What is a Design-Build Contract?
What is a design build contract? A design-build contract is exactly what it sounds like; a contract that intends to cover both the design and the construction of a project. In some instances, these contracts are entered into before the design phases have even begun; in others, the design may be complete before the contract is signed. The design-build contract is a concept in which a single entity is responsible for both the design and construction of a project. Having a single contractual relationship in lieu of a separate design and construction contract allows for more open communication between the parties to contract because they will work together more closely and frequently.
Typically, with a traditional design-bid-build scenario, the owner hires a design professional to prepare the design documents, in lieu of hiring two separate entities. Then the owner will request bids from contractors in order to find the lowest price to construct the project. The contractor will then perform the work based on the existing design documents. In this situation, if there were problems with the design, the owner would have to go back to the designer to fix the problem, at an additional cost. The contractor would also have a claim against the owner for any design deficiencies that resulted in additional construction costs . If the owner decided to sue the design professional for damages the owner suffered as a result of the design, the contractor could bring the design professional into the lawsuit to cover its losses arising from design deficiencies. The same process occurs if the owner and contractor cannot agree on the cost of changes to the existing design.
In order to prevent the disputes that typically arise under a traditional contract, the design-build contract removes the architect or engineer from the equation and combines the designer and the contractor. The contractor is responsible for conducting surveys and other investigative work in order to develop the design. Although disputes may arguably still arise, the contract will likely contain provisions that allow for collaboration on any conflicts that arise between design and construction.
As jurisdictions across the United States continue to adopt the design-build model, the following clause is becoming widely used:
XIPP’s (INSERT DESIGNER’S) services ("Services") to prepare the Design Documents and Construction Documents shall be rendered as outlined in Exhibit B, and at no additional cost to [Name of Owner]. If XIPP or [Name of Owner] determines that the Services rendered by XIPP require a submission of Change Order for additional compensation or a Change Directive due to the improper performance of such Services, XIPP shall be responsible for such error, at no additional cost to [Name of Owner].
Essential Elements of a Design-Build Contract
Like any construction contract, a design-build agreement contains a variety of clauses and paragraphs which allocate responsibility for the myriad of tasks that must be accomplished to complete a construction project from permitting through final construction. At a minimum, a design-build contract will contain clauses relating to scope of work, schedule or timing of construction, and how responsibility is allocated between the design-builder and the project owner for costs, including who will pay to correct defective work.
A design-build contract should set forth in detail what services and goods the design-builder will provide and on what schedule. This is referred to as the scope of work. The scope of work will reflect the nature of the project. For example, a design-build contract for a fast food restaurant that includes the franchise requirements for fixtures and finishes, as well as the functional requirements for the kitchen, will have different scope of work language than a contract for a warehouse tenant improvement. A scope of work clause should be included in a design-build contract to make it clear what the design-builder will be responsible for designing and building and what the owner will be responsible for. The scope of work should also define what is within the scope of the work and what is an "extra" that can be approved on an "as needed" or "when and if" basis.
An important component of a design-build contract will be scheduling. As discussed below, a design-build project may have a number of moving parts. A contract should spell out the general timeline for completing the project from start to finish, as well as interim deadlines. It is important that a contract for a design-build project define the milestone dates for completion of design deliverables so that the project can be timely constructed and opened for business when revenue generation of the business begins. Like any construction project, maintaining the schedule will be critically important. However, in a design-build project, adherence to the schedule is even more important because continual redesign may not allowed to keep the project on schedule. For example, if the design-builder hasn’t completed the preliminary design for permit, it may not be able to expedite the project by making design changes after bids on the subcontractor work have been received.
The timeline should also include a start up period for the design-builder to obtain permits, procure any long lead items, and prepare to commence construction. A design-build project will have a lot of moving parts. In addition to the design work, the owner or project manager may have to coordinate a number of different schedules for utility service, tenant improvements, fire protection systems, and the availability of equipment. If not carefully coordinated, a design-build project can collapse under the weight of a complicated jumble of schedule conflicts wherein the design-builder cannot complete the task in time for the next task to begin. The schedule should be one of the first items to complete so that all parties have time to vet the dates and expectations for the design-build project.
