Design Build Doctrines Contracts And Legislation Construction Essay

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According to the Design/Build Institute of America, more than 40 of non-residential design and construction in the U.S. is provided through the design-build process. By

2015, this number will grow to more than 50%. [1] 

When Brunelleschi built the Dome of Santa Maria del Fiore in Florence, Italy he did so as a Master Builder, providing both the design and the build as one, seamless service. Today, this service is commonly referred to as Design-Build. It is a method of project delivery in which one entity, the design-build team, works under a single contract with the project owner to provide design and construction services; one entity, one contract, one unified flow of work from initial concept through completion.

Over the past 15 years, use of design-build has greatly accelerated in the United States, making this delivery method one of the most significant trends in design and construction today. [2] Despite the history and current success of the design-build method, many factors prohibit or limit the practice of this project delivery method within the United States. This paper seeks to explore the history of design-build, compare and contrast contractual advantages and disadvantage in relation to other project delivery methods, and to explore and discuss various cases involving legislation and legal considerations regarding the practice of Design-Build within the U.S.

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I. Introduction

II. A Brief History of Design-Build

II. Types of Delivery Methods

A. Design-Bid-Build

B. Construction Management (CM) at Risk

C. Design-Build

III. Legal Consequences of Design-Bid-Build Delivery Method

A. Designer's Liability in Design-Bid-Build

B. Contractor's Liability in Design-Bid-Build

C. Owner's Liability Under Design-Bid-Build

IV. Legal Consequences of Design-Build Delivery Method

A. Owner's Liability Under Design-Build

B. Designer's Liability Under Design-Build

V. Other Contractual Considerations for the Design-Builder

A. Owner Cancellation of the Project

B. Ownership of Documents

C. Limitations of Liability

D. Statutes of Limitation and Repose

E. Dispute Resolution

VI. Summary

Introduction

Construction is an industry requiring land, machines, materials, and workers. In defining these resources and collaborating in their use, architects, contractors, regulators, and owners face a mire of legal issues. The ever increasing complexity of buildings, surmounted by the need to reduce design and construction time frames, as well the increasing burden of contract administration has left many within the building industry looking for more efficient ways to deliver projects aside from the traditional design-bid-build method of project delivery.

As a result, many public and private owners have rediscovered the potential value of former construction delivery methods, such as design-build (DB), construction management (CM and CM at risk), in addition to multiple prime delivery method options. Arguments for these alternative contract and deployment methods has gained momentum over the last 15 to 20 years as they include opportunities to leverage private-sector expertise and capital, to predict operational funding requirements, and to realize life-cycle cost reductions through the integration of delivery activities and private-sector efficiencies that are honed in competitive markets. [3] 

Of these methods, design-bid-build, design-build, and construction management are the three project delivery systems most commonly deployed within the North American construction industry. However, research compiled by the Design/ Build Institute of America indicates that the percentage of design/build contracts will hit the 55% mark of all construction projects by the year 2015. [4] As one of the most rapid growing forms of alternative construction this delivery method is becoming one of the most significant trends in design and construction today. Yet many general legislation laws in addition to federal acquisition regulations pose obstacles to design-build, even though design-build is not expressly prohibited in most states.

Against this background, this paper seeks to evaluate and contrast these forms of contract, design-bid-build, design-build (DB), and construction management (CM and CM at risk), for the purpose revealing the tradeoffs involved in transitioning from traditional and other alternative contracts to design-build. In addition this paper aims to identify the history and key characteristics of the design-build method and account for the potential legal and contractual issues regarding the practice of design-build within the U.S

A Brief History of Design-Build

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When Brunelleschi built the Dome of Santa Maria del Fiore in Florence, Italy he did so as a Master Builder, providing both the design and the build as one, seamless service. For centuries the master builder, was responsible for both the design and the construction of a project, having sufficient design and construction expertise in order to oversee projects from inception to completion under a single contract. For the vast majority of history, this was the way of architecture, engineering, and construction. However, increased complexity would eventually require a higher level of specialization, leading to the separation of the designer and the builder.

