Risks and Rewards in Architect Led Design-Build Web Presentation

presents Risks and Rewards in Architect Led Design-Build Web Presentation

Tuesday, May 6, 2008 2:00 PM - 3:30 PM Eastern 1:00 PM - 2:30 PM Central 12:00 PM - 1:30 PM Mountain 11:00 AM - 12:30 PM Pacific

Presented by: Barry Bannett, RA, AIA, NCARB, DBIA Martin(Marty)Sell, AIA, NCARB

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Risk and Rewards in Architect Led Design-Build

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* Non-members who require a certificate please contact Christine Vanderbeek at [email protected] or 202-626-7425 Risks and Rewards in Architect Led Design-Build

A Continuing Education Webinar of the American Institute of Architects

May 6, 2008

Program Sponsor: AIA Design-Build Knowledge Community

Presenters: Barry Bannett, RA, AIA, NCARB, DBIA Martin Sell, AIA, NCARB

About this document

This program is registered with the AIA/CES for continuing professional education. As such, it does not include content that may be deemed or construed to be an approval or endorsement by the AIA of any material of construction or any method or manner of handling, using, distributing, or dealing in any material or product. Questions related to specific materials, methods, and services may be addressed at the conclusion of this presentation.

1 Barry Bannett, RA, AIA, NCARB, DBIA

CEO The Bannett Group, Ltd. 2008 Co-Chair AIA DB KC DBIA Special Advisor Board Member DBIA Instructor in Design-Build Founder of The Bannett Group, Ltd., an integrated designer lead Design-Build company. Over 40 years experience as an architect delivering Design- Build projects. Expert in design and construction and Design-Build project delivery. Licensed planner in the state of New Jersey Guest lecturer at Pratt Institute Former member of the Haddonfield Historic Preservation Board.

Martin Sell, AIA, NCARB

20+ Years Experience in Design-Build Companies located in Wisconsin • K-12 Public Schools in WI and IL • Retirement Housing in the upper Midwest • Resort Hotels and Indoor Water Parks nationwide • Integrated Project Delivery for Public and Private Clientele Co-Chair of AIA’s Design-Build KC Advisory Committee Founder, President and CEO of RKETEK.com, LLC President and CEO of MSA Integrated Project Delivery, LLC Co-Author of The Architect’s Guide to Design-Build Services published by John Wiley and the American Institute of Architects Contributing Author to AIA150 History of Architecture Publication 25+ Years Member of AIA; immediate Past-President of AIA Wisconsin; Wisconsin AIA150 Champion UW Milwaukee and UW Madison Master Degrees in Architecture and Business Administration Instructor at Milwaukee School of Engineering – Arch/Engineering and Building Construction and presenter in Design-Build Program

2 D-B Knowledge Community Webinar Series 2008

#1 Introduction and History of Design-Build #2 Risks and Rewards in Architect Led Design-Build #3 Transforming to an Architect led Design-Build Firm • Tuesday, June 10, 2008 at 2:30 PM Eastern Time • Betsy Downs, OWP/P and Ben Wilking, LBA Corporate Services #4 Contract Forms, Legal Risks and Legislation • Mid September 2008 • G. William Quatman, Esq. FAIA and Barry Bannett, AIA, DBIA #5 Design-Build in the Public Sector • Mid October 2008 #6 Educating Architects during Changing Times Anticipated Webinar Continuationin 2009/2010

Risks and Rewards in Architect Led Design-Build

3 Design-Build Trends and Teaming

Barry Bannett, RA, AIA, NCARB, DBIA The Bannett Group, Ltd. Cherry Hill, New Jersey

Contracts Project Delivery Options Communications

Design-Bid-BuildCM Design-Build

Owner Owner Owner

Manager Design-Build Designer Builder Entity

Designer Builder Designer Builder Consultant Sub Contractors

Consultant Sub Contractors - Linear phases Integrated Team: - Owner holds separate contracts (2) - Linear phases Consultants & Sub Contractors - Three prime players - Owner holds separate contracts (3) - No direct communication for - Four prime players Consultant or Sub Contractor - No direct communication for to Owner Consultant or Sub Contractor to Owner

