A common misconception in the construction industry is that contractors have no responsibility for professional design services on a project if they are furnished drawings and specifications by the owner. On the contrary, contractors bear significant design related risks even under the traditional design-bid-build method of project delivery. Although contractors commonly delegate design responsibilities to subcontractors or consultants, the contractor may be vicariously liable for such design. Moreover, in an effort to reduce project costs, contractors routinely engage in value engineering activities where the contractor recommends changes to the established design. In such cases, absent specific contractual language to the contrary, the contractor is generally responsible for the adequacy of such design alternatives and impliedly warrants their feasibility.

Design Delegation

Aside from value engineering, design may only be delegated from the design professional to the contractor by agreement. The most commonly used design delegation clause appears in the AIA A201-1997, §3.12.10.

Categories of Design Delegation

The AIA design delegation clause can be broken down into two categories.

Category I concerns design services specifically required by the Contract Documents that relate to systems, materials and equipment. In the case of Category I, the contractor must design that particular portion of the work as required by the Contract Documents, provided the designer specifies the performance and design criteria that the contractor must meet. An example of Category I is the design of a cold rolled steel framing system where the contractor is charged with meeting certain specified loading criteria.

Category II concerns design services that relate to the contractor’s means, methods, techniques and procedures. This category does not involve design services for the finished work, but instead involves design services necessary to facilitate the construction process. The most common example of this category is temporary shoring systems.

In all instances, the design delegated to the contractor must be performed by properly licensed professionals.

Since design responsibility can only be delegated through specific direction provided in the Contract Documents it is important to understand the varying types of specifications and the risks associated with each.

Types of Specifications

There are two general types of specifications prevalent in the construction industry—design specifications and performance specifications.

Design Specifications

Under a design specification, the owner, through its design professional, provides the specific design to be followed and the materials to be used. In such case, the contractor is obligated to follow the stated design without deviation. If the contractor does so, the contractor generally bears no responsibility if the design proves inadequate to achieve the intended result. The contractor’s risk, even if framed in absolute terms, is a guarantee that is limited to the quality of materials and workmanship employed in following the owner’s design.

Performance Specifications

A performance specification requires a contractor to produce a specific result without specifying the particular method or means of achieving that result. Under a performance specification, only an objective or standard of performance is set forth, and the contractor is generally free to choose the materials, methods and design necessary to meet the objective or standard of performance, provided the contractor’s design meets the general requirements of the design intent.

Concomitant with control over the choice of design, materials and methods is the corresponding responsibility to ensure that the end product performs as desired. In other words, the contractual risk of nonperformance is upon the contractor. Accordingly, in the event of nonperformance, the contractor is exposed to any damages that would flow from the contract and any other damages or theories of recovery that may be allowed by law. There are, however, two general exceptions. Contractors will generally not be excused from performing something that is possible because of unforeseen difficulties, however, the contractor may still be excused from performance if the contractor can establish the elements of objective impossibility or practical impossibility. If these legal standards are met, the risk generally returns to the owner.

Communication of the Delegated Design

The contractor’s delegated design is generally communicated to the architect and owner by virtue of the submittal process. In such case, the architect generally only reviews, approves, or takes other appropriate action on submittals for the limited purpose of checking for conformance with information given and the design concept expressed in the Contract Documents. In some jurisdictions, the design professional’s review does not necessarily mean that the design professional will evaluate the contractor’s design or coordinate such design work with other work on the project. Furthermore, as a general rule, approval of the contractor’s submittals will not relieve the contractor of any error that may exist in the contractor’s work (as opposed to an error that may exist in performance criteria) so long as the submittal review clause stating so is specific.

Managing the Risk

Most contractors mistakenly assume that by hiring a licensed and insured design professional or a subcontractor to perform the delegated design work they have insulated themselves from the risk associated with design. The contractor generally cannot transfer the entire risk of design. This holds true even where the contract with the design professional or subcontractor contains the appropriate risk transfer provisions such as, hold harmless agreements and additional insured status requirements.

Contractors should not rely exclusively on hold harmless and other contract provisions to shield themselves from liability for the following reasons:

The indemnity agreement might be unenforceable. In most states, one cannot be indemnified for its own negligence.

The design firm may not be in business when the loss occurs. Since most professional liability coverage is written on a “claims made” basis, it is possible that coverage may not exist at the time of the claim.

E&O insurance covers professional negligence only and typically does not cover contractual liability such as that assumed in the “hold harmless” provision unless liability would attach even in the absence of the hold harmless provision.

Even if the E&O policy does respond, the design professional may only carry relatively low limits and have limited tangible assets to satisfy the indemnity obligations if the insurance proves to be inadequate.

Consequently, the contractor’s contractual obligation to protect the owner is not relieved by the inability to collect for design damages from the design sub-consultant.

What about the Contractor’s CGL Policy?

Although the specific language of the CGL policy will control, design exposures and losses (the cost to remedy negligent design) are generally not covered by most CGL policies because such exposures involve professional risks and services. Instead, CGL policies typically limit coverage to property damage and bodily injury caused by an occurrence as those terms are defined by the policy.

What does this all mean?

Contractors should be aware that they assume some degree of design risk on virtually every project. The key, therefore, is to effectively manage that risk. Contractors can manage the risk by properly drafted risk transfer, hold harmless and insurance provisions and by ensuring that the persons to whom the design is delegated carry an appropriate amount of professional liability insurance. Finally, contractors should have their own professional liability insurance program to cover claims of the contractor’s own negligence and for vicarious liability caused by negligent design.