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Design/build takes industry by storm, but is it legal?

Posted online

Specific legal

and insurance

advice is required before design/build contracts are signed for

a project.

by G. William Quatman

for the Business Journal

What started as a trickle is now a full-fledged hurricane: design/build is sweeping the nation in both private and public construction.

Design/build is the process of hiring the architect and the contractor under one contract, with one entity that provides the owner with the full scope of project design and construction services.

Half of all construction is projected to be built using design/build within the next five years. It already accounts for more than $70 billion of annual construction.

Owners have fallen in love with design/build. Traditionally, owners have hired an architect or engineer to design the building, prepare plans and specifications and obtain bids from general contractors. If bids are too high, the parties may redesign, negotiate or rebid the project, all of which delays construction.

The owner then contracts with a general contractor for construction. If disputes arise, the contractor blames the architect, the architect blames the contractor, and the owner feels caught in the middle.

Design/build eliminates these problems with its single-point responsibility of the design/build contractor. If the roof leaks or the concrete cracks, the owner makes one call to the contractor and says "fix it." Whether the problem is a design error or faulty construction, the contractor is responsible.

It's one-stop shopping for the owner. There also are fewer change orders and fewer delays, since design errors are the contractor's responsibility to correct.

Design/build also simplifies communication, gives the contractor greater involvement in the design phase, provides more accurate cost estimating and cost control, and makes it easier to set firm budgets from the outset.

The idea has caught on so well that in 1996, Congress passed legislation to permit use of design/build by the federal government. A similar law was introduced in Missouri last legislative session, which passed the Senate but failed to get a vote in the House before the session ended. Watch for a similar bill in 1999.

Lack of a design/build statute has not stopped the state of Missouri, nor several cities and school districts, from using design/build on public projects. Even the private sector is beginning to use the method for new construction.

Contractors are forming joint ventures with architects; some are even buying architectural firms in order to bring design services "in-house." Several architects and engineers, not to be outdone, are forming subsidiary corporations to offer design/build.

Design/build requires particularly careful contract drafting, and legal and insurance advice is crucial. For example, while the prime contractor is responsible for the project design, he typically will not have insurance that covers design errors.

Further, the contractor's general liability policy excludes coverage for architectural and engineering errors, leaving the owner with limited loss protection. In addition, the architect's insurance policy does not cover construction defects, nor warranties of construction.

Design/build does raise some legal questions. In Missouri, as in every state, architects and engineers are licensed by the state. Firms that offer design services to the public have to hold a state license.

Courts across the nation are divided on whether a contractor can legally provide design-and-construction packages without a state license. A 1961 Missouri Supreme Court case held that there was nothing wrong with design/build as long as the contractor hired a licensed architect to do the design work.

Then, in 1992, a Missouri Federal Court held that a design/build contract was illegal, since the contractor did the design work with its own staff and did not have a state license. The contractor even had to repay to the owner $9,500 in design fees.

Earlier this year, the Missouri Court of Appeals in St. Louis held that a design/build contract for a public school project was legal and enforceable since the plans were prepared by licensed engineers.

The school district argued that the contract was not enforceable since it was a contract for "architectural or engineering services," and the contractor was not an engineer.

The court stated that there was no statutory violation and no illegality in the arrangement these parties entered into.

As to the contractor's liability for design errors, the court held that, "A contractor cannot escape contract liability by arguing that the fault was that of a subcontractor."

National cases have challenged public design/build under competitive bidding statutes and laws that govern how architects are to be hired for governmental work. Missouri courts have yet to wrestle with that issue.

Design/build does have a downside. Because an architect or engineer checking on progress and interpreting plans works for the contractor, this may disrupt the normal architect's role as an owner's adviser and agent, since, under design/build, the architect's client is often the contractor.

Moreover, if the owner decides to fire the contractor, the owner loses the whole team. Under a traditional contract, the architect or engineer would still be on board and able to keep the project going while helping with the transition to another contractor.

Several design/build project form contracts are published by the professional associations for contractors, architects and engineers.

However, state laws, insurance requirements and owner needs require tailoring the contract to fit a project's legal and practical requirements.

In short, look before you leap. Get thorough legal and insurance advice if you are an owner, contractor or design professional considering design/build for your next project.

(G. William Quatman, AIA, is both an architect and an attorney, who practices with the law firm of Shughart Thomson & Kilroy PC. The firm's Springfield office can be reached at 869-3353.)

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