Design-Build Project Delivery

How to control the potential risks associated with DB projects

September 02, 2018 Photo

Design-build is a project delivery system in which the project owner contracts the design and construction services to a single entity known as a design-builder. With both sides of the project managed by a single team, task overlap can result in better communication and collaboration, and a streamlined delivery to the owner. Additionally, design-build (DB) offers owners a more flexible set of selection criteria when evaluating bids, and DB permits owners to transfer risk to the design-builder and its design consultant. However, DB can result in cost overruns and project growth that cannot be reallocated to the owner as betterment.

In typical design-bid-build project delivery, the owner retains a separate contractor and designer, often after retaining a separate geotechnical engineer. As such, the owner of a design-bid-build project remains potentially liable for differing site conditions, cost overruns, betterment, and project scope growth. This is particularly so in the case of fast-tracked projects, where designs are being delivered as construction proceeds. In contrast, contractual provisions in DB projects typically disclaim accuracy or completeness of, and negate any reliance rights on, owner-furnished design or subsurface information. They tend to limit or eliminate options for recovery for design deficiencies or differing subsurface conditions. Rather, the contractor selected for a DB project must both design and construct the project for a guaranteed maximum price.

The DB Process

DB is predicated on the principle that in exchange for ease-of-operation and cost benefits, a project owner will exercise limited control over, and have minimal involvement in, design development. Allocation of design adequacy risk to the design-builder and its designer is rationalized on the degree of control expected of, and is contractually assigned during this process.

In that regard, on typical DB projects, the owner issues a request for proposal (RFP) that incorporates an overview of the project scope plus preliminary and/or conceptual design recommendations that must be addressed in any response to the RFP. The preliminary design often contains very little detail and certainly no information concerning means and methods of construction, as these items are now allocated to the design-builder and its designer to handle.

Generally speaking, the owner prepares conceptual or preliminary design criteria or standards that define certain minimum and mandatory requirements for the final design (“owner design requirements”). The owner disclaims the design-builder’s right to rely upon design or other information that it furnishes in the procurement. The owner’s authority to review and accept/reject the design-builder’s design submittals is limited to evaluation for conformance with the owner’s design requirements. Finally, the design-builder is responsible for the adequacy, suitability, constructability, and performance of the final design (to be stamped or sealed by its consulting engineer), consistent with the owner design requirements and compliance with professional and contractual standards (including fitness for purpose requirements.

Problems and inequity can arise where the owners wish to greatly reduce their risks by engaging in DB, but demand control over the process, including selection of construction means and methods, design development, and the subcontractors and subconsultants. Parties to a DB project are cautioned that this subverts the intent underlying DB, and can result in significant cost overruns and delays.

Next, the prospective design-builder teams with a primary designer, which is either an architect or an engineer depending upon the type of project at issue. They will either enter into a relatively limited contract for pre-bid activities (to define the roles, rights, and responsibilities of the parties), or the designer may simply provide a preliminary proposal to the contractor that describes the designer’s pre-bid activities.

Very often, there is little time between issuance of the RFP and the date that bids are due to the owner. Because of this, the design-builder and the designer must condense their pre-bid scopes into a matter of weeks. This may include a cursory site visit; review of laws, regulations, and codes applicable to the project; and a review of the RFP’s preliminary design. If necessary, the designer will consult with potential subconsultants for their recommendations on elements of the project pertaining to interior design or structural, hydraulic, electrical, mechanical, or other engineering disciplines. After such review and communications, the designer is often left with a matter of weeks to prepare a highly preliminary design in response to the RFP and, if asked, provide preliminary quantities associated with the designer’s scope of work. Given the highly preliminary nature of the DB response to the RFP, it is both logical and necessary to incorporate healthy construction and design contingencies in the RFP response.

Risk Allocation

DBs involve a transfer of design risk from the owner to the design-builder because the design-builder is contractually responsible for adequacy of the design. This is aligned with the design-builder’s ostensible ability to control design development, and to exercise its independent professional judgment and creativity in design development and its direction of construction means and methods.

