Jacob Austin 00:00:00 Hi all. Jacob Austin here from QS.Zone. And welcome to episode 126 of the Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow, and grow their business. Today's episode, number one, two, six is all about design liabilities for subcontractors under JCT. 2024 contracts. Continuing our mini series on JCT subcontracts, and we're going to dig in today specifically to the JCT design and build subcontract and the standard building subcontract with subcontractors design. We'll be covering some important topics, including understanding your design liability, the consequences of design approval clauses, submission protocols and BIM deliverables, and in addition, some common amendments that main contractors might make that shift risk onto you. So let's kick off with the basics of design liability. If you're a subcontractor doing any design work, your contractor will define your design obligations. The two big terms to know when it comes to liability are reasonable skill and care and fitness for purpose. These two terms can sound legalistic, but the difference between them is massive.
Jacob Austin 00:01:37 Reasonable skill and care is the standard duty for professional design work. It's saying that you must perform your design services with the same care and competence as an ordinarily skilled professional in your field. In practical terms, it means you're expected to do a diligent professional job. It doesn't guarantee a perfect outcome. And if you meet this obligation, as in you're not negligent by professional standards, then you won't be liable for design issues if somebody decides that you've fallen short. As one legal commentary explains, under reasonable skill and care. The duty a designer has doesn't necessarily have to achieve a particular result, just as a doctor has got to treat his patient carefully. He can't guarantee necessarily a cure every time. Whereas when you contrast that with fitness for purpose, that imposes a much higher bar. If you agree your design will be fit for a particular purpose, you're essentially guaranteeing a result. You're promising that the completed works will meet the intended purpose or specific performance criteria. Unlike the skill and care standard, under a fitness for purpose obligation, you can be held liable for any failure of the design to achieve the required result, even if you weren't negligent in your approach.
Jacob Austin 00:03:02 It's essentially an absolute warranty that the designed works will work as they were intended. In construction, that might mean, for example, if you designed a roof under a fitness for purpose duty and it leaks, then it hasn't met its standard and you're in breach of contract. Regardless of how carefully you did the detailing and the design. A fitness for purpose obligation creates this absolute obligation, and a breach of that obligation doesn't require proof of negligence. So in short, skill and care is about how you do the work. Doing it professionally. Whereas fitness for purpose is about the resort. The default in UK law, unless the contract says otherwise, is usually the skill and care standard for design services. However, if the contract is silent or ambiguous, The courts can imply a fitness for purpose requirement for design and build work. Treating the contractor more like a seller, guaranteeing the finished product suitability. And so modern contracts spell out the design duty really clearly. So let's look at what the JCT 24 subcontracts say about it.
Jacob Austin 00:04:15 The good news is that the standard wording sticks firmly with reasonable skill and care. In fact, JCT has strengthened the wording to avoid any doubt. The latest wording explicitly says that the contractor and the subcontractor have no greater duty than reasonable skill and care, and in no circumstances will design be subject to a fitness for purpose obligation. In other words, JCT is making it crystal clear unless you explicitly agree. Otherwise, you're not on the hook to guarantee that your work will achieve a specific outcome or be fit for some particular Purpose. That clarity has been added in reaction to case law and industry pressure, and it reflects the reality of the market where contractors avoid fitness for purpose obligations. This kind of clarity is necessary because of previous case law, and the famous case MIT Hojgaard versus E.ON in the Supreme Court is a good example of that. In that case, a contractor designed foundations for offshore wind turbines using well-regarded industry standards. The contracts had different ideas, though, because it included a statement that the foundations should last for 20 years, which is effectively a performance guarantee.
