Unique Concerns for Design-Build Contract Participants
Construction industry participants are well familiar with design-bid-build (DBB), the traditional method of project delivery. Indeed, in the public sector, this method is often mandatory in determining the lowest responsible bidder for award subsequent to the project having been fully designed, either in-house by the owner’s design professionals or, more often, by a previously selected design entity. Under DBB, the lines of authority, responsibility, reporting and potential liability are clearly drawn, for owner, design professional and contractor. A long established body of law throughout the nation, both statutory and in court decisions, has refined most issues arising from these well-defined relationships.
During the past quarter century, an alternative project delivery method known as design-build has evolved, intended to significantly reduce design and construction costs and time of performance. The growth of design-build throughout the country has been documented in a recent Engineering News-Record cover story, entitled “Design-Build Evolution”, which advises that most states permit full or at least limited use of the design-build project delivery method, predominantly for state highway and bridge construction projects. In the same time frame, federal procurement rules have been modified, with design-build now commonly used by a number of federal agencies. Clearly, this project delivery method is rapidly becoming one of choice, albeit not necessarily for every type of construction project, where DBB or other well established project delivery methods are more appropriate.
This discussion initially considers the organizational structures and relationships in design-build contracts, which are markedly different than for DBB projects. While the owner entity is unchanged, its relationships with a design professional and a construction contractor now requires contracting with a single entity, responsible for both functions. The process in establishing such relationship is also changed. Certain owner design parameters and other technical criteria are established for the project, followed by selecting a design-build entity. Such process, often through a request for proposal (“RFP”) from contractors and design professionals in joint ventures or prime-subcontractor relationships, gives consideration to “best value” factors, rather than just lowest price. These can include specific required qualifications, proposed innovative approaches, past performance on similar projects, cost and other factors. Since the selected design-build entity becomes the single point of contact for the owner and, as such, has full responsibility for both design and construction problems, the focus here on unique concerns relates to the internal composition of that entity, and the shared and separate responsibilities undertaken by its participants.
A typical design-build entity comprises a construction contractor as prime and a design professional as subconsultant. If the owner solicitation is by RFP, with a design-build proposal to include a preliminary design, incorporating any owner-furnished parameters, a proposed contract amount, and duration for the work, issues can arise with regard to detail needed for the preliminary design, consistent with the owner’s overall concept and other competing interests. The contractor component of the design-build team wants meaningful detail for maximum utility in pricing the construction cost, whereas the design professional is understandably concerned about the unreimbursable cost of a significant design effort, should they not be awarded the design-build contract. Since these parties are not, at that stage, able to enter into a full-blown prime contractor-design subconsultant contract, a common practice is to enter into a memorandum of understanding (“MOU”). The MOU would include a description of the pre-proposal activities to be performed by the contractor and by the designer, with each to absorb its own costs in their respective efforts. Although limited in scope, it must be remembered that such MOU is a contractual document which, if not carefully drafted, can create significant downstream issues between the parties.
Another potential thorny issue that needs to be addressed at inception is the contractually created liability of the design-build prime contractor to the owner for design errors and omissions on the part of its design professional subconsultant. Thus, the prime contractor, who is to perform only construction work and no design services, and likely unlicensed for any such design services, can nevertheless have direct exposure for such liability to the owner, with whom the contractor is in privity of contract. Appropriate protective measures need to be considered against this risk, such as the contractor being included as an additional insured on the design subconsultant professional liability policy, and also through a contractual indemnification provision in the contractor-design professional subcontract.
A further point of concern can arise regarding the totality of the design-build entity’s responsibility for design, under its design-build contract with the owner, a position that some owners have espoused.
The following illustrations as to the above unique design-build concerns underscore the reality of how significant issues can develop in these areas:
Adequacy Issue as to Engineer’s Preliminary Bridge Design Under MOU for Design-Build Proposal
An international contractor submitted a proposal for a design-build contract with a prominent engineering firm, as design subconsultant, for replacement of a state’s historic lengthy cable-stayed bridge across a major river. The parties initially entered into a pre-proposal MOU, intended to encompass a preliminary design, taking into account the state’s provided design parameters, and upon which the contractor would prepare a cost estimate for the contemplated quantities of structural steel, concrete, rebar, etc. Following contract award by the state, as owner, the contractor and engineer entered into a design subcontract for the requisite final design services. Upon approval by the state of the design-build entity final design and implementation of construction, it was determined that the pre-proposal quantities had been significantly underestimated and inadequately costed in the proposal. While a number of other disputed issues arose between the contractor and designer, a principal point here was the lack of clarity as to the parties’ respective responsibilities under both the MOU and design subcontract. This in turn led to a multimillion dollar arbitration claim at significant time and cost to both parties. The seeming lack of attention to carefully drafted and clear contractual language was surprisingly a principal culprit here.
Protecting the Construction Contractor from Engineering Liability on a Water Tunnel Project
An engineering consultant was in contract with the owner for services involving inspection, testing and overseeing partial replacement of an aged leaking water supply tunnel under a major river. A construction subcontractor had developed specialized proprietary equipment it planned to use for certain inspection and testing aspects of the project, and the engineer initially insisted that the subcontractor maintain its own professional liability insurance. The subcontractor balked, since its business was not engineering, but rather construction contracting and related work. The matter was resolved by inclusion of the contractor as an additional insured on the engineer’s professional liability policy. Indemnification was also considered, but not implemented in these circumstances, which were far less potentially severe than in the more traditional design-build contract, where the contractor entity is in privity with the owner and has clear direct contractual design responsibility.
Viaduct Design Error Not Responsibility of Design-Build Entity
An owner’s engineer asserted, in a design error claim context, that a greater than expected existing deck thickness for a viaduct replacement in a design-build contract, was entirely the contractor’s responsibility, since it had full design responsibility under the contract. However, cooler heads prevailed when the arbiter recognized that this was an unforeseeable condition, exacerbated by erroneous existing deck thickness data furnished by the owner in its initial request for proposals on this contract. The principle here is that all design responsibility in a design-build contract is not always automatically that entity’s responsibility, and can result in owner liability.
The suggested lessons learned here are the importance of careful drafting of contractor-design professional contracts to clearly reflect the differing responsibilities of the parties, with separate disciplines, albeit united contractually; the need to include contractual protective mechanisms to insulate the contractor from design responsibilities; and the recognition of certain exceptions to absolute design responsibility.
Lastly, it is worthwhile remembering that, notwithstanding the dramatic increase in number of design-build contracts throughout the country, there are few legal precedents to rely upon in considering the design vs. construction dichotomy in this process. That is simply because the preponderance of claims that arise are resolved in unreported arbitration forums, and hence the added incentive for contractual vigilance upon entering into a design-build contract.
Jack S. Kannry, Esq., P.E., is a partner and chair of the Construction Law Group for the New York City law firm of Warshaw Burstein, LLP. He can be reached at firstname.lastname@example.org