design build risks and rewards for public owner

Design-Build Contracting: Risks & Rewards

for the Public Owner April 17, 2014

© 2014 Kraftson Caudle | www.kraftsoncaudle.com

Overview • Potential rewards of Design-Build (D-B) vs. Design-Bid-Build

(D-B-B) project delivery process; • Legal and Practical Issues (Risks) with D-B; • Significant Prime Contractual Provisions; • Owner/Contractor/Designer Relationship; and • Warranties/Liability.

Potential Rewards of D-B vs. D-B-B • Early “guarantees” of project cost; • Transfer of design liability risk from owner to contractor; • All risks are assigned to party having control to manage such risk (if

contract properly assigns risks among the parties); • Guaranteed project delivery date; • Reduction in time from project inception to completion; • Design and construction in one party’s hands- reduces “buck

passing”; • Value engineering in design phase reduces overall costs; • Design and construction in a single party’s hands increases quality

potential; • Decreases Owner’s administrative burden (long term overhead); • Reduction in change orders (design errors); and • Overall project risk is better managed because design and

construction under one roof.

A Single D-B Entity

Owner

Owner

Prime

Architect(s) Engineer(s) Consultants Subs

Suppliers

Single-Source D-B or CM-DB

D-B Entity A/E GC

Major Subs Major Consultants

Owner

Minor Consultants

Minor Subs

Suppliers

Integrated D-B

Owner as Third-Party Beneficiary in D-B

Source: Design Alliance, Inc., Waukee, IA

D-B-B vs. D-B D-B-B

D-B

Time Savings

Sources: Jasper Lumber Co, Inc., Jasper, IN and FHWA D-B Effectiveness Study (2006)

Minimal Contractor Input Extensive Contractor Input

Minimal to Extensive Contractor Input Extensive Contractor Input

GMP Estb.

Source: 2006, Federal Highway Administration, Design-Build Effectiveness Study, Image from Dr. Keith Molenaar, University of Colorado at Boulder

D-B Cost Experience • Award Cost Increases 4.59% on D-B Projects; • Post-award Cost Growth = 1.99%

(Compared with 8.78% on D-B-B) • Overall Cost Savings = 2% • Construction Time Savings = 21.1% • Design/Construction Time Savings =54% • Conclusion

o Design-Build Produces Slight Cost Savings; o Design-Build Produces Great Time Savings (Inception to In-Service) o Design-Build Introduces Great Budget Stability for the Owner

(Source: FHWA Design-Build Effectiveness Study, 2006)

Owner’s Risk of Design Error • Contra Preferentum – construction/interpretation against the

drafter generally no longer Owner’s risk • Spearin Doctrine: An owner who issues detailed design drawings

warrants to the contractor that the design represents what the owner desires to be built and if the contractor builds the project in accordance with such plans, the contractor is not liable for costs to modify the end product. U.S. v. Spearin, 248 U.S. 132 (1918)

• What happens when Owner turns to Design Professional after paying Contractor an extra as a result of Owner’s breach of implied warranty of plans and specifications?

• The Owner’s Dilemma: A problematic or “defective” design is not necessarily a breach by the professional designer of its contract with the Owner -- Professional Negligence Standard Applies

• Potential dispute between Contractor and Designer -- “Defective Design or Defective Construction”?

D-B: Contractor may be strictly liable to Owner for defective construction

and defective design • Owner’s position is that “if there’s a problem . . . fix

it!” • Design Professional liable to Contractor only for

defective design if defect constitutes “professional negligence”

Owners Must Optimize Baseline Engineering

• Too much inhibits creativity and innovation • Too little inhibits Owner’s ability to objectively

evaluate and differentiate proposals • 30% optimum

Owner Oversight/Approval of Design

• Owner acceptance of D-B Proposal constitutes acceptance of the design concept

• Subsequent reviews at design development intervals should be advisory and for purpose of ensuring conformance with criteria.

• QA/QC Program is primary “quality-checking” mechanism. • Agreement should include specific design review response

time standards (build into CPM). • Fast-track design review dispute resolution system (Partnering,

DRB, etc.). • If D-Ber controls schedule, it must have reasonable control and

certainty over CP activities. • If the Owner takes overly active role in reviewing and

commenting on design OR over-prescribes the design requirements up front, it may assume some of the design liability intended to belong to the DB Contractor.

