Beware of Shifting Design Risk

| February 18, 2015 | 0 Comments

by Michael P. Sams

Michael P. Sams, Esq.

Michael P. Sams, Esq.

It is important for contractors to understand that unless they are intending to take on design risk, they (and we) really need to carefully review proposed contracts to weed out provisions that potentially shift design risk to the contractor. Unless a design-build delivery method is intended, removing the design risk is imperative because the client contractor likely is not being paid to take it on and, moreover, likely does not have insurance to cover it.

The notable shifting of design risk was seen in a very recent Massachusetts Superior Court case, Coghlin Electrical Contractors, Inc., v. Gilbane Building Company and Travelers Casualty & Surety Company of America.* In Coghlin, the plaintiff subcontractor sued the construction manager at risk, with whom it had contracted, for alleged additional costs incurred because of, among other things, alleged design changes. Gilbane, the construction manager at risk, responded in part by asserting third-party claims against the awarding authority/owner, including for breach of contract, contribution and indemnification related to “damages caused by design changes and design errors” that it might ultimately be obligated to pay to Coghlin. The awarding authority filed a motion to dismiss the claims.

The court identified the question before it as whether the construction-manager-at-risk contract that imposed upon Gilbane “extensive planning and oversight duties” can trump long-standing Massachusetts common law “protecting a contractor from liability for design error where another party furnishes the design and impliedly warrants their sufficiency for the purpose intended.”** After an apparent lengthy hearing, the court allowed the awarding authority’s motion to dismiss, leaving Gilbane in a position of potentially incurring financial responsibility for design changes on the project even though it did not expressly contract to provide the design.

As part of reaching its decision, however, the court noted that the contract placed “extensive ‘Design Review’ responsibilities” on Gilbane. Specifically, the court cited the following provision:

The CM [i.e., Construction Manager] shall review, on a continuous basis, development of the Drawings, Specifications and other design documents produced by Designer. The design reviews shall be performed with a group of Architects and Engineers, who are either employees of the CM or independent consultants under contract with the CM. Review of the documents is to discover inconsistencies, errors and omissions between and within design disciplines.

The CM shall consult with DCAM and the Designer regarding the selection of materials, building systems and equipment, and shall recommend alternative solutions whenever design details affect construction feasibility, schedules, cost or quality (without, however, assuming the Designer’s responsibility for design) and shall provide other value engineering services to DCAM. Without limitation, the CM shall review the design documents for clarity, consistency, constructability, maintainability/operability and coordination among the trades, coordination between the specifications and drawings, compliance with M.G.L. c. 149A for procurement, installation and construction, and sequence of construction, including recommendations designed to minimize adverse [e]ffects of labor or material shortages.

As these provisions make clear and the court noted, the typical relationship between an owner and construction manager differs from that of owner and general contractor. Unlike a general contractor, a construction manager customarily is involved in the design phase, and the contract is customarily amended during or at the end of the design phase to include a guarantee maximum price, with the construction manager having had the benefit of participation in (and being compensated for it) the design phase.

The court concluded that with these added responsibilities, and given the material changes in the roles and responsibilities a construction manager voluntarily undertakes as compared to a general contractor, the protections that Massachusetts courts historically have extended (the Spearin doctrine) are inapplicable.

With the growing use of CM-at-risk contracts and a seeming trend towards pushing design responsibility over to the contractor even in standard design-bid-build projects, contractors need to be aware of the potential design risk they are taking on. Either weed it out or insure it and get paid for it.

*Coghlin Electrical Contractors, Inc., v. Gilbane Building Company and Travelers Casualty & Surety Company of America, Worcester Superior Court C.A. No. 2013-1300-D (Memorandum of Decision and Order On Third Party Defendant Division of Capital Asset Management’s Motion to Dismiss, June 23, 2014).
**Alpert v. Commonwealth, 357 Mass. 306, 320 (1970) (adopting the Spearin doctrine).
Michael P. Sams, Esq. is a founding member and shareholder at Kenney & Sams, P.C. in Boston.

 

 

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