-Partners in Practice -

Twelve members of the a/e Select Risk Management Forum met recently at the Advanced Management Institute in San Francisco to discuss design-build project delivery systems and the unique risks they pose for architects and engineers. Forum members were joined by Rik Kunnath, Executive Vice President of Charles Pankow Builders and former Chairman of the Design-Build Institute of America. The discussions were focused on identifying best practices for managing the risks of design-build project delivery where a general contractor assumes the role of design-builder.

There was no disagreement with the proposition that the design-build project delivery system, regardless of its configuration, is fraught with the potential for increased risk over the more traditional design-bid-build approach. But it also became clear that design-build offers opportunities for managing risknot available under the traditional approach, opportunities which could lead to improved project delivery and better project outcomes. Identifying those opportunities is the focus here.

The place to start is with an understanding of the nature of the increased risk. A primary source of that risk lies in the difference between the contractor's historical assumption of the risk of a guaranteed outcome and the design professional's more limited assumption of the risk of negligence in the performance of professional services--leaving to the owner the obligation of furnishing to the contractor a design presumed to be suitable for its intended purpose. In other words, the contractor has traditionally been the guarantor of the construction and the owner the guarantor of the design.

Neither guarantee is fully insurable. But, at least in theory, the risk undertaken by the contractor is commensurate with the profit expectations built into the construction cost. The risk undertaken by the owner, that of non-negligent design errors and omissions, is likewise commensurate with the gain to be realized as a result of a successful outcome.

Architects and engineers have rarely been offered such lofty profits as would justify their participation in either the owner's risk or the contractor's. But altogether too often, they have been reluctant participants in disputes between the two over whose performance guarantee was to be called upon to right things gone wrong. The possibility that negligence in design may have been the cause of everyone's woe has simply been too attractive to ignore.

On a design-build project, where the owner is looking for a single point of responsibility for project delivery and performance, allocation of the uninsurable risk of non-negligent errors and omissions in the design is a key issue. The question is this: Who is going to assume responsibility for the owner's risk? The most obvious answer is to leave it where it belongs, but this is often inconsistent with the benefits the owner expects from design-build, and it may be altogether impractical in today's intensely competitive environment. The alternative is for the design-builder to assume the risk, but then what?

Contractors are accustomed to managing assumed risks, and those who lead design-build teams can be expected to apply time-tested formulas. Where possible, risks which cannot be left at the owner's doorstep are simply transferred to subcontractors. Those which cannot be transferred are typically quantified, and the cost of managing them built into the project.

What this means to architects and engineers is that they can expect some design-builders to seek to pass the design guarantee obligation through to them. Contractors with more experience and a longer term focus will recognize that other ways need to be found to manage this risk. They will seek to build strategic alliances with design partners which can be strengthened over time, and they will build adequate contingencies into their projects to deal with the consequences of the unresolved design issues they know they will encounter during construction.

In assuming responsibility for design, experienced design-build contractors find themselves swept up in a major paradigm shift. They recognize that they are no longer in a position to look to the owner for recourse--they can only look to their own design team, and there is far less incentive for them to do so. Where true partnerships are forged, they may even forego opportunities to pursue borderline allegations of negligence in the interest of preserving the greater benefits of a long term relationship with a valued partner. Herein, clearly, lie both a challenge and an opportunity.

Other design-build risks for architects and engineers are being generated by owners seeking to secure the cost and time saving benefits of design-build without relinquishing access to independent professional advice from the design team. Some pursue this objective through contract terms which seek to establish a right on the part of the owner to direct the activities of the prime professional (whose contractual obligations run to the design-build contractor) throughout the project. This is clearly unworkable from the point of view of both the design-builder and the prime professional. It is generally rejected and successfully so.

