Legal Risks and Responsibilities
I. A/E as Design/Builder
A/Es who take on the lead role as the design/builder are in for the greatest shock with respect to potential liability and risk. In doing so, they may not be covered by the standard professional liability insurance coverages for many of the most common risks of the construction process. Following is a short list of the additional risks the A/E will incur by becoming the lead member of the design/build team.
Faulty or Defective Work
The A/E will be responsible for making sure that the work is performed in accordance with the construction documents. In fact, under this scenario, the contractor will be insulated from claims by the owner for defective work. With respect to the owner, the A/E will be liable for faulty workmanship on the part of the contractor or trade contractors. In order for the A/E to act in the lead role, the A/E must require some form of indemnity from the contractor on this issue and others. And the owner will expect the A/E to indemnify it against defects in both design and construction.
Means/Methods and Safety.
The A/E may be liable for site safety, and for construction means and methods. This means that the A/E will be exposed to OSHA citations and penalties, and may have a more difficult time arguing that the job site is not a "place of employment" (the standard by which A/E's have managed to duck OSHA liability in recent past). The A/E will have increased liability to claims and lawsuits by injured workers and other third parties. In response to all this exposure, the A/E will have more difficulty arguing that its involvement on the jobsite was minimal, as many of the standard protections of the AIA documents regarding construction administration will be missing. For example, the A/E as lead design/build team member will not be able to take the position, vis-à-vis the owner, that its review of shop drawings was for the limited purpose of determining whether such drawings were consistent with the intent of the design; any discrepancies or mistakes in the shop drawing process will become the A/E's problem.
Budget.
If the work cannot be performed within the project budget, the lead A/E will bear at least some of the risk of cost overruns. The allocation of this risk will depend upon the subcontract with the contractor, but a lead A/E cannot expect to reap the benefits or rewards of carrying the project without bearing some of the attendant risk.
Conflicts of Interest.
In this scenario, the lead A/E's interests will be so wrapped up with those of the contractor that the A/E will lose some of the independence that it has traditionally prided itself on. Although the client owner may continue to expect that the A/E is protecting the owner's interests, the reality is that the A/E will be pulled between the interests of the owner and those of the contractor performing the work for the A/E.
Contractor Concerns.
The contractor in this relationship must understand the A/E's conflicting responsibilities to the owner and to the design/build relationship. Where the A/E is the lead, the contractor must have a clear understanding of what the A/E will do in the event of a conflict between the desires of the owner and the A/E's own professional standards.
Summary.
The assets of the A/E will be at risk in the way that many contractors are used to, but few A/Es have considered. Furthermore, the A/E will probably be unable to procure any payment or performance bonds if requested by the owner/client. And to top it off, the A/E will be responsible in the event the contractor encounters financial difficulty and is unable to complete the work. Few of these risks will be covered by any malpractice insurance procured by the A/E.
As discussed in more detail below, some potential risks are not dependent upon the nature of the team. On balance, the A/E in the lead role will incur additional legal risk beyond that of the traditional design-bid-build format. Weighed against this additional potential risk is the likely diminished practical risk, due to the collaborative nature of the A/E's relationship with the contractor, and the ability to work out directly many of the issues typically giving rise to construction claims.
II. Contractor as Design/Builder
This structure is much more common than the A/E in the lead role. One primary reason for this structure is the financial capacity of most contractors relative to that of most A/E's. However, there are a number of issues of concern to a contractor undertaking the lead role on the design/build team.
Responsibility for Design.
As between owner and design/build team, the contractor lead will be responsible for a proper design. This includes compliance with all applicable codes, regulations and industry standards. Design issues arising at substantial completion which delay obtaining a certificate of occupancy will not excuse the contractor's performance relative to the owner. The contractor will have no defense to claims by the owner, and will have no right to additional compensation, in the event of an inadequate, incomplete or defective design.
Delay in Design.
Any delay in the performance of the design will not entitle the contractor to additional time or money from the owner. The contractor and A/E will have to work out coordinated schedules for completion of the design as the construction work goes forward.