Jacob Austin 00:05:34 When issues emerged, the court held the contractor liable for breach of that fitness for purpose requirement, even though the contractor wasn't proven negligent. The reasonable skill and care clause in the contract didn't save the contractor because the technical specification contained this 20 year performance term, and that was an overriding obligation. The big lesson to take away from that is that scope documents sat outside of the main body of the contract can introduce a performance or outcome requirement, which can then trump the skill and care duty that's written in the contract, putting you on the hook for an absolute guaranteed result. In the MT Hojgaard case, the contractor then had to pay for extensive remedial works because the design didn't meet that 20 year durability requirement, which was a harsh outcome given that they'd otherwise followed the expected standards. It's cases like this that has pushed the JCT into adding the no fitness for purpose clause. The drafters wanted to prevent stealth fitness for purpose obligations from arising via the technical requirements or references to standards by stating outright that design is not subject to a fitness for purpose obligation.
Jacob Austin 00:06:53 The contracts aiming to give both contractors and subcontractors more certainty about their risk. So that means, as a subcontractor, if you stick to the unamended JCT subcontract wording, your design liability is limited to using reasonable skill and care and not guaranteeing perfection. However, and this is a big however, that protection only holds true if the clause isn't amended or contradicted because JCT contracts are often amended by the parties. We'll talk later about common amendments where main contractors try to tilt risk onto you. Remember, the default position is that you only have to promise to try your best as a competent designer. Not that the design will be flawless, but you do need to read your subcontract to check whether the standard clause has been tweaked. If someone wants a promise of a flawless result, that is a significant increase in liability. Next, let's discuss design approvals. Many subcontractors think if the main contractor or the client's engineer approved my drawings, then I'm off the hook if something goes wrong. And that might sound reasonable. After all, they signed it off, right? But that's not how it works in most contracts.
Jacob Austin 00:08:12 Virtually all construction contracts, including JCT subcontracts, have wording to the effect that no review or approval of your design by the contractor or employer relieves you of your liability. For example, a typical clause might say that the main contractors or architects approval of drawings shall not absolve the subcontractor from responsibility for any errors or omissions. The logic is that the risk of design adequacy stays with the person who designed it. You and not the reviewer. Approval is usually treated as checking for compliance or coordination, not accepting design risk. In short, an approved stamp is not a get out of jail free card for you. But what are the legal and commercial consequences of that? First, you can't defend a design defect claim by saying, but you approved it. If a structural element fails that you've designed, it's not a defense that the main contractor's team looked at the drawings and gave them a thumbs up. The approval process is there to ensure that design meets the project requirements and integrates with other work, but it doesn't transfer liability.
Jacob Austin 00:09:27 The only exception to this would be if the contract explicitly said that approval does shift responsibility, which is so uncommon it's barely worth saying. Second, from a practical perspective, design approval clauses can affect your workflow and time scales under JCT, DB sub 2024 and SBC sub D, there will typically be a design submission procedure. It's usually schedule one of the contract conditions, and that lays out how you should submit design documents and how approvals and responses are given. For instance, you might have to submit drawings to the main contractor design manager who then has say ten days to respond with a code or notation. We're talking. A equals approved B equals approval. Comments C is not approved. Rejected. If you get a B or a C, you're usually required to make revisions and resubmit. So it's important to budget time for that process. Iterations of the design might be required. Also if the main contractor or employer delays in giving approval that can impact your program. JCT contracts provide for extensions of time in these cases, but you've got to follow the notice procedures to be able to claim it.
Jacob Austin 00:10:51 When you do get back and approved or approve with comments response. Treat it as an interim checkpoint, not a warranty. So incorporate comments and double check the design yourself. Don't assume that because somebody else has reviewed it, it must be fine. If an error is missed, it's still your problem later. The language of the contract makes sure of that. An absolutely necessary tip is to maintain clear paper trails of your submissions and approvals. It helps you on two fronts. If there is any kind of dispute about approval, whether you submit it on time or follow the required procedure. And secondly, it maintains a record of whether your contractor is carrying out their approvals on time as well. And that record is going to be vital if you are getting to extension of time territory. If you've got a clear list of what you submitted and when and then when the contractor has approved it, then your claim for additional time because of late approval, say, is going to draft itself. This is the power of having accurate records.
