Some Construction Owners Need Specific Results

If a power plant owner needs to retrofit its plant to comply with specific restrictions on emissions, it needs to hire designers and contractors to achieve this result.  This poses contracts problems with allocating risks because of the way insurance policies are written.

Contract Agreement Forms Have Adapted

Construction owners’ need for specific results has led to an increasing use of contract forms such as Design/Build and Engineer/Procure and Construct.  These contracts give the Owner one point of responsibility and minimize Owner risks of builder architect finger pointing. Owners using these delivery models often seek performance level guarantees.

Designer Insurance Excludes Special Guarantees

Insurers for designers cover only agreements to meet the ordinary professional “standard of care”.  Professional liability insurers for designers want no part of the risk of special warranty failures.  Extra warranties are explicitly not covered by architect’s negligence insurance.  A vast body of cases have arisen to determine the scope of a builders’ insurer to cover ‘defective’ construction results.

Traditional Warranty Risk Allocation

Under old customs, builders agreed to match the building to the plans and come back for one year after completion to make the structure match the plans.  Architects agreed that they would comply with the standard of ordinary care – meaning they would avoid negligence as judged by their profession.  Traditional construction equipment suppliers warrant their goods such as the roofing system or HVAC equipment. Usually risks are best handled by those with the most control.

Problems With Guaranteed Results

If a guarantee stretches much beyond the time when the user occupies or uses the building, issues such as misuse and wear and tear can cloud the warranty claim.  It is unwise to warrant any kind of LEED rating outcome although many agree to work towards a specific goal.

Meeting the Business Need

Construction and Design companies will take some of the risk to meet the business need for particular guarantees.  They may try to cap their exposure to the Owner to some percentage of the fee on the contract.  Owners with specific performance needs should be able to contract for such warranties.  Design/Builders and E/P/C contractors take some of this business risk to satisfy customers.  The professional liability insurance market has yet to meet the need transfer some of that risk for a price.