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Just how risky are design/build projects?

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Design/build has become the project delivery method of choice for owners who seek a single point of responsibility for the design and construction of their projects. For design firms new to this project delivery method, an awareness of the unique financial and liability risks associated with design/build can help avoid unpleasant even devastating surprises.

When it comes to design/build, some types of projects are riskier than others. Projects that are repetitive in nature, such as fast-food restaurants, chain stores and tract housing, often are considered low-risk candidates. Also, some highly complex projects (i.e., thermal energy storage systems or wastewater treatment plants), for which the project owner relies heavily on guidance from specialized design professionals, can also be successful design/build projects.

Conversely, one-of-a-kind projects that are dependent on an owner's unique needs or tastes -- especially projects in which changes during design or construction are likely -- are not good candidates for design/build, given the fixed price aspect of these product types.

Limiting the risks

Despite the pitfalls associated with design/build projects, certain corporate, contracting and insurance options are available to the design professional in order to limit some of these risks.

First, in order to guard against liability claims resulting from increased risks, design firms (whether acting as the prime or subcontractor) can establish new corporate legal entities separate from their normal business structures for each design/build project. These new entities would then become the legally responsible parties for the projects.

This protects assets used only for traditional design projects from claims on subcontracts, equipment rental and other project-specific agreements.

Second, the contracts between the design professional, owner, contractor and other parties gain extra importance. Careful attention should be paid to each party's work scope, indemnification clauses, limitation of liability provisions, construction observation requirements and dispute resolution methods.

Third, firms involved in design/build should consider project insurance for liability coverage. Project insurance can cover all design firms on a specified project only, preventing attachment or depletion by claims from other projects. This can help allay the fears of the owner that insufficient coverage will be available in the event of a claim, and help get the claim resolved quickly without a lot of finger-pointing.

Finally, make certain to consult your legal and insurance adviser to ensure that your contracts are fairly written and responsibilities and expectations are clearly defined. Also, it's important to understand your exposure to loss and have developed a risk management and insurance program that addresses these exposures.

More information is available at www.cavignac.com.

Submitted by Jeff Cavignac of Cavignac & Associates

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