Benefits of a Design-Build Contract
One of the primary advantages of using the design-build project delivery method is that the contracting parties can pass the primary responsibility for design and construction onto one entity or project team. As a result, the owner usually has fewer contractual relationships to manage. Design-build also often leads to faster project delivery than sequential or integrated project delivery methods or fragmented design-bid-build approaches. Because it streamlines procurement and consolidates the contractual relationships between project participants, design-build can cut weeks off the project delivery schedule. Thus, design-build can allow the owner to realize earlier project revenue and to start realizing the benefits of the completed project sooner.
The fact that the owner usually has only one contracting relationship—sometimes just one G.C. and no separate architect or A/E—makes for a more cohesive project team. The same people who design the project are also responsible for constructing it. Having one entity in charge of the design and construction of a project minimizes disputes over design-defect liability and the differences between construction documents and the final built project. Having a single point of responsibility for the design and construction of the project allows for faster problem solving and decision making. This objective was behind the creation of Section 4305C of Ohio’s Revised Code, which provides a statutory framework for allowing design-build for Public Authority Project Delivery Methods. Section 4305C was added to Ohio’s Competitive Government Contracts Law (ORC Chapter 153:1-3) in 2008. In enacting the statute, the legislature made the following factual findings: These legislative findings tell us that the Advantage of Design-Build is twofold. First, with fewer contracts, it is easier for the Owner to choose the Design-Builder. If a project delivery method involves multiple contracts, it will be much more difficult for the Owner to vet prospective contractors for the projects. Second, with fewer contracts, there will be faster project delivery.
Potential Issues with Design-Build Contract Implementation
Additional challenges can arrive if the contract’s terms are not properly implemented. For example, sometimes, the design-builder has only partial control over the quality of work. These limitations may have been created by a separate agreement between one or more parties and the design-builder or may simply be the result of the way the design-build contract is set up. Problems may lie with the intermediate designers (112), who have already dedicated a specific amount of time to a specific number of projects per year. They may find themselves obligated to deliver designs with scope or with content which do not meet the requirements previously determined or expected while the Contract was being negotiated, or if their own resources are not properly planned for and allotted. Differences in expectations as between the client and the design-build contractor may manifest in a variety of ways, including: In addition to these potentially damaging control problems related to the quality of work, the omission of peripheral design components may injure client expectations through miscommunication. Practices such as incorrectly determining what can be considered "design" items, which should be controlled by the design-build contractor and what may be considered "detail" items, which may be under a separate agreement may create legal loopholes via which designers may attempt to deny responsibility for seemingly minor, but ultimately essential, elements. In any case, such omissions can result in extreme project delays. Any one of the issues described above may result in disputes between the client and the contractor. In a true design-build contract, to the extent personnel and activities are shifted from one subcontractor to another, they are shared and the responsibility, and liability, becomes less clear. As a result, when the project fails, the cost overruns may be the responsibility of several parties, leaving the client vulnerable. The design-build contract framework may still be subject to the "pass-through" contingencies and risks present in traditional contract form, while admitting the negative consequences of no such specified insurance arrangement. Even with a plan that appears solid at signing, humans can err or neglect important details during the execution period. In cases where the design-build contract lacks the oversight mechanisms necessary to guard against opportunistic behavior, it may be the client, who suffers most.
Design-Build Contract Case Study: A Practical Guide
To better illustrate the workings of a design-build contract, consider a hypothetical case study: a hospital expansion project in the mid-Atlantic region. The design-build firm, in this case a partnership of a national design firm and a regional contractor, has been engaged by the hospital to design and build a new four-story, 150,000 square foot hospital expansion being built onto the east end of the existing hospital. The new building will have a specialty for cardiac care. The primary client contact is the hospital’s chief operating officer ("COO"). The COO is an engineer by training, and is well versed in construction speak. The COO has also called together an internal core team of seven direct reports to represent the hospital. Because of the size of the project, the COO and core team have weekly meetings with the design-build firm to address all manner of project issues, have approximately two and one-half meetings with the design-build firm to fine tune major design issues, and have bi-weekly meetings with the design-build firm to review monthly pay applications and invoices for reimbursable expenses.
