Victor O. Schinnerer & Company, Inc.
Management Advisory
© 2002, Victor O. Schinnerer & Company, Inc. The information presented here is for risk management guidance. It is not legal advice nor
should it be construed to be a determination on issues of coverage for specific claims.
D ESIGN - BUILD I SSUES
AND
I NSURANCE C OVERAGE
In the design-build delivery approach, the design and construction roles and responsibilities are combined into a
single entity. Some clients prefer the design-build approach to the traditional design/bid/build approach because
one entity is accountable for both design and construction—"single point" responsibility. Important risk management considerations arise for design professionals contemplating involvement in design-build projects. Issues to
consider include the duties and authority of the design professional within the design-build entity; contractual
provisions that properly allocate risks and responsibilities; licensing; insurance and surety matters; liability exposure of the design-builder that differs from the exposure under the design/bid/build delivery approach; and business issues of the design-builder that typically differ from those of the "traditional" design professional.
Role of the Design Professional
The role of the design professional in the design-build entity will significantly influence the nature and extent of
the design professional's potential liability exposure. There are three basic roles that design professionals may
undertake in a design-build approach:
Prime Entity—The design professional has the prime contractual relationship with the client and has sole
responsibility to the client for both design and construction. In this prime capacity, the design professional may
subcontract to a construction contractor the construction portion of its contractual responsibilities. The design
professional could also serve as only a coordinating entity or design scope entity and subcontract final design
services, the preparation of construction documents, and any on-site activities to another design professional or
other appropriate party.
Co-responsible Entity—The design professional may enter into some sort of a joint venture relationship with a
construction contractor where together they will be primarily responsible to the client for design and construction of the project. Under this approach, the design professional typically performs the traditional design professional services and the construction contractor, as part of the joint venture, actually constructs the project. For
the client, however, each entity in the common effort is completely responsible for the acts of the other.
Subcontractor—In this situation, the design professional is a subcontractor to the entity holding the prime contract with the client. While this prime entity could be a developer, construction manager or other party allowed
by state law to hold the prime contract, usually a construction contractor has the prime contractual relationship
with the client and thereby has total responsibility for both design and construction. The prime entity retains the
design professional as a subcontractor to provide design and specified, and usually very limited, construction
administration services.
The Role Establishes the Risk
The design professional's liability exposure differs significantly in each of these roles. Under the role of Prime
Entity, even though the design professional may subcontract or delegate the construction portion of that undertaking, the design professional is legally and contractually responsible for both the design and construction. In
addition to being subject to liability under the traditional professional standard of care (or negligence), the
design professional will also be subject to liability for: the warranty, guarantee and indemnification obligations of
a builder; any applicability of strict liability to the construction activities; compliance with any pertinent product
liability laws; and the exposure created by federal and state environmental and safety laws and rules.
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Fax: (301) 951-5444
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Victor O. Schinnerer & Company, Inc.
Depending upon the state, the design professional serving as the Prime Entity may need to be licensed as a contractor. The client may require that the design-builder obtain performance and payment bonds and insurance
coverages such as builder's risk and comprehensive general liability insurance not normally required or maintained by design professionals. The increased liability risk associated with this role is not entirely insurable. For
example, the financial obligations associated with statutory fines and penalties, subcontractor defaults and payment problems, liquidated damages imposed due to late project completion, and additional performance costs
due to unanticipated conditions are business risks that are not covered by insurance.
In addition to careful consideration of the risk management issues presented to the design professional under the
role as the Prime Entity, the design professional contemplating that role must be prepared to meet an equally significant challenge—learning to "think like a contractor." For many design professionals, this will require a major
transformation in their perspective of the design and construction processes, and, in particular, in terms of how
risk should be allocated between the client and design-builder. Instead of being the client's representative, as in
the design/bid/build delivery approach, the design professional, as the design-builder (Prime Entity), has a vendor relationship with the client. Therefore, significantly greater economic tensions may exist between the client
and design professional. In addition, a design-builder must focus on certain risks, such as the time and cost risks
associated with encountering concealed or unanticipated subsurface conditions that are typically encountered by
construction contractors but traditionally have not been subjects of intense financial or business concern by the
design professional.