The first recorded instance of the intentional separation of the art of architecture from the craft of building was in Italy in the mid-fifteenth century. The work and writings of Leon

Battista Alberti helped to establish the art of architecture as a profession distinct from engineering and construction. [5] His book De Re Edificatoria, was the first printed work on architecture of the Renaissance, and gave rise to the idea of professional seperation.

In the 18th century, the nature of labor during the industrial revolution changed the way we work by breaking down the production process into individualized tasks. New facilities of mass production required more specialized design skills further establishing the separation of design and engineering from the craft of building. Essentially, builders needed to be onsite to perform their work while designers and engineers did not and could communicate their intent through drawings.

By the middle of the 19th century the distinction between design professionals and builders was inevitable. The American Institute of Architects was formed in 1857, and the American Society of Civil Engineers formed in 1852, and by 1897 the first architectural licensing laws were passed requiring all states have their own individual licensing laws for architects, engineers, and contractors. [6] 

In 1935 the separation was made absolute by passage of the Miller Act, requiring contractors on federal projects exceeding $100,000 to post a performance bond and a labor and material payment bond. Each of the 50 states eventually enacted "Little Miller Acts." [7] Eventually, even the private sector would follow suit with bonding requirements. Bonding companies would require a contractor to show adequate capital reserves before the issuance of bonds (financial guarantees). This need for capital presented a barrier to design professionals offering construction services and cost guarantees. [8] 

The reform movement in the construction industry in North America continued with public contract laws mandating the separation of design from construction and the selection solely on the basis of the lowest responsible bid. Procurement laws of this type, by implication, established the designer as an agent of the owner and prohibited the designer from any financial dealings with the builder

As the separation and specialization of services increased, design and construction entities were sharing information only at the end of design and during the construction process. Interaction, particularly during the design phase, was extremely low. So, in the 1970s and early 80s, owners brought in third parties (CMs) to assist them in managing design and construction entities, in hopes to coordinate construction and building efforts earlier in the process. These construction managers did not hold trade contracts, nor could they contractually guarantee the cost or schedule for or with the owner.

By the late 1980s, a concept similar to that of the CM developed, however the contractor was contractually responsible for the work, and guaranteeing both the cost and schedule. As these general contractors developed such capabilities, the construction manager / general contractor (CM/GC) or construction manager at risk (CM at-risk) evolved.

Under this approach the construction manager could also self-perform some or all of the work in order to meet a contract guarantee. In construction management at risk, the contractor has significant input in the design process and guarantees the maximum construction price, but the desire to establish a single point of responsibility and a faster, more seamless, delivery led many owners toward a single source design-build model. This project delivery system is characterized by a single contract between the design-build entity and the owner.

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In 1993, the Design-Build Institute of America (DBIA) was formed; whose stated purpose is the promotion of design-build project delivery in the United States. Before 1996, the Federal Acquisition Regulations made it difficult to utilize anything except the traditional design-bid-build method. Nevertheless, in February 1996, following the private sector's lead, the U.S. Congress passed the "Clinger-Cohen Act" allowing the use of the DB project delivery method. This act established guidelines to determine whether design build was appropriate for public projects.

Today, the design-build delivery method is the closest contractual relationships to that of the traditional master builder. Very few, if any state statutes expressly prohibit the use of the design build method. Though, many state laws create barriers to design-build, as when a law requires the design-bid-build method; splits a project into separate design and construction phases; or requires the preparation of plans and specifications before bids are solicited. [9] Other laws providing barriers to using the design-build method mostly deal with the prohibition of single contracts, in favor of multiple party contracts.

Types of Delivery Methods

As is the case in the delivery of infrastructure, complexity emerges with assets specific to the transaction, which leads the parties into bilateral dependence during contract execution. [10] This is to say that when one or more parties enter into a contractual relationship, they enter into a transaction that carries value. This value can be perceived as and attribute of experience, information, or investment and can lend itself as an asset or liability to the project at hand.

Contracts, as legal instruments structuring the governance of transactions, also have attributes. [11] In order to understand the tradeoffs involved in transitioning from traditional and other alternative contracts, one must compare and contrast the rudiments of each delivery method contract: design-bid-build, construction management + construction management-at-risk, and design-build.