4 Market Penetration of Major Project Delivery Systems

Source: Design-Build Institute of America

Benefits of Design-Build

Independent research on project performance has shown that Design-Build, an Integrated Design and Construction process, when compared with traditional design and low-bid contracting, is: • 33% faster • 6% less in unit costs • Superior in product quality • Generates substantially less claims and litigation

5 Design-Build National Trends

More industry sectors using Design-Build

Transportation/Public Utilities

More owners see advantages of single contractual responsibility and a multidisciplinary team

Part of more integrated solutions which include financing, operation, maintenance, and/or ownership

2005 Design-Build State Public Procurement Laws

Updated July 2007

6 The Integrated Project Delivery Team

Teaming

The cornerstone of Design-Build, Integrated Design and Construction is assembling a project team built on collaboration

Must assemble an Integrated project team that is committed to a collaborative process and capable of working together

There must be: • Mutual respect • Mutual benefit • Early goal definition

7 Integrated Design-Build Teams

Seamless Fully Engaged Operates from a 100% - 0% attitude Listens for what serves the project Facilitative leadership Accountable & count on-able Trust, Trust, Trust Communicates, Communicates Focus on Solving the Problem Not on Protecting Your Position

TRUSTTRUST

Communication Collaboration

Integration

8 Collaboration

…means using ALL team members to… Define ALL the problems to be solved in a project Develop solutions that meet the needs of the Owner’s business, business processes, market conditions, stakeholders, financing, operation, and maintenance (as well as design and construction)

The Integrated Team Must Think “Outside of the Box”

Communication h: Trust tablis Vision nd Es A Attitude Respect

With the Owner and all parties involved with the project and project delivery.

9 Design-Builder The Architect

Science of Techniques Art of Design Engineering of Construction

Single point of responsibility

Design-Build

Architects should lead the Design-Build Team

Design-Build addresses Owner’s concerns – design, cost, schedule, quality and functionality while offering the best value for their construction investment – clients are happier with the results

Design-Build offers Architects an ability to expand their practices, business and increase profitability

10 Architects have…

Vision – Architects have always been the industry leaders, trend-setters, crafting creative solutions

Leadership – Architects have the best ability to lead and manage the building team

Client Focus – Architects have been taught to listen to and learn from clients, and translate their dreams into reality

Technical Knowledge – Architects are natural “master builders” who best understand codes, materials and building systems.

Financial Rewards of Design-Build

Martin Sell, AIA, NCARB MSA Integrated Project Delivery Beaver Dam, Wisconsin

11 Financial Analysis

Are you happy with your financial bottom line?

Financial Analysis

“Designer led Design-Build… enables the A/E to participate in construction profits which dwarf the profits from the design phase.

Informal research among design firms that take the lead in Design-Build projects indicate that the ratio of construction profits to design profits exceeds 4:1.”

Mark C. Friedlander - Schiff, Hardin and Waite, Attorneys DBIA Professional Practice Committee

12 Financial Analysis

Additional Sources of Revenue • Retain Traditional Design Fees • Additional Construction Fees • Use of General Conditions to cover Costs Reduction in Duplicated Costs • Overhead of separate companies • Shared knowledge throughout projects • Avoid duplication of design and drawings

Top 500 Design Firms Firms with a Construction Component

80% 2000 - Top 2% of Firms = 36% of Revenue 70% 60% 50% 40% 30%

20% 2000 10% 2001 0% 500 100 50 10

Source: Engineering News Record – April 2001- 2002

13 Financial Example Project

Project Organizational Chart

Owner

Design/Builder

Consultants Contractors Material Suppliers General Conditions

Example Assumptions

$10,000,000 Total Project Scope D-B using CM At Risk Delivery Model • 100% Competitive Bidding of Trades Most Design-Build Services In-House Design-Builder Fees and Reimbursables • Market Comparable AE Fee • Market Comparable CM Fee • Market Comparable General Conditions Experienced Design-Builder.

