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Basic Risk Management Techniques
for
General Contractors Entering Into Design/Build
By Cynthia Turner
To increase a firm’s profitability, many general
contractors are looking to increase the efficiency of
its project delivery process. And why not? The buzz
around the industry is that design/build is the wave
of the future for maximizing profit. If design/build
is a consideration for your firm, don’t enter
into it lightly. Do your research, understand the advantages
and the risks, manage the exposures from the start,
and hopefully you will reap the benefits of success
commonly associated with this delivery method.
Experience and Relationships
First, stick within your niche industry. Your industry
experience is priceless. Next, pick team members wisely;
this is a key factor in a successful design/build relationship.
Use firms that you have a strong relationship with and
who have experience in design/build, as well as personnel
who know the design/build process. With firms in different
roles and retaining different risks than with a traditional
project delivery method, knowledge of the process, identification
of the exposures and implementation of controls are
critical.
Does your client understand the risks of design/build,
or do they just believe it should give faster, cheaper
results than traditional delivery methods? All team
members, including the client, should be educated on,
and understand, the risks, as well as the benefits of
design/build. For example, many owners believe that
change orders will not be generated by a design/build
project. This is not the case, and the owner must recognize
this before the project commences.
The Rules of Engagement
Check with legal counsel familiar with the construction
industry to identify the legal nuances of design/build
and design/build contracts. Counsel is also important
to identify the legal climate in the geographical area
of the project. Discuss the process with experienced
design/builders in your industry. State statutes may
require, or there may be legal or financial benefits
to establishing a joint venture relationship or a separate
entity to provide such a project. Again, discuss these
issues with peers and legal counsel to identify the
advantages and disadvantages of such. Industry meetings,
as well as the Design/Build Institute of America are
invaluable resources for information.
Picking a quality design professional experienced in
the design/build delivery system will have a tremendous
impact on the project, but you should also consider
if they are risk savvy. Do they have adequate insurance?
If not, require it. Risks can be contractually passed
on to the design professional, but as the design/builder
you have assumed vicarious liability for the professional
services. Ensure that you are covered, both by requiring
errors and omissions insurance retained by the designers
and retaining similar insurance for your professional
liabilities.
Setting Expectations
Clear expectations are critical to project success regardless
of the project delivery process. Communicate the need
of setting expectations up front to the owner and design
professionals. Encourage questions, share knowledge,
and establish parameters for services (i.e., services
included, services not included, and expectations of
others). Assume nothing. Lack of established expectations
will inevitability lead to discussions, disputes and
possibly claims. All of which take up time and money.
Design Liabilities
Just how much more liability is involved with hiring
the design professional? Previously, when plans and
specifications were provided by the Owner, the contractor
had an implied warranty on the accuracy of those plans
offered by the Owner. However, now with their contractual
relationship with the design professional that implied
warranty is no longer valid. As long as the design services
are provided consistent with industry standards, designers
are not required by law (and should not so as to not
compromise their professional liability policies) to
guarantee their documents. Any issues that arise with
the design of a project must now be managed directly
between the contractor and the designer. This new arrangement
is not necessarily negative, as long as the team has
a good working relationship and issues can be quickly
resolved.
Documentation and Communication
Once initial expectations are established, move to the
communication and documentation phase. Expectations
for comprehensive documentation to accurately reflect
the project’s progression should be established
early. Have meetings to foster communication. Promote
communication throughout the project team and work out
problems early. Disputes that are not rectified quickly
fester and cause a deterioration of the project relationship.
Claims tend to follow shortly thereafter.
Summary
Design/build holds liabilities for the contractor, more
than just the hiring of the designer. The vicarious
liabilities of the designer, knowledge of the progression
of the design process, working relationships with the
design professionals, construction phase administration
services, the allocation of risks and the burden of
the entire project’s risks are all new or untraditional
issues that must be dealt with by the contractor as
the design/builder, and dealt with effectively to ensure
positive project results. If you decide to enter into
design/build, understand the nuances of this delivery
method and understand the consequences of the liabilities
assumed. Before you begin:
- Talk to peers
- Have someone on the team with hands-on experience
in design/build
- Use design firms that you work well with and trust
- Establish expectations early with project team
and Owner
- Anticipate a learning curve
- Ensure contract documents are applicable and appropriately
allocate risks
- Document and communicate well and often
By addressing these risks, the chances of a successful
project can only increase.
Cyndy Turner is a Senior Consultant with the XL Insurance
construction and environmental services unit. She has
more than 13 years of experience in the environmental
industry and has conducted hundreds of risk assessments
for a variety of clients. She holds a BS degree in Environmental
Science and an M.Eng. degree in Engineering Sciences,
with a concentration in Environmental Engineering.
No part of this publication may be reproduced without
permission of the XL Insurance companies. This publication
is intended for general information purposes only. Contents
should not be construed or used as legal advice or opinion.
"XL Insurance" is a registered trademark
of XL Group plc. XL Insurance is the global brand
used by member insurers of the XL Group companies.
XL Insurance
Construction & Environmental Services
520 Eagleview Blvd.
PO Box 636
Exton, PA 19341-0640
Voice: 800-327-1414
Fax: 610-458-8667
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© 2005, XL Specialty Insurance Company. All rights
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