Design-Build and IPD Contracts: Who is responsible for the design when unforeseen conditions arise and why does that matter?

There has been a rise recently in the construction industry in Design-Build (DB) and Integrated Project Delivery (IPD) contracts. These newer models aim to improve project efficiency, foster collaboration, and reduce costs. With this recent rise, we are seeing an increase in design liability conflicts. Traditionally, construction projects often followed a Design-Bid-Build model (DBB), where the design responsibilities and construction responsibilities were separate. However, the DB and IPD delivery systems can blur those lines.

In a Design-Build project, a single entity is responsible for both designing and constructing the project. This consolidates control over the design and construction of the project; however, it exposes the contractor to design-related liability, even if the design-builder subcontracts the design to an architect or engineer. The legal consequence resulting from this single point of responsibility in the DB contract is an increase in lawsuits where contractors are found liable for design errors, even when the actual design work is done by a licensed professional. Put simply, this means that the design-builder is generally liable for any design issues and resulting consequences. This liability for the DB contractor may exceed damages limitations of the design subcontract and/or insurance coverage.

In an Integrated Project Delivery, all parties, which can include the owner, architect, contractor, and sometimes even major subcontractors, share the design and construction responsibilities. IPD contracts are intended to promote collective responsibility among the owner, designer, and builder because they typically include shared financial risks and rewards and encourage open communication and early collaboration. The legal consequence stemming from IPD contracts is increased difficulty in assigning liability.

With design liability lines blurring, who is liable when a design flaw causes delays or cost overruns? Courts are increasingly scrutinizing contracts to determine how to allocate risk. In order to avoid potential disputes arising out of design issues, contracts should be clear. They should spell out exactly who is liable for what, including construction performance, design defects, coordination errors, etc. Precise contract drafting is critical, especially in a DB or IPD contract. Any ambiguity in risk allocation can lead to a dispute. As collaboration increases, clarity in the contract becomes more important.

One critically important subject that should be clearly addressed in a DB or IPD contract is risk allocation resulting from unforeseen conditions. Unforeseen conditions are often one of the most significant sources of risk, especially in DB contracts. “Unforeseen conditions” typically refers to site conditions that were not anticipated by the parties during the contracting, design, and planning stages of the project. This can include subsurface conditions, environmental conditions, structural defects, and changes in codes or regulations. In a DB contract where one entity is responsible for both design and construction, the allocation of risk for unforeseen conditions can be complex, because the contract does not anticipate the conditions.

Who bears the responsibility when an unforeseen condition arises? In typical “lawyer-style,” the answer is: it depends. It depends on the contract. The general approach to unforeseen conditions in a DB contract is to address the issue through risk-sharing mechanisms that set clear, unambiguous guidelines on how parties will handle unexpected circumstances. The most common approach is to place the risk of unforeseen conditions on the owner. This allocation is typical, especially when the owner has better access to information about the site or has the ability to perform more thorough investigations. Less commonly, the design-builder will assume responsibility for unforeseen conditions, particularly if the contract is fixed-price. This shifts significant risk to the design-builder, which usually results in elevated prices. It is also common to see shared risk allocation clauses in which both parties share the risk of unforeseen conditions. This is more commonly seen in cost-plus contracts or guaranteed maximum price contracts.

The more frequent use of DB and IPD contracts means more and more disputes arising out of design related liability issues. In order to avoid the guaranteed headache that stems from a design-issue dispute in a DB or IPD contract, the contract should be as clear as possible in allocating risk. This may mean including defined terms, setting baselines, and including unambiguous language in pertinent contract provisions. As design responsibility lines begin to blur, the contract needs to simultaneously become clearer. We see many disputes between design-builders and owners that could have been avoided had the contract been clearer. Close scrutiny of contract language on the front end may seem burdensome, but it could go a long way in avoiding costly litigation and headaches later.

Smith Currie Oles provides comprehensive legal services to all parts of the construction industry across the nation. Smith Currie lawyers have decades of demonstrated success representing construction and federal government contracting clients “From the Ground Up,” including procurement matters, contract formation and negotiation, project administration, claims prosecution and, when necessary, in litigation and other forms of dispute resolution.

The views expressed in this article are not necessarily those of ConsensusDocs. Readers should not take or refrain from taking any action based on any information without first seeking legal advice.