Under the Co-responsible Entity role, the design professional faces much the same enhanced liability risk and
exposure as under the Prime Entity role. Although the scope of the design professional's services may be specifically defined in the agreement with the client and the internal distribution of responsibilities, both the design
professional and its joint venture partner are jointly and severally liable to the client for all of the design and construction obligations. Thus, it becomes extremely important to structure the common effort in a way to limit the
liability of each co-venturer for the acts of the other. A limited liability company is often the most effective form
for such a joint venture since it limits many risks to the assets of the company and the responsible party in the
company.
Under either of the above-mentioned arrangements, it is possible—and advisable—for the design professional to
allocate and transfer some risk to other entities involved in the design-build team through indemnification, insurance transfers of risk and bond requirements. Specifically, the design professional should require that the contractor indemnify the design professional for risks associated with the "build" portion of the undertaking. The design
professional should also require the contractor to obtain appropriate general liability coverage, including contractual liability. The contractor and its subcontractors should also be required to purchase both performance and
payment bonds that will, in effect, insure the performance and payment obligations of the contractor and its subcontractors. However, as stated above, not all of the enhanced risks associated with the design professional serving
as the Prime or Co-responsible Entity may be allocated or transferred entirely to the contractor or insurers.
The role that is commonly assumed by a design professional on a design-build project is as a subcontractor to the
construction contractor or other prime entity. This arrangement represents the most conservative and traditional
level of involvement that a design professional may undertake as a direct participant in the design-build project
delivery approach. In the role as a subcontractor to the construction contractor or other prime entity, the design
professional is retained by the party responsible for both design and construction to provide design and certain
construction administration services. This role does not represent any significant increase in professional liability
or other risk for the design professional; it also gives the design professional very little control or opportunity for
profit. In fact, because the design professional typically does not act as a representative of the client, some of the
Two Wisconsin Circle
Phone: (301) 951-9746
Chevy Chase, MD, 20815-7022
Fax: (301) 951-5444
Attn: Client Services Liaison
Email: vos.info@schinnerer.com
www.schinnerer.com
www.PlanetAEC.com
Victor O. Schinnerer & Company, Inc.
more traditional services performed by the design professional during the construction phase may be eliminated
from the design professional's scope. As a consequence of its direct contractual relationship with the construction
contractor, the design professional will probably not be involved in any review of payment requisitions or determination of the quality of work.
Appropriately Allocating Risk by Contract
The relationship of the client, design-build entity and any subcontractors (including the design professional as a
subcontractor) has to be carefully detailed to place risks and responsibilities where the ability to manage or insure
against those risks and fulfill those responsibilities is feasible. There are two "systems" of contractual arrangements that have been developed and should be examined by any design professional contemplating participation
in the design-build project delivery method.
The Engineers Joint Contract Documents Committee (EJCDC) published an extensive set of design-build documents and forms in 1995. EJCDC provides guidance on the various options of establishing the design-build entity and allocating the responsibilities between the prime and ancillary parties. The EJCDC document, Guide to Use
of EJCDC Design/Build Documents (EJCDC 1910-42), is especially valuable in assisting clients and design-build
team members in identifying, assessing and determining how to manage the risks of design-build. EJCDC documents are available from the National Society of Professional Engineers (NSPE) by calling 703/684-4811, and
from the other sponsoring organizations of EJCDC, the American Society of Civil Engineers (ASCE) and the
American Consulting Engineers Council (ACEC).
The American Institute of Architects (AIA) has revised its set of design-build documents. The three documents
in the set actually include internal sequential agreements separating the preliminary design effort from the final
design and construction. Carrying a 1996 publication date, the documents include the following:
A191, Standard Form of Agreements Between Owner and Design/Builder
A491, Standard Form of Agreements Between Design/Builder and Contractor
B901, Standard Form of Agreements Between Architect and Design/Builder
The AIA forms are available from local distributors, such as AIA state components, or the national publication
sales office at 800/365-ARCH.
Two Wisconsin Circle
Phone: (301) 951-9746
Chevy Chase, MD, 20815-7022
Fax: (301) 951-5444
Attn: Client Services Liaison
Email: vos.info@schinnerer.com
www.schinnerer.com
www.PlanetAEC.com