Design-Bid-Build

In the traditional design-bid-build system of project delivery, the owner enters into two contractual agreements. The first arrangement is between the owner and the project architect or engineer, the second is between the owner and the general or prime contractor (see Fig 1).

Fig.1, Design-Bid-Build Contractual Relationship, Dr. Raymond Issa

This structure involves three distinct phases (see Fig.2). In the design phase, the project architect/ engineer prepares comprehensive plans and specifications sufficiently definitive to permit lump sum price estimates. In the bid phase, the owner submits the plans and specifications to one or more prime contractors who either submit bids as part of a competitive award process or who submit proposals to the owner for negotiation. In the third phase, the prime contractor to whom the owner has awarded the job builds the project strictly in accordance with the plans and specifications.

Fig.2, Design-Bid-Build Sequences, Department of Transportation

Construction Management + Construction Management-at-risk

Construction Management + Construction Management-at-risk are project delivery methods that provide for project acceleration by allowing the owner to contract with a construction manager early in the design process (see Fig.3). Under general CM the contractor is not responsible for trade contracts, cost, or schedule. Whereas, the CM-at-risk contractor agrees to a negotiated price for construction before the design is complete. CM/CM-at-risk is particularly recommended for projects that are technically complex, have challenging schedules, or where a high level of construction phasing may be appropriate (e.g., long corridor). [12] 

Because only one contractor is used, costs can be determined at an earlier point in design than either DB or DBB. Design and construction overlap, leading to faster project completion. Materials can be ordered and work can begin before the design is completed. The CM firm is generally chosen on the basis of experience, qualifications, or best-value. The Construction Manager provides price, schedule, constructability, and value engineering input during the design process. Once project risks are more clearly defined, the owner and the Construction Manager typically agree on prices for certain construction packages or a "guaranteed maximum price" for the entire project.

Fig. 3, CM + CM-at-risk Contractual Relationship, Dr. Raymond Issa

Since the contractor and designer work together throughout design to identify and minimize future construction risks, cost and scope can be more precisely controlled than with DB. Increased partnership and team building allow innovation to be nurtured and rewarded, enhancing the potential for creativity. (see Fig.4).

Fig. 4, CM + CM-at-risk Sequences, Department of Transportation

Design-Build

Design-build project delivery involves a single contract for both design and construction services rather than one contract for design and another for construction, allowing for the acceleration of project delivery (see Fig 5). With design-build, a firm or team of architects, engineers and constructors are "at risk" for the cost, schedule, quality, and management of the project. Selected specialty work, or in some cases all work, may be subcontracted to other design-build specialty companies.

Fig. 3, Design Build Contractual Relationship, Dr. Raymond Issa

Traditional design-bid-build approach takes these steps in sequence, whereas DB allows them to overlap. There is a single phase for the procurement of a firm who is responsible for both design and construction. The contractor is involved early in the design, so the designer can tailor plans to contractor capabilities from the onset. Because both design and construction are performed under the same contract, claims for design errors or delays are significantly decreased. The potential for other types of claims is also greatly reduced. However, only four States do not have authority to use DB, while another 18 States have limited authority.

Fig. 5, Design-Build Sequence, Department of Transportation

Legal Consequences of Design-Build Delivery Method

In design-build projects, the owner and design-builder's most important protection is the terms of the contract. This is particularly true in light of the loss of checks and balances, which is found in delivery methods such as DBB and CM. There are numerous important contract provisions, and the parties at hand should carefully consider various possible provisions in light of the nature of the project.

Owner's Liability under Design-Build

As is the case with standard form contracts such as the AIA, AGC, or EJCDC, each design builder's standard proposal or contract form rarely favors the owner. For example, even seemingly innocuous provisions pertaining to owner approval of the design at various stages can be used to transfer liability from the design builder to the owner when construction in accordance with the plans fails to achieve the desired result. Therefore an owner who is interested in design-build, as with any project delivery method, should be prepared to craft a personalized contract in order to avoid the all too often standard generic forms.