14 Revenue Analysis Design Only

$10,000,000 Project Fee

7% AE Fee Reim Exp • $700,000 ½ % Reimb Expenses Remainder • $50,000 AE Staffing Schedule • 6 months Schematics • 6 months CD’s • 12 months Construction $750,000 Total Revenue

Revenue Analysis Design-Build

$10,000,000 Project Fee

7% AE Fee; 5% CM Fee Reim Exp • $1,200,000 5% Reim/General Cond Remainder • $500,000 AE Staffing Schedule • 6 months Schematics • 6 months CD’s • Less Time Construction $1,700,000 Total Revenue

15 FTE Staffing Analysis Design Only

$10,000,000 Project 100 Total Revenue 90 = $750,000 80 70 Total FTE’s 60 50 = 7.5 40 Revenue/Employee 30 20 = $100,000 10 0 Design Employees Revenue

FTE Analysis Design-Build Conservative Staffing

$10,000,000 Project 160 Total Revenue 140

• $1,700,000 120

Added Staff 100

• 1.5 Construction Mgr 80

• 1.0 Superintendent 60

• 1.5 Project Accountant 40 • .5 Office Overhead 20 Design • Reduce AE by 0.5 0 Design/Build Employees Revenue Total FTE’s = 11.0 Rev/Emp = $154,545

16 FTE Analysis Design-Build Aggressive Staffing

$10,000,000 Project Total Revenue 180 160 • $1,700,000 140 Added Staff 120 • 1.0 Construction Mgr 100 • 1.0 Superintendent 80 • 1.0 Project Accountant 60 • .5 Office Overhead 40 20 • Reduce AE by 1.5 Design 0 Design/Build Total FTE’s = 9.5 Employees Revenue Rev/Emp = $178,947

Sample Project Comparison Revenue per Employee Increase Design Only Design-Build Total Revenue Total Revenue = $750,000 = $1,700,000 Staffing Staffing = 7.5 FTE’s (assumed) = 9.5 to 11.0 FTE’s Staffing Increase $100k/employee = 27% to 47% increase Revenue Increase

Revenue per Employee = 127% increase + $54k +$79k

17 Value of Construction Fees

Marketing the Value of a Construction Fee • Construction ALWAYS has a Fee Component − CM Fee, Contractor Fee, Buried Fees • Benefits of Open Book Accounting − Fees are Visible, Costs are Visible, Trust is Developed Tax Exempt Clientele • Direct Purchase of Materials for Tax Savings Direct Purchase Opportunities • Purchasing and Procurement of FFE Commissioning and Expanded Services

Construction Revenue Analysis Construction Fee and General Conditions

Architectural Fees are mostly absorbed by Personnel Costs Construction Fees are mostly Profit that drops to the Bottom Line General Conditions cover many Personnel and other Costs of a Construction entity $50,000,000 New Hospital

18 Revenue Analysis Design-Build –General Conditions Analysis

$1,500,000 of Personnel Costs in General Conditions

Construction Revenue Analysis Comparison of Bottom Line Profit

Architectural Firm 6% of $50,000,000 $3,000,000 Fee 15% Profitability $450,000 Profit Construction Manager 2% of $50,000,000 $1,000,000 Fee Most Personnel Costs in General Conditions $50,000,000 New Hospital $1,0000,000+ Profit

19 Opportunities in Design-Build

Barry Bannett, RA, AIA, NCARB, DBIA The Bannett Group, Ltd. Cherry Hill, New Jersey

Opportunity 1:

An Integrated, Architect (Design Led) Design-Build Firm

20 Design Led, Design-Build, Integrated Firm

A single source contract OWNER for all of the design and construction services

Design/Build Firm

Design Project Estimating Construction Department Management

PROJECTPROJECT

Design Led, Design-Build, Integrated Firm Normal design services are included in the architectural basic service contract. To offer integrated construction, you need to: • Expand the architectural service contract to include the construction services • Normal contractor’s services which are part of his contract are: − Project Management − Estimating − Purchasing − Supervision • These services can be additional employees or added on to the vendor’s scope of his subcontract

21 Compensation

The Design-Build contract can be either of the following: • Lump sum contract with a GMP for design and construction OR • A CM contract with a GMP (open book plus a cost plus a fee) OR • A CM contract as an agent for an additional fee

Advantages

Total control of the design and construction

More profitability

Clear communication between the Owner, the subcontractors and vendors for an integrated project

22 How to do it:

Write a 2-Part Design-Build Agreement • Part I: Design and Budgeting − Fee: 1 – 3 % of the construction cost • Part II: Final Design and Construction − GMP − CM – Cost Plus a Fee − Owner’s Rep Think out of the box for documentation: − Facilities programming and project criteria − Conceptual preliminary and design drawings − Design development drawings and scopes of work − Contract documentation (Part I) − Permit documents − Construction documents (Part II)

The Design-Build Process

With Design-Build – the cost and design parameters of the project are determined and managed THROUGH the design process, NOT as a result of (after!) the design process.

