Common Construction Project Delivery Methods and Professional Liability: Managing the Risks
Designing and building any structure is a complex and interdisciplinary process, exposing contractors to a multitude of risks. From pre-design through post-construction, building projects involve many stakeholders. The lines of responsibility between architects, designers, construction managers and contractors can sometimes be difficult to determine. New building materials, design models and construction methods emerge, but for each opportunity they create, new challenges arise.
While there may be several delivery methods available to complete construction projects, each also presents unique risks. Factors such as project type, location, timeline and budget, as well as the level of owner involvement and their risk tolerance, must be carefully considered.
Ultimately, the client chooses which delivery method will be used, but it falls upon the contractor to execute according to plan while minimizing risk. At a minimum, that often means carrying a Commercial General Liability (CGL) insurance policy. But for contractors taking on additional responsibilities – such as managing design firms, handling design in-house, acquiring or fabricating materials or collaborating with other building professionals – professional liability exposures can increase, and CGL coverage may not be enough to properly cover their risk.
In this article, we’ll examine some distinguishing characteristics, benefits and professional liability risks associated with three common construction project delivery methods, as well as the mitigating strategies that could help protect your business’ bottom line and reputation no matter which is used.
Commonly referred to as the “traditional” method, design-bid-build is the popular approach taken to complete construction projects in the U.S.1 The owner selects the architect and designer to complete drawings and specifications, then solicits bids and chooses a construction firm to oversee the construction. It is often used for projects where design details take precedence over the project timeline and budget.
Two separate contracts cover most D-B-B projects – one between the owner and design firm, and one between the owner and contractor. In this method, the owner takes on project oversight and communication tasks, assuming most of the risk for any discrepancies between the design and final product. Remaining responsibilities are divided between the designer, who must meet industry and professional standards of care, and the contractor, who must ensure that the build aligns with the design requirements.
When the design-build method is used, the owner selects a single entity – the design-builder – who assumes full responsibility for meeting all contract requirements. Since owner involvement is minimized, the design-builder assumes the bulk of the project burden and risk, making this method best suited for low-complexity designs like infrastructure and road projects – particularly when the design-builder has experience with the specific project type.
Overseeing the entire project, the design-builder must cover communication, coordination and administrative tasks, handle disputes, hire and manage subcontractors, procure materials and supplies, and regularly report project progress to the owner and other stakeholders.
Construction Manager at Risk (CMAR)
Though not explicitly a project delivery method, the construction manager at risk approach is a variation of the D-B-B method and follows a similar process. The owner hires a design firm and construction manager (CM) to act on their behalf, with the CM then subcontracting the construction portion of the project and collaborating with the designer and builder, either as one entity or separately, to create the project plan.
Multiple contracts are involved, which can add layers of complexity. For example, there may be one contract between the CM and owner covering project management and oversight, another between the owner and the design firm, and a third between the CM and the contractor(s). While responsibilities are divided between parties, the construction manager assumes a substantial amount of the project burden and risk. As with other methods, here the designer must meet professional standards of care while the contractor ensures that their own and any subcontracted work adheres to the design specifications.
If a Guaranteed Maximum Price (GMP) is incorporated into the contract, the CM calculates the GMP, which the owner must approve. When work is completed within the GMP, the CM may be rewarded and allowed to keep or split profits with the owner. But in cases where the cost of the project exceeds the GMP, the CM is responsible for covering the difference.
Choosing the Right Insurance Coverage Is Important
Regardless of which project delivery method is used, Contractors Professional Liability coverage is becoming increasingly popular and, in some cases, necessary to win bids and secure contracts. While a CGL policy typically covers bodily injury and property damage directly caused by a contractor’s work, products or employees, a Contractors Professional Liability policy can cover bodily injury, property damage and economic loss specifically resulting from construction management or design issues related to professional acts, errors or omissions by the contractor or third parties hired by the contractor.
On certain projects, Contractors Pollution Liability – which covers bodily injury, property damage and pollution cleanup costs for covered operations at a project site – might be considered for an extra layer of protection as well.
Common Professional Liability Risks for Contractors
The Risk: Contractors directly handling the design aspects of a project – including any of its structural, mechanical, electrical or plumbing components – assume full risk for any professional acts, errors or omissions that may lead to bodily injury, property damage or economic loss for the owner or other invested parties.
