Liability of Design-Builders for Design, Construction, and Acquisition Claims (2015)

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3LIABILITY OF DESIGN–BUILDERS FOR DESIGN, CONSTRUCTION, AND ACQUISITION CLAIMS By Michael C. Loulakis, Capital Project Strategies, LLC; Nancy C. Smith, Donna L. Brady, and Rick E. Rayl, Nossaman LLP; and Douglas D. Gransberg, Gransberg and Associates I. INTRODUCTION The rights and duties of those contracting under traditional project delivery methods, where the owner has separate contracts with design profes- sionals and contractors, are relatively well-defined and predictable. This is the result of more than 100 years of judicial precedent, where courts around the country have collectively defined what design pro- fessionals and contractors owe to their clients and to third parties that may be affected by their work. Based on this judicial precedent, it is well accepted that contractors on design–bid–build projects have a firm obligation to meet the owner’s plans and specifi- cations. If, however, the contractor fully complies with the plans and specifications, and the project fails to meet the owner’s intended purposes, the con- tractor is not liable for the consequences. If design errors impact construction, the owner is obligated to pay the contractor for the consequences of those errors. These conclusions stem from the Spearin doc- trine, a concept that is familiar to most state trans- portation agencies and other public sector owners. Case law also provides judicial clarity regarding a designer’s liability for design errors and omissions. Absent a contract provision to the contrary, design- ers are only liable if they fail to comply with what a similarly situated designer would have done under similar circumstances. Stated differently, designers do not guarantee that their work will be perfect or error-free. As a result, when a project experiences a design defect that increases costs, the owner may be unable to recover those costs from the designer. The design–build process changes many of the legal paradigms under which the construction indus- try has operated. Although the concept dates back thousands of years to ancient Egypt, design–build in the United States, particularly in the public sector, was relatively unheard of until the mid-1990s. Due to federal and state procurement reform at that time, design–build then became an attractive alternative to design–bid–build and at-risk construction man- agement for many reasons, including the following: The design–build process accelerates project delivery by allowing procurement of the construction contractor (who is part of the design–build team) to begin before the plans and specifications are fully completed; The design–build process allows construction contractors to be involved in the design process, giving owners the benefits of their insight, including more creative design alternatives; The design–build process puts the construction contractor and designer in a direct contractual relationship, which can enhance working relationships between them and result in tangible benefits to the project and the owner. The last point is central to risk allocation and design–build liability. Because design–build contrac- tually binds the designer and construction contractor, the owner is able to contract for its project on a “sin- gle point of responsibility” basis. As a consequence, whether a problem is caused by a design defect or defective construction is immaterial—the design– builder is responsible for both. By eliminating the “liability gap” created when the owner has separate contracts with the designer and construction contrac- tor, the owner sheds significant risk, and the design– builder assumes significant potential liability. Design–build has also enabled some state trans- portation agencies to shed risk arising from the right- of-way acquisition and utility relocation processes. Because of design–build’s speed of delivery, it can be beneficial for the transportation agency to require the design–builder to perform property acquisition and utility relocation. Depending on the processes used by those agencies, the design–builder will likely assume liability for performing these services. Some transportation agencies believe that using design–build can shift all risk and liability to the design–builder. This is a misconception—design– build does not create a risk-free project for the owner. Owners that act in a way that impacts the design– builder will be held responsible, notwithstanding contract language to the contrary. As a result, when something goes wrong on a project, it is not unusual to see a dispute between the owner and design– builder over who bears responsibility. The purpose of this digest is to thoroughly exam- ine the design–builder’s liability for design, con- struction, and acquisition claims. Section II provides an overview of design and construction liability from the design–bid–build perspective. It addresses, among other topics, the Spearin doctrine, and design liability concepts. Sections III and IV focus on the design–build process and examine contract clauses