80% of the costs are defined in 20% of the documentation

23 Opportunity 2:

A partner in a Design-Build Contract

A single source contract for all of OWNER the design and construction services

Design-Build Partnership

A/E Firm General Contractor

Design Project Estimating Construction Management Superintendents

PROJECT

24 A partner in a Design-Build Contract

Must determine the expertise that each party brings into the contract • Architect provides the Design and Engineering • Contractor provides – Project Management – Estimating – Supervision – Purchasing • Determine the value of the service that each party brings into the contract (suggest a fixed fee price) • Decide who will handle the overlaps and who will be the bus driver to manage the project

Advantages

Control of the design Direct communication with Owner, Subcontractors, Vendors Share of the profits Design and construction staffing are in place

25 Disadvantages

Greater risk than design only Financial obligation Liability and bonding

How to do it:

Write a 2-Part Design-Build Agreement • Part I: Design and Budgeting - Fee: 1 – 3 % of the construction cost • Part II: Final Design and Construction - GMP - CM – Cost Plus a Fee - Owner’s Rep Partner with a contractor who has successfully completed the building type Form an LLC with each partner at equal risk and equal share in the profits Have one checkbook with double signature for payables

26 Opportunity 3:

A Specialty Consultant to a Design-Build Contractor

OWNER A single source contract for all of the design and construction services D/B Contract

General A/E Firm Contractor

Construction Estimating Project Designer Superintendent Management

PROJECT

27 Traditional Project Responsibilities

Architectural/Design Contractor’s Overlaps Responsibilities Responsibilities Facilities programming, space Conceptual Agency & approvals planning & conceptual design estimating Legal Preliminary design Scheduling Financing Design Development Budgeting Interior Design Construction Documentation Bidding & Consultants Bidding & negotiation negotiation Special Systems (e.g., Construction Administration Construction lighting, and Quality Assurance Punch lists telecommunications) Warranty & guarantee Coordination of specialty Occupancy contractors

Need to know – Who’s in Charge – Who Will Handle Overlaps

Defining the Relationship

Must clearly define the relationship with the Owner and the Contractor for Design Liability and request that no isolated meetings through the design process are held without the Architects present

Since the Architect is contracted to the Design-Builder: • Owner is responsible for the criteria and function • Architects, Engineers are responsible for design and codes • Contractor is responsible for Project Management cost and construction

28 Defining the Services

Must clearly define the scope of services that the A/E is to provide in each phases: • Pre design – Owner’s criteria • Conceptual and schematic design • Design development • Construction documents and specs • Construction administration Suggest a multiple of time for pre-design, conceptual and schematic design A lump sum fee for design development and construction documents A multiple of time for construction administration

Design-Build Entity Structural Arrangements

Integrated firm Integrated Design-Builder Contractor led 28% Designer (A/E) led Joint venture Contractor-Led Developer-led 54%

Designer-Led 13% Joint-Venture 5%

29 Advantages

Control of the design

Direct communication with Subcontractors and Vendor

Guaranteed payment (earlier)

Construction administration is smoother (less finger pointing)

Disadvantages

Not working directly for the Owner

A consultant to the Design-Build contractor

Indirect communication with the Owner

No control of the design

30 How to Do It:

A clear contract Suggest a 2 Part Agreement • Part I: Design and Budgeting • Part II: Final Design and Construction • A fixed fee for each part • A separate fee for consultants required. i.e.: Structural engineers, Mechanical Engineers, etc. • Suggest that these fees be part of the Design-Builders agreement (determine who manages and coordinates consultants)

Opportunity 4:

