Design-Build: Increased Profit, Increased Risk

Design-build contracting has gained an industry foothold, offering accelerated schedules and one-stop shopping to owners, and increased profits and control for contractors. Along with the increased profits, though, comes significantly increased risk.

In design-build contracting, the contractor and owner agree on the performance parameters of the project, and the contractor takes complete responsibility to deliver a product that meets those parameters. Design-build contracting can be an efficient way to build a project. There is one price, one contract, and one chain of communication and responsibility for the entire project.

Increasingly, even traditional construction projects include design-build elements, especially for the specialty subcontractors' systems. Typically, mechanical, electrical, and plumbing systems will be incorporated, under a design-build agreement, into the overall design and construction of a project.

An important issue for contractors is that they must be very careful not to practice architecture or engineering without a license when providing design-build services. In Oregon, architects and engineers must be professionally licensed. In the event a dispute arises, the owner may have a defense that the contract is void because the contractor is performing unauthorized professional services. A careful design-builder will ensure that it does not contract to perform the professional services called for, but that the services will be provided or procured in order to meet the performance specifications. The contractor may then hire or subcontract for the architectural or engineering portion of the contract.

Another issue with design-build is risk allocation. Traditionally, the owner bears the risk that the project will not perform according to the intent of the specifications. If the project does not ultimately perform as intended, but the architect or engineer acted reasonably, the owner normally bears the loss, assuming the contractor built according to the specifications. Design-build shifts the risk from the owner to the contractor because the contractor warrants that the project or component will perform at a certain level. If the performance is not adequate, the contractor will be liable for the damages that result, regardless of the quality of construction. The design-builder also bears significantly greater risk than in traditional contracting with respect to differing site conditions, worker safety, and environmental issues.

Design-build is becoming more prevalent in the construction field as owners look to increase efficiency, save costs, and shift risks, and as contractors seek innovative ways to market themselves and increase their profit margins. Contractors can manage the increased risk inherent in design-build contracting through clear and unambiguous contract language, careful analysis of projects that are design-build or have design-build components, and through careful management of projects as they unfold. The key is to analyze the benefits and risks of each specific project, and to address as many of the issues as possible that can arise before the contract is signed. Consult your attorney early in the process to help you develop an advantageous contract "from the ground up." This approach will minimize potential problems at the outset of a project, and help ensure positive results for the owner and the design-build contractor.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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