A recent study by the Federal Highway Administration determined that on average, design-build projects were completed 14% faster than the traditional design-bid-build projects. Design-build, however, exposes contractors to risks they don’t have under traditional delivery methods.
Since under design-build, 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 subconsultant, the contractor still retains additional exposure.
To maximize the benefits of design-build, it is 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.
A scope of services agreement will not only decrease misunderstandings as to who is responsible for what, it can also prevent duplication of effort. Likewise, a “teaming agreement” is helpful to make sure that all parties to the project work together to maximize project successes and minimize potential disputes.
The indemnity agreements are critical—both the contractor’s obligation to indemnify the owner and the design professional’s obligation to indemnify the contractor (assuming the contractor is subbing out the design). 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.
Unfortunately, most design professionals will resist signing a similar indemnity in the contractor’s favor. The reason for this is that the contractual liability coverage provided under a design professional’s professional liability policy is not as broad as the contractual coverage in the contractors general liability policy. Where the general contractor is probably insured if it signs this type of agreement, the design professional will not be. The ultimate indemnity the design professional is willing to agree to will come down to a negotiation between the contractor and the design professional.
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 (which we recommend), or the contractor, several elements should not be overlooked:
● Coverage should be written on a “special peril” (all-risk) basis.
● Hard costs (cost of construction) and soft costs (design costs, finance charges, insurance premiums, future profits) should be carefully evaluated to make sure limits are appropriate.