Contrary to these practices, design-build does allow owners broader alternatives and significant advantages in the design and construction phases. While it does not eliminate the need for sound contracts and careful planning; it does help to minimize the owner's assumed risk of design errors as found with other forms of contracts. Despite this the owner may still be responsible for preliminary design criteria or other design documentation and data that the owner or its performance representatives are required to furnish to the design-builder. As with the case of all other contracts, contractors are not liable for the owners' documentation as per the Spearin Doctrine.

Design-Builder's Liability under Design-Build

Design-build projects can be structured in a variety of frameworks and on more than one tier of performance responsibility. As with design-bid-build, the scope of work and obligations undertaker by each party in a design-build relationship is determined by the contractual agreement between the parties.

Breach of Express Contract

Breach of express contract is the most common legal theory used by owners who have claims against design-builders. In Koppers Company, Inc. v. Inland Steel Company, the owner entered into agreement with the design-builder for the design, engineering and construction of a blast furnace and a battery of sixty-nine ovens [13] . When the project came in two years late and $177 million over the estimated cost, the owner sued the design builder for cost overruns and the design-builder counterclaimed for the balance of its unpaid fee. In reviewing the net jury award to the owner of $63,902,000, the appellate court found that the agreement between the parties containing their respective rights and obligations actually consisted of four separate agreements that must be read together. The appellate court carefully reviewed and construed numerous provisions in all four agreements before affirming the award. [14] 

The design-build contract will often have objective performance specifications with testing and guarantees built around these specifications. One example is a power generation project where the design-builder will be responsible for achieving specific capacity and heat-rate requirements. A "performance specification," in contrast to a "design specification," sets forth certain quantified, objective standards to be achieved without dictating the design. Design-build contracts often call for the imposition of liquidated damages in the event certain performance criteria are not met. [15] 

Breach of Implied Warranties

As previously discussed, courts have traditionally been reluctant to imply into a design contract a warranty that the design will be free from defects or will achieve a specific result. But the melding of design and construction responsibilities into a single design build contract may lead courts to a different conclusion. It may be that courts will imply a warranty that the design-builder will furnish a design fit for the intended purpose.

If the design-build contract requires the design professional to furnish cost estimates for the project to the owner, some courts have implied a warranty that the estimates will be reasonably accurate. [16] 

Implied warranties are created by both judicial precedent and application of the Uniform Commercial Code (UCC). Judicially imposed implied warranties typically include: the implied warranty that the work will be performed in a professional manner and the implied warranty that the work will be fit for the purpose for which it is intended. Article 2 of the UCC is applicable to the sale of goods and establishes some commercial terms governing the rights and responsibilities of the buyer and seller of goods. Included in the scope of the UCC are warranties by the seller that its goods will be fit for the purposes intended and of merchantable quality. (Every state except Louisiana has adopted the UCC in some form).

Courts are typically reluctant to apply the UCC, and UCC warranties, to construction projects, which are typically service-intensive rather than a sale of "goods." But construction projects do, at times, fall within the purview of the UCC when a balancing of the services and goods provided weighs in favor of goods. (See, Omaha Pollution Control Corp. v. Carver Greenfield, 413 F.Supp. 1069 (D. Neb. 1976) (court held a contract for the design and construction of a sewage treatment plant was for the sale of a product)). The more typical UCC case is The Marley Cooling Tower Company v. Caldwell Energy & Environmental, Inc., 280 F.Supp.2d 651 (2003) (applying the Kentucky UCC to Marley's sale of air-cooled condensers on a power generation project).

A well-drafted design-build contract should properly disclaim any warranties that are not expressly stated in the contract. The UCC sets forth specific criteria that must be satisfied to achieve a fully enforceable disclaimer.