Ft. Stewart, Georgia

Owner should not use D-B to simply transfer risks to D-B teams

that Owner cannot control • Subsurface Conditions • Environmental Permitting • Environmental Hazards • Existing Utilities • Right-of-Way & Easements

Project: U.S. 20 Owner: Oregon DOT

Prime: Yaquina River Constructors

RFP/RFQ Process Prone to Challenges

• Traditional D-B-B Procurement Process Almost Completely Objective

• Additional Judgment Injected Into D-B in Both the Qualification and Final Selection Process

Attributes of a Fair RFQ/RFP Process • Two-step -- First Pre-Qualify based upon experience, financial

strength, and organizational resources o First step reduces final competitors down to from three to five o Provides for stipend in appropriate circumstances o Individuals on selection panel should be knowledgeable about design, permitting and

construction o Selection criteria must be set forth in RFP and must be appropriately weighted o The End Product = Qualitative Score o Key factors should include quality, life-cycle costs, maintenance, price, aesthetics, etc. o Reasonable Proposal Deliverables -- require only that information which is necessary to

adequately judge competing proposals o Over-Prescribed Design Criteria -- limits D-B teams from bringing innovative solutions to

the table; o Under-Prescribed Design Criteria -- Bidders must making sweeping assumptions and

proposals are unlikely to satisfy owner expectations. Proposals cannot be accurately compared.

o Articulate functional requirements; external constraints; performance requirements (30% design optimal)

• Price and Qualitative Proposals in Separate Sealed Envelopes • Prices Opened After Qualitative Scores are Established

Ohio DOT I-90 Inner Belt Project

Source: DBIA 2006

Enabling Legislation for Public Owners • State: MoDOT pilot projects (2004); expires July 1, 2018 unless

extended o No more than 2% of MoDOT’s annual projects o Two-phase proposal process:

• Short list • Price and technical evaluation (oral presentations allowed)

o Mo. Rev. Stat. § 227.107

• State: Commissioner of Administration: D-B contract for minimum security correctional facility under specific criteria (Mo. Rev. Stat. § 221.500)

MoDOT Projects • 2005: $535M reconstruction of I-64 in St. Louis • 2007: $245M Kit Bond Bridge • 2008: $487M Safe & Sound Bridge Improvements • According to MoDOT, “all three projects received national

acclaim and were completed on time or ahead of schedule and on or under budget.”

MODOT Safe & Sound Bridge Program

Henry County, Route N over Honey Creek

Enabling Legislation for Public Owners • State: MoDOT pilot projects (2004); expires July 1, 2018 unless

extended o No more than 2% of MoDOT’s annual projects o Two-phase proposal process:

• Short list • Price and technical evaluation (oral presentations allowed)

o Mo. Rev. Stat. § 227.107

• State: Commissioner of Administration: D-B contract for minimum security correctional facility under specific criteria (Mo. Rev. Stat. § 221.500)

• St. Louis County Code of Ord. § 113.010, et seq. o AIA-MO sought declaratory judgment in St. Louis County Circuit on 11/1/12; summary

judgment for defendant/County granted 1/3/13

St. Louis County Code § 113.010, et seq. • Three phases o (1) Prequalification o (2) Design proposal evaluation

• Stipend available o (3) Cost evaluation

• Legal Challenge

Enabling Legislation for Public Owners • State: MoDOT pilot projects (2004); expires July 1, 2018 unless

extended o No more than 2% of MoDOT’s annual projects o Two-phase proposal process:

• Short list • Price and technical evaluation (oral presentations allowed)

o Mo. Rev. Stat. § 227.107

• State: Commissioner of Administration: D-B contract for minimum security correctional facility under specific criteria (Mo. Rev. Stat. § 221.500)

• St. Louis County Code of Ord. § 113.010, et seq. o AIA-MO sought declaratory judgment in St. Louis County Circuit on 11/1/12; summary

judgment for defendant/County granted 1/3/13

• Kansas City, MO Ord. § 3-31, et. seq.

