Limitation of Liability on Design-Build Projects

by | Feb 27, 2023

Design-build contracts continue to mature and evolve in many aspects, including terms related to liability. In the world of water infrastructure delivery, design-build most often pairs a contractor and a design firm. The well-established risk management tools for these entities—developed over decades of exposure in the design-bid-build model—account for liabilities typical to their work. Similarly, the customary risk profile for traditional design contracts and construction contracts has been driven by tried-and-true contract terms and conditions that incorporate well-established legalese and carry long precedence. The advent of design-build in the water industry has created a relative reset of these terms, and the market has responded with development of standard contract document templates which are now widely adopted. One aspect of these contracts that continues to develop, however, relates to limitation of liability.

The majority of design-build teams in our industry are contractor led, and the contractor—and its insurance and bond underwriters—are very comfortable with, and accustomed to, accepting liabilities associated with its work. In other words, a builder has no issues with accepting full liability for correcting any deficiencies in the construction of its projects. When leading a design-build team, however, that same contractor is now a design-builder and is contractually responsible for the design as well as the construction. Although the contractor will certainly push down design liability to the designer of record through its subcontract, depending on the contract requirements this may also be new territory for the designer. If the design-build contract includes abnormal standard of care clauses and/or exorbitant or unlimited liabilities, the designer will typically want to limit its exposure to these risks. As a result, there is risk of a “liability gap” for the design-builder with regard to project design, with the design-build contract requiring more design liability than the amount that is agreeable with the design partner. This may create an impasse during contract negotiations or result in excess project costs, as the design-builder must account for the increased risk through increased fees or general conditions.

There are several ways that this liability gap can be addressed. The most economical way is to collaborate with the project owner to incorporate acceptable standard of care clauses and reasonable overall liability limits. Such liability limits can be based on several factors, including project size, project complexity, and whether any newer technologies are being relied upon (and the corresponding vendors’ liabilities). Another method to “close the gap” may be through the purchase of a high-limit project-specific professional liability policy (PSPL) for the project. A PSPL provides a clean, no-guesswork method to create an umbrella of design insurance for the project, and the project team can often collaboratively decide on the amount of coverage based on a menu of coverage limit options and corresponding premium costs. The PSPL also ensures that the full coverage amount will always be available, unaffected by any other projects involving the design-builder or designer. The downside of the PSPL is cost, as the premiums are significantly higher for a project-specific policy than the pro-rata portion of a general corporate PL policy with the same limits.

As with all things in the collaborative delivery world, deciding on how to address project liability is best done… you guessed it—collaboratively. A fully transparent review of each party’s goals, requirements, and costs, coupled with a “one-team” mindset, will always result in the best solution.