A/E's Allegiance.
A concern for contractors in this relationship is the A/E's allegiances. The contractor and the A/E must discuss ahead of time how the A/E intends to deal with conflicts between the desires and demands of the owner, and those of the contractor or the design/build entity. Although the design professional will be working directly for the contractor, many A/E's will not be able to make the transition between working for an owner (and all that entails) and working for a contractor. The natural tension that has existed on a traditional design-bid-build project - among owner, contractor and design professional - will be mostly missing or completely gone.
III. A/E - Contractor Joint Venture
This format of pursuing design/build work may make the most sense. Here neither the A/E or contractor takes the position of "lead", but rather they agree among themselves (and perhaps even with the owner) who is responsible in the event of any claims. A joint venture is a special form of partnership, and the term is usually applied to a partnership that is established by two or more companies for the purpose of pursuing or performing a single project. There are a few critical legal issues to keep in mind.
Joint and Several Liability.
A co-venturer may be held liable to the owner for the entire obligations of the joint venture. The owner may pursue either one or both joint venture members, and in the event of the financial failure of one of them may simple pursue the other for the full obligation. Each co-venturer has rights against the other, according to a written agreement between them (if there is one) or according to common law principles; but that is of little consequence to the only remaining solvent party in a joint venture. In a joint venture scenario, each co-venturer must take steps to ensure that it can survive the failure of the other party.
Tax Implications.
This is not a tax paper, but a simple aspect of a joint venture is that each co-venturer is treated for tax purposes as a partner, and taxed only at a single level. In other words, there is no corporate tax in addition to any tax on dividends or salaries.
Differing Capital Interests.
A joint venture can easily accommodate differing financial interests in the JV entity. It is not necessary that the co-venturers share equally in the risks and rewards, or that they contribute equal amounts of capital. The parties are free to reach an accommodation suitable for their particular situation.
IV. Separate Corporate Entity
In lieu of setting up a joint venture, parties to a design/build project may establish a separate corporate entity. While this creates a more formal relationship, there are a few advantages and problems.
Liability.
Shareholders of a corporation are sheltered from the liabilities of the corporate entity. So long as the corporation acts as a distinct entity, and the parties do not blur the distinction between the corporate identity and their own identities (personally or as members of other entities), the owners will not be personally liable for the obligations of the corporation. However, if the corporation is established for a particular project, and/or is thinly capitalized, the owner may insist upon guarantees from the corporate owners, and the advantages of the corporate status may be lost vis-à-vis the owner.
Tax Implications.
Income to a corporation is normally taxable both at the corporate level, and at the level of distributions, dividends or salaries. One exception to this rule is for so-called "Sub-Chapter S" corporations, named after a section of the Internal Revenue Service code. Owners of Sub-S corporations can receive the net income from the corporation free of taxes at the corporate level, and be taxed only upon distributions or salaries. There are certain limitations upon Sub-S corporations and restrictions that must be followed for this tax status to apply.
Licensing.
The Massachusetts licensing statutes restrict the performance of design services to registered architects and registered engineers. While such persons may practice as employees of a corporation, any contract executed on behalf of the corporation that includes design services must be signed by the registered design professional, and the design work performed by that person (or another employee who is also a registered design professional) or by other employees under that person's direct supervision.
V. Common Risks and Responsibilities
A few issues will remain no matter the team format, and must be considered in any design/build team agreement.
Insurance.
Both the A/E and the contractor will likely carry comprehensive general liability insurance. Both must consider the additional coverages commonly available, to determine the need, utility and cost of those coverages. Common added endorsements include contractual liability and completed operations coverages. Both A/E and contractor must discuss these coverages with their own insurance broker or company.
