Jones, Waldo, Holbrook & McDonough, P.C. NAVIGATING DESIGN-BUILD LIABILITY 2016 American Insurance & Investment Design Conference Craig R. Mariger Jones, Waldo, Holbrook & McDonough, P.C. 170 S. Main St., Suite 1500 Salt Lake City, UT 84101 Telephone: 801-521-3200 Email: cmariger@joneswaldo.com 1224968

DESIGN-BUILD PROJECT DELIVERY: WHAT IS IT Definition: The Owner contracts with one entity which has responsibility for both designing and constructing the facility 2. Design-Build Project Delivery is not design delegation 1224968

MOST FREQUENTLY USED PROJECT DELIVERY METHODS Design – Bid – Build Construction Manager – At Risk (CM/GC) 3. Design-Build (EPC; Turn-Key; Design-Build-Operate-Maintain; Design-Build-Operate-Transfer) 1224968

DESIGN-BID-BUILD OWNER DESIGN PROFESSIONAL GENERAL CONTRACTOR DESIGN CONSULTANT DESIGN CONSULTANT SUBCONTRACTOR SUBCONTRACTOR DESIGN BID BUILD 1224968

CONSTRUCTION MANAGER-AT RISK OWNER DESIGN PROFESSIONAL CONSTRUCTION MANAGER GENERAL CONTRACTOR DESIGN CONSULTANT DESIGN CONSULTANT SUBCONTRACTOR SUBCONTRACTOR DESIGN BID BUILD 1224968

DESIGN-BUILD OWNER CRITERIA CONSULTANT DESIGN-BUILDER DESIGN PROFESSIONAL GENERAL CONTRACTOR DESIGN CONSULTANT DESIGN CONSULTANT SUBCONTRACTOR SUBCONTRACTOR DESIGN BID BUILD 1224968

DESIGN-BUILD DELIVERY - INTEGRATED OWNER CRITERIA CONSULTANT INTEGRATED DESIGN-BUILDER IN-HOUSE DESIGN IN-HOUSE CONSTRUCTION SUBCONTRACTOR SUBCONTRACTOR 1224968

DESIGN-BUILD DELIVERY – SPECIAL PURPOSE BUSINESS ENTITY LED OWNER GENERAL CONTRACTOR DESIGN PROFESSIONAL CRITERIA CONSULTANT SPECIAL PURPOSE ENTITY DESIGN-BUILDER GENERAL CONTRACTOR DESIGN PROFESSIONAL SUBCONTRACTOR SUBCONTRACTOR DESIGN CONSULTANT DESIGN CONSULTANT 1224968

DESIGN-BUILD DELIVERY – DESIGNER LED OWNER CRITERIA CONSULTANT DESIGN-BUILD DESIGN FIRM IN-HOUSE DESIGN GENERAL CONTRACTOR DESIGN CONSULTANT DESIGN CONSULTANT SUBCONTRACTOR SUBCONTRACTOR 1224968

DESIGN-BUILD DELIVERY – CONTRACTOR LED OWNER CRITERIA CONSULTANT DESIGN-BUILD CONTRACTOR IN-HOUSE CONSTRUCTION DESIGN PROFESSIONAL DESIGN CONSULTANT DESIGN CONSULTANT SUBCONTRACTOR SUBCONTRACTOR 1224968

DESIGN-BUILD: THE PROS AND CONS Shorter Project Duration Single Point Responsibility Owner Eliminates Risk of Impliedly Warranting Construction Documents Fewer Change Orders and Claims The Owner Can Procure Performance Warranties Earlier Cost Data That is More Reliable Better Communication and Less Adversity Between D/B and DP Lower Design Costs – Less “Defensive Detailing” Loss of Checks and Balances Protective of the Owner Less Owner Control of Design and the Project Lower Quality Design That is Driven by Costs and Constructability Legal Obstacles: Licensing Laws, Procurement Laws, and Insurance Products Less Competition in Procurement For Public Projects, Procurement Process is Lengthier and More Complicated The Delivery Method is Not Well Suited to Unsophisticated Owners There is Little Precedent and More Uncertainty Regarding Interpretation of Contract Forms 1224968

PROJECT SHARE NON-RESIDENTIAL CONSTRUCTION 70%    60%       50% 40%        30%   20% 0% 2005 2006 2007 2008 2009 2010 2011 2012 2013    DESIGN-BID-BUILD    DESIGN-BUILD Data: RS Means Market Intelligence 1224968

