Risk Management Articles

The New DBIA Subcontract Between Designer and Design-Builder:
What You Need to Know.
By G. William Quatman, Esq., AIA

On October 13, 1999, the Design-Build Institute of America (DBIA) released its first ever series of subcontracts between the prime design-build contractor and the various subcontractors, including the design professional. The documents come one year after DBIA published its first contract forms for use between the prime design-builder and the owner in October 1998. The document series is well written, user friendly and incorporate some of the more current concepts in construction contracting. They are specifically written for use on design-build projects and, in this author's opinion, are a great improvement over the AIA design-build forms. The DBIA's 10-member committee attempted to draft fair contracts, which favor neither the owner, contractor nor design professional. Being the Anew kid in the contract form market, DBIA's authors agree that their contracts, while fair, are not perfect. Of course perfection is in the eye of the beholder.

Of interest to design professionals is the 1999 subcontract between the Design-Builder and Designer (DBIA Doc. No. 540). With the majority of design-build work being contractor led, and the forecast that 50% of all non-residential construction will be design-build in the next 5 years, it is likely that you will be asked to sign this contract sometime soon. Consistent with the drafters= goal, the design subcontract is fairly balanced in many areas. However, from an architect's perspective, there are many risks which are not covered by insurance, plus payment contingencies that should be amended to establish a more fair balance of risk. Here are some of the key problems with the new DBIA form:

Conflicts. Par. 1.3.1 and 1.4.1, when read together provide that when in conflict, the DBIA form 540 takes precedent over written Supplementary Conditions executed by the parties. This is contrary to the very purpose of such conditions, which are intended to alter the form contract. This should be revised to make clear that Supplementary Conditions govern over the DBIA form.

Communication with Owner. Par. 2.1.4 bars direct contact between the designer and owner, unless the design-builder agrees otherwise. This is not an uncommon subcontract provision but will run contrary to the way in which architects normally deal with end users of their buildings. The architect must rely totally on the prime design-builder to pass on the concerns and comments of the owner and designer.

Standard of Care. DBIA has included an insurable standard of care in par. 2.2.1, consistent with state law in most jurisdictions holding the designer to that level of care and skill ordinarily used by members of the design profession practicing under similar conditions at the same time and locality of the Project. However, the clause goes on to add that the designer shall comply with any performance standards required by the prime contract (i.e., regardless of the standard of care). This may create a warranty or guarantee not covered by professional liability insurance.

Estimating Errors. Although the design-builder is responsible for all cost estimating, including mistakes or miscalculations of market conditions under par. 3.3.3, the architect is required under par. 2.6.6. at its own cost to revise the design as needed to achieve the budget. It would seem more equitable that if the architect is relying on the design-build contractor to price out the design as it progresses, then the contractor (who is responsible for its mistakes) would bear part or all of the cost of design revisions needed due to estimating errors.

Site Observations. Par. 2.7.6 requires site visits by the designer at appropriate intervals to determine if the construction is proceeding in accordance with the Construction Documents. Absent full-time resident services, lots of work will go unobserved by the designer. As a result, architects should agree only to observe the progress of work for general conformance to the Documents.

Certifications. A vague, yet broad sentence in par. 2.7.8 requires the designer to provide certifications as may be necessary relative to Substantial Completion. This may include certifications to lenders, sureties and government officials dealing with codes, ADA and environmental risks. With each third party certification comes increased liability for the architect. At a minimum, the designer should have the rights to: 1) approve the form of certificate in advance; and 2) issue only those certificates it can reasonably do so based on its level of involvement during construction. Watch for certifications that might create an uninsurable warranty or guarantee.

Limited Reliance on Contractor-Furnished Information. The prime design-builder must furnish the architect with surveys, geotechnical data, easements, zoning, as-built drawings, environmental and inspection reports, among other data. While the designer is permitted under par. 3.3.1 to rely upon such items that reliance is limited to that level that the design-builder can rely on such information under the prime contract. Since the architect most often cannot negotiate the terms of the prime contract, it is left with whatever deal, good or bad, that the contractor makes with the owner. If provided by the owner or design-builder, the architect should be entitled to rely on the completeness and accuracy of such data without limitation. The designer must insist on seeing and reviewing the prime contract and all exhibits, conditions, etc. prior to signing any subcontract which incorporates or refers to the terms of that contract.

Ownership and Reuse of Documents. DBIA's theme for this topic is that the designer retains ownership of its documents, but grants a license to the design-builder and owner to use them for this project. While that sounds fine, par. 4.2.1 requires the architect to agree to whatever licenses are given to the owner in the prime contract. This may include broad rights to reuse or alter the documents, or transfer/assign such license to others without the designer's review or involvement. The contract should prohibit: 1) future reuse on other projects; and 2) alteration by design-builder, owner or others on this or any other project, without an agreement to defend and indemnify the designer and its consultants. The indemnity provided by the DBIA form in par. 4.3.1 is limited to use on another projects, which does not cover changes the design-builder or owner may make on this project, including completion of the documents by others in the event of termination of the design subcontract for convenience or cause.

The 7-Day Meeting. Under par. 2.1.5, the parties are to meet within 7 days after execution of the contract to discuss the project, schedule, payment, etc. This A2.1.5 meeting is referenced throughout the contract and the meeting agenda should include every topic tied to that paragraph in the subcontract.