Jacob Austin 00:11:58 So in summary, approval in a contract is about consent to move forward, not transferring design risk. It's a necessary process for coordination and for client assurance. But you should continue to do your own design checks and to own the adequacy of that design. The commercial reality is that if a design issue surfaces during construction, or even worse, after completion, you as the subcontractor will be expected to go back and fix it regardless of any prior approval. Now we're going on to talk about professional indemnity insurance, because this goes hand in hand with design liability pie. is that policy that covers you for claims arising from professional services. So in construction, that typically means design or technical advice if you're doing design work. Most main contractors will require you to carry Pi insurance and there'll be a specified minimum cover amount. Example 1 million or Ā£5 million. This insurance is supposed to cover negligence in your design, but the crucial thing to note here is that Pi insurance generally covers you only for the skill and care level of liability, and not for fitness for purpose obligations.
Jacob Austin 00:13:18 So that means a standard Pi policy will indemnify you if you commit a breach of professional duty. Essentially, if you are negligent or you didn't meet the reasonable skill and care test in completing your design. But almost all Pi policies have exclusions for guarantees or warranties. Beyond that, insurers don't like open ended promises. They can't easily quantify the risk associated with that. So PII policies will exclude them. And that usually means exclusion or fitness for purpose, warranties for performance, or any contractual promise to achieve a particular result that you wouldn't have under normal law. So in plain English, for you as a subcontractor, that means if you accidentally or otherwise accept a fitness for purpose obligation, your insurer can decline your coverage. They would only cover you for what you'd be liable for under law, i.e. negligence, unless they explicitly state something else. That means you will be self-insured that risk. So if your design fails and there's a strict outcome involved hidden away in the spec, your pie insurance probably won't pay out. And that means financial catastrophe.
Jacob Austin 00:14:35 The claim goes straight to your balance sheet and you're paying out of your own bank account. And some industry experts even believe that your insurance policy could be voided altogether because of a little warranty in your subcontract, meaning that your insurer would likely want to wriggle out of even a valid negligence claim. And that means, in a worst case scenario, you could face a claim for, say, a major building remedial work potentially costing millions, and find out because of a little tucked away phrase requiring an absolute performance that you're having to pay out of your own pocket to settle that claim. Pie insurance has become ridiculously restrictive in recent years. Some insurers are excluding high rise buildings altogether. And of course, the hot topic is fire safety, with many Py policies now excluding cladding and fire safety related claims altogether. A key action to safeguard yourself is to line up your contractual obligations with what your P.I. insurance covers. If your employer is trying to get you to agree to a higher standard like warranting, the design will be fit for purpose or even indirectly by specifying a specific performance outcome, then that needs to be a big red flag for you.
Jacob Austin 00:15:53 And as a subcontractor, you need to push back on that. Or perhaps get your insurance broker to check whether the policy covers it or what they could cover if the wording were tweaked to align it with your policy. Generally, to be prudent, you need to avoid any design liability that is beyond reasonable skill and care or negligence. And that is why the standard wording of the JCT defaults to reasonable skill and care, aligning with what Pi will generally cover. You also need to match the maintenance period of your Pi against the specified years after completion, which is typically 12 years if your contract is under a deed. If the worst happens and your pie is lapsed. Then the claim comes back to you and you're exposed. Any serious design liability often will manifest. Years after construction, with thinking of latent defects here. So that insurance tailing out after the project is complete is critical still. Now let's circle back to the design submission procedure I mentioned earlier, the schedule one design submission process from the DB contract, along with its ABC approval status.
Jacob Austin 00:17:04 It's worth noting that GT 24 updates actually tweaked the timescales from previous contracts. For instance, the main contract now gives the employer eight weeks instead of 12 weeks to respond to design submissions, and correspondingly, the period at subcontract level is shortened by the same amount. This is trying to speed up project workflows. These are key areas that you need to be aware, and they're places that amendments regularly happen. So this is a place to double check what your requirements are. That way you can perform on time, and you can also measure your contractor against how they're performing in response. Now, some people still don't know this, but when it comes to using BIM on a project essentially working from a 3D model and a shared data environment, the JCT expects that if BIM is being used, a separate BIM protocol will be introduced in the contract document, and that BIM protocol overrides the standard submission procedure in the subcontract. The protocol is far more detailed than the original schedule. It sets out rules for how model information is shared, what software version is to be used, who's responsible for what in the model, and the level of detail required at each stage.
