-Partners in Practice -

Vol. 15 No. 3		December 1996

What have some of the leading firms in the Bay Area learned about managing the risks of design-build where a general contractor has assumed the lead role? Here is a summary of the conclusions reached in a recent three hour discussion among members of the a/e Select Risk Management Forum at the Advanced Management Institute in San Francisco:

Develop a sound basis for long-term working relationships with design-build contractors who specialize in the same building types you do before you set out to pursue work as a design-build team.

Pick up teams of architects and engineers unfamiliar with one another do not function smoothly, and neither do hasty engagements or shotgun marriages between design professionals and contractors. There are simply too many issues to resolve to attempt to define working relationships and mutual expectations in the heat of proposal preparation. Select your partners carefully, and start with small projects. Use them to gain experience and smooth rough edges. Here is an opportunity to reduce your risk and increase your success rate at the same time, for sophisticated clients are looking for design-build teams who can demonstrate a history of effective working relationships, integrated procedures, and successful projects of like kind.

Seek out sophisticated design-build contractors whose management practices reflect sound business judgment and who demonstrate the recognition that architects and engineers cannot be retained and managed in the same manner as other subcontractors.

Look for contractors who organize design-build management teams separately from those formed to manage traditional projects, ideally staffed with professionals who understand the design process, the values of those who have chosen architecture or engineering as a profession, and the unique constraints that govern the performance of professional services. Look for those with a sophisticated understanding of the contracting risks they face and the capacity to negotiate effectively with owners. You will find that these firms are more likely to take advantage of the skills you bring to the table in ways that will benefit both the project and the client and that they will do so in a manner which recognizes the need for an equitable balance between risk and reward.

Plan on working with your design-build partner to reduce the risk of non-negligent design errors and omissions, but resist the assumption of that risk.

Sophisticated contractors will recognize that architects and engineers are not compensated enough to assume the uninsurable risks associated with the performance of professional services, and they are not likely to step forward with an offer of compensation sufficient to justify your doing so. Given this, there is no basis for you to accept the owner's design guarantee risks (which the contractor is likely to have assumed), but there are many reasons and, in design-build, many opportunities to work with the contractor to help to manage those risks. The fact is, there is too much at stake for both of you not to do so.

Build your skills and relationships on private projects, where all parties, including the owner, define their self-interest in terms of the opportunity to invest in continual improvement over time.

This is consistent with the desire of owners in the private sector to limit the number of service providers they deal with and to build value in the relationships they do maintain by making TQM a reality. They are looking for process improvements based on post-performance evaluation, feedback, and organizational learning as one means of securing a competitive edge. In the pursuit of design-build work as an effective team, you and your design-build partner can develop an equally sharp competitive edge by seeking out owners whose goals are consistent with your own.

Approach design-build work in the public sector with particular caution.

The mutual self-interest which functions well for all concerned in the private sector is not and, in fact, cannot be present in the public sector where, no matter how well you perform on one project, it is unlikely to make a difference when the bids are opened for the next. If you do pursue public design-build work, do it as a member of an experienced design-build team whose performance you can rely on. Experimenting with team building on bid public work is a bit like learning to waltz at the edge of a precipice.

Be especially wary of "two step" projects. Participation in one or the other of the two steps is preferable to the blurred responsibilities and unmanageable risks that accompany participation in both. Your best option--design only.

Recognize that design-build requires that major elements of the design be fixed far earlier in the life of a project than your experience with the design process is likely to indicate.

This can be a major source of conflict, and it is one best thought through in advance. The economics of design-build do not allow the kind of iterative design through construction documents and beyond you are accustomed to, and you need to come to grips with how you are going to deal with this.

From the design-builder's point of view, once the price is set, the design is cast in concrete. This is not entirely possible, and the contractor needs to understand that, but neither is it likely that the design can remain as fluid as it has in the past throughout the course of the project. Some accommodation of the contractor's need to manage against a tight budget will have to be made, and the nature of that accommodation will have to be well understood by everyone involved.

Tailor your compensation strategies to reflect the unique aspects of each project.

Just as the standard forms of agreement governing design-build project delivery are likely to require significant modification to reflect the unique characteristics of each project, your compensation strategies need to reflect the specific circumstances at hand. Higher fees are one means of dealing with increased risk, for example, and it would not be inappropriate to apply this principle to the disproportionate front-end costs assumed by the design team in design-build competitions. Partial compensation for otherwise uncompensated design efforts might be one approach. Additional fees might reasonably be provided for if the project is awarded. The design-builder has much more room to recover marketing costs from the project than you do, and your compensation arrangement ought to reflect that fact.