The A/E needs to discuss the professional errors and omissions coverages available. The insurance market has come out with new endorsements for design/build projects in the past two years, which eliminate some of the impediments that previously existed to obtaining A/E insurance on design/build projects. This coverage must be carefully explored, as well, to ensure that the scope and terms of the coverage are coordinated with the nature of the design/build relationship. Typical exclusions to E&O coverage are: warranties and guarantees; faulty workmanship; means and methods of construction; delays in performance; personal injury claims; cost estimates; and services not ordinarily performed by an A/E.
Bonds.
Will performance and payment bonds be required by the owner? As with errors and omissions insurance coverage, the market is coming around to offering products that enable design/build projects to be bonded. Contractors must consult with their brokers and sureties to determine the options for bond coverage, and the limitations upon the scope of that coverage. It remains that sureties will not issue performance bonds for design errors.
Indemnities.
The nature and scope of contract indemnities must be carefully considered. The line of indemnities should follow the party who can control against certain claims, and the party who can insure against certain claims. The trail of indemnities in the standard contract forms may need to be modified to reflect differing insurance risks or allocations. Who will take the primary responsibility with respect to safety, and will be first in the line of fire in the event of a worker injury and subsequent claim?
Unlike the indemnities in the standard form contracts for design-bid-build, the indemnity issues will go beyond the normal insured risks. The contractor and A/E in a design/build team will likely seek indemnities from one another with respect to those risks each would normally assume in a more traditional project delivery process. Thus, the A/E might indemnify the contractor against claims and damage arising out of defective design, and the contractor may indemnify the A/E against claims arising out of defective construction. One word of caution regarding indemnities from an A/E: most E&O policies exclude from coverage liabilities arising out of an express contractual warranty or promise, so an express indemnity from an A/E may not be insured.
Dispute Resolution.
It is critical that a design/build team be able to resolve disputes quickly and efficiently. The dispute resolution clause must recognize this fact, and provide for partnering, mediation or some other alternative - with a quick timetable attached to the process. If the front-line representatives cannot resolve a dispute within, say, 24 hours, then the dispute should go up to the next level for resolution. The players at the next level would have only an additional 24 hours to reach a resolution before the dispute would go up one more level. In this fashion, issues would not linger, crippling the design/build process. An alternative would be for the parties to agree, in advance, upon a person to sit as a mediator, facilitator or arbitrator in the event of a dispute, to reach a resolution quickly in that fashion.
Contract Agreements
Critical Legal Issues
1. Contract Scope
There is never too much that can be said about defining the project scope. The greater the definition, the less likelihood of claims and problems down the road regarding claims for out of scope work, or claims that the design/build team failed to provide what the owner was expecting. Also, the greater the scope, the less likely there will be a dispute between contractor and A/E about the cost and schedule for the work. This aspect of the project requires close coordination and extensive communication between A/E and contractor at the outset.
The most common problems on design/build projects are quantity variations, shifting quality requirements, underestimating subcontractor costs, and unforeseen circumstances. Close collaboration between A/E and contractor during the design development stage, and continuing into the construction documents phase, will hopefully minimize these situations.
2. Design Review
The owner's design review also is a potential trap for the design/build team. The A/E's efforts to respond to owner requests and demands may create tension between A/E and contractor. There are two critical points to keep in mind. First, document the owner's design review carefully, to note requests, changes, approvals, etc. Follow up with the owner to verify the discussion and outcome. Second, include the contractor in the owner's design review - this should not simply be between the owner and A/E, no matter what the nature of the design/build team.
3. Coordination of Design and Construction Efforts
One party has to be designated as the lead for these efforts. No matter how much the parties intend to collaborate and work together, there must be one party or person having final responsibility for coordination of the design with the construction, and with the authority to make decisions or changes as necessary to make sure the design and construction efforts are coordinated so as to maintain the level of quality required and yet stay within the budget.
4. Budgets/Bid Preparation
The assumptions of performance and quality standard must continually be tested by the contractor and A/E together. Many industry participants recommend that both parties prepare independent budget estimates at various times, to act as a check against one another's assumptions and interpretations. Keep checking materials, equipment and timetables to ensure that both are on the same wavelength from a cost and quality standpoint. Again, good communication is key to establishing a design that is within the budget and schedule parameters set by the team.
