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Managing risky business for turnkey delivery

Ernie Edgar | 20 Apr 2017 | Comments

Our built environment requires projects with massive scope, scale, design life, sustainability and resilience. Can we design our way out of the design risks involved?

Worthwhile pursuits require risk; how you manage that risk is often the difference between success and failure. It’s the defining factor in whether a project is commercially rewarding, unfruitful, or worse, a catastrophe. Delivery models for new projects are changing, shifting the design risk from the owner to the contractor. Better the risk you know, than the risk you don’t; let’s get to know the risks, shall we?

For much of the last century, design-bid-build was the conventional project delivery method. In this model, the owner contracts with the project designer (who creates and delivers the design), and then the owner solicits bids from contractors. The completed design allows the contractor to bid the project at a fixed price thereby providing a measure of certainty in overall project cost and liability.

Today, there is a trend toward new project delivery models; the design/build model is quickly becoming one of the most common. Design/build brings the design and construction of the project under the purview of one contractor. That contractor bids the project based on the conceptual vision of the owner.

This project delivery model is intended to expand project financing, contain project costs, compress project delivery schedules, and reduce project claims and litigation. In the public sector, this approach has given rise to public-private partnerships (P3) which can offer not only turnkey delivery, but also privately-funded project finance, operations, and maintenance to stretch limited tax dollars to meet sophisticated infrastructure needs. These are the benefits, but what are the risks?

In design-bid-build, contractual privity and risk allocation are simple: the designer is only beholden to the owner. If there are design defects because of professional negligence, the owner has a cause of action against the designer, but the Economic Loss Doctrine in most states insulates the designer from collateral claims by other parties such as the contractor.

In contrast, the design/build delivery method makes the designer part of the construction contractor’s team, generally as a subcontractor. The difference is clear. These alternative delivery methods shift the project design risk from the owner to the contractor, and there is a dilution (if not outright transfer) of the owner’s Spearin doctrine risk associated with a finished design.

So, what can you do to limit our risk in this changing environment?

First, you must know the risks. In addition to exposure for professional negligence, the design/build delivery method exposes the designer to certain construction risks, such as the imposition of liquidated damages, not usually part of pure design contracts. The client relationship is profoundly different as well: the design is delivered to the construction contracting team, which is responsible for conveying both the design and the finished project to the owner. Thus, adhering to the ultimate project delivery schedule becomes a very real performance risk for the designer.

Second, you must evaluate the risks—paying close attention to your contract. Contract provisions are particularly vital in ensuring the proper allocation of commercial design risk. Ensure that the contract provides for the right insurance coverage. Confirm appropriate indemnification. In traditional design contracts, there is typically no limitation of liability term; design/build projects may offer limitation of liability to protect the designer from the risks mentioned above.

Third, you must know your insurance carrier and choose the right coverage. In design/build projects, given their size, complexity and associated risk, owners often obtain project-specific professional liability policies to cover design risks. As such, these are independent of a designer’s practice policies. Because of project size and associated risk, they tend to be expensive, so it is essential to the design/build team to price the project-specific professional liability policy and include that cost in its overall bid. Alternatively, the owner can obtain the coverage for the design/build team. In either case, it is essential for the designer to ensure the policy terms adequately cover its design risk.

Fourth, you must utilize technology for accurate modeling. Among the more recent technologies to come into use is Building Information Modeling (BIM). To date, it does not yet define the standard of care, but it is becoming more persuasive as a quality and delivery benchmark.

And finally, you must communicate. Whether aided by project management technology, or through other means, communication is paramount in any design project. Ensure clear standards and procedures that provide for dynamic communication among all parties involved in the project.

Project delivery models are shifting. As the purpose, scope and requirements of the built environment increase in complexity—as pressures to deliver projects as scheduled and on budget are increasingly intense—we need to take a deep look at how these changing models upset the risks involved. In the words of Warren Buffet, “risk comes from not knowing what you’re doing.” A sober understanding
                            of project risks and risk mitigation solutions will go a long way in ensuring commercially rewarding
                            projects in an ever-changing future.