Understanding and managing the potential liability risks associated with construction contracts are factors all contractors must face when bidding on a project.
Corbin Devlin of Edmonton law firm McLennan Ross LLP describes the four major contract models currently used for non-residential construction.
Perhaps best known is the design-bid-build model, involving several contracted professionals plus a separate contract between the project owner and a general contractor. A construction management model has a construction manager hired by the owner, which is then broken down into “construction manager as agent” and “construction manager at risk” contracting models. Integrated Project Delivery is a contracted collaboration between partners that includes shared risks and rewards.
And then there is the design-build model, reportedly now accounting for over 40 per cent of non-residential building in North America. Here, a single entity is contracted to undertake and execute all design, procurement and construction.
Design-build has an attraction to owners, writes Devlin. In exchange for what he calls “a degree of certainty as to project price and schedule,” the owner gains “relatively less risk associated with the definition of project scope or incomplete design.”
Devlin points out, however, that no matter what contract type is used, there are “many cases where disputes arise due to a fundamental difference of expectations, or a misunderstanding by one of the parties, regarding the contractual allocation of risks.”
Managing liability risk is particularly acute when design-build contractors either use in-house designers or subcontract some of those services to outside professionals. Often, there is a strong reliance on insurance.
Nicole Markowitz and Richard Robinson with U.S.-based international law firm Peckar & Abramson, P.C., point out there can be major gaps in many standard Errors and Omissions insurance policies.
“Often professional liability policies do not insure against all defects or deficiencies in the designer’s work. Instead, the policies are drafted to insure against a finding of liability on the part of the designer, and that liability is based on the failure to meet an applicable standard of care.”
Defining “standard of care” can result in an architect maintaining that their objective is not to necessarily attain perfection, and that reasonable latitude for errors is to be expected, write Markowitz and Robinson.
“Where courts embrace that standard, there could be an error, but no liability for that error and therefore no insurance coverage.”
The problems arise when a design-build contractor accepts a different standard.
“When that occurs, the two most common mechanisms of risk management anticipated by design-builders, assuming that the risk was shifted to the designer or through insurance, may not function as expected. In turn, the design-builder may face an unmanaged risk.”
Markowitz and Robinson suggest design-build contractors consider Contractors Protector Professional Insurance (CPPI) coverage, explaining this type of policy can mitigate many of the gaps that may be left unprotected.
They describe how a “well-developed CPPI” can not only provide professional liability insurance but can also provide appropriate coverage for mitigation and rectification for design errors discovered during construction.
“It can proactively correct that error or omission prior to the assertion of any claim by the owner.”
A CPPI can also provide protective coverage.
“Protective coverage supplements the design professional’s professional liability insurance coverage by providing direct benefits to the contractor/design-builder for any downstream claims for costs above what will be paid by the design professional’s liability insurance.”
It’s also critical that any contractor engaged under a design-build agreement carefully review and understand where its exposure for design liability might rest.
“Design-build contractors must be aware of the traps that may exist in relevant agreements, as well as the weaknesses that may exist in risk management strategies previously thought to be sufficient.”
As Devlin concludes, no matter what contract model is followed, potentially uncovered risks lie in wait for those who fail “to consider the suitability of the chosen contract model to the project at hand, or a simple misunderstanding of the risk allocation inherent in the chosen contract model.”
John Bleasby is a Coldwater, Ont.-based freelance writer. Send comments and Legal Notes column ideas to firstname.lastname@example.org.