The owner can reallocate design adequacy to the design-builder, thereby significantly containing the owner’s cost overrun exposure. That said, in some important respects, contractual provisions pertaining to design adequacy risk allocation in DB may, ultimately, provide less legal protection to the owner for cost overrun exposures. The latter situation may occur when owners engage in certain procurement, contractual, and performance practices that result in a reallocation of risk to the owner. If an owner chooses, in name only, procurement, design, and construction of its contract as DB to reduce costs to itself but maintains control over all aspects of the project, then the owner will be less likely to recover cost impacts and delays resulting from such conduct. In other words, the owner cannot simply label a project DB without allocating the requisite responsibilities that go along with it if it seeks to contain its cost overrun exposure.

The project-specific application and initial articulation in procurement and contract documents of risk allocation approaches for design adequacy may not be set in stone. For example, the RFP may not identify whether design criteria are only guidelines or are mandatory; the extent to which the design-builder may rely upon the owner’s information; whether the design-builder is entitled to equitable adjustments for differing site conditions, or even owner-directed changes in scope or “changes of mind” associated with the initial RFP.

Another risk factor for the designer is that, on a whim, the design-builder may decide to effect different construction means in methods and practice than it anticipated when submitting its bid. That change could significantly impact implementation of the designer’s preliminary design, as well as any quantities that the designer may have provided to the design-builder in response to the RFP.

Yet another risk to which a designer may be subject to is the elimination of the project contingency. To win the project award, a design-builder seeks to reduce its costs as much as possible. To do so, it may reduce or eliminate the construction and/or design contingencies. As discussed previously, since the design contained in the RFP is typically conceptual or inadequately developed, and the design submitted with the bid is 30 percent complete at best, it is important to incorporate these contingencies because both the design-builder and the designer know that the project design phase will require extensive design development. Unfortunately, the contingency is usually the first casualty of a DB bid submission, which tends to fall on the designer.

Finally, another risk is schedule-driven. It is very important for the designer to have input into the project schedule for its design-based tasks both during design development, preparation of construction documents, and during the construction phase if it has construction administration tasks. If those tasks are not taken into consideration, then the schedule will not reflect realistic project requirements, like sufficient time for completion of design development, redesign if needed, submittal reviews, responses to RFPs, or construction re-work.

Mitigation of Risk

For DB to work effectively, design-builders and designers must control the potential risks associated with DB projects. The key is to clearly define the roles and responsibilities of the owner, the design-builder, and the designer contractually and in practice. There must be effective, consistent communication among all parties to enable achievement of the finished project.

As discussed, the greater the degree of control by an owner in a DB, the less likely the owner will be able to recover purported damages associated with cost overruns and delays. To avoid the owner control risk, the contractor, the owner, and design-builder should clearly delineate, and then memorialize in the parties’ contract, the parties’ roles and responsibilities to make clear that the design-builder controls design development, is responsible for adequacy of design, construction means and methods, and quality control and quality assurance. The owner and design-builder should begin early in the contract development stage discussing the owner’s plans, goals, and objectives and include projected budgetary requirements.

When the design-builder and design team respond to an RFP, the expectations and goals, roles, and responsibilities of the parties should be clearly delineated in a teaming agreement. This should include responsibility for the level of design required for the response, expectations of both parties for provision of quantities, and the party charged with ultimate responsibility for the content of the bid submitted in response to the RFP.

The parties’ post-submission intentions should also be plainly defined: Entitlement to any subsidy issued by the owner if the bid is not successful, or the proposed terms of a design agreement if the bid is successful. The parties need to reach agreement on key contractual provisions including, but not limited to, development of realistic project and submittal schedules.

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About The Authors
Multiple Contributors
Alex Niederman

Alex Niederman is a complex claim specialist, casualty claims, for Ironshore. He can be reached at alex.niederman@ironshore.com.

Fred Perez

Fred Perez is vice president at McLarens.

Fredric Trester

Fredric Trester is partner at Manning, Kass, Ellrod, Ramirez, Trester LLP.

Gwen P. Weisberg

Gwen P. Weisberg is partner at Donovan Hatem LLP.

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