Responsibilities and Risk Management in Design-Build Construction
Design-build construction is dramatically increasing in popularity with home buyers as a way to simplify the process of remodeling a home or building a new one. In contrast to the design-bid-build method, in design-build, the architect and builder are employed by the same company, giving the homeowner one contractor to work with throughout the project.
Although the design-build arrangement allows for more streamlined communication and faster delivery, there are still risks involved; some of it has simply shifted to the contractor – the contractor now takes on two roles, that’s more reward (profit) but more risk. As the homeowner, you need to be aware of the differences between the two methods so that you can minimize your risk exposure and not be blindsided by any obstacles that arise.
Design-Build and the Three Major Construction Risks
If you’re at all familiar with the construction industry, you know there are three key risks involved with every project: time, quality, and cost. Let’s take a look at how these risks play out in a design-build project:
In theory, a design-build project should deliver faster than a design-bid-build project because not only is it more efficient for the builder to work off plans he’s made himself, he can begin procurement and even construction early in the design process as he works in close contact with the owner. This theory has certainly proven true, as the Design-Build Institute of America (DBIA) reports that design-build projects deliver 102% faster than design-bid-build. At Legal Eagle Contractors, quicker project delivery is one of our primary objectives which design-build helps us to achieve.
Design-builders avoid the risk of delays that design-bid-build projects face as a result of disputes between the architect and the builder over plans. And because design-builders are responsible for the design, they can be more accurate with their completion date and cost estimates.
Because architects typically don’t have the knowledge of real-world costs that builders have, their estimates can be artificially low and balloon once construction begins. Having one firm handling both design and construction should lead to accurate quotes, fewer change orders, and lower overall costs, and that’s exactly what we find. A study by Penn State University found design-build projects were 5% less likely to incur cost growth and 6% cheaper in overall cost.
Stil, if unforeseen issues do emerge, on a fixed-price project (see more on these below) the design-builder could try to cut corners to stay within the budget, or face the prospect of lost profits. If the project is priced on a cost-plus basis with no capped price, the homeowner runs the risk of soaring materials costs.
When mistakes are made on a home construction project, who is responsible? Under the traditional design-bid-build system, the designer gives the plans to the homeowner, who then gives them to the builder. The owner is responsible for the completeness of the design plans, meaning unless he can establish someone was negligent, neither the designer nor the builder can be held liable for faulty construction.
Design-build is dramatically different. It removes the difficulty to the owner in establishing liability because the design-builder is liable to the owner for both design errors and all construction defects, whether they are due to negligence, errors, or omissions.
Still, it’s important to note exactly what the design-builder’s responsibility is regarding quality.
Whether it’s expressly stated in the contract or not, the design-builder warrants to the owner that the final project will be of “workmanlike” quality and the home will be habitable. So unless you as the owner have specific details in writing about what all you expect of the final product, if the final result is acceptable by industry standards, you won’t have cause for action.
If the contract has an express warranty, the contractor is liable for repairs for the time limit stated in the contract (often one year). If the warranty is not stated, but only implied, state and federal law dictate how long the warranty lasts.
The Design-Build Contract
As design-build projects are still not yet as commonplace as design-bid-build projects, the associated risks on each party are not as well established – these are, naturally, being worked out and planted as design-build grows. For this reason, a well-formulated contract between the homeowner and the design-builder is crucial for avoiding disputes and settling them should they arise. The contract can include anything both parties are willing to agree to, but certain provisions should be laid out and certain topics addressed with any design-build contract:
- Scope of Work: This provision can be as broad as covering “all necessary services and materials needed to complete the work,” or it can be much more detailed. For example, the scope of work might include your project goals as the owner, permits the contractor will secure, and things the design-builder will not do, or will do for an additional fee.
- Timing: You should be able to refer to the contract for an agreed-upon date of at least substantial completion, with periodic milestones for the project to be satisfied. This section may also specify the extent of damages you will be owed if substantial or final completion are late, and what events (acts of God, work changes) qualify for a time extension for the contractor.
- Indemnification: An indemnification clause is an important protection for the owner against claims or losses by a third party, such as an employee of the contractor who is injured on the job. If the design-builder is using a subcontractor, it’s the builder’s responsibility to secure his own indemnification against claims from the subcontractor.
- Payment and Pricing: There are several kinds of contracts used in construction projects, and which one you select will determine issues such as who covers the cost of change orders and overruns. The most straightforward type is a lump sum contract, wherein the homeowner agrees to pay a fixed amount, with no refunds if the project comes in under the estimate. This method is used in both design-build and design-bid-build arrangements.
In a cost-plus contract, the owner is responsible for costs directly related to construction activity, “plus” a fixed fee or percentage on top. This type of contract can be paired with a guaranteed maximum price (GMP) that caps the amount the homeowner will pay (unless the GMP is raised by mutually agreed-upon change orders), making overruns the design-builder’s responsibility.
In any case, the cost structure must be clearly set forth in the contract, along with when and how the owner is to make payments. To hedge against the risk of the project not being completed to your satisfaction, you as the owner may elect to practice retainage: withholding a portion of each payment until substantial completion is achieved. Laws governing retainage vary by state, so you’ll have to investigate to determine how to utilize this practice on your project.
- Insurance: The contractor needs to provide, and detail in the contract, proof of insurance that is applicable and ample. Because a design-builder is performing professional services in addition to construction, general liability insurance is not sufficient to cover defects resulting from design and engineering. Special insurance called contractor’s professional liability coverage that protects against any errors or omissions in construction or design is recommended.
It is also advisable for the homeowner to purchase builder’s risk insurance, which protects against certain losses during construction, possibly including theft or vandalism, natural disasters, and fires and explosions.
- Dispute Resolution: Whether you commit to arbitration or litigation in court, some method of conflict resolution must be built into the contract in the unfortunate event you and the contractor can’t come to an agreement when there’s a problem.
The Design Build Institute of America, the American Institute of Architects, and the Engineers Joint Contract Document Committee all make sample design-build contracts available for free or purchase online. They can serve as an excellent basis for your home-building or remodeling contract, but they should always be tailored to suit your exact purposes. Consulting a lawyer to help you craft, review, or modify a contract is always an option if you don’t feel comfortable handling it yourself.