How is the role of design in a construction project summarised? A simple way is to call it the choices necessary to turn an idea into a finished development.
Badly designed projects may fail to address the needs of their users and impair not only bottom lines but people’s lives and well-being. Determining who is held responsible requires serious consideration at the earliest stages.
This article considers some of the main issues clients ask lawyers in this regard.
What extent of design liability can be presumed from a construction party?
Professionals have an implied duty to perform their services with reasonable skill and care. “Reasonable” is defined by the person’s discipline – an architect would be held to the usual practice and standards of other architects at the time.
Also on the table is fitness for purpose, which requires the design to meet the client’s requirements even if any failure to do so is unattributable to negligence. This is a problem for contractors since common law imposes a reasonable fitness for purpose warranty for any design they have carried out. Many contractors will restrict exposure by excluding any such warranty and capping liability for design inadequacies.
In large real estate development the middle ground prevails, with proficient developers expecting duties of skill and to be upgraded to “good industry practice”. Here, the architect would be judged against an experienced peer providing such services for similar projects. Importantly, and unlike fitness for purpose, this obligation is more readily protected by professional indemnity (PI) insurance.
Should design and build be used?
From warehouses to High Speed 2 and everything in between, design and build contracting has become the default choice for significant projects. Its rise can partly be attributed to the contractor carrying the can for everything – design, procurement and construction – and acting as sole interface.
There is a trade-off. This scale of risk transfer does not necessarily offer value for money – it is not dubbed “design and dump” for nothing. Intricate projects can also struggle to attract tenderers. In particular markets, for instance oil and gas, this has led to clients exploring alternatives.
Others shy from a central locus of responsibility. Developers with strict quality requirements, such as those in the upmarket luxury hotel and residential markets, often worry about contractors interfering with design. Large house builders and others with repetitive projects know their markets well enough to reclaim particular risks through management contracts.
Before design and build became popular, most developers would engage designers to prepare full plans and specifications. These allowed contractors to price and programme confidently. Indeed, the “traditional” basis is still used, with or without limited contractor design contribution, although it is chiefly reserved for straightforward fit-outs or refurbishments.
For larger projects, it has become unfashionable. Splitting design and construction lengthens the period between inception and completion and leaves contractors unable to input at early stages on value engineering and buildability. Development is inherently perilous but rapid development and reduced appetites for risk are the new normal.
Developers are loath to fork out substantial legal and experts’ fees to establish which construction team members to sue for defects. Similarly, tenants, investors and funders welcome the “one butt to kick” mentality that design and build brings.
This methodology has shown itself to be tremendously adaptable to different projects and market conditions. Indeed, it is often not a question of whether the procurement route is used but which variant.
Until enough contractors or insurers grow weary of the risks or pricing premiums spiral out of control, design and build will continue to be a mainstay of experienced developers and novices alike.
What should professional indemnity insurance protect against?
Covering negligence in design or other services rendered in the course of business, PI insurance not only reimburses any damages payable but also the costs spent fighting the claim. Should the insured become insolvent, developers can now pursue any current insurer directly under the Third Parties (Rights Against Insurers) Act 2010.
Insurance limits are customarily followed by the words “any one claim” or “in the aggregate”. The first denotes that the limit pays out per claim from the same cause. The latter is cheaper though less desirable, with the amount shared across all claims (even on unrelated projects).
I am often asked what an appropriate level of insurance is. Many developers look at an amount commensurate with the works cost. However, counterparties can struggle with this where that exceeds the insurance levels available in the market or where margins are slim. A more scientific method is to consider the losses that could accrue if they fail in their duties. Any exclusions, limitations and excesses from cover must be scrutinised against the desired project risk profile. It can be counterproductive for developers to insist on contract terms which are uninsurable.
The insurance market presently has surplus capacity, which has led to more favourable rates and terms being offered. Nonetheless, businesses sometimes regard PI insurance as an overhead rather than a means of self-preservation. That is unfortunate, if understandable. After all, it is a hefty cost. PI insurance obligations encompass not just their project involvement but typically six to 12 years beyond that. They may also be jittery because the policies are renewed annually. Past claims are taken into account, leaving future premiums uncertain. Prepare for some haggling over numbers.
Francis Ho is head of construction at Olswang LLP