5. Cost Overruns
Who will guarantee what? Will the A/E agree to redesign as required to make the budget, or in the event of a change or problem during construction that necessitates modification of the building? What will the contractor agree to do in the event of a cost overrun, and what costs can be absorbed by each party? Consider an agreement that each party will absorb its own costs up to a certain point and without compensation from the other party, in the event of cost overruns.
6. Contingencies
Establish a contingency in the design/build budget, and make sure that such a contingency is separate from any contingency that the owner may have. Decide on parameters for tapping into the contingency during the project. Perhaps the parties will agree to each absorb a certain level of costs during performance, and until they can determine whether there will be money left in the contingency at the end of the project; at that time the parties can reimburse themselves out of leftover contingency money. Establish contract conditions with the owner as to who controls it, and when and how the owner's contingency may be tapped by the design/ build team.
7. Schedule/Delays
What is going to happen in the event of a delay? This issue must be addressed not only in the contract with the owner, but in the contract or teaming agreement between contractor and A/E. The circumstances in which the design/build team may be entitled to additional time for completion must be spelled out. And the design/build team members must agree among themselves what liability they may have to one another in the event one causes delay to the other.
8. Owner's Failure to Pay
How is the risk of the owner's non-payment borne by the parties? The simplest solution may be for each party to absorb its own losses, as the parties at least will be able to understand going into the project what those losses may be. However, the parties should consider other alternative approaches to share the risk of non-payment, if that mechanism would not be equitable.
9. Construction Supervision
How are shop drawings going to be handled? How is construction administration going to be handled? What will the A/E's role be during construction? If the A/E and contractor are on the same team, how accessible does the A/E need to be, and what should be the responsibility between them? All of these questions must be answered by the design/build team before entering into a contract for the project. This issue will also be affected by the level of the owner's involvement in the design and construction.
10. Changes
How are changes to be determined? If the design review has been carefully documented, then the room for disagreement between owner and design/build team should be minimized. The contractor and designer must communicate early and often in the design process, and in this manner neither one will be surprised by what the other has done.
11. Liability to Owner
How is the liability to the owner going to be handled? If there is one lead team member (e.g., a contractor who contracts with the owner), then how will owner claims against that member relating to the work of the other member be handled? One option is to negotiate an agreement with the owner that in the event of a claim, the owner will pursue that claim against the responsible party. The problem with this approach is that it gets away from single-point responsibility which is one of the selling points of design/build. Another option mentioned earlier is for a set of indemnities; but keep in mind that an indemnity is only as good as the party behind it, which means that the indemnity may be worthless in the event of financial failure of a party.
12. Construction Performance
Who is responsible for safety? For means and methods of construction? For coordinating the trade contractors? Whether the A/E and contractor agree to carry their traditional roles into the design/build process, or whether they agree to modify the "traditional" roles, must be decided and documented.
13. Warranties
This issue is tricky for design professionals. Any express warranty will likely be excluded from coverage under the applicable E&O policy. One way around this is the form of warranty in the EJCDC design/build contract form, where the warranty extends only to the constructed project and portions of that project, and not to any elements of the design.
14. Third-Party Liabilities
The indemnities must be established to follow the trail of insurance or of control over aspects of the project. Furthermore, the contractor and A/E must agree on their liability as against one another in the event of a claim that is not covered by insurance. Consider waivers of subrogation, but talk to your insurance carrier and broker about such a waiver. (Note that insurance carriers do not like waivers of subrogation, but the insured parties may nevertheless insist upon waivers in order to know that there will not be an "end run" on the allocation of insurance risk.)
I. A/E as Design/Builder
A/Es who take on the lead role as the design/builder are in for the greatest shock with respect to potential liability and risk. In doing so, they may not be covered by the standard professional liability insurance coverages for many of the most common risks of the construction process. Following is a short list of the additional risks the A/E will incur by becoming the lead member of the design/build team.
