Design risk transfer (D&C contracts)

Design risk transfer is the contractual mechanism by which a Design and Construct (D&C) contract moves responsibility for the adequacy and coordination of the design from the consulting designers (architect, structural engineer, services engineer) onto the builder. Under a traditional construct-only contract the principal holds the design contracts directly with the consultants and the builder is responsible only for building strictly to those drawings. Under D&C, the builder novates or directly engages those same consultants and warrants the resulting design to the principal as fit for purpose. If the design proves to be defective, the principal sues the builder, and the builder works back through the consultant chain.

The transfer has three direct commercial consequences:

The lump-sum price under D&C is higher than the same job under construct-only, because the builder has priced the design-risk premium (commonly 3% to 8% of contract sum on residential D&C).
The builder must hold Professional Indemnity (PI) insurance at a limit that covers the foreseeable design liability, alongside the usual contract works and public liability cover. Where construct-only contracts may not require builder PI, D&C contracts almost always do.
The builder retains design exposure for the limitation period of the design defect (commonly 10 years post-completion under most state Acts), even after the job is finished. Builders winding down a D&C book of work typically need run-off cover to remain insured for claims notified after the active policy ends.

Also known as: single-point design liability; design-build risk allocation.

Category: Contracts & commercial.

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