The Sting (A Case Study for Design Professionals Handling Owner/General Contractor Jobs)

The following is a case study based on actual facts involving a medium-sized regional design professional firm. The fact pattern is meant in no way to criticize or disparage owners or developers who act as their own general contractors. Instead, the article is meant to highlight problems inherent in the structure of the job that may be encountered by design professionals.

The Players

The Setting

...somewhere in the Northwest

The Stage

Beginning in the early 1990s, Developer conceives the plan to construct several large multi-family residential units. Developer has a national presence with several wholly-owned subsidiaries, including a company exclusively dedicated to acting as General Contractor. The company also has a subsidiary exclusively dedicated to management of the properties.

Developer retains Design Professional to design the project concept, including a comprehensive site design. Design Professional also agrees to draft construction documents, but does not agree to construction management or inspection.

The Pitch

Along the way, Developer insists Design Professional include "Product" made by Product Manufacturer in the specs, and expressly provides Design Professional with the application specs for the Product. The Product has been purchased in record quantities at rock bottom prices by Developer, at great savings. Design Professional dutifully, after research of the Product, includes them in the plans.

Construction of the project is undertaken by the General Contractor subsidiary of Developer. In all cases, General Contractor subsidiary oversees construction and the Subcontractors during the buildout. Dozens of Subcontractors work at various projects, all overseen by subsidiary General Contractor, who implements the plans and specs and makes "field changes" as necessary in the construction. Construction continues over a three year period involving dozens of subprojects, all of it using "Product."

The Set-Up

It turns out the Product is defective, and was sent to market years before testing was complete. The Product deteriorates and there is extensive damage throughout the projects. Some of the properties are so bad the residents have moved out, and buildings are, for all purposes, abandoned.

It also turns out the construction and buildout of the project was done in a way completely inconsistent with the plans and specs. Using a procedure called "field changes," the General Contractor substantially changes the design, substituting alternative products and cheaper construction methods, ignoring specific directions in the plans and specs.

Subsequently, when problems begin to develop, Management Company, another wholly-owned subsidiary of Developer, is retained to repair the work on an "as needed" basis. Much of the work is flawed.

The Sting

Not surprisingly, Owner sues Product Manufacturer alleging product defect, seeking millions in damages to the properties. Product Manufacturer brings everyone else, including Design Professional, into the suit, alleging defective construction and defective design. Here's the catch: the Design Professional is caught in a multi-million dollar lawsuit for defects to a product it didn't manufacture, on a project which it neither inspected nor supervised.

Role of the Design Professional

The traditional role of the design professional in a construction project is to act as liaison between owner/developer and the contractor. In this capacity, the design professional retains authority to stop the project if it doesn't comply with the plans. The design professional oversees progress payments to the contractor and completion of the punch list. This provides significant leverage for insuring compliance with plans and the change order procedure.

An increasing number of developers are assuming construction contractor roles on projects either owned or developed by them. This is largely done because of the presumption that substantial savings can be obtained by controlling the construction portion of the project.

The two keynote subjects at the 1999 AGC National Conference in Seattle were business succession planning and design/build construction. It appears to be the perception of the construction industry that "design/build" is the preferred means of structuring a project. In design/build, the design professional works for the contractor who presents a final project to the owner. Here again, the architect and/or engineer relinquishes principal control as gatekeeper over the project to the contractor. Should something go wrong, however, the design professional remains the principal stamping professional on the project, and thus will be the lightening rod when litigation ultimately ensues.

With the developer/contractor and the design/build projects, the customary means of retaining control over the project — punch lists, change orders, and inspection reports — are frequently discarded in favor of "field changes" approved by the owner at the request of the contractor, often without knowledge or input from the design professional.

Cost Versus Benefit

I would not suggest that all projects where the owner and general contractor are the same should be avoided. Certainly, the owners who have the resources to undertake their own contractor work are usually involved in large scale, visible, and potentially lucrative projects. Similarly, in the design/build arena, many of the construction companies are national players. Before bidding or accepting either a developer/contractor job or a design/build job, one should undertake a cost benefit analysis. This is difficult when the lure of a substantial new job is right outside the door. One must carefully analyze the contract with the owner and request the contract documents with the general contractor. If there is a pre-bid meeting, inquire about the structure of the project and the lines of communication and responsibility. If the exposure far outweighs the value of the job, strongly consider declining it. Alternatively, request the premium rate to compensate for the role that will be undertaken.

Second, carefully craft the contract to reflect the scope of work, and most importantly, a means of enforcing it. Include a provision that states that "field changes" or changes done without appropriate change orders will be deemed defective and not the responsibility of the design professional. Even if construction observation or inspection are not part of the contract (which will probably be the case, given there will be no progress payments where the owner and contractor are the same), undertake informal inspection to insure compliance with the construction documents.

Finally, field changes or procedures that are inconsistent with the plans and specifications must be carefully documented. What is least expensive, or most efficient, is often not the best for the project.

The Endgame

The end of the story will depend on how well one has prepared the contract documents, defined the structure of the project, and documented the role of the design professional in the project. The fact that the developer is also the general contractor should not be a bar to participating in the job. You just need to be careful to avoid getting stung.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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