Recognize, too, that more often than not, design-build and fast-track construction go hand in hand. This is driven by a competitive environment in which "speed to market" is a crucial consideration in the success or failure of a commercial undertaking. Do not underestimate the impact of out of sequence design and redesign. You are not likely to be in a position to turn to the owner for the recovery of the additional costs, and your design-build partner is going to be less than sympathetic if they exceed the budget you prepared in the first place. Provide for these costs, and work with your design-build partner to implement the management techniques necessary to keep them under control. This is worth a fair amount of effort, for the more effective the techniques and the communications that sustain them, the more profitable your design-build projects are likely to be.

Start with a project budget which has adequate contingency funds allocated to the solution of those design problems most efficiently resolved in the field.

At some point in the preparation of the imperfect communications tools that are called plans and specifications there comes a recognition that the economic interests of all concerned are best served by calling a halt to the increasingly costly search on the boards for things that just might go bump in the night. Caveats against untimely design changes notwithstanding, some problems are best left to be resolved in the field. There needs to be room in the construction budget to do just that, and design-builders who recognize this and provide for it are the ones who will lead more consistently successful design-build projects. Your biggest challenge will be to protect that budget in the final round of cuts that are made to produce an award winning bid.

Pay attention to insurance issues. Insurance can be an important risk management tool, but do not let it control your design-build decision making.

Some insurers are more accommodating of design-build risks than others, but the fact is that the marketplace is awash with quality options for insuring both the professional and the general liability risks of design-build. You can easily obtain both, and so can the general contractor. Coverage for both can also be written on a project-specific basis. The owner can even secure coverage excess of your professional liability insurance if extraordinary limits are required. The issues are complex, however, and unique to each project. You will want to seek the advice of a competent and experienced insurance professional to guide you and your design-build partner to appropriate solutions. A few, key issues are, nevertheless, worth keeping in mind. They are the following:

1. Does your design-build partner independently maintain professional liability insurance covering both its vicarious liability for the negligence of its design consultants and its liability for negligence in the performance of its own professional services? If not, you and your insurer are likely to bear the brunt of those risks, and that makes no sense at all. Look for insured design-build partners.

2. Is the design-builder willing to name you and your consultants as additional insureds on its general liability policy? This will strike a general contractor as an unprecedented request, for it is not a concession it would even consider granting to a typical subcontractor. Your situation is different, however, in that subcontractors do not have professional liability deductibles at stake in the event of disputes over responsibility for a loss. You do, and it makes no sense to expose that deductible to risks, such as injuries on the job site, to which you did not contribute and over which you have no control. Your design-build partner can readily insure this risk, and it is a reasonable consideration.

3. Will your design-build partner agree to mutual indemnification as respects the performance of professional services? Once again, this will be viewed as an unprecedented request, but there is a compelling rationale behind it. Contractors are accustomed to passing through to each subcontractor responsibility for 100% of the losses arising out of that subcontractor's operations, notwithstanding the fact that the contractor may be partially responsible. This is an efficient and economical allocation of risk, for subcontractors can easily and inexpensively insure the contractor's contribution to a loss. You can do no such thing, at least not where the performance of professional services is concerned, and it is important that your agreement reflect a clear, mutual understanding on this point.

4. Do your subconsultants maintain adequate insurance protection, and do you secure current certificates of insurance to satisfy yourself that they do? This is a sound risk management precaution under any circumstances, but it is particularly important in a design-build setting. Moreover, your design-build partner will insist on it.

What is to be learned from all this? Design-build project delivery does entail greater risk. But, it also affords opportunities to apply management and process innovations which can bring the risks under control, deliver added value to the owner, and produce better project outcomes. The challenge to you is this: Taking advantage of those opportunities going forward requires that you find ways to turn what has historically been something of an uneasy truce into an unaccustomed alliance. The good news is that there are ways to do this well.

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© 1996, Professional Practice Insurance Brokers, Inc. This newsletter is published as a professional liability loss prevention service to PPIB clients and friends. It is intended for use by architects and engineers as an information resource. It is not intended to afford legal or insurance advice or opinion. Readers are urged to consult competent legal and insurance counsel for assistance in applying the information presented here to their own unique circumstances.

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