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Performance Bonds on Design Build Projects

The use of Design Build construction continues to increase. In fact, it currently makes up nearly 50% of new construction projects according to the Design Build Institute of America. How do contractors get Performance Bonds on Design Build construction projects and what are the challenges? Below is additional information on Design Build Construction projects, the challenges in getting contract bonds for them and how to get Performance Bonds on these projects.

 

What is the Design Bid Build Construction?

 

Design Bid Build Construction is a method of construction delivery where an Owner contracts with a design professional to first design a project. Once designed, that project is put out for bid to contractors. The Owner on the project is then working with two contracts and two parties for the project's completion. This project delivery method has been the standard way to build in the U.S. for many years.

 

What is a Design Build Construction Project?

 

Design Build is a construction delivery method where the owner works with the contractor on both the design of the project and also the construction of the project. There is a single contract and the design and construction team work together throughout the project. 

 

Advantages of Design Build Construction

 

Design Build Construction has many advantages over Design Bid Build Construction. Design Build construction allows for better communication. Because the Owner is dealing directly with one party instead of multiple parties, project communication can happen much quicker.  

 

Fewer Potential Disputes on Design Build Projects

 

Construction is an industry where disputes and litigation are common. However, because of more open collaboration and communication, Design Build projects can eliminate many of these disputes before they start. There is a single point of responsibility on Design Build projects. This is a big benefit to all parties by reducing the chances for costly litigation later in the project. 

 

Costs May Be Less on Design Build Projects

 

Design Build projects are often more cost effective. Better communication often leads to less delays and changes. In fact, a 10 year study showed that Design Build construction was more cost effective than both Design Bid Build and Construction Manager at Risk Delivery Methods.

 

Faster Construction on Design Build Projects

 

Design Build projects can in many cases, be completed faster than other project methods. Often the construction can start on these projects while the design team finalizes some finishing details. Additionally, changes and other issues that can slow down a project can be discussed and dealt with more quickly. 

 

Getting Performance Bonds on Design Build Projects

 

Design Build projects are considered by surety bond companies to be more risky than other types of construction projects. The reason is because the General Contractor, or Principal on the Performance Bond, is not only responsible for the completion of the project, they are also responsible for the design work. This adds another layer of risk for the contractor and the performance bond company. Below are some considerations both contractors and performance bond underwriters should consider.

 

 

Performance Bond Considerations for Design Build Projects - Blue and red chart showing 4 considerations for getting perofmrance bonds on design build projects. The top and bottom have outlines of cityscapes in red.

 

Increased Performance Bond Claim Liability on Design Build Projects

 

On a typical design bid build project, once a contractor successfully completes the project and the maintenance period passes, a surety bond company’s liability under the performance bond is significantly reduced. However, on a design build project, there is alway the possibility that a claim could be made against faulty design work long after the project has been completed. 

 

A bond underwriter will want to understand who is designing the project and what their experience is. For example, does the contractor have internal design staff or are they subcontracting the design work to a third party? Does the design team have experience designing the type of project that is being built?

 

Professional Liability Insurance is Important for Performance Bonds on Design Build Projects

 

Because the contractor is ultimately responsible for design work on the project, a performance bond underwriter will want to make sure that the contractor has adequate professional liability insurance to cover any potential claims against design flaws. This is normally a requirement even if a contractor is subcontracting the design piece. This is because design professionals may lack adequate insurance to cover the contractor.

For example, a design firm may have other claims that affect the limits of the policy. A design firm may also have a policy that prevents them from adding the contractor as an additional insured. This is a common practice for professional liability policies. Contractors may not like the additional costs, but if the contract says, Design Build, most performance bond companies will require the contractor to carry professional liability insurance, regardless of whether the contractor subcontracts the design work or not. 

 

Increased Costs for Performance Bonds for Design Build Projects

 

Because performance bonds on design build projects carry more risk, most bond companies charge more for these bonds. The additional charge depends on the performance bond company but contractors should expect to pay a 20% - 50% surcharge. That means that if a contractor typical performance bond rate is 1%, a performance bond on a design build project would cost between 1.2% - 1.5% for that same contractor. This is important to understand so that contractors can price their design build contractor appropriately. You can read more about performance bond rates for both design build and other projects here.

 

Warranty on Design Build Projects Could Make Performance Bonds Difficult

 

Contractors should review the warranty or maintenance provisions on design build projects carefully. Generally, performance bond companies prefer shorter to longer maintenance periods. This is because things deteriorate over time, even on a construction project that is built properly. Performance Bonds are not intended to be long term insurance and bond companies are often skeptical to write performance bonds when the maintenance period excludes 24 months. This is common on both design build projects and other projects. 

 

Unfortunately, some bond forms on design build projects regularly require longer warranty periods. For example, the DBIA bond forms have a standard 5 year warranty period. This will make performance bonds difficult to obtain for all except the strongest contractors. When these forms are required, the contractor should try to negotiate a lower warranty period upfront.

 

As Design Build projects become more common, performance bond underwriters are also getting more comfortable writing these bonds for contractors. However, understanding the risks and being prepared upfront will make obtaining these bonds easier for contractors. Other construction bonds could also be required on design build projects such as bid bonds, payment bonds and maintenance bonds. Contact Axcess Surety anytime and we can help you obtain these performance bonds or answer any questions that you may have.