Faulty or Defective Work
The A/E will be responsible for making sure that the work is performed in accordance with the construction documents. In fact, under this scenario, the contractor will be insulated from claims by the owner for defective work. With respect to the owner, the A/E will be liable for faulty workmanship on the part of the contractor or trade contractors. In order for the A/E to act in the lead role, the A/E must require some form of indemnity from the contractor on this issue and others. And the owner will expect the A/E to indemnify it against defects in both design and construction.
Means/Methods and Safety.
The A/E may be liable for site safety, and for construction means and methods. This means that the A/E will be exposed to OSHA citations and penalties, and may have a more difficult time arguing that the job site is not a "place of employment" (the standard by which A/E's have managed to duck OSHA liability in recent past). The A/E will have increased liability to claims and lawsuits by injured workers and other third parties. In response to all this exposure, the A/E will have more difficulty arguing that its involvement on the jobsite was minimal, as many of the standard protections of the AIA documents regarding construction administration will be missing. For example, the A/E as lead design/build team member will not be able to take the position, vis-à-vis the owner, that its review of shop drawings was for the limited purpose of determining whether such drawings were consistent with the intent of the design; any discrepancies or mistakes in the shop drawing process will become the A/E's problem.
Budget.
If the work cannot be performed within the project budget, the lead A/E will bear at least some of the risk of cost overruns. The allocation of this risk will depend upon the subcontract with the contractor, but a lead A/E cannot expect to reap the benefits or rewards of carrying the project without bearing some of the attendant risk.
Conflicts of Interest.
In this scenario, the lead A/E's interests will be so wrapped up with those of the contractor that the A/E will lose some of the independence that it has traditionally prided itself on. Although the client owner may continue to expect that the A/E is protecting the owner's interests, the reality is that the A/E will be pulled between the interests of the owner and those of the contractor performing the work for the A/E.
Contractor Concerns.
The contractor in this relationship must understand the A/E's conflicting responsibilities to the owner and to the design/build relationship. Where the A/E is the lead, the contractor must have a clear understanding of what the A/E will do in the event of a conflict between the desires of the owner and the A/E's own professional standards.
Summary.
The assets of the A/E will be at risk in the way that many contractors are used to, but few A/Es have considered. Furthermore, the A/E will probably be unable to procure any payment or performance bonds if requested by the owner/client. And to top it off, the A/E will be responsible in the event the contractor encounters financial difficulty and is unable to complete the work. Few of these risks will be covered by any malpractice insurance procured by the A/E.
As discussed in more detail below, some potential risks are not dependent upon the nature of the team. On balance, the A/E in the lead role will incur additional legal risk beyond that of the traditional design-bid-build format. Weighed against this additional potential risk is the likely diminished practical risk, due to the collaborative nature of the A/E's relationship with the contractor, and the ability to work out directly many of the issues typically giving rise to construction claims.
II. Contractor as Design/Builder
This structure is much more common than the A/E in the lead role. One primary reason for this structure is the financial capacity of most contractors relative to that of most A/E's. However, there are a number of issues of concern to a contractor undertaking the lead role on the design/build team.
Responsibility for Design.
As between owner and design/build team, the contractor lead will be responsible for a proper design. This includes compliance with all applicable codes, regulations and industry standards. Design issues arising at substantial completion which delay obtaining a certificate of occupancy will not excuse the contractor's performance relative to the owner. The contractor will have no defense to claims by the owner, and will have no right to additional compensation, in the event of an inadequate, incomplete or defective design.
Delay in Design.
Any delay in the performance of the design will not entitle the contractor to additional time or money from the owner. The contractor and A/E will have to work out coordinated schedules for completion of the design as the construction work goes forward.
A/E's Allegiance.
A concern for contractors in this relationship is the A/E's allegiances. The contractor and the A/E must discuss ahead of time how the A/E intends to deal with conflicts between the desires and demands of the owner, and those of the contractor or the design/build entity. Although the design professional will be working directly for the contractor, many A/E's will not be able to make the transition between working for an owner (and all that entails) and working for a contractor. The natural tension that has existed on a traditional design-bid-build project - among owner, contractor and design professional - will be mostly missing or completely gone.
