General and specialty contractors, construction managers, suppliers and manufacturers are often asked to expand responsibilities beyond their traditional role to include design services. Accepting this responsibility includes the acceptance of a significant measure of risk, including risk that may not be covered by insurance. The request for design assistance can come in many forms, not all of them obvious, so contractors and others should be able to spot the red flags that warn of design delegation and understand the dangers of assuming design risk.

Identifying Delegated Design

In the best of situations, design delegation is a clearly understood and negotiated aspect of the job from the start. The soliciting party may state in the first communication or in the request for proposals that it has contacted the contractor specifically because of its experience in these situations. The owner may identify certain subcontractors that must be used because of their experience with the design element at issue. The owner may call for the use of a design-build amendment to its agreement and include a required form of subcontract. Even in those situations, the contractor must still keep an eye on the risks as discussed in the next section. In instances where design delegation is not immediately identified, contractors must focus on design delegation as a part of a diligent review of the contract documents.

The owner may delegate design responsibility in a section of the specifications. For example, the specifications may call for the construction of a particular building component, provide a performance specification and within that performance specification indicate directly or indirectly that the contractor is to design that component to meet that performance specification.

A specification may also direct the contractor to provide a submittal from an engineer or an architect on a specific element. In some situations, those submittals may, in the end, serve as the project’s only design documents. Or, a general specification may list particular specification sections as identifying elements that the contractor is to design. Some specifications may make it easy to spot the issue by using a paragraph title along the lines of “Delegated-Design Submittal,” but that might not always be the case.

Contractors should also pay particular attention to the section of the specifications that defines the meaning of the designer of record’s approval stamp on a submittal. Expect that the approval does not shift the risk away from the contractor. The specifications and the approval stamps typically say very clearly that the risk remains with the contractor.

Design delegation may also be indicated within the notes on construction plans. A note may call for the contractor to select and engage a design professional to handle a particular system or component. Again, all contract documents must be reviewed carefully to identify design elements that are delegated to the contractor.

Understanding the Risks of Delegated Design

During the contractor’s initial review of the contract’s requirements, it must identify design delegation risks and then review the risk-shifting provisions in the general conditions and elsewhere in order to comprehensively evaluate the project’s risks and rewards. The key provisions in the contract documents that deal with the risks associated with design delegation are the same provisions that govern risk shifting in general—indemnity, insurance and warranty. Contractors must always review these provisions and do so with a heightened sense of diligence on projects involving design delegation. This serves as self-protection while also identifying risks that must be shifted to consultants and subcontractors.

Typical indemnity provisions will, without specifically referencing design responsibility, call for the contractor to indemnify and defend an owner for all occurrences, not just those arising from construction, including the faults of subcontractors and consultants for which the contractor is responsible. The same goes for warranty provisions, which may or may not distinguish between design warranties and construction warranties.

Design professionals often use contracts that do not provide any warranties and state only that they will prepare the documents in accordance with a localized general standard of care. Those contracts typically include a liability limitation that is expressed in dollars and that does not even approach a fair acceptance of risk. For a contractor that has engaged a design professional, this can create a huge liability gap. Contract coordination is essential.

The biggest risks in this context are those for which the contractor does not have insurance. To put it simply, a contractor’s commercial general liability policy, without modification, will not provide coverage for claims relating to a design error. Failure to realize that professional liability insurance is required for any portion of a construction project can leave contractors exposed to significant design liability for years after a construction project is complete.

The American Institute of Architects has addressed the issue of professional liability for design delegation. For many years, the AIA-201 General Conditions, which are incorporated into many of the AIA contracts, has defined permissible delegation. Also, the AIA-133 Standard Form Agreement between Owner and Construction Manager calls for professional liability insurance for design delegation, but it does so in such a way that someone unfamiliar with the document may not identify that different insurance is required. If the contractor is providing a performance bond, it must very carefully discuss design risk with its surety before putting the bond in place.

Contractors can also include provisions that disclaim design responsibility in its entirety. This can even extend to value engineering recommendations. Contractors should not expect that it will be easy to insert such a provision in an agreement where the owner has specifically sought to delegate design. In those situations, the contractor should look at the indemnity, insurance and warranty provisions and make sure it has the appropriate insurance at acceptable limits. A clause passing on the costs of added insurance can be helpful, and is fair, in those situations.

With the increasing use of design delegation methods, project owners are obtaining specialized input on design issues from parties other than architects and engineers. Doing so creates a significant risk for contractors and others. The contract documents should contain the terms and conditions that identify both the design scope as well as a fair allocation of risk. Contractors must work diligently to understand those risks and just as diligently to shift that risk to insurance carriers, subcontractors and design consultants.

For additional tips and background, the American Bar Association Forum on Construction Law recently addressed this topic in a webinar catered to the design and construction industry.