1. Jones, Waldo, Holbrook & McDonough, P.C.
NAVIGATING DESIGN-BUILD LIABILITY 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:

2. 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

3. 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)

4. DESIGN-BID-BUILD OWNER DESIGN PROFESSIONAL GENERAL CONTRACTOR DESIGN
CONSULTANT
DESIGN
CONSULTANT
SUBCONTRACTOR
SUBCONTRACTOR
DESIGN
BID
BUILD

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

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

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

8. 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

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

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

11. 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

12. 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

13. 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 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

14. 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

15. 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 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

16. 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 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”

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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)

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. NAVIGATING DESIGN-BUILD LIABILITY
QUESTIONS