III. A/E - Contractor Joint Venture
This format of pursuing design/build work may make the most sense. Here neither the A/E or contractor takes the position of "lead", but rather they agree among themselves (and perhaps even with the owner) who is responsible in the event of any claims. A joint venture is a special form of partnership, and the term is usually applied to a partnership that is established by two or more companies for the purpose of pursuing or performing a single project. There are a few critical legal issues to keep in mind.
Joint and Several Liability.
A co-venturer may be held liable to the owner for the entire obligations of the joint venture. The owner may pursue either one or both joint venture members, and in the event of the financial failure of one of them may simple pursue the other for the full obligation. Each co-venturer has rights against the other, according to a written agreement between them (if there is one) or according to common law principles; but that is of little consequence to the only remaining solvent party in a joint venture. In a joint venture scenario, each co-venturer must take steps to ensure that it can survive the failure of the other party.
Tax Implications.
This is not a tax paper, but a simple aspect of a joint venture is that each co-venturer is treated for tax purposes as a partner, and taxed only at a single level. In other words, there is no corporate tax in addition to any tax on dividends or salaries.
Differing Capital Interests.
A joint venture can easily accommodate differing financial interests in the JV entity. It is not necessary that the co-venturers share equally in the risks and rewards, or that they contribute equal amounts of capital. The parties are free to reach an accommodation suitable for their particular situation.
IV. Separate Corporate Entity
In lieu of setting up a joint venture, parties to a design/build project may establish a separate corporate entity. While this creates a more formal relationship, there are a few advantages and problems.
Liability.
Shareholders of a corporation are sheltered from the liabilities of the corporate entity. So long as the corporation acts as a distinct entity, and the parties do not blur the distinction between the corporate identity and their own identities (personally or as members of other entities), the owners will not be personally liable for the obligations of the corporation. However, if the corporation is established for a particular project, and/or is thinly capitalized, the owner may insist upon guarantees from the corporate owners, and the advantages of the corporate status may be lost vis-à-vis the owner.
Tax Implications.
Income to a corporation is normally taxable both at the corporate level, and at the level of distributions, dividends or salaries. One exception to this rule is for so-called "Sub-Chapter S" corporations, named after a section of the Internal Revenue Service code. Owners of Sub-S corporations can receive the net income from the corporation free of taxes at the corporate level, and be taxed only upon distributions or salaries. There are certain limitations upon Sub-S corporations and restrictions that must be followed for this tax status to apply.
Licensing.
The Massachusetts licensing statutes restrict the performance of design services to registered architects and registered engineers. While such persons may practice as employees of a corporation, any contract executed on behalf of the corporation that includes design services must be signed by the registered design professional, and the design work performed by that person (or another employee who is also a registered design professional) or by other employees under that person's direct supervision.
V. Common Risks and Responsibilities
A few issues will remain no matter the team format, and must be considered in any design/build team agreement.
Insurance.
Both the A/E and the contractor will likely carry comprehensive general liability insurance. Both must consider the additional coverages commonly available, to determine the need, utility and cost of those coverages. Common added endorsements include contractual liability and completed operations coverages. Both A/E and contractor must discuss these coverages with their own insurance broker or company.
The A/E needs to discuss the professional errors and omissions coverages available. The insurance market has come out with new endorsements for design/build projects in the past two years, which eliminate some of the impediments that previously existed to obtaining A/E insurance on design/build projects. This coverage must be carefully explored, as well, to ensure that the scope and terms of the coverage are coordinated with the nature of the design/build relationship. Typical exclusions to E&O coverage are: warranties and guarantees; faulty workmanship; means and methods of construction; delays in performance; personal injury claims; cost estimates; and services not ordinarily performed by an A/E.
Bonds.
