Three Legal Issues Unique to Design-Build

by Mark Friedlander

The author is a partner in the Construction Law Group of the Chicago law firm of Schiff Hardin & Waite. This article was adapted from DATELINE, the newsletter of the Design/Build Institute of America, Washington, D.C.

Although all construction projects involve important legal issues, there are additional legal concerns that are unique to design professionals entering the design/build arena. These can be broken down into three broad categories.

1) The Relationship Among Parties

The most obvious difference distinguishing design/build from traditional projects is that the design professional is not the owner's consultant, and is instead the contractor's teammate. Design professionals have contractual incentives to perform their services so as to further the design/build team's goals, which ordinarily are not fully congruent with those of the owner. The design professional may have a disincentive to call the owner's attention to difficulties with the construction work, and the design may value such factors as cost and constructability over other criteria of importance to the owner.

The existence of a "team" comprised of contractor and designer raises unique legal issues regarding the relationship between them. Will one be prime to the owner with the other as a subcontractor? If the design/builder is not already a single entity, do the contractor and designer form a single entity to contract with the owner, and if so, should the entity be a joint venture, corporation or limited liability company. Within the design/build entity, how will decisions be made, and how will disagreements be resolved? These issues all involve important legal and business planning decisions.

2) Design Professional's Standard of Care

The design/build relationship allows, but does not require, a change in the designer's standard of care. Ordinarily, an engineer or architect is only held responsible for exercising the degree of skill or care that the average, similarly situated engineer or architect would employ, and does not ordinarily warrant or guarantee a successful outcome for services. The ordinary rule for a contractor is different: contractors do impliedly warrant that the result of their services will be a successful project, provided that the design and other factors over which they have no control are proper and appropriate.

Many courts have held that a design/builder is more nearly akin to a contractor than to a design professional. Accordingly, design/builders are usually held to the same warranty standards as contractors. This is true even of the design services that they offer. (This is one of the primary reasons why owners like design/build construction: the whole truly is greater than the sum of its parts because the designer is held to a stricter standard in a design/build context than when there is a separate contract for design services.)

It is important to note, however, that the standard of care applicable to design in design/build projects can be changed by contractual agreement. The design/builder's liability for design problems can be returned to the usual "appropriate levels of skill and care" standard by including a contractual provision in the design/build agreement that so provides.

3) Licensing, Insurance and Bonding Problems

Every state in the country regulates and restricts the practice of professional engineering and architecture. Many states will not allow a contractor to hold itself out as performing professional services as part of a design/build project unless the contractor itself is a registered design professional. Likewise, states may require a design professional to be licensed as a contractor to perform as a design/build entity.

Design professionals' errors and omissions insurance ordinarily excludes construction services, and contractor's general liability policies exclude professional services. These policies may have disparate impacts on the parties, since general liability policies ordinarily have little or no deductible, whereas professional liability policies have large deductibles. Certain states have anti-indemnity laws for construction projects that limit the parties' contractual ability to redress this disparate impact.

Surety bonds can lead to similar problems. For example, performance bonds may not cover an affiliated engineer's design services. Although it is certainly possible to arrange adequate and appropriate insurance and bonding, the unique legal issues require additional analysis.

Design/build projects can offer substantial opportunities for design professionals. However, unique legal issues such as those outlined above must be carefully considered before entering this burgeoning field.