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Is there a risk in Builder's Risk Insurance?
Avoiding the competitive bid process
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I THINK THAT you all understand what "design/build" is and the risk that goes along with being the sole party responsible for an entire project. One of the chief advantages to an owner of using design/build is the lack of involvement in finger pointing between the architects and engineers on one side and the contractors, subcontractors and vendors on the other. One of the chief disadvantages to the design/builder is full liability for everything that goes wrong.
While contractors understand and prepare themselves to deal with the heightened risk that goes along with design/build, frequently they overlook the fact that they are taking on this same sort of risk every day, even in their standard fixed-price contracts.
Design/build systems. This is probably the area where contractors are most likely to realize the risk they are assuming — that is, if they are aware that the system is really "design/ build." Most fire sprinkler contracts are recognized as being design/build, but, in essence, any time you are told merely to "meet code" and given no specifics of how the designer of record wants you to do it, you are the designer for that part of the work. Even systems that were not stated to be design/build can actually be that in practice, though, such as where sizing and configuration of ductwork is left to the sheet-metal subcontractor.
Technical reps and sales engineers. These folks, who in an effort to sell more products assist designers and contractors in solving problems and selecting the correct equipment, frequently are participating in the design itself. While their names may not appear on the drawings, in the event of a failure of the design to work as expected, they and their employers can expect to be brought to the table to "participate in solving the problem" — which generally means paying money.
"Value engineering." When bids come in above budget, as they so often tend to do, it is not uncommon for the low bidder to be asked to assist the owner with "value engineering" efforts to get the cost down by tweaking the design or suggesting ways to install work more efficiently. Unless these ideas all get officially incorporated into the stamped design documents (and sometimes, despite this fact), the party who proposed the change could find itself sued.
Substitutions. While typically contractors know that any substitution has to be equal to or better than the originally specified item, I don't know how many of them realize that by proposing an alternate product, they are taking on liability if that product doesn't work in the overall application. I recently saw a "standard form" contract from a large national developer that clearly places on the contractor 100% responsibility for the technical sufficiency of any proposed substitutions.
Performance guarantees/retrofits.
Quite often owners are persuaded to undertake new work (and hire a particular firm to do it) based on representations that the project would generate energy savings of a predetermined level. Frequently, third-party design professionals are not involved in making these representations. The construction firm itself makes them. It is left to that firm to decide what kind of equipment to furnish and how to program and install it to achieve the goals.
Delegation of shop drawing responsibility. Over a long period of time, the practice of delegating to the contractor (or in reality, to its subcontractors and vendors) responsibility for "miscellaneous connections" evolved to the point where significant design responsibility was being pushed down to second-and third-tier subs. It was this practice that was determined to have led to the failure in 1981 of two "skywalks" at the Hyatt Regency Hotel in Kansas City. The Missouri Supreme Court unequivocally ruled that, at least in the "Show-Me State," the licensed designer couldn't disclaim design responsibility. Duncan v. Missouri Board For Architects, Professional Engineers and Land Surveyors, 744 S.W.2d 524 (Mo. App. 1988)
Why does all this matter? First, foremost and dwarfing all other considerations is public safety. A primary purpose of having educational and testing requirements for licensure of designers is to assure the public that buildings are going to be safe. Passing responsibility to non-licensed individuals defeats this purpose.
For the firm that is doing the work, the liability being taken on not only may be much larger than the dollar value of the contract, it also may not be insured or even insurable. This leaves the assets of the firm totally at risk. It may expose the individual who did the "design" work to civil or criminal sanctions for practicing architecture or engineering without a license. While contract language stating that you "are not performing any design work or assuming any responsibility for the design" might be helpful in a dispute with your customer, it won't be much good if you get sued by the family of the children caught in a fire that you were blamed for.
For a general overview of the way different states treat this issue, see "Responsibility of one acting as architect for defects or insufficiency of work attributable to plans," 25 A.L.R.2d 1085 by G. H. Fischer, and "The Effect of Licensing Laws on Design-Build Projects," Construction Briefings No. 2001-3, 2001-4 by E. Mabry Rogers, Donna M. Crowe and Robert J. Campbell. Contractors and vendors need to be cautious any time they are asked to do work that they believe could be considered design work. They need to weigh the risk and reward carefully and either obtain the licensure necessary to do this work or insist that it be reviewed and adopted by the designer of record. They need to review their insurance coverage to make sure that they are comfortable with the risk they are running. And sometimes, they may need to pass on a chance to take a particular project.
Susan McGreevy is a partner at Husch & Eppenberger, Kansas City, Mo., tel. 816/ 421- 4800, e-mail to susan. [email protected]
Susan Linden McGreevy
Susan McGreevy is a former partner at Stinson, Morrison, Hecker LLP, Kansas City, Mo., 816/842-4800.