Following award of the RFP for the design-build contract, the design-build firm continues its early work of programming with the COO and core team. The programming effort includes evaluation of the site; launching a "blue wave" exercise to ascertain best practices from inside and outside the industry; developing a program of approximately 150 spaces needed for the project; assessing current and future technology necessary for a state-of-the-art cardiac care hospital, including CMS rules; defining the process by which the hospital will seek a Certificate of Need; and developing an earning potential model for the project. Once the programming effort is finalized, the design-build firm and hospital agree on the basic approach to the project, including: By the end of the design development, the design-build firm has increased the square footage of the expansion by almost 25 percent, and designed the expansion with two additional floors, to save $2 million on site development costs. The project is now designed to include approximately 30 percent single-patient rooms, 60 percent semi-private rooms, and 10 percent multi-occupancy rooms, representing an industry best practice in hospital design. The design-build firm has also designed the project to meet the World Health Organization "Safe Health Care Facility Guidelines for Infection Control," an industry standard for minimizing patient infections and re-admissions to the hospital.
To address the project schedule, the design-build firm proposes a construction management plan that seeks to complete the project within three years. This requires the design-build firm to overlap construction phases and to enter into specialty contracts with self-performing tradesmen. Issues arise with the construction management plan because the hospital does not yet have its Certificate of Need from the State Health Planning and Development Agency , and because by law the hospital cannot begin construction until the Certificate of Need is issued. Nevertheless, the design-build firm and the hospital agree on the construction management plan and submit it to the State Health Planning and Development Agency. The plan is rejected because of the overlapping phases and entry into special contracts. On re-review of the plan several weeks later, the State Health Planning and Development Agency concludes that the plan is acceptable.
Once the Certificate of Need is issued, the design-build firm begins construction of the project. It uses a linear scheduling technique, called "Time-Chainage," to show which tasks the design-build firm must finish by specific dates in order to meet major project milestones (like completion of leveling for pouring the concrete). The design-build firm also conducts bi-weekly project coordination meetings with the core team to discuss all project issues. The design-build firm reports to the hospital every two weeks with a detailed progress report. Approximately four months into construction, the client code inspector discovers, through plan reviews, that the project as designed is not state code compliant in terms of height and number of stories. To remedy the non-compliance, the design-build firm must redesign some sections of the project and take other steps, including re-bidding some packages. The design-build firm and hospital agree that the design-build firm and some of its sub-contractors will self-perform certain work in order to save time and money. The redesign and re-bidding exercises lead to a six-month delay in project completion. The design-build firm agrees to reduce its fee by 10 percent to cover the additional cost to the hospital of the delay. In addition, the design-build firm waives any claims against the hospital for the impact of the Code Inspector’s directive.
As the project is nearing completion, the client code inspector discovers that portions of the project are still not code compliant. The inspector sends a letter to the state fire warden requesting a waiver from a number of state codes because of the new construction. The state fire warden denies the waiver request. The design-build firm attempts to negotiate the situation, but the state fire warden will not permit occupancy of the entire building unless the project is code compliant or the waiver is granted. Because the design-build firm has exhausted all administrative remedies at the state level, it seeks a temporary restraining order in federal court to prevent the state fire warden from enforcing the state building and fire code requirements.
The Legal Aspects of Design-Build Contracts
Importance of Legal Protections in Design-Build Contracts
Like any contract, a design-build agreement requires a drafting or enforcing party to comply with all relevant laws to the fullest extent conceivable. However, contractors providing professional services typically have additional legal considerations that construction agreements lack. In addition to any number of state or federal laws regarding false advertising, unlicensed activity, fraud, bid rigging, antitrust issues, and more, commercial contractors and architects must concern themselves with specific provisions that entitle them to legal protections like negligence and liability limitations.