Will performance and payment bonds be required by the owner? As with errors and omissions insurance coverage, the market is coming around to offering products that enable design/build projects to be bonded. Contractors must consult with their brokers and sureties to determine the options for bond coverage, and the limitations upon the scope of that coverage. It remains that sureties will not issue performance bonds for design errors.
Indemnities.
The nature and scope of contract indemnities must be carefully considered. The line of indemnities should follow the party who can control against certain claims, and the party who can insure against certain claims. The trail of indemnities in the standard contract forms may need to be modified to reflect differing insurance risks or allocations. Who will take the primary responsibility with respect to safety, and will be first in the line of fire in the event of a worker injury and subsequent claim?
Unlike the indemnities in the standard form contracts for design-bid-build, the indemnity issues will go beyond the normal insured risks. The contractor and A/E in a design/build team will likely seek indemnities from one another with respect to those risks each would normally assume in a more traditional project delivery process. Thus, the A/E might indemnify the contractor against claims and damage arising out of defective design, and the contractor may indemnify the A/E against claims arising out of defective construction. One word of caution regarding indemnities from an A/E: most E&O policies exclude from coverage liabilities arising out of an express contractual warranty or promise, so an express indemnity from an A/E may not be insured.
Dispute Resolution.
It is critical that a design/build team be able to resolve disputes quickly and efficiently. The dispute resolution clause must recognize this fact, and provide for partnering, mediation or some other alternative - with a quick timetable attached to the process. If the front-line representatives cannot resolve a dispute within, say, 24 hours, then the dispute should go up to the next level for resolution. The players at the next level would have only an additional 24 hours to reach a resolution before the dispute would go up one more level. In this fashion, issues would not linger, crippling the design/build process. An alternative would be for the parties to agree, in advance, upon a person to sit as a mediator, facilitator or arbitrator in the event of a dispute, to reach a resolution quickly in that fashion.
Contract Agreements
Critical Legal Issues
1. Contract Scope
There is never too much that can be said about defining the project scope. The greater the definition, the less likelihood of claims and problems down the road regarding claims for out of scope work, or claims that the design/build team failed to provide what the owner was expecting. Also, the greater the scope, the less likely there will be a dispute between contractor and A/E about the cost and schedule for the work. This aspect of the project requires close coordination and extensive communication between A/E and contractor at the outset.
The most common problems on design/build projects are quantity variations, shifting quality requirements, underestimating subcontractor costs, and unforeseen circumstances. Close collaboration between A/E and contractor during the design development stage, and continuing into the construction documents phase, will hopefully minimize these situations.
2. Design Review
The owner's design review also is a potential trap for the design/build team. The A/E's efforts to respond to owner requests and demands may create tension between A/E and contractor. There are two critical points to keep in mind. First, document the owner's design review carefully, to note requests, changes, approvals, etc. Follow up with the owner to verify the discussion and outcome. Second, include the contractor in the owner's design review - this should not simply be between the owner and A/E, no matter what the nature of the design/build team.
3. Coordination of Design and Construction Efforts
One party has to be designated as the lead for these efforts. No matter how much the parties intend to collaborate and work together, there must be one party or person having final responsibility for coordination of the design with the construction, and with the authority to make decisions or changes as necessary to make sure the design and construction efforts are coordinated so as to maintain the level of quality required and yet stay within the budget.
4. Budgets/Bid Preparation
The assumptions of performance and quality standard must continually be tested by the contractor and A/E together. Many industry participants recommend that both parties prepare independent budget estimates at various times, to act as a check against one another's assumptions and interpretations. Keep checking materials, equipment and timetables to ensure that both are on the same wavelength from a cost and quality standpoint. Again, good communication is key to establishing a design that is within the budget and schedule parameters set by the team.
5. Cost Overruns
Who will guarantee what? Will the A/E agree to redesign as required to make the budget, or in the event of a change or problem during construction that necessitates modification of the building? What will the contractor agree to do in the event of a cost overrun, and what costs can be absorbed by each party? Consider an agreement that each party will absorb its own costs up to a certain point and without compensation from the other party, in the event of cost overruns.
