Source: Victor O. Schinnerer & Company, Inc.

Design firms that take part in design-build projects face different risks than those faced in traditional design-bid-build projects. Firms, whether taking the design-build lead or serving as a subcontractor to the design-build entity, often are legally responsible on a contractual liability basis rather than for their negligent professional services. Even the professional liability claims differ in scope and severity when compared to claims against insured professional firms on more traditional projects.

This study explores a sampling of claims against professional service firms that either took the lead on a design-build project or served as a subcontractor to a design-build entity, which usually was a construction contractor. The study also provides information on design-build claims specific to Schinnerer’s separate design-build professional liability insurance program. Firms are placed in our design-build program when they are established as integrated design-build firms or their design practice has more than 20% of billings from design-build projects where the design firm serves as the single-point responsible party by contractually assuming accountability for both design and construction.

Severity of Subcontractor Claims Is Significant

Based on the sample of design-build claims, it is clear that firms serving as subcontractors to design-build entities are at greater risk for paying large professional liability claims. Leading the design-build process, while resulting in professional liability payments more than twice the average on traditional projects, is significantly less than when firms are subcontractors. In our study, the average cost of a paid claim when the design firm is the design-build entity was $381,125. The average cost of a paid claim when the design firm serves as a subcontractor to the design-builder was $525,059. The data suggests that the risks associated with working on design-build projects may be more manageable when the design professional leads. Neither figure, of course, reflects the contractual liability assumed by the design firm as the lead or as a subcontractor. On design-build projects, the business risks may be significantly higher than the exposure to professional liability claims.

Case Studies of Subcontracted Professional Liability Exposures

Often design firms providing professional services as subcontractors on design-build projects are held responsible in situations where communication problems create misunderstandings or where the professional liability exposure “skips over” the unlicensed design-build entity. Here are some examples of professional liability claims generated by design-build projects.

Case Study #1

A general contractor provided professional services as the design-build lead of a project for a state department of transportation (DOT). As part of the contract, the contractor was required to perform engineering controls for the layout of a roadway between two cities, including six bridges. The contractor also had significant design responsibilities for the project. A problem occurred when excessive camber was built into the decking at one bridge due to the misinterpretation of the specifications, which were furnished to the contractor by the DOT. The contractor admitted that his staff engineer missed a bridge column height issue, which led to the problem. The DOT demanded that the columns and bridge decks be removed and replaced. The claim was settled for the contractor’s remaining policy limits of $1 million.

Case Study #2

An engineer was hired by a contractor to design a bridge over an inter-coastal waterway for a state DOT. The design was to be preliminary and was meant for bidding purposes only; it was not intended to be constructed. The engineer’s preliminary design for the bridge was conservative, and the contractor used the flawed design to bid on the project. The contractor won the design-build contract with a bid that was $6 million less than other bidders due to the preliminary design being under-designed. In the final plans, the amount of steel required was 75% or 400,000 pounds more than submitted in the bid.

Since the project was contracted using design-build with a guaranteed maximum price the contractor’s bid was the amount the contractor was contractually obligated to design and build within. The contractor was left to build the bridge with no money for extras or delays. The engineer’s exposure was in excess of policy limits. The claim settled for $1,091,000. While the engineer did make several errors on this project, the errors may have been the result of the need to rush the plans to prepare for the bidding process.

Case Study #3

A mechanical engineer (ME) provided mechanical engineering services to the primary design engineer on a project to construct a steam turbine power generator for a beer brewing facility. The equipment was to replace an existing generator that was no longer code compliant. The project was awarded under a design-build contract to an entity that underbid the construction.

The generating equipment was being tested when an explosion occurred. The property damage occurred primarily in the piping system, contributing to extra costs and delays to the scheduled implementation date. The ME designed the expansion joint that failed, which caused the

explosion. The ME argued that the design-builder prepared the specifications that were used for design and that the testing procedure was completed improperly by the contractor.

This claim settled for a total of $415,000, with the ME’s share being $197,500.

Case Study # 4

An architect was retained by a design-builder to design loft condominiums. The condominiums were built in a commercially zoned area, meaning that they technically weren’t bedrooms; they were sleeping spaces called live/work lofts. After construction was completed, the unit owners complained that the units were too noisy due to plumbing, neighbors, and street noise. The noise issues involved all 46 units. The homeowners association sued the developer, and the developer brought the architect into the suit through a “skip-over” provision in the prime agreement.

The architect argued that since the units were live/work lofts they had no applicable noise codes. An expert backed the architect on this opinion and felt that the architect met the standard of care. However, it was apparent that there was too much noise in the units. Defense counsel felt that the jury would have decided that the architect should have anticipated the noise problems regardless of code because the condos were built in a significantly noisy area. As a result, defense counsel felt the case would have been difficult to defend. The claim settled for $125,000.

Case Study #5

An engineer was hired by a design-builder to provide engineering services, preliminary design, and construction phase services for the construction of a multi-million dollar power plant. The engineer subcontracted with a structural engineer. The design-builder alleged that the engineer and structural engineer failed to perform according to contract, thus causing the design-builder to incur cost overruns and lost revenues. The engineer did have some liability for failing to alert the design-builder of limitations with the composite floor system, and for providing incorrect equipment and piping loads as determined by the structural engineer subconsultant. The engineer also had vicarious liability through the structural subconsultant. However, the design-builder was responsible for the majority of the losses and for failing to effectively manage the large design-build project, thus causing delays. The design-builder also prepared project cost estimates based on unrealistic assumptions for equipment discounts, personnel requirements, and insufficient contingencies for a fast track design-build project. In addition, the design-builder failed to ensure that the subcontractors were using the latest version of the drawings and failed to provide equipment design information critical to the structural, mechanical, and electrical portions of the design.

The design-builder’s claim was for $7 million. Expenses of $500,000 had already been paid, and $1.6 million was estimated as necessary to fully defend the design team. An expert felt that there was $1 million in issues that could be found against the engineer, and even more would be possible due to vicarious liability. The claim was settled with the insurance company paying over $2.2 million in addition to the insured’s deductible obligation.

Managing the risks of design-build projects

• Sign agreements that fairly allocate risk.
• Avoid agreements with warranties and guarantees.
• Avoid agreements with strict liability.
• Avoid “flow down” contractual risk you can’t manage.
• Avoid a “skip-over” provision in the prime agreement that will allow the client to bring a claim directly against you.
• Avoid agreements that allow the design-builder to make changes to your professional services without your involvement.
• When serving as a subconsultant to the design-builder, remember that your obligation is to your client—the design-builder—and not the project owner.
• When serving as a subconsultant to the design-builder, request evidence that the design-builder has professional liability coverage.