Delays and Claims. A standard subcontract provision is to require subs to give the prime contractor notice of delays or claims in sufficient time to permit the contractor to make such claim to the owner. Par. 5.4.1 and 11.1.1 pass this requirement onto the designer. It is therefore important to read the prime contract to understand the time limitations on claims. Of key importance is par. 11.3, which states that if a claim involves the owner, the architect agrees to resolve the dispute per the terms of the prime contract. What if that agreement says that the owner gets to decide disputes, and that the owner's decision is final? Or if disputes are resolved in some far off jurisdiction? Be careful here not to fall into a trap unaware. Under par. 11.3, the designer agrees to be bound by the outcome of the dispute resolution as full and final resolution of such dispute. What if the owner has claims against the contractor which offset the designer's claim, resulting in no recovery to the designer? Or if the design-builder does not follow strict notice requirements of the prime contract, resulting in a waiver of the claim? Modifications should be considered here.

Payment. There are several concerns here. First, par. 6.2.1 requires the architect to submit its certified application for payment monthly. There is no form of application published by DBIA, so the certification is not specified. The inference is that the designer certifies its own invoice. Next, par. 6.2.3 and 6.5.1 are pay when paid clauses, which condition any payment to the designer on the owner having first paid the design-builder. While DBIA takes the view these are not pay if paid clauses, and are not meant to be taken literally (as the courts often do not do), par. 6.6.1 makes it clear that all payments to Designer hereunder . . . shall not be due until after Design-Builder actually receives payment from the owner. How the courts in your state will interpret this clause is unknown, but deleting this provision is the only safe course. What if a dispute between owner and contractor, such as termination, defective construction, etc. hold up payment? Par. 7.1.1 states clearly that if the prime contract is terminated, the designer only gets paid those amounts Design-Builder actually receives from Owner, which reads like a pay if paid clause. These clauses, while invalid in some states, should be amended to state a drop-dead date by which the design-builder must make payment regardless of whether the owner has paid the contractor. Finally, par. 6.3.1 permits the design-builder to hold retainage until the owner releases that money to the contractor. Again, disputes between the owner and contractor over liquidated damages, defects, etc. could delay or prevent release of retainage, putting the designer at risk of ever seeing that money.

Insurance. One of the most hidden traps for architects is buried in par. 6.5.1, which requires as a condition of final payment that the architect provide certificates of insurance confirming that required coverages will remain in effect consistent with the requirements of the Contract Documents. See also par. 9.1.5. If the owner requires that insurance be maintained for several years after substantial completion, the designer will be unable to furnish this certificate of insurance in most cases, thus delaying final payment. Since professional liability policies are written most often for one-year terms, with no guarantee of renewal, the most an insurer will certify is that the policy will remain in effect for the remainder of the current one-year term. In absence of a project policy, designers will not be able to meet this condition, which should be deleted. The specific insurance required under the subcontract is left open in par. 9.1, to be agreed in an exhibit to the contract. Par. 9.1.6 requires the designer to name the design-builder and others as additional insureds except as stated in the insurance exhibit. Be sure to exclude professional liability and workers compensation policies, which normally do not permit additional insureds. Finally, the waiver of subrogation in par. 9.2.1 only applies to property insurance, which is not normally carried by designers or contractors, but by the owner.

Release of Claims. Par. 6.5.1 also requires a general release of all claims as a condition of final payment. This should exclude claims that first arise after the submission of the designer's final invoice, such as a claim for indemnity dealing with reuse of documents, site safety, etc.

Indemnity. There are several indemnity clauses sprinkled throughout the contract. Par. 6.8.1 requires the designer to indemnify the owner and design-builder for claims of payment or liens by subconsultants, without any requirement that the design-builder has first made payment to the architect. Second, par. 10.1.2 requires the designer to indemnify the owner and design-builder for copyright and patent claims with some exceptions. Missing for the exceptions is where the owner or design-builder provide the design (like a site adapt) under which case it is the designer who should be indemnified by those parties, not vice versa. Third, par. 10.2 is a mutual indemnity section under which both parties indemnify each other. Due to differences between insurance coverage provided to designers and contractors, par. 10.2.1 should be modified to delete the words defend, claims and liabilities. Last, without using the term indemnity the architect is required in par. 11.3.4 to pay damages due to a breach without any reference to negligence as needed for insurance coverage for this clause.

Dispute Resolution. Article 11.4 is a multi-tiered disputes clause, with claims between the parties resolved by negotiation, followed by mediation and, last, by arbitration if not settled at the lower levels. Be sure that your subcontracts with consultants adopt this same process and permit joinder of all needed parties into any mediation or arbitration.

Liquidated Damages. Par. 11.7.2 passes on to the designer any liquidated damages the owner assesses against the design-builder due to the designer. Remember that claims involving the owner like this are resolved under the prime contract, which result is final and binding. Check your insurance policy to see if liquidated damages are insurable, especially without any reference to negligence in this clause.

Miscellaneous. In par. 7.2.1, delete the word ensure which may create an uninsurable warranty. Also, par. 12.3.1 makes the law of the place of the project applicable to the contract, rather than the law of your home state. Be sure you understand that law and that your subcontracts contain the same provision.

The DBIA contracts are intended to be fair. However, it does not appear that there was much input from the design community in their drafting. Balancing a contract is a difficult task, since it means shifting risks equally to all parties. For architects using this new form, you need to determine whether the risks are balanced by the rewards offered on each specific project. Obtain proper legal and insurance advice before signing this or any other contract.

The information in this and all other RISK Administration and Management Company articles is intended for information purposes only and does not constitute legal advice. For legal advice and assistance, please contact competent counsel in the jurisdiction of your professional practice.

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