Understanding and managing the potential liability risks associated with construction contracts are factors that all contractors must face when bidding on a project.

Corbin Devlin of McLennan Ross LLP law firm in Edmonton describes the four main contract models currently in use for non-residential construction.

Perhaps best known is the design-bid-build model, in which several contracted professionals and a separate contract are concluded between the project owner and a general contractor. A construction management model has a construction manager commissioned by the client, who is then subdivided into the contract models “construction manager as intermediary” and “construction manager at risk”. Integrated Project Delivery is a contractually agreed collaboration between partners that includes common risks and opportunities.

Then there’s the design-build model, which is reported to now make up over 40 percent of non-residential buildings in North America. Here a single unit is commissioned to take over and carry out the entire planning, procurement and construction.

Design-build has an appeal to property owners, writes Devlin. In return for what he calls “some degree of certainty about project price and schedule”, the owner gains “relatively fewer risks associated with defining project scope or incomplete planning”.

Devlin points out, however, that regardless of the type of contract, “there are many cases in which disputes arise due to fundamentally different expectations or a misunderstanding by one of the parties about the contractual risk distribution”.

Liability management is particularly acute when contractors either use in-house designers or outsource some of these services to outside professionals. Often there is a strong dependency on insurance.

Nicole Markowitz and Richard Robinson of the US-based international law firm Peckar & Abramson, PC, point out that many standard error-and-omission insurance policies can have large loopholes.

“Often, professional indemnity insurances do not cover all defects or shortcomings in the designer’s work. Instead, the policies are designed to insure against the determination of liability on the part of the designer, and that liability is based on failure to comply with an applicable standard of care. “

Defining “standard of care” can lead an architect to claim that their goal is not necessarily to achieve perfection and to expect a reasonable margin for error, Markowitz and Robinson write.

“If courts accept this standard, there may be an error, but no liability for this error and therefore no insurance cover.”

The problems arise when a contractor accepts a different standard.

“In this case, the two most common risk management mechanisms expected by design builders, assuming the risk has been shifted to the designer or through insurance, may not work as expected. In turn, the design builder can be exposed to unmanaged risk. “

Markowitz and Robinson suggest that design-build contractors consider Contractors Protector Professional Insurance (CPPI) coverage, explaining that this type of policy can fill in many of the loopholes that may go unprotected.

They describe how a “well-designed CPPI” can not only provide professional indemnity insurance, but also provide adequate coverage to mitigate and correct construction defects that are discovered during construction.

“It can proactively correct this error or omission before the owner makes a claim.”

A CPPI can also provide protective cover.

“The protection supplements the professional liability insurance protection of the planning specialist by offering direct advantages to the contractor / designer for all subsequent claims for costs that go beyond the costs to be paid by the professional liability insurance.”

It is also important that any contractor hired under a design-build agreement carefully examines and understands where their design liability risk might lie.

“Design and construction contractors need to be aware of the pitfalls that may be contained in relevant agreements, as well as the weaknesses that may exist in risk management strategies that were previously deemed sufficient.”

As Devlin concludes, no matter which contract model is followed, potentially uncovered risks lurk on those who do not consider “the suitability of the chosen contract model for the project at hand, or a simple misunderstanding of the contract model inherent in the chosen risk distribution.”

John Bleasby is a freelance writer based out of Coldwater, Ontario. Send comments and ideas for legal notice columns to editor@dailycommercialnews.com.