Answering a vague allegation

You can simply deny the allegation. The fact that the work was defective would be considered an Affirmative Defense and should be alleged in a separate paragraph. It is true you can include it in your response to the Paragraph X, but it might be overlooked by the Court. Alleging the defective/faulty work as an Affirmative Defense makes it clear in the pleadings.

You can either "admit" or "deny" an allegation. No need to give any detail. However, it's essential that you plead any and all available affirmative defenses, or you may waive your right to plead them. Therefore, I urge you to consult with an attorney. Your attorney may also be able to file a motion to dismiss the complaint, as opposed to filing an answer. I would not advise doing that on your own though, because the law can get quite complicated. There are many attorneys on in your locality - give one of them a call! Good luck!