Kansas City Code § 3-31, et seq. • Three types of D-B contracting o (1) Best Value – “based upon any factors and

method and formula” in the RFP o (2) Qualifications-Based – special committee

appointed when project > $6M o (3) Two-Phase

• D-Ber ranked by special committee based upon statements of qualifications submitted by D-Bers

• Special Committee evaluates proposals

Enabling Legislation for Public Owners • State: MoDOT pilot projects (2004); expires July 1, 2018 unless

extended o No more than 2% of MoDOT’s annual projects o Two-phase proposal process:

• Short list • Price and technical evaluation (oral presentations allowed)

o Mo. Rev. Stat. § 227.107

• State: Commissioner of Administration: D-B contract for minimum security correctional facility under specific criteria (Mo. Rev. Stat. § 221.500)

• St. Louis County Code of Ord. § 113.010, et seq. o AIA-MO sought declaratory judgment in St. Louis County Circuit on 11/1/12; summary

judgment for defendant/County granted 1/3/13

• Kansas City, MO Ord. § 3-31, et. seq. • Columbia, MO Ord. No. 20880, § 22-76

Columbia, MO Code section 22-76 • Three steps o (1) City council determines D-B should be used

on a specific project. o (2) Public hearing o (3) Council authorizes City Manager to

determine which proposal is best based upon: • Cost, city’s prior history with D-Ber, D-Ber’s

reputation, D-Ber’s technical capability, and “any other factors deemed relevant by the City Manager.”

Enabling Legislation for Public Owners • State: MoDOT pilot projects (2004); expires July 1, 2018 unless

extended o No more than 2% of MoDOT’s annual projects o Two-phase proposal process:

• Short list • Price and technical evaluation (oral presentations allowed)

o Mo. Rev. Stat. § 227.107

• State: Commissioner of Administration: D-B contract for minimum security correctional facility under specific criteria (Mo. Rev. Stat. § 221.500)

• St. Louis County Code of Ord. § 113.010, et seq. o AIA-MO sought declaratory judgment in St. Louis County Circuit on 11/1/12; summary

judgment for defendant/County granted 1/3/13

• Kansas City, MO Ord. § 3-31, et. seq. • Columbia, MO Ord. No. 20880, § 22-76 • Proposed Missouri Legislation

Source: 2006, Federal Highway Administration, Design-Build Effectiveness Study, Image from Dr. Keith Molenaar, University of Colorado at Boulder

MO HB 1945

• Contract Documents and Order of Precedence • Responsibility for Differing Site Conditions • Responsibility for Obtaining Permits and Easements • Responsibility for Finding and Relocating Utilities Within the

Project • Responsibility for Compliance with Changes in Applicable Law and

Regulations • Responsibility for Environmental Hazards and Remediation • Responsibility for Delays • Responsibility for Overruns in the Design or Construction Budget • Indemnification, Insurance and Bonding • Default and Termination • Design-Builder’s Duties and Responsibilities • Public Owner’s Duties and Responsibilities • Contractors Should Seek

Contract Provisions

Pre-Contract Agreement - Designer and Builder

• Team Formation Considerations o Compatibility (Designers are from Venus; Builders are from Mars; Owners may think the Sun revolves

around them) o Efforts to Get Award of Contract o Risk Management o Value Engineering o Financial Considerations o Definitions of Roles o Interface with Owner o Sharing of Costs - Honorarium o Noncompete o Ownership of Proprietary Information

• Termination of Agreement o Owner Will Not Proceed o Team Disqualified o Another Team Wins o Award to Team Leader o Portion of Team’s Proposal Unacceptable o Joint Venture Agreement or Prime / Subcontract Signed o Loss of Licensure / Enforcement Action as to a Team Member

Post-Award Considerations • Matrix of Responsibilities • Flow Down of Prime Contract Terms • Coordinate Design with Construction and Budget • Designer Quality Essential to Get to Phase II • Designer’s Financial Condition Can be Important • Important to Clearly Establish Relationship Prior to Submitting

Proposal • Big Issue “Growth” of Project – Requires Close Work Between

Designer and Contractor • Most Experts Suggest Contractor Take Lead Role • Contractor Must Make Sure Limitations on Design Risk Are In

Contract with Owner

Project Examples • Owner’s expectations must be reasonable and flexible (e.g.,

Ft. Stewart, Georgia) • Owner needs a prime contractor/designer with financial

ability and contractual savvy to “make it work” (e.g., Whiteman Air Force Base, 2010 Housing Redevelopment)

• Public Opinion/perception can be challenging in D-B (e.g., ODOT I-90 project)

• Owner as Third-Party Beneficiary (e.g., State of DelDOT v. Figg Bridge Engineers, Inc. et al., 2011 WL 5593163 (Superior Ct. of Del., Sussex County, Nov. 9, 2011))

Design-Build Contracting: Risks & Rewards

for the Public Owner April 17, 2014

© 2014 Kraftson Caudle | www.kraftsoncaudle.com