6. Contingencies
Establish a contingency in the design/build budget, and make sure that such a contingency is separate from any contingency that the owner may have. Decide on parameters for tapping into the contingency during the project. Perhaps the parties will agree to each absorb a certain level of costs during performance, and until they can determine whether there will be money left in the contingency at the end of the project; at that time the parties can reimburse themselves out of leftover contingency money. Establish contract conditions with the owner as to who controls it, and when and how the owner's contingency may be tapped by the design/ build team.
7. Schedule/Delays
What is going to happen in the event of a delay? This issue must be addressed not only in the contract with the owner, but in the contract or teaming agreement between contractor and A/E. The circumstances in which the design/build team may be entitled to additional time for completion must be spelled out. And the design/build team members must agree among themselves what liability they may have to one another in the event one causes delay to the other.
8. Owner's Failure to Pay
How is the risk of the owner's non-payment borne by the parties? The simplest solution may be for each party to absorb its own losses, as the parties at least will be able to understand going into the project what those losses may be. However, the parties should consider other alternative approaches to share the risk of non-payment, if that mechanism would not be equitable.
9. Construction Supervision
How are shop drawings going to be handled? How is construction administration going to be handled? What will the A/E's role be during construction? If the A/E and contractor are on the same team, how accessible does the A/E need to be, and what should be the responsibility between them? All of these questions must be answered by the design/build team before entering into a contract for the project. This issue will also be affected by the level of the owner's involvement in the design and construction.
10. Changes
How are changes to be determined? If the design review has been carefully documented, then the room for disagreement between owner and design/build team should be minimized. The contractor and designer must communicate early and often in the design process, and in this manner neither one will be surprised by what the other has done.
11. Liability to Owner
How is the liability to the owner going to be handled? If there is one lead team member (e.g., a contractor who contracts with the owner), then how will owner claims against that member relating to the work of the other member be handled? One option is to negotiate an agreement with the owner that in the event of a claim, the owner will pursue that claim against the responsible party. The problem with this approach is that it gets away from single-point responsibility which is one of the selling points of design/build. Another option mentioned earlier is for a set of indemnities; but keep in mind that an indemnity is only as good as the party behind it, which means that the indemnity may be worthless in the event of financial failure of a party.
12. Construction Performance
Who is responsible for safety? For means and methods of construction? For coordinating the trade contractors? Whether the A/E and contractor agree to carry their traditional roles into the design/build process, or whether they agree to modify the "traditional" roles, must be decided and documented.
13. Warranties
This issue is tricky for design professionals. Any express warranty will likely be excluded from coverage under the applicable E&O policy. One way around this is the form of warranty in the EJCDC design/build contract form, where the warranty extends only to the constructed project and portions of that project, and not to any elements of the design.
14. Third-Party Liabilities
The indemnities must be established to follow the trail of insurance or of control over aspects of the project. Furthermore, the contractor and A/E must agree on their liability as against one another in the event of a claim that is not covered by insurance. Consider waivers of subrogation, but talk to your insurance carrier and broker about such a waiver. (Note that insurance carriers do not like waivers of subrogation, but the insured parties may nevertheless insist upon waivers in order to know that there will not be an "end run" on the allocation of insurance risk.)
Legality of Private and Public Design/Build Projects in New England and New York
| Issues | Connecticut | Maine | Massachusetts | New Hampshire | New York | Rhode Island | Vermont |
| Allow combined design and con-struction contracts? | Yes | Yes - public projects | Yes - private projects | Yes | No | Yes | Yes |
| Expressly prohibit combined contracts? | No | No | Yes - public projects | No | Yes | No | No |
| D/B permitted on public projects? | Yes | Yes | No | Yes | No | Yes | Yes |
| D/B subcontractors permitted? | Yes | Yes | Yes - private projects | Yes | No | Yes | Yes |
Source: Survey of State Procurement Laws Affecting Design/Build, Design/Build Institute of America (April 1996).