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April 30, 2015

Contractors face new risks with early design

  • Collaborative contracting means risk must be allocated and insured against.
    Ashbaugh Beal



    Construction is a collaborative process. Always has been, always will be.

    Despite this reality, market forces have historically prevailed in developing construction contracts to compartmentalize the owner’s relationships with the builder and the designer, keeping designer and builder separate from each other despite the need for these entities to work together in order for the project to succeed.

    At its most dysfunctional, collaboration in construction occurs in the field, typically between a superintendent and a field engineer doing their level best to resolve an issue that managed to go unaddressed until well after steel had been purchased, formwork built and concrete poured. Despite the most valiant efforts, collaboration at this point often comes too late to efficiently affect any needed changes.

    Enter alternative contracting methods. Construction is no different from other businesses in that the market participants figure out the best way to accomplish a goal while lawyers and insurers follow behind wagging a finger at the risk created by going off script, improvising or being an entrepreneur.

    This article discusses the oftentimes unallocated risk that’s created by collaboration and the melding of construction and professional services; the technology incentivizing even greater collaboration and blurring of the traditional designer and builder roles; and how you can effectively manage this risk by reassessing your contracts and insurance coverage.

    Filling in design gaps

    Years ago, contractors began offering owners pre-construction services to overcome inefficiencies of traditional design and construction — inefficiencies that ultimately made the contractor look bad. Under this broad umbrella of services, a contractor would get involved early on and work with the owner and designers to deliver a project that was cost-effective, met the owner’s needs, and posed the fewest challenges to build.

    In essence, pre-construction services moved collaboration forward to a point where changes could be made with minimal cost. With a need to tout innovation, the industry soon marketed these pre-construction services as alternative contracting methods using mysterious names like CM-at-risk, GC/CM and IPD.

    Meanwhile, design completeness remained on a steady decline. The owner and its designers looked more and more to the builder to fill design gaps, and the builder typically looked to its subcontractors and suppliers. To this day, significant portions of a project are designed through subcontractor shop drawings and submittals. Additionally, the design can be so heavily influenced by the builder’s early participation that the builder effectively becomes a designer.

    The contractor’s zealous desire to deliver for the owner and earn repeat business resulted in an unchecked growth of risk. Then the technological revolution of building information modeling, or BIM, arrived and brought with it an irresistible temptation to collaborate on a virtual model of the project. While the early collaboration has proven invaluable in improving nearly all aspects of construction, it has also resulted in the contractor acquiring a basket of risks that the contractor often fails to understand and consequently fails to spread and insure against.

    Construction is not known for its technological innovations — the reality is that to this day, the speed of construction can literally be brick-by-brick. But BIM has emerged as a true disruptor, representing one of the biggest leaps forward in construction since the hydraulic backhoe replaced the cable shovel. Improvements in storage and connectivity has made BIM commonplace on projects of all sizes, and BIM has become the center point of complementary methodologies like lean construction and collaborative contracts.

    BIM promotes efficient collaboration by providing all of the participants an economic benefit from collaborating. More, it pulls collaboration upstream, no longer relegated to the field at extraordinary costs, but instead in a virtual environment at virtually no cost.

    New risks

    The shared financial benefits from BIM collaboration provide a natural incentive for more collaboration. But this collaboration means new risks and potential liabilities because in most cases, businesses continue to model their risk allocation within the traditional assumption of compartmentalization. All the while, the businesses’ collaborative efforts reach beyond these traditional confines, creating risks that all too often go unaddressed.

    Given that BIM, collaborative contracts, and design-by-shop drawing are the norm for today’s private construction projects, the question is, do your contracts and insurance policies properly spread and bear the risks and liabilities that accompany this new way of building?

    From a contract standpoint, both the American Institute of Architects and ConsensusDocs provide standard BIM addendums. These are good places to start as far as structuring the allocation of collaboration risks. But a contractor will want to review these contract provisions with an attorney experienced in this area before using these off-the-shelf addendums. Both addendums allocate risk in ways that are not always suitable for the particular project or contractor, and as such, may require modification.

    From an insurance standpoint, any collaboration that blurs a contractor’s traditional role as builder will most assuredly push the contractor and its subcontractors outside of the insurance coverage typically provided by commercial general liability policies. So whether providing construction management services, design and constructability advice through BIM modeling, or design through shop drawings, these services must be covered by a combination of general and professional liability policies.

    Some basic things to keep in mind in understanding the difference between the two policies is that, by and large, general liability policies insure against bodily injury and property damage only. Your general commercial liability policy will not cover pure economic loss and typically excludes professional services.

    On the other hand, professional liability policies generally exclude bodily injury and property damage and instead only insure against economic losses arising from acts, errors or omissions in professional services. That said, endorsements to professional liability policies are often available that provide coverage for property damage and bodily injury.

    Also, it is quite rare for professional liability policies to name additional insureds, so a prime contractor should not plan on protection from its subcontractor’s professional liability policy where, for example, the subcontractor’s shop drawing design resulted in loss to the owner. The flipside is making sure that as the prime contractor, your professional liability policy includes protection for vicarious liability where a subcontractor’s rendering of professional services results in a loss.

    It’s also important to look at your policies’ definitions, which are a significant part of any policy. And in the case of professional services, you want that definition to be as broad as possible so it covers everything from construction management services to value engineering to design work.

    Other considerations include understanding that professional liability policies are virtually all manuscript policies, meaning they are not standard policy forms. You should be prepared to work closely with your broker and coverage attorney to ensure you are getting the coverage you need.

    Also, these policies are claims-made policies, meaning coverage is triggered by the claim being made, not when the loss occurred.

    Collaborative construction contracts carry unique risks that must be allocated and insured against. Traditional contracts and commercial general liability policies aren’t enough. If you have been operating under a business-as-usual approach when providing professional services, now is the time to make important risk management changes to insure your firm’s continued and future success performing collaborative contracts.

    Tymon Berger is a partner in Ashbaugh Beal’s Construction Law Group and Tristan Swanson is a lawyer in the firm’s Insurance Recovery Group. Ashbaugh Beal is based in Seattle.

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