Bonding Design-Build Projects - Design-Build for Water and Wastewater Projects - page 143

Some sureties are reluctant to bond the design portion of the design-
build contract. These sureties prefer that the principal [contractor]
enter into a contract with the owner that is divisible into design and
construction components, with the bond (and thus the sureties' obli-
gation) furnished solely for construction defaults. They also promote
the idea of having the owner limit the liability of the design-builder
to design problems, either by tying exposure exclusively to what is
recoverable from the A/E's E&O policy or by giving the owner the
right to sue the design professional directly. This approach, however,
counters the position taken by the Design-Build Institute of Amer-
ica, which recommends that a single bond cover the faithful perfor-
mance of the entire contract, including professional design services,
and specifically recommends against allowing separate bonds or
construction-only bonds on design-build projects. This position
is consistent with what most owners expect and demand given the
single-point responsibility associated with design-build contracting.
(Loulakis and Shean 1996a)
Although the Design-Build Institute of America promotes best practice of the sure-
ty's issuance of unqualified performance bonds accepting design risks, other organiza-
tions, such as the Associated General Contractors of America, see value in distinguishing
between design and construction services. A surety ultimately passes on loss due to design
risks to its contractor/principal and any individual indemnitors. The Associated General
Contractors of America therefore has issued standard form design-build performance and
payment bonds that limit the surety's liability just to the construction work or, at most, to
costs attributable to design defects covered by whatever general liability or professional
liability insurance was required under the DB contract.
From an owner's perspective, there are strong motivating factors for incorporating
the entire DB risk under the bond. There are also supported reasons for limiting bond
coverage only to the construction phase and looking solely to insurance to cover the design
portion of the work. Neither approach is right or wrong. Each owner must balance these
factors to achieve the best value and model for an individual project.
Second Level of Analysis: Unique Design-Build Considerations
Beyond consideration of bond terms and coverage, sureties give careful consideration to
the substantive risks inherent in the underlying DB transaction:
Although the general contractor may be perceived as an excellent
underwriting risk in its traditional role as the “builder,” sureties are
fearful of the non-construction risks, such as design and performance
guarantees the general contractor may assume through the design-
build relationship. . . . This uncertainty concerns many sureties and
often delays or prevents the surety's underwriting of the performance
bond. The sureties are also concerned with the fact that they are
underwriting performance for a project that has yet to be designed
and may be dealing with performance guarantees associated with the
design. (Loulakis and Shean 1996b)