The functionality and reliability of coated devices are strongly related to residual stresses of thin films and coatings. A methodology for thermo-mechanical design in layered coatings is needed that complements experimental procedures for evaluation of coatings. This paper discusses the role of residual stresses on the mechanical integrity of physical vapour deposition (PVD) functional coatings. A numerical model of the residual stress distribution within a layered metal-ceramic composite coating is presented. The stress-induced failure modes are analysed. The topics discussed should provide some insights regarding the development of a methodology for designing fail-safe layered coating systems used in optical devices,