Strategies To Minimize Design Professional Liability Claims

Design Contingency Fund

The parties should consider creating a design contingency fund separate from the overall construction contingency, which will be used to pay for contractor costs arising out of design errors or omissions. This fund can be held solely by the contractor and used at its discretion, or it can be a fund that requires agreement by the contractor and designer that an error has occurred, and monies in the fund are to be used to pay for the extra costs incurred by the contractor. Typically, this joint design contingency provides for a sharing of any savings left at project completion as an incentive for the designer.

A design contingency fund is used for any and all errors and omissions until the fund is exhausted and can be combined with the use of a very high deductible project-specific professional liability (PSPL) policy and/or high deductible contractor's protective professional indemnity (CPPI) policy in order to save premium dollars and optimize the dollars spent mitigating these risks.

Alternatively, a contingency fund can be targeted to specific areas where the uncertainty is the greatest or where issues have the highest probability of occurring. Funds are used not necessarily for errors and omissions per se but rather changes arising out of the fact that the bid design is inherently preliminary since it is developed on limited information available at bid time. For example, if the available geotechnical information prebid is insufficient (e.g., insufficient boreholes), the contractor and designer could jointly create an adequate contingency fund to deal with cost overruns stemming from changes in foundation design during final design.

Another variant of this concept is to broadly look at quantities contingencies. Although typically the contractor has sole responsibility for deciding the quantity takeoffs and pricing them in the bid, the designer and contractor should jointly analyze the likelihood of quantity variances and the potential percentage increases that may occur. This is a rigorous analysis resulting in an agreed-upon quantity variance matrix from which the contractor can make informed decisions regarding contingency for such potential increases.

Alternatively, the parties can contractually agree that any increases in quantities beyond specified parameters in the matrix are deemed a breach of designer's standard of care resulting in designer's liability for those additional costs. The parties should also specify how changes in other items/materials not captured in the matrix will be dealt with to avoid leaving a gap that could become problematic later.

Design Team Personnel and Protocols

The parties should require that the contractor's design manager and the design firm's key personnel working on the project at the request for proposal date remain on the project until design completion and are available thereafter throughout the construction period to ensure historical project knowledge and continuity when requests for information inevitably arise and some design changes may be necessary.

In addition, ideally the contractor's design manager and others managing design are professional engineers and very involved in the design process every step of the way. Cohabitation arrangements (i.e., sharing office space at or near the project site) have proven effective in facilitating open and regular dialogue among construction and design team members.

Finally, the contractor and designer should establish a document management process that dictates that the project team maintain accurate and organized documentation throughout the project's life cycle. Such a process would ensure any design changes, deviations, and approvals are properly documented and create a clear record of design and project evolution.

Peer Review

The contractor may choose to retain an independent design firm to perform a peer review analysis of the preliminary design or portions thereof during the bid phase. This may be particularly helpful on projects with highly complex structures, such as a signature bridge. A peer review can also be utilized as the design develops post-award and/or when disputes arise between the contractor and designer with respect to certain aspects of the design during design development.

Professional Liability Insurance Coverage

The parties should optimize their professional liability insurance program for the project to maximize coverage in the most cost-effective manner possible. For example, the professional liability insurance program can utilize one or more of these types of professional liability coverages.

• A PSPL policy naming the lead design firm as the named insured
• A design firm's practice professional liability policy
• A contractor's professional liability policy
• A project-specific CPPI policy

The determination as to what coverages and what limits to include for a certain project will depend on many factors including the risk profile of the project, the estimated value of the project, the estimate of the total design fees, the practice coverage limit the designer carries, the complexity of the design, and whether the contractor is in a joint venture (in which case, a CPPI policy is typically recommended).

Contractual Specificity

As discussed in greater detail in our first article, it is important that the contractor and designer have agreed upon and clearly articulated in a pre-bid executed design subcontract the allocation of responsibilities, potential exposures, and liabilities. While the provisions around the standard of care and any limitations of liability are an important focus, certain other key issues should be discussed early on (even prior to agreeing to team up and submitting a request for quotation) and documented. Such key issues include the following.

• The status of the pre-bid design work and whether it will be considered part of the final design
• The standard of care applying to pre-bid design versus final design if different
• Whether any errors or omissions in the pre-bid design work are subject to the pre-bid teaming agreement's limit of liability (if any) or the final design subcontract's limit of liability (typically the design subcontract's limit of liability supersedes the pre-bid teaming agreement terms)
• Addressing design errors via the establishment of a dispute resolution process that may also include an expedited dispute resolution process for certain issues

Naturally, a legal contract can only go so far in attempting to anticipate and address future issues and, even so, certain questions will be much harder to resolve beforehand via a contract (e.g., what changes are due to normal design development versus due to errors made in the pre-bid design). Nonetheless, discussing these issues openly and transparently before bidding is necessary to mitigate potential issues post-award.