Jacob Austin 00:18:21 So instead of emailing over formal PDFs with a cover note, you might be expected to upload a model to the common data environment. The review is then likely completed digitally via a workflow, perhaps with similar terms being used for the approval flow and the status, but it's handled usually throughout in the BIM software. So if your contract particular, say, BIM protocol CIC second edition applies, then your project is going to follow that. They might be doing that by issuing the other document or incorporating it by reference. If it's by reference, then you need to obtain and read it. It's going to tell you things like the file format to provide naming conventions when federated models are issued, clash detection responsibilities, and so on. It should also clarify how responsibility is being managed in a BIM context. For example, you might be responsible for your model elements up to a certain defined interface, at which point somebody else might take over. You also need to note that the JCT contract terms typically prevail over the bin protocol if there's a conflict.
Jacob Austin 00:19:33 Unless they've been amended to say otherwise, some standard protocols like the CIC bin protocol will say the opposite that the protocol prevails. Picture that Spider-Man meme of the two Spider-Man pointing at each other. This is a clear conflict, so watch out for that and ensure the contract documents clarify what the precedent is. Confusion is where disputes can arise. So if you spot that and it's a common error, then point it out and draw a line under it. Right at the start. You'll have a list of BIM deliverables under your project. It's going to include giving a 3D model of various elements of your subcontract works. Be it structure, pipe work, electrical layout, and so on. That will be coupled with a level of information or a level of detail either Loi or Lod as it's commonly referred to, which typically grows as the project design matures. You'll likely have to populate data fields for the ongoing management of the building, as well for them to be used as asset tags and on higher risk buildings, there is an obligation to produce the golden thread of building information, an obligation which some clients are writing into all their contracts, regardless of whether it's a higher risk building or not.
Jacob Austin 00:20:47 The main contractor is obligated to provide that information at handover of the building, if not before. So be prepared that you're going to have to provide your tie in information to that. It's likely that your subcontractor will also call for things like BIM coordination, meetings, and use of a specific common data environment platform for delivering the model and for delivering things like your O&M data in digital form. The tip practically here is to get clarity early on what you're expected to deliver and when non-compliance with BIM obligations can lead to delays, and this is an area where the main contractor will potentially be looking at withholding money or financial penalties if it causes them an issue handing over the building. So you need to be prepared that after you've finished your work, you're updating your model to make sure it exactly reflects what you've installed and you're handing it over, which means more design time, which you obviously need to factor into your bid. Another thought to highlight for you is that a 2017 case between Trent and MacDonald brought to light an issue where a contractor was locked out of a design data platform by a consultant during a dispute.
Jacob Austin 00:21:58 This is something you need to take care about, because if you're considering withholding BIM data, it can land you in hot water. Jets guidance suggests parties who administer the CDE should be agreed upfront and agree that everybody will have continuous access, even if there's a dispute. And the prudent thing to do is make sure you've got a backup of your key submissions and models that you produce in the event of any issue. you can still satisfy your performance requirements to provide what you can, ensuring you're not stranded if the system is shut off. In addition to embracing BIM, JC 24 also includes for electronic notices to be submitted, meaning you can now email that potential delay notice across to your employer rather than sending it by registered snail mail. Another benefit of that is that you always have that record of when it was delivered, and you can even get the read receipts to prove it's been opened and digested. Now let's move on to the final segment, and we're going to discuss contract amendments that can increase your design liability.