STATISTICS OF INTEREST The Construction Industry is the only major industry in the U.S. to have a decrease in productivity between 1964 and present On average, productivity of U.S. industries has more than doubled since 1964. Mark Konchar and Victor Sanvido, Nov./Dec. 1998 Journal of Construction Engineering and Management Study of 351 domestic building projects that used Design-Bid-Build, CM at risk and Design-Build Unit cost of Design-Build was 6.1% less than Design-Bid-Build and 4.5% less than CM at risk Construction speed of Design-Build was 12% faster than Design-Bid-Build and 2% faster than CM at risk Cost growth of Design-Build was 5.2% less than Design-Bid-Build and 12.6% less than CM at risk Schedule growth of Design-Build was at least 11.37% less than Design-Bid-Build and 2.18% less than CM at risk 1224968

LEGAL ISSUES UNIQUE TO DESIGN-BUILD D/B’s Expressed or Implied Warranty of Performance DP’s standard of care DP’s warranties DP’s Potential Conflicts of Interest DP does not contract with Owner DP’s contractual and financial incentives are congruent with D/B, not the Owner Owners have historically viewed design professionals as protecting their interests Under licensing laws and codes of professional ethics, DPs have a duty for public health and safety which may conflict with interests of D/B 1224968

LEGAL ISSUES UNIQUE TO DESIGN-BUILD Licensing Law Issues Utah courts have not interpreted the licensing laws. Read literally, one cannot offer or contract to perform professional services for which one is not licensed DOPL has permitted offers by unlicensed persons to provide licensed professional services through contracts with licensed design professionals Given the Utah legislatures’ recent attention to Design-Build public procurement, it ought to clarify licensing laws Public Procurement Law Issues 2013 and 2014 Amendments to the Utah Procurement Code, UCA Section 63G-6a-101 et seq. (UPC) generally permits Design-Build procurements by “local government procurement units” (including counties, cities and towns adopting the UPC) 2014 Amendments to UCA Section 11-39-101 et seq. appear to permit Design-Build procurement by “Local Entities” (counties, cities and towns, local districts and special service districts) that do not adopt the UPC but the Local Entity must contract with a Design Professional to consult with regarding Design-Build 1224968

Contract Issues of Design-Build Standard of Care Negligence based or required to adhere to performance standard Standard contract forms may create uninsured liability Consensus Docs – “the standard of professional skill and care required for a Project of similar size, scope and complexity” Evidences a performance standard – “the skill and care required for project to succeed” Not consistent with common law standard of care DBIA – “notwithstanding Section 2.2.1 above [negligence standard], if the Design-Build Agreement, including but not limited to the Basis of Design Documents, contain specifically identified performance standards for aspects of the Work, Design Consultant agrees that all Services shall be performed to achieve such standards” 1224968

Contract Issues of Design-Build Warranties Express warranties to achieve a performance standard – DBIA Express warranties to comply with applicable codes Both Consensus Docs and DBIA require code compliance Express or implied warranties that plans and specifications are suitable for GMP Proposal Consensus Docs – Review GMP proposal and advise D/B of any errors discovered DBIA – If requested by D/B, prepare design documents necessary for establishment of GMP Proposal Are all warranties other than warranty to conform to standard of care disclaimed? Not in Consensus Docs or DBIA contract forms Risk of Implied Warranty of fitness for purpose Commentators: A warranty of fitness is implied in Design-Build. An implied warranty of fitness can be disclaimed 1224968

Contract Issues of Design-Build Indemnities Are contractual indemnities negligence based? Bodily injury and property damage Consensus Docs and DBIA are negligence based Delay Damages Consensus Docs – actual direct damages of delay DBIA – All costs, damages and expenses arising from a delay including LD’s imposed by Owner on D/B Do indemnities require DP to “defend” Consensus Docs and DBIA do not require Some standard indemnities are uninsurable For patent and copyright infringement Liens and claims by sub-consultants 1224968

Contract Issues of Design-Build Liquidated Damages Raise insurance issues. Contractually assumed liability DBIA – Flow down of Owner imposed LD’s Delay Damages Failure to meet performance standards of Basis of Design documents Limitations of Liability Consensus Docs and DBIA do not include traditional limitation of liability of the DP Waiver of Consequential Damages Consensus Docs and DBIA – only if Prime Agreement does not permit consequential damages to be recovered from D/B Significance of consequential damages if designing to a performance standard Assure that D/B has procured the waiver Waiver of subrogation Consensus Docs and DBIA include 1224968

