Hidden Factors in Design-Build

Before the coronavirus pandemic, I conducted a workshop on the estimator’s role in design-build projects. Many questions were about how contractors can best protect themselves from risks not generally considered when doing design-build projects. Every EC should consult with three key partners before starting such a project: their surety company, their attorney and their insurance provider.

You are probably thinking, “What’s so different about design-build projects?” Maybe you’re even saying, “We do design-build every day.”

I approached a few professionals I have had the pleasure of working with and asked what considerations I should make to protect myself and my company from potential claims and limit my risk. I talked with Joel Heusinger, partner at Woods & Aitken LLP, with offices in Nebraska, Colorado and Washington, D.C., specializing in construction law and litigation; Jim King, president of Nebraska-based Gene Lilly Surety Bonds; and Tami Soukup, senior account executive, Unico Group, Lincoln, Neb.

If I am a contractor looking to do design-build projects, are there any specific insurance policies I should carry?

Soukup: In addition to your primary insurance policies (general liability, auto, etc.), you should consider Contractors E&O (errors and omissions) and professional liability policies. I would recommend contractors have both of these coverages, whether they do pure design-build or even design-assist projects, because the design professionals have a policy that does not always protect you as the contractor. We like to take a proactive approach with our clients and make sure they have the necessary coverage for the types of projects they are pursuing. It is better to look ahead than try to play catch up after the fact.

Are there any additional bonding requirements contractors should be aware of when pursuing design-build work?

King: Early on, sureties were not keen on contractors performing design-build projects. The reason is that under the design-build method, the design firm is inside or “included” as a subcontractor in the contract. Sureties and their contractors are now exposed to potential design errors and its ramifications. Due to the unfamiliarity of this “new” contracting method, sureties moved cautiously in their acceptance of this type of delivery method.

Today, insurance products have become a better and more affordable risk-transfer mechanism that contractors can use to limit the exposure to design issues for both themselves and their surety. Only experienced and well-capitalized contractors participate in the design-build marketplace. Surety underwriting has developed to better understand the risks and to help protect ECs and their clients from financial damages and possible design errors and omissions. Sureties have now developed a comfort level for design-build work principally through gathering insurance documentation, the familiarity of the work and strong financials.

It sounds like being proactive is the best approach to take as a contractor, and you should have open communication with your surety and insurance agents.
Joel, listening to Tami and Jim, their concern is protecting their customers and themselves from litigation arising from claims associated with design-build projects they are pursuing. What are some of the issues that ECs have run into as they venture into design-build projects?

Heusinger: The No. 1 issue we typically see is that the contractor does not have the proper licensing needed. Each state has some version of an architecture and engineering act that defines what is considered design work. This licensing and compliance would be above and beyond their normal business, contractor or master electrician licensing. Secondly, there could be issues relating to the actual design and construction itself, such as scope, schedule, ownership of the design and to what level the design is being engineered. Most, if not all, of these concerns can be addressed through a well-written contract. As Jim and Tami both stated, it is far better to be proactive on the front end of a project as opposed to being surprised by something in the contract after you have already started working on the project.

Two common themes I am hearing are being proactive and having open communication. Are there any parting thoughts that you would like to share?

King: We want our customers to know we are here to help them succeed; we are happy to review their contracts with them to ensure they know what they are on the line for.

Soukup: I second that. As I said before, it is easier to get the necessary coverages before you start working on a project.

Heusinger: I want to emphasize how important it is to fully understand what you are getting into when you become a designer. There are additional risks as well as a different standard in the level to which the work has to be completed. Engage the services of your outside partners as soon as possible and communicate as much as possible; you can never have too much communication.

 

My biggest takeaway from the conversation is the importance of engaging your partners because they want you to succeed.

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