While these clauses are typically beneficial to the contractual party creating them, it is still very much to the benefit of any designer, architect, engineer, or other professional to ensure that denominated limits on damages and liability specifically extend to negligent acts and/or omissions. Otherwise, liability for as yet undetermined problems and issues may remain for the life of a new structure’s existence.
Many states enjoy statutes of repose that fall under the umbrella of contractual limitations. Though they can offend some customers who feel shortchanged, such clauses can be written to be quite expansive and thus allow resolving issues before design defects become a potential runaway issue. The issue is not that designers always have the option to take on total unlimited liability, but that they must rarely face liability for issues that result from the fault of multiple parties or due to reasonable wear and tear.
A design-build partnership should never trust the discretion of a court to relieve them of liability. Though judges exercise judgment of their own based on the language of the contract, they make mistakes. If design-build partners want to limit their liability, they must write that specific limitation into the contract terms that they themselves choose, and/or secure the services of an attorney to ensure that the language actually accomplishes the intended result.
Strategies for Design-Build Contract Negotiation
Last month I shed some light on the "who, what, and why" of design-build contracts. Having touched on the basic concepts, I turn now to the "how" of design-build contracts: best practices for the negotiation and drafting process.
First and foremost, stakeholders must understand that a design-build contract is a "package deal." Rather than striking the best possible conditions for each component of a construction project by way of separate contracts for design and construction, participants in a design-build process agree to waive previously available leverage in favor of the efficiencies and promises of a streamlined project. That is, parties to a design-build contract get only one bite at the apple (relative to a design-bid-build contract) when it comes to negotiating for favorable terms. (Although as discussed in my prior post, there are some contracting models that combine separate design and construction contracts, they do not all provide for a single-source of liability as in a traditional design-build contract, which is central to the cost- and time-savings associated with design-build contracts.)
Because this is a package deal, participants must approach negotiations with their eyes wide open. Your opening proposal should reflect all aspects of the design-build project, rather than beginning somewhere in between your first choice of terms that you believe are fair and somewhere in between those terms and the other party’s ideal terms. Be sure that your initial pitch for the terms of the design-build contract encompasses project specifics such as: retainage; change order pricing; decisions on whether and how to meet performance requirements; preliminary review of schedules and milestone dates; dispute resolution; warranties; insurance and indemnification; and liquidated damage amounts.
Also, don’t forget to review the clauses of the contract that concern liability and condemnation. With regard to liability, parties should negotiate how responsibility for types of loss will be apportioned, whatever the cause. The contract may require the design-builder to bear all losses stemming from defects, errors, incomplete or negligent work, and damages (and even consequential damages) that arise out of the design-builder’s project-delivery services . Or it may push back against liability to the extent that the design-builder was not the cause of the loss or where the loss could have been avoided, mitigated, or is covered by insurance. On the flip side of negotiation, the design-builder can seek to limit its liability or seek to pass certain risks back to the owner—or require the owner to assume responsibility for losses caused by unforeseen events, inappropriately retained design-controlling consultants, or improper instructions or submittals from the owner.
The contract should address how losses associated with unanticipated changes will be handled. Losses incurred because the owner has made changes to the original design may force the design-builder to spread costs over the entire contract as liabilities attributable to the owner. The contract can provide that the owner agrees to compensate the design-builder for additional costs incurred, or even lost profits. In addition to being a means of compensation to the design-builder, this type of provision is an incentive to the owner to be mindful of limits on changes in the scope of work. On the other hand, if the changes were to result from a suspension of the project that is not attributable to the design-builder, the design-builder may agree to be responsible for some of the costs of that suspension of work. Again, the contract provides a negotiating opportunity that should reflect the parties’ relative bargaining power and/or the specific circumstances leading to the suspension.
Finally, the contract should turn to condemnation provisions. Whether or not the contract (or applicable law) provides for termination rights in the event of condemnation of the project site, the parties should agree to which party bears the risk of partial condemnation—i.e., where only a portion of the property is taken, but construction must continue on the remaining property. The contract should also address responsibility for seizures without legal process (i.e., where the government acts to prevent a project from being undertaken), and the cost and schedule impacts associated therewith.