Bridging

31 Bridging

The Architect can translate the owner’s needs and objectives into quantifiable documents that can be readily understood by the construction industry There are 2 accepted practices for Architects to provide bridging documents: • Option 1: − The Architect can prepare the facilities program, project criteria, conceptual and preliminary design drawings and then turn them over to a Design-Build contractor, who will complete the design, sign and seal the documents and construct the project OR • Option 2: − The Architect can prepare the facilities program, project criteria, conceptual and preliminary design drawings and design development drawings to be used to select a Design-Build contractor − These documents will be the foundation of the design of the project, but they are signed and sealed by another Architect

Option 1

The bridging documents will be used for basis of design of the project These documents are released to a Design-Build contractor, who will then retain the services of another Architect who will design the project, then sign and seal these documents and become the Architect of Record The bridging Architect may or may not remain on the team as the Owner’s representative, however, he has no responsibility or liability for the design documentation or construction

32 Advantages Option 1:

The Architect has the opportunity to consult with the owner in the owner’s criteria and project design and to produce the conceptual design requirements for the project

He is released of liability or risk for the performance of the design or construction

He can remain as an owner’s representative as a consultant to the Design-Build team

Disadvantages Option 1:

The bridging Architect has no control of the final design or construction

33 Option 2

The A/E will prepare a full facilities program, conceptual drawings, design development drawings and specifications to be use to select a Design-Builder. These documents will be the basis for the design of the project.

The Design-Builder will then hire an outside Architect to finish the documents, sign and seal the drawings and become the Architect of Record

The bridging Architect will remain on the project team through the construction documentation and construction administration

Advantages Option 2:

The Architect will be paid a larger fee to provide more services

The signing and sealing and the liability of the design and construction is assigned to another professional

The bridging Architect will stay in control during the final design and construction

34 Disadvantages Option 2:

The Design-Builder’s Architect might not want to assume the liability for another Architect’s design

The bridging Architect is not in control of the construction or contractor’s vendors

Can lead to finger pointing

Opportunity 5:

Consultant to the Owner (Owner’s Rep.)

35 Consultant to the Owner

The Design and Construction process is the same whether it is a:

• Single Source Design-Build Contract • A CM Contract Therefore, the services that are to be provided by the design professional are the same.

There is an opportunity for the architect to be the owner’s representative to the Design- Build Integrated Team as the Owner’s consultant.

Advantages

Utilizes all of the architectural knowledge and education of the Architect

Limited Liability (if any)

No financial risk

Easily accomplished by small practitioners

36 Disadvantages

NONE

Design-Build Benefits

Design-Build is the future of the industry Architects belong at the forefront of Design- Build/ Integrated Design and Construction Design-Build provides a win-win scenario for all involved: Owner, Architect, Contractor and the Building Team Integrated Services = Seamless Team = Design-Build = Integrated Design and Construction WIN-WIN SOLUTIONS WITH NO CONFLICTS!

37 Insurance and Bonding

Martin Sell, AIA, NCARB MSA Integrated Project Delivery Beaver Dam, Wisconsin

Are You A Risk Taker?

38 New Risks: Are You Ready?

We teach Architects: But in Design-Build? • Avoid site safety • Full site safety duties • Don’t make guarantees • Guarantee the project • Don’t warrant estimates • Possibly enter into a • Don’t indemnify anyone “Guaranteed Max Price” • Limit site visits to • Indemnity is a standard “general observation” requirement • Limit your liability • Full time site “inspection” • Full liability for: (design + construction)

Legal Risks When Prime

Architects are used to “everything” being insured • contractors “self-insure” most mistakes; Commercial General Liability (CGL) Insurance is very limited coverage Uninsurable Indemnity Clauses • common in construction contracts Guaranteed Maximum Prices • 100% risk of cost overruns Express Warranties • different standard of care Site Safety and OSHA • new roles for architect

39 Legal Risks When Prime

Strict Liability/Unemployment Compensation • more realistic in Design-Build • no court cases . . . yet! ADA and Fair Housing Act • “design and construct” expands liability Defaulting Subcontractors • more common in construction than in design • 6,300 subs failed in 1997 vs. 374 A/E firms failing Mechanic’s Liens • also more commonly asserted by subs/suppliers

Are Increased Risks Real?

CNA Insurance Statistics:

Traditional Projects: • 22.6 claims per 100 insured A/E firms per yr.

Design-Build Projects • 12.9 claims per 100 insured A/E firms per yr.