Jacob Austin 00:23:08 I laboured the point on this last week, calling out that the standard form of the contract is reasonably balanced, if not slightly, in favor of the employer and the main contractor, but the standard form is rarely what you end up signing up to because starting with the client and their lawyers, lengthy schedules of amendments are often rolled out. These trickle down through the main contract and then to you in your subcontract, and seemingly small changes in wording can add a lot of extra risk onto you as a subcontractor. First off, we've mentioned already inserting fitness for purpose obligations. I won't labour the point again on what that means, but whether it's a direct amendment to the subcontract text or its inclusion in the scope, this is one to be really vigilant for anything that includes a word such as guarantee, warrant and sure or other synonyms for the same. These are indicating guarantees of outcome. If you see this, you need to draw it out and refuse to accept it. And at the very least, make sure that it's caveat to clarify the reasonable skill and care obligation only in a similar fashion.
Jacob Austin 00:24:20 Performance To warranties where either the client or the contractor included specific performance targets that you must maintain with your design e.g. heating and cooling system to maintain 21 degrees plus or minus two. At all times. It's fine to strive for that as a target, but a clause that makes it your responsibility to meet that target is effectively an outcome warranty. If those targets are critical, then you need to ensure that your obligation is framed to say that you're designing it with the skill and care to achieve those targets, not a promise to absolutely deliver them. This is important because as much as you may well complete your design to achieve that performance criteria, it doesn't stop somebody from doing something abnormal upstream or after the building is finished that you never would have assumed in a million years in your design assumptions. And you can argue that it's not reasonable for you to have foreseen that use until you're blue in the face, but if you signed up to that absolute obligation, it will hurt you if it doesn't perform. Watch out for unlimited or broad design risks.
Jacob Austin 00:25:31 Some amendments are trying to remove protective limits that the contract would typically have things like caps for design liability and consequential losses. Really, harsh amendments might sound like the subcontractor is liable for all costs, losses and expenses arising from design failure, howsoever caused. Phrases like that are absolute red flags. It's trying to make you liable for even unexpected or indirect consequences. Without a cap, a design that causes a major delay could potentially expose you to huge delay damages. So resist deletion of reasonable caps and be aware of what the worst case exposure you're going to have. Watch out for indemnities for design. This is similar but different to the removal of a cap. Something like the subcontractor shall indemnify the contractor for any loss or damage from any defect in the subcontractors design that will bypass the need for the contractor to prove negligence. And it also includes things like the contractor's legal costs and basically accelerates the process of you paying for a problem. If that kind of indemnity is in your contract, it underscores that you're carrying that risk.
Jacob Austin 00:26:49 But what you really want to see is design liability being dealt with under normal breach of contract, where a fault has got to be shown, not a blanket indemnity. That means you potentially have to pay at the drop of a hat. Another red flag is clauses that say you satisfied yourself as to the adequacy of any design or specification provided to you. By others, this might mean that the main contractor, the employer, or even other subcontractors that have a feed in feeding requirement for your work. It might be phrased in a fashion that says you've reviewed certain information and that you satisfied yourself with it, and take responsibility for the interfaces. That can be problematic because it's effectively transferring upstream design risk onto you, and you should only be responsible for your own design and for coordinating reasonably with others, not for errors in others work that you couldn't have known about. If you see that kind of a clause or a statement, then clarify that your duty is to point out obvious discrepancies that you become aware of. You don't have to hunt for discrepancies, and you don't have to guarantee the work of others with either the contractors or the employer's design team.
Jacob Austin 00:28:00 Some contractors will remove net contribution protection. This is where a contract includes what's termed a net contribution clause, which limits your liability only to the portion of loss fairly attributable to you if multiple parties are responsible for the same defect. So say both you and an architect had design faults that together causes a problem. A net contribution clause would ensure that you only pay your share, and then the client or the contractor chases the architect for their share. Main contractors might look to delete that kind of clause in either warranties or subcontracts, because they'd prefer to recover the full loss from you and then leave you to argue it with others. And a final obvious one is extending liability, duration or terms. Main contractors might require you to enter collateral warranties to the client or to other third parties, typically funders or people that might take on a lease for part of the building. Often, warranties will mirror your contract duties, but pay attention to these because sometimes they sneak in higher standards or longer limitation periods. I've done a detailed episode on collateral warranties previously, which I'll link in the show notes, but look out for obvious statements that warrant that the project is fit for purpose, even if your subcontract doesn't say that, that bring in step in rights that seem unreasonable, or extend your liability period to say, 12 years under a deed from practical completion, even if your subcontract is underhand.