Claim Example: An HVAC contractor designed the ventilation system for a hotel in Florida’s amusement parks area. There was an error in the specifications for routing the ducts, and the building did not pass code. Existing ducts needed to be replaced, and additional duct work was needed to meet code and safety requirements. The hotel lost bookings due to the delay in opening, and the owner claimed a loss in profits as a result ofthe design error.
Vicarious Liability for Subcontracted Design
The Risk: When a contractor hires subcontractors to handle the design and installation of components (e.g., structural, mechanical, electrical, plumbing) or more complex, sophisticated aspects of the construction process (e.g., false work for bridge building projects), the contractor may be held liable for any professional acts, errors or omissions that result in bodily injury, property damage or economic loss for the owner or other invested parties.
Claim Example: A general contractor hired an electrical contractor to design and do all electrical work associated with a college stadium remodel, including the design of a new scoreboard. Though the electrical contractor installed the scoreboard as designed, when the city inspected the work, it found that the scoreboard did not meet code requirements. In the project owner’s suit against the general contractor, because of the electrical contractor’s design error, the general contractor was held liable for the cost to entirely rewire the scoreboard before the stadium reopened.
The Risk: A contractor taking on project management responsibilities who falls short in those duties may be held liable for damages resulting from poor project oversight – including any work that subcontractors they hire may have performed themselves or through subcontractors of their own – that cause bodily injury, property damage or economic loss for the owner or other invested parties.
Claim Example: A construction manager was responsible for overseeing an addition to a school. A subcontractor working on the project was responsible for taking measurements and ordering the correct materials for a metal roof. The measurements and material specifications were done incorrectly, resulting in the roof of the addition having a different pitch than that of the original structure. As a result, to resolve the district’s claim, the construction manager had to order new materials and rework the roofs at the construction manager’s expense.
The Risk: When construction work does not meet project requirements because of professional acts, errors or omissions of an architect or engineer hired by a design-builder, the contractor may be held liable for bodily injury, property damage or economic loss to the owner or other invested parties. This extends to work performed by the contractor or any subcontractors they hire.
Claim Example: A design-builder was contracted to complete upgrades to an urban transit line and hired an architect for the design. An error in the architect’s design of the structural-steel portion of the project went unnoticed by the design-builder during the shop drawing review but was uncovered after the steel subcontractor had already fabricated and installed the structure. The structure’s top-of-steel elevations had to be changed by the architect, after being installed with the incorrect clearance height. The owner made a claim to recoup the cost to correct that design defect from the design-builder, which ended up being compensated by the architect only for a fraction of the cost due to a limitation of liability provision in the contract with the architect.
Having a Comprehensive Risk Management Strategy Is Key
Remember, all claims have a cost, even if your company is not found liable in the end. While insurance can be a great safety net, mitigating risks associated with each project delivery method can be the best line of defense. There are many ways contractors can minimize their professional liability exposure on any project.
Here are two key strategies:
Draft contracts to mitigate or transfer risk, with focus on:
- Scope of services.
- Timeline, including a scheduled completion date and potential contingencies.
- Budget and potential contingencies.
- Roles and responsibilities of each party involved.
- Project delivery method to be used.
- Procedures for submitting, reviewing and approving change orders.
- Coordination of professional and construction services.
- Requirements for certificates of insurance, licenses and permits.
- Procedures to address nonadherence to contractual obligations and duties.
- Carefully crafted liability, subrogation and indemnity/hold harmless clauses.
Document all aspects of the project and retain records for as long as possible and at least for the applicable statute of repose, including:
- Expenses incurred, discussions had and decisions made.
- Third-party sign-off on any design changes.
- Orders and receipts for materials, supplies and equipment purchases and rentals.
- Invoices and payments made to subcontractors and permitting offices.
- Invoices and payments received from the project owner or manager.
- Contracts with all involved parties.
- All original and revised design and engineering drawings and specifications.
- Certificates of insurance for your company and all involved parties.
- Change order submittals, reviews and approvals.
- Inspection reports with town, state and other officials.
- Value engineering decisions your company made or participated in making.
- Photographs documenting project milestones, observations and quality of work performed.
- Recordings or minutes of stakeholder discussions and meetings.
- Any instances where your company was prevented from performing its own contractual duties.
Travelers is here to help contractors navigate and manage the professional liability risks associated with a variety of construction delivery methods. We offer industry-leading insurance and innovative risk management solutions tailored to meet the specific needs of your contracting business. Our coverage and services are backed by years of experience and financial stability.
Learn more about Travelers’ expertise in contractors' professional liability coverage. Ask your insurance agent about Travelers insurance for your construction business.
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