CNA says “we overestimated the risk”

40 Risky Business

Zweig White Survey: Why? • 2/3 of A/E firms felt it • Problems are worked was less likely they out in the field, keep would be involved in a job moving, keep cost dispute when doing down Design-Build… • Team – integrated • 97% had never been project delivery – involved in a lawsuit approach to project over a D-B project delivery is working!

What is the Design-Build Risk?

Which has more risk?

Putting out a set of Or being the plans for competitive Design-Build bids to a group of low contractor and bidders who exploit being in total every opportunity for control? a change order + claim?

41 Is there Risk in Traditional Design-Bid?

Insurance and Bonding

“This may not be the hardest insurance market ever, but it sure feels like it. Almost 17 years of ever-easing terms and conditions erased the collective memory of the last (insurance) crisis in 1985.”

42 Surety Bonds

A bond is a guarantee of an underlying agreement Payment Bonds • Assures payment to subs and suppliers Performance Bonds • Guarantees work will be completed Maintenance Bonds • Guarantees warranty work will be performed • 1 year automatically include in performance bond Bid Bonds • Guarantees that bidder will honor its bid

Qualifying for Bonds

An evaluation of the financial 1998-99: less than strength of the company 31% of design firms • What do they have? said they could get a − Annual report bond… − Interim statements …2/3 said when they • How do to keep it? could not, they − Investment strategies teamed with a − Cost control contractor who was • At this time bondable − Current backlog of work

43 What Do Bonds Cost?

Bid Bonds • Free Performance Bonds • From 0.5% to 2.5% of contract value • Generally lower rates mean better financials Payment Bonds • Free, when issued with a performance bond • Reduced cost when issued alone

Difference from Insurance

Insurer pays claim; you pay deductible

Surety bond is a personal guarantee – Surety looks to YOU to reimburse it 100% – May requires a personal indemnity agreement from you as owner of the company and your spouses!

44 Can You Get a Bond?

Probably Not! We are in a very tight market!

Surety wants to see sufficient assets to cover potential loss under bond • $1 million net worth + $1 million in current assets as threshold for some programs

Bonding limits based on ratio of working capital • e.g. a 10% case = $500,000 capital/10% = $5 mil. Bonds • Recent Survey says $5 million is relatively low bonding line for Design-Build

So What Can You Do?

Act as a subcontractor Bond your key subs Stick to private-sector • “dual obligee bonds” Team with bondable Letter of Credit contractor • for less than full • who will bond your contract amount Joint Venture or LLC SBA bonding program Subcontract to a • up to $1.25 mil. contractor Retain profits/build • who provides a “dual financial statement obligee” bond • so you are bondable! • to You and the Owner

45 Bonding Requirements

Surety Information Office

www.sio.org

Insurance Issues

Insurance Coverage, Differences and Exclusions • Difference between contractor’s Commercial General Liability and the Architect’s Error’s and Omissions Professional Liability Policy Exclusions Commercial General Liability Limitations

46 The Numbers of Design-Build Contractors Able to Insure

77% in 1997 87% in 1998 100% in 1999

Workers Comp Insurance

Architect’s Office: • Very few workplace injuries (carpal tunnel) Construction Site: • The Department of Labor ranks the construction industry as one of the most dangerous industries in the U.S. (over 300 deaths/yr.)

47 Workers Comp Insurance

Contractors surveyed in 1999 reported average of 24 workers comp. claims/year with an average cost per claim of $3,629 • Down from an average of 34 claims in 1995 • Important to carry workers comp. insurance as a Design-Build contractor (much higher premium than you are used to as an Architect) • Make sure that your subcontractors do too! Nobody sets foot on the job without a Certificate of Insurance!