Jacob Austin 00:29:34 It's important to check the terms of your warranties against your subcontract to avoid inconsistencies. And in an ideal world, you want the warranty to contain the same obligations and not more. Given all of these possible amendments, the practical advice is to read the schedule of amendments really carefully. Get your construction lawyers help if that's too much for you to do, and do it before you sign up to it. Don't just assume that because it says JCT on the cover that that's the whole story. The devil is usually in the detail, stuck within amendments that can completely change the game. Many SMEs. Subcontractors understandably focus on price, scope and program and gloss over the legal terms. But design liability is one area where a few little sentences can completely change the game and shift tens of thousands of pounds or more of risk onto your shoulders. So it's worth that extra diligence. If you spot a nasty clause and you don't feel you can negotiate it out due to pressure, at least factor that risk into your price. High risk should command a higher price, and it may even mean higher insurance coverage.
Jacob Austin 00:30:49 Often if you confront a main contractor and they know they've got some fairly extreme clauses in their amendments, when you reasonably come to the table and explain why you don't want that amendment, particularly if you've got strong statements like this clause would make our insurance invalid, which isn't in either of our interests, they'll look to help you out on that. An uninsured subcontractor is dangerous for everybody. And now let's wrap up this episode with reference to a recent case mentioned in construction industry commentary. This involves Lendlease, Construction Europe and Aeon Energy Solutions. Lendlease is a contractor who had performance obligations in a contract for an energy centre, and the court held Lendlease liable for failing to meet specified efficiency outcomes, even though they may have exercised reasonable care in their design. The court decided that the contracts wording imposed the efficiency outcome as an absolute obligation. This is a fresh reminder that if a contract says you must achieve X, the court will enforce that reasonable skill and care gets cast aside. Ultimately, if you sign up to it in the black and white you're signing to say you agree that this kind of argument will run in parallel for subcontractors if your subcontract includes a performance guarantee.
Jacob Austin 00:32:11 You're exposed to outcome based liability in a different case between Tribe Asset and ADT fire. The courts demonstrated that they won't interpret a clause as fitness for purpose unless it's clearly written. In that case, a fire protection system failed, but the contractor was not held strictly liable because the wording didn't unequivocally require a guaranteed resort. So the moral here is, if you get the exact wording right and that exact wording matters, the courts will uphold it. So scrutinize your subcontract for words like ensure, warrant, shall achieve, guarantee and of course, fit for purpose. These phrases signal strict outcome based duties and they need to be replaced by exercise reasonable care or use reasonable endeavours which signal diligence duties, which is where you want to be. Remember managing design and the risk associated with it is not about avoiding design work, it's about doing it on fair terms, with awareness of where your responsibility ends. Many SME contractors are extremely innovative and provide specialist designs for things like steel structures, M&E systems, facades and so on.
Jacob Austin 00:33:29 These can add huge value to your projects, and I wouldn't want to deter you in any way from doing that, but just do it with open eyes and make sure your contract reflects a reasonable allocation of risk. You can then focus on delivering a quality design without fear that an honest mistake or an unforeseeable issue will ruin your company. It may sound to you like I've talked about a lot of technicalities today, but just remember that court cases will often be decided on those technicalities, and losing a big claim because of that kind of technicality could be an absolute financial disaster. Now, design liability can be a heavy topic, but I hope this discussion has made it more accessible to you and given you some practical pointers to protect your business. My mission with this podcast is to help the million SME contractors working out there in our industry. If you've taken some value away from today's show, then I really need your help to share the show and pass that value on to somebody else who'd benefit from hearing it. And of course, subscribe yourself if you haven't already.
Jacob Austin 00:34:35 And thanks for tuning in. If you like what you've heard, then you can find more information at. www.QS.Zone Or check us out on all your favorite socials again @QS.Zone. And remember, miss the contract detail and the commercial risk falls on you. Thanks all. I've been Jacob Austin, and you've been awesome!
