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CM at-Risk and Design-Build Contracts are Here to Stay, So Draft Them Right
By Brian Perlberg

Design-build and CM at-Risk account for over 40% of the current nonresidential building according to a report produced by RSMeans Market Intelligence, with military construction projects coming at 80% over the last 8 years utilizing just the design-build project delivery method. The Associated General Contractors' (AGC) State Law Matrix, indicates that 10 states added CM at-Risk authority for transportation in legislation between 2012 and 2013. This brought the total number of authorizing states to 35 for transportation. Design-build and CM at-Risk have come a long way over the past two decades to become an established choice. Historically a lack of a proven track record was a big stumbling block against these “alternative” delivery methods. Now, proponents of CM at-Risk and design-build sometimes refer to them as a “tried and true” project delivery methods, as compared to integrated project delivery (IPD). A remarkable shift has occurred over a relatively short timeframe.

A driving force in design-build gaining market share is its track record of closing liability gaps for owners, who are traditionally caught in the middle between the builder and designer pointing fingers. Design-build gives an owner the opportunity to contract with one entity and thereby have a single point of responsibility.

Why is this so important? Legally speaking it is because of the Spearin Doctrine. The Spearin Doctrine puts owners in the middle of warranting their architect’s design plans and the builder (regardless if the contract is awarded via bid or negotiation). Unfortunately for owners, they can only expect to seek recovery if the design services producing those design documents fall below the ordinary standard of care from the architect or engineer. A design professional can be expected to provide good services, but expecting 100% perfect design documents is just not reasonable. The American Institute of Architect large Firm Roundtable, AGC, DBIA, LCI and others are currently working with McGraw Hill Construction on a report regarding the negative aspects of expecting perfect design, and will issue a full report in October. Insurers have made it perfectly clear that design professionals’ insurance does not cover anything above the ordinary standard of care. Consequently, many design professionals will make a no-go decision if asked to take on a higher standard of care. Design-build, if done right, basically takes the Owner out of the Spearin Doctrin equation because they are no longer in the contractual middle between two distinct contractual entities.

Different project delivery methods establish different contractual relationships and different contracts for each. If you get the contractual structure wrong, you are more likely to run afoul in executing the project delivery. You can’t just dust off your traditional design-bid-build contracts for design services or general contracting and make a few tweaks. To illustrate this, consider that a builder is expected to give a warranty for their work to be free from defects, as well as pass along the manufacturers’ warranty for major systems. It is equally true that a design professional does not typically warrant his services because that goes above the ordinary standard of care, and therefore is not insurable. In fact, design professionals are warned early and often from their insurance carriers, not to take on contractual warranty obligations. If a design-builder warrants both the design and the build, they will now be judged on a strict liability standard, which is likely inappropriate for a construction project.

A more typical approach taken in design-build contracts can be seen in the ConsensusDocs standard form contracts, which are quite popular for the design-build project delivery method, and carry the endorsement of 40+ owner, contractor, surety, and design organizations. The ConsensusDocs design-build agreements (400, 410 & 415) warrant that the physical construction work will be free from defects. Additionally, the owner gets the benefit of all the manufacturers’ warranties for equipment, systems and materials incorporated into the work. The design clearly is not included, and therefore the strict liability standard for prefect design documents is avoided.

The American Institute of Architect (AIA) just recently updated their 2004 design-build contract documents. Surprisingly, the 2014 edition of the AIA’s design-build documents has design-builders warranting the entire work, and therefore operating under a strict liability standard. This elevated risk, above the ordinary standard of care, is not covered by insurance. Significantly, the new AIA design-build documents do not flow this fundamental risk down in agreement between the design-builder and architect (or engineer). This inconsistent treatment of a fundamental risk appears to create potential liability gaps for the design-builder, and shields architects and engineers from a risk. Best practices dictate that the party in the best position to control and mitigate risk should be allocated that risk (if not to the project overall). In reality, the design professional is in the best position to control and mitigate design defects. Moreover, the AIA design-build documents endanger design-builders, by potentially creating a fiduciary relationship with Owners at section 5.6 of exhibit A. So, when crafting your design-build and CM at-Risk contracts, be sure to allocate risk appropriately, consistently, and fairly. Otherwise, you can lose some of the benefits that these now established project delivery methods have to offer.

About the author: Brian works in the D.C. metro area and serves as Executive Director of ConsensusDocs and Sr. Counsel to AGC. He can be reached at bperlberg@consensusdocs.org


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