Commercial General Liability Insurance

The “core policy” carried by contractors Covers personal injury, property damage and death Which results from the negligence of the contractor • excludes damage to the work itself • typical limits are $1 million per occurrence • new policies after 2002 may exclude: − mold − EIFS − residential construction projects

48 Compare Errors and Omissions to Commercial Liability

Errors & Omissions: Comm. Gen. Liability: • Limits reduced by • No deductible attorney’s fees • Attorney’s fees are in addition to • Has a deductible policy limits • Limits reduced by each • Can get “per project” limit claim endorsement • Covers negligence only • Can get “contractual liability” • No additional insureds endorsement • Covers almost any • Can get additional insureds easily damage caused by • Excludes damage to the Work your negligence (broad) itself; limited to personal injury, property damage and death

Differences in Contractor’s and Architect’s Insurance Architect’s Professional Liability • written on a “claims made” basis • covers claims that are made within the policy period, regardless of when the work was actually done. • each claim and legal fees reduce available coverage • Example: firm has a $1 million policy; has two claims in the same year, one of which incurs $50,000 in legal fees and the other of which pays out a $200,000 settlement. This reduces the available coverage for other claims by $250,000, in effect reducing the policy limits to $750,000.

49 Differences in Contractor’s and Architect’s Insurance Contractor’s Commercial General Liability • written on an “occurrence basis” • the policy in place when the negligent act occurred is the one that covers the loss, regardless of when the damage happens or when the claim is made • Example: a contractor is covered by AETNA when the job is built, but switches to USF&G a year later, the claim is still covered under the AETNA policy if it is made even many years after completion of the project, though AETNA is no longer the current insurer for the contractor and receives no more premium payments.

Builders’ Risk Insurance

Provides property coverage during the construction process, protecting the actual structure under construction • including materials, fixtures, equipment to be used in the construction • “All risk” coverage is the most broad and most common • usually written for the full contract price • covers loss from fire, lightning, explosion, windstorm, vandalism, sprinkler leakage and, if broad form, falling objects, weight of snow and ice at the project site • provided by contractor or Owner

50 Automobile Insurance

Hired, Owned and Non-owned Included Combined Single Limit per Accident $1,000,000

Umbrella Insurance

Terms “excess” or “umbrella” often used interchangeably • this policy adds to the policy limits of a CGL policy • primary CGL insurance is normally $1 million • additional limits of insurance can be obtained by purchasing an “umbrella” policy • umbrella adds not only more coverage dollars − but can also add coverage for perils not covered under the underlying CGL policy

51 Professional Liability Insurance Warnings

Watch Out For: • Indemnity clauses not limited to YOUR negligence • Requirement to add others as “Additional Insureds” • Requirement to carry for __ years after completion: − AGC and the DBIA forms require professional liability insurance for a specific number of years after substantial completion − You cannot guarantee this (1-year renewable policy terms) Project policy: covers entire design team • Be careful about “additional insureds” due to the “insured vs. insured” exclusion (e.g. D-B v. A/E)

Professional Liability Exclusions

Liquidated damages Fines and penalties The cost to repair or replace faulty workmanship in any construction performed by you • Some exclude claim against YOU by any entity: − operated, managed or controlled by YOU; or − in which you own more than 15% to 50% (varies) • So if your Architectural firm owns a D-B firm, the D-B firm cannot make a claim under YOUR policy! • Unless you get an endorsement around this!

52 The Warranty Exclusion

Contractors typical Design-Build contracts warranty is one-year WILL have express from Substantial warranties! Completion Either qualify such Architects are not warranty as applying only insured for express to the “construction warranties or guarantees work”, or be prepared to self-insure the risk of a warranty

The Contractor’s Design Exclusion

Just as architects are not insured for construction work performed by them, contractors are not insured for design work done by them… CGL policy for a contractor contains an exclusion for “professional services”, defined as: “The preparing, approving, or failing to prepare or approve, maps, shop drawings, opinions, reports, surveys, field orders, change orders or drawings and specifications; and inspection, supervision, architectural or engineering activities.”

53 Are you ready to take the plunge?

“The best way to limit your risk as a Design- Builder is to UNDERSTAND your Risk … and to MANAGE your Risk”

Any Questions?

Time for Questions of the Presenters

E-mail your comment/question by clicking on the “question icon” in the lower right corner of your screen. Type your question or comment in the window that appears, and then click “send.”

Additional thoughts, ideas, and discussions:

• Email Us − Barry Bannett: [email protected] − Martin Sell: [email protected]

54 Program Credits

AIA Design-Build Knowledge Committee www.aia.org/db

AIA National Staff and Support Katherine Gupman: [email protected] Kathlene Lane: [email protected]

Program Coordinator Sasha Henderson: [email protected]