Articles

Introduction

Design and Construct (D&C) contracts have long been integral to the construction industry, offering a streamlined approach by combining design and construction responsibilities under one contractor. However, the increasing complexity and associated risks of these contracts have led to greater circumspection among industry professionals. D&C contracts require contractors to handle both the design and construction of a project, blending two sets of professional dexterity and expertise: building and designing. This dual responsibility, while potentially advantageous in terms of project coherence and efficiency, introduces significant challenges that are prompting many in the industry to reconsider their use. The inherent risks and challenges are causing these contracts to fall out of favor, with some insurance agencies now refusing to underwrite them.

What is Design and Construct (D&C)?

In a D&C contract, the contractor is responsible for both designing and building a structure. This differs from traditional contracts where these tasks are separate. The D&C model requires:

• Design: Involves disciplines like engineering, architecture, and drafting.
• Construction: Concerns the actual building process.

This amalgamation creates a unique risk profile, as the contractor must ensure both design and construction are fit for purpose, either contractually or in accordance with apposite regulations.

Why D&C Contracts are Risky

D&C contracts pose higher risks compared to traditional lump-sum building contracts where the contractor only builds. In traditional contracts, the contractor typically tenders based on sophisticated and often permitted plans provided by the owner.

In contrast, under a D&C contract, the contractor often assumes responsibility for generating plans, securing permits, and building, often based on a fledgling and limited brief where the owner may only provide preliminary or limited scope of work materials.

The more limited the briefing scope, the greater the risk assumed by the builder. Conversely, the more advanced the preliminary scope, the lower the risk, although there is no standard formula for managing these risks.

Absent a standard approach to owner-generated design augmentation packaging, there is a lot of variability. The greater the comprehensiveness of the design documentation given to the contractors, the lesser the design component to the brief, and the greater the build component to the brief.

Such is the variability of design and specification inputs pre-construction that it is hard to use a standard industry instrument designed on an all-things-to-all-people basis.

Insurance Challenges

Obtaining adequate insurance for D&C contracts is becoming increasingly difficult. It is particularly challenging to secure comprehensive commercial build risk insurance, which not only leaves contractors vulnerable but also developers and property owners in the event of insolvency. Further, the more risk the contractor assumes for design, which will tend to follow his design input, the greater the risk of insolvency if the design does not sufficiently embrace the client’s expectations. If those expectations are manifest in a take-it-or-leave-it contract, the contractor will be incarcerated by contractual conditions that prevent any cost escalation.

Scope of Work and Risk

Standard D&C contracts often need modification to fit specific projects, depending upon the comprehensiveness of the scoping brief. This can lead to problems when reconciling standard contracts with project-specific requirements, and a high level of construction law expertise is required for the drafting of bespoke conditions.

Types of D&C Models

1. Major Contractor Design Input: This model involves significant design work by the contractor, leading to higher risks. If the contractor takes on most of the design responsibilities, they also assume more liability for any issues that arise.
2. Limited Contractor Design Input: Here, the owner provides the primary design, reducing the contractor’s risk. The contractor’s role is mainly construction, based on a detailed and predefined design.

Detailed Considerations for D&C Contracts

• Initial Design Details: The initial design’s detail level significantly impacts the contractor’s risk. Detailed designs provided by the owner can reduce uncertainties and liabilities.
• Documentation Status: The status of design documents is critical. Designs approved by relevant authorities or detailed by professional designers present lower risks than un-evolved, conceptual designs.
• Ability to Vary Price: Contractors will not normally have flexibility to adjust prices based on design inputs and changes. Locking into a fixed price with an incomplete design can be financially challenging. Unless the design documentation is highly evolved when the building permit is issued, there exists the risk that the contractor will seek variations from the principal. In such cases, the principal may employ construction lawyers to curb the contractor’s ability to seek design-based variations. Conversely, if the design is underdeveloped, the contractor may find itself locked into a price based on incomplete design documentation, leading to financial strain.

In-House vs. Outsourced Design

• In-House Design Approach: Contractors with in-house design teams should ensure they have appropriate coverage for design and construction risks. Internal teams can manage risks more effectively, as they control both design and construction.
• Outsourcing Design: Contractors often subcontract design work. This can lead to underinsurance if the subcontractor’s coverage is inadequate. It’s essential to ensure clear scoping of responsibilities in the subcontract to prevent future disputes.

The Complexity of Litigation in D&C Contracts

When it comes to litigation, the fusion of design and construction risks in D&C contracts can be particularly challenging to unravel. The contractor assumes both the design and construction risks, making it difficult to separate the two when defects or failures occur. This often results in prolonged legal battles where the contractor, in circumstances where the design task was contracted out to a third-party architectural practice, may struggle to defend against claims due to the intertwined nature of their responsibilities.

The Decline of D&C Contracts

Given the risks and insurance challenges, D&C contracts are becoming less popular. Insurance agencies are increasingly reluctant to underwrite these contracts due to their complex risk profiles. Contractors are also steering away from D&C models because of the potential financial pitfalls associated with unclear design responsibilities and insufficient insurance coverage.

Conclusion

Design and Construct contracts, while beneficial for integrating design and construction, pose significant risks. The blending of responsibilities leads to liability challenges, and securing adequate insurance is becoming harder. With the growing reluctance of insurance agencies to cover these contracts, and the complexities involved, D&C contracts are falling out of favor. Contractors must navigate these challenges carefully, ensuring clear risk management and adequate insurance to protect their interests. By understanding and addressing these risks, the industry can better determine when and how to employ D&C contracts effectively.

About the Author:

Justin Cotton is the Director and Head of Practitioner Advocacy at Lovegrove & Cotton. With over two decades of experience, Justin is an expert in building practitioner advocacy, construction litigation, and regulatory compliance. He represents clients in multiple Australian jurisdictions and is a respected figure in the construction law community

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Disclaimer:

The information provided in this article is for general informational purposes only. It does not constitute legal advice. For specific legal advice related to building regulations and compliance, please consult a qualified construction lawyer.