Other owners, particularly in the public sector, are experimenting with a variation on the "two step" approach to design build, under which the prime professional is retained by the owner through sufficient design development for the owner to seek design-build bids. In this version, one of the conditions of the bid package is that the design-builder retain the original design team to complete the design and provide construction phase services. The design-builder can probably live with this because of the control it is likely to be in a position to exercise under the design-build contract. For the design team, this permutation of the two step approach can be considerably more problematic.

For one thing, it forces a "shotgun wedding" with a design-builder not necessarily of the design team's choosing. This gives rise to an increased probability of a difficult working relationship. At the same time, the design team is placed in the impossible position of having taken direction from and made commitments to the owner and then being required to change allegiance and take directions from a new client, the design-builder. This split responsibility can leave the owner at least partially exposed to design-related claims from the design builder. It can also leave the design team squarely in the middle. The result is a high potential for the same complex disputes that caused owners to turn to design-build in the first place.

Public projects appear to be less likely candidates for successful design-build delivery than private work, where effective team building is more often reinforced by mutual, long-term objectives. A successful private project can lead to repeat work. A successful public project can lead only to the next bidders' list. Because of this, public work is more likely to foster pick-up design-build teams formed on the basis of short-term convenience. Although this latter problem can be overcome, the possibility of building long-term, mutually beneficial relationships with public owners is remote.

Contractors who assume the role of design-builder are in a position either to manage the increased risks of design-build or to exacerbate them. Those who fail to build teams likely to benefit from established working relationships, those whose focus on fee bids govern their selection of architects and engineers, and those who act on the assumption that professional service providers can be managed like any other subcontractor in construction are more (as opposed to less) likely to be the source of costly problems. This is an element of risk that architects and engineers can control, and they would be well advised to think through, outside the context of the pursuit of any particular project opportunity, just how they are going to exercise that control.

The contractor's inevitable and essential focus on construction costs can be another source of conflict. On the one hand, from the contractor's point of view there is more than enough uncertainty on a building project without the added complication of design changes after the price has been cast in stone. On the other, the contractor may have a difficult time understanding why some cost saving alternatives have to give way to the protection of the integrity of the design. Architects and engineers will need to clear new fields of mutual accommodation in their relationship building with design-build contractors, and issues of cost are likely to litter those fields. At the same time, there is opportunity here. It resides in the potential for meaningful, ongoing constructability analysis during design.

Contractors come in many shapes and sizes, and some are more sophisticated than others. The differences can be particularly stark when it comes to understanding contracting risks and bringing appropriate resources to bear on the negotiation and allocation of those risks. Contractors who are accustomed to accepting whatever they are handed are going to have a difficult time dealing equitably with professionals who bring to the table a more sophisticated understanding of risk and a more protective standard of care. They are also more likely to take on projects with the seeds of disaster planted long before the ink is dry. Sophisticated contractors make better design-build partners.

Architects and engineers bring enormous skill and experience to the design-build team. So, too, do competent contractors, but they are very different skills. Designers are accustomed to beginning with an ill-defined problem and moving toward its solution, from the ambiguous to the specific, in an iterative, often disjointed manner. Their aim is to narrow options and increase focus over time. Contractors start with a problem which is presumably well defined in the construction documents. They formulate and price their solution, and they bring their expertise in managing complex projects to bear on implementing that solution on time and within budget. Fires are extinguished along the way as expeditiously as possible. There is little room for iterative problem solving.

On a design-build project, architects and engineers have to adapt to the reality that they are not likely to be in a position, either to respond to an evolving understanding of the owner's needs or even to continue to incorporate their own, iterative refinements to the design, once the price has been fixed by the design-builder. It is an unaccustomed role for most architects and engineers, but, they are somehow going to have to come to a working understanding with the design-build contractor based on a far more restrictive obligation to get it right the first time than they have had on traditional design-bid-build work.

All this leads us to the formulation of best practices, drawn from the experience of those who have begun clearing fields of misunderstanding. That is the focus of "Design-Build, Part II." Look for it in the next issue of Perspectives on Professional Liability.

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