understand the increased insurance and liability risks inherent in design-build projects. 


Insurance Coverage

When contractors enter design-build arrangements, they are required to provide the projects’ design services.

They may have licensed designers on staff, or they may hire subcontractors for design services.

Either way, they must ensure they have the proper insurance policies in place to protect themselves from any in-house mistakes or subcontractor errors.

It is tricky, however, since most designers’ professional liability policies are error and omission (E&O) policies, which will not cover all deficiencies or defects found in a designer’s work.

Instead, they cover designers in meeting a reasonable standard of care.

That standard means that designers are not expected to produce perfection, some variations are subjective, and errors are accepted to a “reasonable” degree.

Therefore, they are not liable for such issues. However, contractors may have a different standard and be held liable for defects. This situation results in unmanaged risk.

To protect against defect liability, design-build contractors should consider additional insurance.

One option is contractor’s protector professional insurance (CPPI), which may offer coverage for design risks.

In addition to providing standard professional liability coverage, a CPPI policy likely will include mitigation coverage.

In this case, if design-build contractors discover a design error, they can correct that mistake during construction before the owner files a claim.

This type of policy should also include protective coverage, which addresses downstream claims for those costs that go beyond the professional liability insurance a designer holds. 


Contract Stipulations

Many construction contracts will ensure that the “work” will be free from any deficiencies or defects.

They may also state the contractors will agree to correct any defective work.

Either of those stipulations can be problematic in design-build projects since they could be related to defects in the design, which—as discussed earlier—may not be covered by insurance. 

Contractors would be wise to revise contracts to state that “work” warranties refer only to construction materials and labor—not to design services.

In addition, they might offer to provide a separate standard of care agreement for design services. Similar revisions are also suggested for indemnity clauses that address issues arising from completing the “work.”


Advice for Contractors


While taking on a design-build project can be enticing, there are numerous risks to consider.

If those seem daunting, another option is to agree to a design-assist project instead.

With this arrangement, contractors have input on the design but do not assume liability for it.

If contractors choose this route, they should take extra care to ensure that no design-build language finds its way into contracts, resulting in the same gaps in coverage.

Instead, contracts should clearly state that the owner or designer is liable for any design errors or omissions.

Before signing a contract for a design-build project, a smart strategy is to consult legal counsel.

An experienced construction attorney can review the agreement and point out any language that could leave the contractor liable for design defects or related issues.

 

Disclaimer: The information contained in this article is for general educational information only. This information does not constitute legal advice, is not intended to constitute legal advice, nor should it be relied upon as legal advice for your specific factual pattern or situation.
 

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