DBIA Risk Management and Allocation Questions and Answers 2 — Questions and Answers
Question 1: What is DBIA's recommended approach to risk allocation in design-build contracts?
- Transfer all risk to the design-builder
- Allocate each risk to the party best able to manage, mitigate, or absorb that risk (Correct answer)
- The owner should retain all project risk
- Risk allocation should not be discussed until problems arise
Correct answer: Allocate each risk to the party best able to manage, mitigate, or absorb that risk
DBIA advocates that risks should be allocated to the party best positioned to manage them, producing lower overall project costs.
When risks are inappropriately transferred to a party that cannot control them, that party must add contingency, increasing cost without reducing actual risk. Fair allocation also promotes collaborative behavior.
Question 2: Which risks are typically retained by the owner in a design-build contract?
- All construction risks
- Risks related to differing site conditions beyond what was indicated, owner-directed changes, regulatory changes, and force majeure events (Correct answer)
- No risks transfer to the owner
- Only design-related risks
Correct answer: Risks related to differing site conditions beyond what was indicated, owner-directed changes, regulatory changes, and force majeure events
Owners typically retain risks they are better positioned to manage or that are beyond the design-builder's ability to anticipate.
Owner-retained risks include Type I differing site conditions, owner-directed scope changes, post-execution regulatory changes, force majeure events, and third-party delays the owner has the contractual relationship with.
Question 3: How should professional liability insurance be addressed in a design-build contract?
- Professional liability insurance is not needed
- The design-build entity should carry professional liability (E&O) insurance with coverage limits appropriate to the project's complexity and value (Correct answer)
- Only individual architects need professional liability
- General liability covers all design-build risks
Correct answer: The design-build entity should carry professional liability (E&O) insurance with coverage limits appropriate to the project's complexity and value
Professional liability insurance specifically covers design professional negligence and is essential in design-build.
This insurance covers claims from negligent acts, errors, or omissions in professional design services. Key considerations include appropriate coverage limits, claims-made policy structure requiring ongoing coverage, and ensuring subconsultant design coverage.
Question 4: What is a 'limitation of liability' clause, and how does it function in design-build?
- It eliminates all liability for the design-builder
- It caps the design-builder's maximum financial exposure for certain types of damages, negotiated based on project value and available insurance (Correct answer)
- It prevents the owner from filing any claims
- It only applies to warranty claims
Correct answer: It caps the design-builder's maximum financial exposure for certain types of damages, negotiated based on project value and available insurance
A limitation of liability clause establishes a maximum amount the design-builder can be required to pay.
Without such caps, a catastrophic failure could exceed the design-builder's net worth and available insurance. Common approaches include capping at contract value, insurance limits, or a multiple of the design-builder's fee.
Question 5: How should design-build contracts address warranty obligations?
- Design-build projects do not have warranties
- Contracts should distinguish between construction warranties (typically 1-year correction period) and the designer's ongoing professional standard of care obligation (Correct answer)
- Warranties expire at substantial completion
- The owner waives all warranty rights
Correct answer: Contracts should distinguish between construction warranties (typically 1-year correction period) and the designer's ongoing professional standard of care obligation
Design-build warranty structures must address both the construction correction period and the professional standard of care for design services.
The construction warranty is typically 12 months from substantial completion. The professional standard of care for design services extends for the statute of limitations/repose, which may be 6-10+ years depending on jurisdiction.
Question 6: What is 'consequential damages' waiver, and why does DBIA recommend it for design-build?
- A waiver of all project damages
- A mutual waiver where both parties agree not to claim indirect damages like lost profits or lost revenue from each other (Correct answer)
- A waiver that only benefits the design-builder
- A prohibition on filing insurance claims
Correct answer: A mutual waiver where both parties agree not to claim indirect damages like lost profits or lost revenue from each other
DBIA recommends mutual consequential damages waivers because indirect damages are unpredictable, potentially catastrophic, and difficult to insure.
Consequential damages can vastly exceed contract value. The mutual waiver keeps risk within insurable bounds, encourages open communication about problems, and supports the collaborative relationship design-build requires. Direct damages remain fully recoverable.
DBIA Risk Management and Allocation Questions and Answers 2
What is DBIA's recommended approach to risk allocation in design-build contracts?