To further elaborate on contractual dispute resolution processes mentioned above, we have observed that many design agreements utilize dispute resolution procedures involving several steps to attempt to resolve differences, starting at the project personnel level then escalating to the respective parties' executives, before moving to mediation and then arbitration or litigation.

Some design-build project agreements use an interesting and innovative dispute resolution process mandating an "early neutral evaluator" to produce an initial evaluation of the relative strength of the contractor's and designer's claims (please refer to our second article in this series for more details on one particular project). To the extent one (or both) of the parties disagreed with the outcome of the neutral evaluation, the parties would move on to arbitration or litigation, with the added provision that, to the extent the party triggering the arbitration or litigation process does not obtain a more favorable outcome than at the neutral evaluation, such party would be liable for the other party's cost of arbitration or litigation on a sliding scale based on the difference between the awards at evaluation and at arbitration or litigation. This is an interesting additional incentive to try and resolve differences faster and at a lower cost.

Emphasis on Design-Build "Team"

Although under most design-build team structures the designer tends to be a subcontractor to the contractor, the contractor should treat the designer as if they were a joint venture partner and give them a "seat at the table." Constructability reviews and value engineering are both critical to the successful execution of the project, and constructability reviews during the design phase will allow the identification of potential issues before construction begins. Value engineering allows the team to explore options to optimize the project's design while maintaining functionality and meeting the budget, schedule, and performance requirements.

These reviews should start during the bid/preliminary design phase to tackle some of these issues early on before a fixed price is submitted to the owner. In the same spirit of partnership and as mentioned above, we have seen bids where both contractors and design firms mutually agree on the quantity takeoffs and on an allowable percentage variance during the final design (sometimes called a "quantity growth matrix") as opposed to the contractor using its sole discretion in setting the quantities in the bid. As we have seen litigation cases involving major differences in quantities being ruled against contractors where bid quantities were decided without the designer's involvement, this seems to be an interesting attempt to make sure both parties have skin in the game.

Progressive Design-Build

Many of the prevalent issues with traditional design-build projects such as quantity variances and design errors and deficiencies in the bid phase, resulting in project delays and cost overruns, emanate from the fact that the contractor is submitting a firm fixed-price bid based on only 20 to 30 percent design. While progressive design-build is not necessarily the remedy for all problems inherent in design-build procurements and should not be viewed as the ultimate replacement for all design-build project procurements, it does help to mitigate or eliminate some of the major risks in traditional design-build.

The owner's selection of the design-builder in a progressive design-build procurement is based primarily on the bidder's qualifications, such as comparable project experience, committed key personnel, and conceptual design approach. Once selected, the Phase 1 contract is entered into for the design development and pre-construction services, which often include site investigation and early works.

During Phase 1, design is collaboratively developed with participation by the contractor and the owner. At the time, the contractor is required to provide a guaranteed maximum price (GMP) proposal to the owner, and design has been developed much further than in traditional design-build procurements (typically to 60 or 90 percent completion). Additionally, many of the standard unknown risks have been identified by the contractor when conducting its pre-construction services and site investigations.

Thus, the contractor has a high level of pricing certainty when presenting its GMP proposal, and the possibility of design error and pricing error is greatly reduced. In fact, contractors who have completed progressive design-build projects have proclaimed little to no design claims on those projects. Time will tell whether this will be a positive trend going forward.

Conclusion

Avoidance of design-related claims and employing tactics to achieve such a goal should be at the forefront of the contractor's and designer's checklist once they have decided to team on a design-build project. To reduce or eliminate claims between them, the contractor and designer should be proactive at the beginning of the project pursuit and utilize many of the strategies discussed herein: establishment of a design contingency fund, pre-bid agreement of the design subcontract terms, joint development of a quantities growth matrix, maintenance of key personnel and document protocols throughout the life of the project, design peer reviews, constructability reviews and value engineering, optimizing the professional liability insurance program, and efficient dispute resolution procedures.

Most importantly, the contractor and designer should keep in mind that they are a design-build "team" and that the ultimate success for both parties and for the project depends on their ability to work through issues when they arise in an expedient and fair manner.