Contract Issues of Design-Build Conflicts of Interest Requirement to certify to Owner Payment Applications Consensus Docs and DBIA do not require Loose use of AIA Document G702/G703 Application for Payment Forms Substantial Completion or Final Completion Consensus Docs does not require DP certification DBIA permits D/B to require DP to certify (unclear to whom certification is made) Requirement to notify Owner of defects observed during site observations. Consensus Docs and DBIA require reports to D/B, not to Owner 1224968

Contract Issues of Design-Build D/B’s procurement of professional liability insurance Consensus Docs and DBIA permit professional liability insurance to be procured by D/B through DP Shared limits Increased claim exposure DPs should require D/B to procure its own professional liability insurance Owner as third-party beneficiary of Design Contract Obligation to indemnify Owner Consensus Docs and DBIA make Owner an indemnitee of DP’s general indemnity and patent and copyright indemnity Owner as an express intended third-party beneficiary Consensus Docs and DBIA do not do so, other than for indemnities Commentators recommend D/B make Owner a third-party beneficiary of Design Contract Disclaimer of third-party beneficiary Consensus Docs and DBIA do not disclaim 1224968

Contract Issues of Design-Build Prevailing Party Attorneys’ Fees Contractually assumed liability – uninsurable Consensus Docs and DBIA include Interference with DP’s duties to protect the public health and safety DP have duty under licensing statutes and ethical standards to protect the public health and safety in the design of structures Do Design-Build agreements interfere Consensus Docs is silent on the issue DBIA recognizes the duty and permits direct contact with Owner (provided a written copy is given to D/B) 1224968

Contract Issues of Design-Build Allowance of less complete CD’s One of the alleged efficiencies of Design-Build is less “defensive detailing” Common understanding – less detailed CD’s are expected in Design-Build Common experience – less detailed CD’s are delivered in Design-Build No contract basis for this. Consensus Docs and DBIA require detailed and complete CD’s Flow down of Prime Agreement Is the flow down limited Consensus Docs and DBIA limit flow down: to the extent applicable to the performance of DP’s services Does the flow down expose DP to uninsured risk not in Design Contract Consensus Docs requires compliance of design with Codes in Prime Contract only 1224968

CDC Claims Data Warehouse 18 April 2018 CDC Claims Data Warehouse Over 8,500 claims of all types for period 2003-current Over 60 different project types categorized Contract Type, Procurement Method, Contractor Selection all categorized Over 450 Design/Build Claims logged, including 17 Design/Build/Operate/Transfer D/B projects and D/B/O/T represent $34MM in total claims of $683MM represented in the CDC (total claims = loss paid + loss expense paid) or approximately 5% of total © 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 1224968

Who Is Involved in D/B Claims? 18 April 2018 Who Is Involved in D/B Claims? © 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 1224968

The Frequency and Variability Question 18 April 2018 The Frequency and Variability Question Standard Deviation is a measure of the variability around the mean © 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 1224968

Which D/B Projects Experienced Most Claims? 18 April 2018 Which D/B Projects Experienced Most Claims? Point of this is that they are certainly not infrastructure. No single project type predominates, though residences as an aggregate category account for ~33%. © 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 1224968

And How Much Did Those Claims Represent by Project Type? Residential $12.7MM Recreational $0.5MM Institutional $7.2MM Infrastructure $3.6MM Industrial $4.0MM General Building $6.1MM Environmental Total $34.1MM © 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 1224968

18 April 2018 Highly Significant Differences Exist Where the Designer’s CA Services Were Limited © 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 1224968

Was LoL Negotiated in the Contract? This is significantly different from the overall LoL use rate on non-D/B projects Designers are at a significant disadvantage when they are limited on their CA services and have no LoL negotiated up-front © 2011, XL Group plc companies. All rights reserved. I MAKE YOUR WORLD GO 1224968

DESIGN PROFESSIONAL CLAIM EXPERIENCE 1. Per claim severity is not greater on average for Design-Build Claim incidence per dollars of revenue is unknown, but XLDP does not think it is appreciably different XLDP believes residential exposure in Design-Build is disproportionate to its overall claims experience with residential construction 4. Design-Build does not reduce the risk of residential projects, and likely increases the risks 5. Take-Aways Contract for full construction observation Request limitation of liability c. Consider turning down Design-Build residential projects 1224968

NAVIGATING DESIGN-BUILD LIABILITY QUESTIONS 1224968