Publications

Design Professional's Practice Bulletin

Volume 2, Number 3 — December 1998

This Bulletin addresses recent developments affecting Design Professionals as well as business concerns as important as the specific professional and technical issues they face.

Editors: Neil P. Clain and Richard J. Davies

Design/Build: Are You Ready?

By Lawrence A. Borda

Design/build appears to be the wave of the future. Professional prognosticators are predicting that within five to ten years more than one-half of all construction nationwide will be design/build.

In Pennsylvania, the issue is especially ripe for consideration by virtue of the recent passage of amendments to Section 3 of the Act of 12/14/82 (P.L. 1227, No. 281), known as the Architect's Licensure Law. Until the passage of these amendments, the Architect's Licensure Law prohibited any party from entering into a contract to provide architectural services unless that party was authorized under the laws of the Commonwealth of Pennsylvania to practice architecture. This prohibition applied notwithstanding that the party intended to retain a firm properly authorized to practice architecture in Pennsylvania as its subcontractor. This prohibition made contractor-led design/build illegal in Pennsylvania1. Because most architectural firms were reluctant to engage in designer led design/build, the growth of design/build delivery in Pennsylvania was stunted.

The revisions to the statute dramatically alter that result. The pertinent portions of the amendments are set forth below.

First, the Act now provides definitions for "design-build" and "design-build entity," as follows:

"Design-Build" A project delivery method whereby a design-build entity signs a single contract to provide a combination of architectural and construction services to a client.

"Design-built entity." An entity which provides by single contract to a client a combination of architectural and construction services.

Second, the amendments add a specific provision authorizing firms that are authorized to practice architecture to provide design-build services, as follows:

(m) An architectural firm authorized to practice under subsections (a) through (i) will be allowed to offer design-build services consistent with the provisions of section 15(9) [see below for text - ed.].

Finally, the amendments eliminate the requirement, as it relates to design-build entities, that only a firm authorized to practice architecture can offer to provide architectural services:

Section 15, Permitted practices

Nothing contained in this act shall be construed to prohibit:

(9) Design-build services, strictly in accordance with the following practices: a design-build entity not authorized to practice under section 13(a) through (i) may offer design-build services, if the architectural services in the design-build process are provided in accordance with the following:

(i) An architectural firm which has been authorized to practice in this Commonwealth under section 13(a) through (i) shall independently contract with a design-build entity and is responsible for all material aspects of the practice of architecture as defined in section 3.

(ii) At the time a design-build entity offers a written design-build proposal for a specific project the design-build entity shall give a written disclosure to the client stating an architect will be engaged by and will be contractually responsible to the design-build entity and will not be responsible to the client.

(iii) The design-build entity shall agree that the architect will have direct supervision of the architectural work.

(iv) The contract between the design-build entity and the client shall set forth the name of the architectural firm which will be contractually responsible to the design-build entity for providing architectural services.

As the result of these amendments to the Act, there are now three ways in which an architect may become involved in a design/build project in Pennsylvania.

1. Designer-led design/build.

First, if the architect is properly authorized to practice architecture in Pennsylvania, it may engage in design/build by contracting directly with the owner to provide design and construction services and then retaining a contractor to undertake the actual construction. This is typically referred to as "designer-led" design/build.

There are advantages and disadvantages to the architect by choosing to be the prime (the one having the contract with the owner) on a design/build project. The advantages include greater control of overall project quality, the potential for enhanced profits by sharing in the "mark up" on the construction part of the project, and increased marketability, particularly if the architect enjoys high name recognition.

There are also disadvantages to the architect in choosing to be the prime on a design/build project. Certainly, if the project is to be bonded, the architect will have to address the exposure presented by the indemnity provisions in any payment or performance bond. Further, by subcontracting the construction of the work, the architect is responsible for the acts and omissions of the contractor. Thus, after years of trying to avoid responsibility for means and methods and safety, the architect thrusts itself squarely into these high exposure areas. It is unlikely that the architect will have the necessary insurance coverage in place, particularly under its professional liability policy, for protection against the liabilities attendant to deficient construction and construction site injuries. Although there are new insurance products on the market that will address some of these risk, the architect that intends to take the lead must carefully consider the quality of his contractor partner and the adequacy of the contract with the contractor particularly with regard to indemnities and transfer of construction scope.

2. Architect as subconsultant to contractor.

Section 15 (9) (Permitted Practices) of the Act permits an architect to serve as a subconsultant to an individual or entity not organized as an architectural entity in Pennsylvania, e.g., a contractor. That can only occur, however, if the parties adhere to the following procedure as specifically set forth in the act:

(1) the architect must independently contract with the design/build entity (an entity which provides by single contract to a client a combination of architectural and construction services);

(2) the architect is responsible for all material aspects of the practice of architecture;

(3) a written disclosure must be contained within the "design/build proposal" wherein the design/build entity represents to the owner that the "architect will be engaged by and contractually responsible to the design/build entity" and will not be responsible to the client";

(4) the design/build entity shall agree (ideally in writing) that the architect will have "direct supervision of the architectural work"; and

(5) the contract between the owner and the design/build entity will identify the architectural firm.

Working as a subconsultant to a design/build entity eliminates the principal dangers to which the architect is otherwise exposed in designer led design/build. However, given the dramatic change to the traditional relationship between the architect and the ultimate owner of the project, there is an increased potential for conflicts to arise concerning what is in the owner's best interests vis-a-vis the best interests of the architect's client, the design/build entity. The architect's contract must clearly be revised from what is "standard" to exclude, for example, the traditional "policeman's" role during construction. Of course, if the design/build entity has retained a separate contractor to perform the construction (rather than performing the construction itself), the architect may play the "policeman's" role for the design/build entity as the client. The disadvantage, of course, is that the architect does not derive any profits from the construction and its fee may also be reduced because of the reduced scope and the relative difference in bargaining position between the architect and the contractor.

3. Architect forms new design/build entity.

The last alternative, and perhaps the most appealing for those firms that wish to dramatically increase their participation in design/build, is to create a separate design/build entity as contemplated by the amendments to the Act. That entity could be a joint venture with a contractor or the creation of a new entity, for example, a new corporation or limited liability company, for the purpose of entering into the design/build project. That new entity could be comprised of the design firm's owners or contain other participants. This joint venture or other entity would then contract directly with the owner and then retain the architect's design firm as a subcontractor to provide design and retain a contractor to provide construction. In some cases, design firms who want to aggressively control the construction have organized their design/build entities to actually perform, or at least manage, the construction. The advantage of such a system is that it allows the owners of the design firm to segregate and control the construction risks associated with design/build while at the same time creating the opportunity to share in some of the construction profits.

So, are you ready for design/build? The amendments to the Architect's Licensure Law provide great potential for both rewards and risks. Those architects who perform design/build as a prime must be aware of the new and unique risks derived from having the construction flow through their contracts. Those who work as a subconsultant to the design/build entity are faced with providing architectural services in a format that potentially lessens their ability to interface with the owner or to control the overall outcome of the project. The creation of a new entity may provide the architectural firm's owners with the best of both worlds. It allows the architect to share in the profits and the enhance control and marketability while still fulfilling the requirements of the statute. Ultimately, the most crucial decisions that you will make when you begin to participate in design/build are the selection of projects and the selection of the contractor partner, if any, with whom you will undertake these projects.

©1998 Powell, Trachtman, Logan, Carrle & Lombardo, P.C.

This bulletin is intended for general information purposes only and does not constitute legal advice. The reader should consult with legal counsel to determine how laws, suggestions and illustrations apply to specific situations.