Liability to the Owner Based in Tort

As with the design professional in design-bid-build, the courts will impose a duty on the design-builder to conform his or her design activities to a judicially defined professional standard of care. The melding of design and construction roles into one entity under a design-build contract will mean that the duty of professional care will be imposed on an ever increasing array of activities and functions. As one writer has noted, "injection of a professional services component to that contract appears to release a virus of negligence that infects both the construction and design components of the project." [17] 

Moreover, the design-builder may have increased responsibility for the design services delegated to or provided by others. A project A/E whose contract includes specialty design services furnished by consultants may, at a minimum, thereby assume a duty to the owner to use care in selecting qualified consultants, and to properly review, approve and coordinate designs by the consultants. [18] 

Liability to Third Parties Based in Tort

The analysis for liability of the design-builder to third-parties in tort will basically track the liability of the design professional and contractor to third-parties as discussed above.

But the potential for "vicarious liability" does appear to be greater in the design-build arena.

Generally, designers and contractors are not responsible for the torts committed by "independent contractors," such as their subcontractors and consultants. [19] But there are two important exceptions to this general rule. The first is "where the wrongful act violates a duty imposed by an express contract upon the employer." [20] The second exception to the general rule is where the independent contractor is performing a no delegable statutory or regulatory duty imposed upon the contractor. [21] 

The courts have declared that these duties are non-delegable. In construction and design cases, the non-delegable duty analysis is often applied if the damage or injury arises out of the violation of a statute or administrative code or regulation relating to safety. This does not mean that the duty (i.e., the work) cannot be delegated to a subcontractor or design consultant. But it does mean that the duty is such that the person primarily responsible for performance of the duty (i.e., the design-builder at the top of the contractual pyramid) will be vicariously liable for performance by the designee, even if the designee is an independent contractor. [22] 

Other Contractual Considerations for the Design-Builder

The cost associated with preparation of design-build proposals can be significant, particularly if the RFP requires substantial preliminary design work, therefore the design-builder should take careful consideration in the following areas: owner cancellation of the project, ownership of documents, limitations of liability, statutes of limitation and repose, and dispute resolution.

Financial Risk

Serving as the prime in a design-build project typically means taking on a much larger portion of the liabilities associated with the project. In fact, the design-builder may have full responsibility for managing, directing, and coordinating the design and construction, including responsibility for the adequacy of the plans and for the construction means, methods, techniques, sequences and procedures, as well as for jobsite safety. [23] In addition to liability for design errors and omission that would traditionally be placed on the lead architect/engineer, design-builders are responsible for specification, workplace, and construction errors and delays. Often times these errors result in financial loss.

Other unique financial risk occurs when serving as prime on a design-build contract. Owners will often ask for 50% designs before they will commit to the project, in addition to the potential of owner cancellation and termination of provisions. Since so much work goes into the preliminary work of the design, the design-builder can occur significant expenses if the project is not built, and needs to be assured that if terminated, is not a matter of convenience and that compensation is in effect. Additionally, in such cases, the design-builder can be left with little recourse for compensation, leaving sub-consultants and subcontractors unpaid.

Furthermore, with CM and DB projects, financial risk can be associated with the fact that the contract price is established in initial negotiations under a guaranteed maximum price. Unfortunately, this can lead to financial liability for unanticipated design and construction cost on the part of the design-builder. It is important that contracts are established ahead of time in exact wording to avoid increased chance for errors, omissions, and claims lawsuits.

Liability Risk

Ownership of the documents should also be taken into consideration when drafting and reviewing contracts of this nature. Not all design build entities are fully integrated firms. Often times these relationships are joint ventures between architects, engineers, and contracts. In addition, if a design-builder is terminated does the owner retain the right to intellectual property.

A properly drafted contract between the owner and the design-builder should address and clarify these issues.

Limitations of Liability

While liability is daunting, it is not insurmountable. Limitation of liability clauses in design-build contracts can take a number of forms: the clause can limit the amount of damages for which the design-builder can be liable to the owner to the contract price or a percentage thereof; limit the amount of damages for which the design-builder can be liable to the owner to the amount of available insurance coverage; exclude liability for lost profits and other consequential damages; establish liquidated damages as the exclusive remedy for breach of performance guarantees; exclude all implied warranties; limit liability for defective work to the cost of repair or redesign; and limit liability for design errors exclusively to the obligation to correct errors rather than to pay damages.

Whether a particular limitation of liability clause is enforceable in a particular state will generally involve a public policy analysis. However there is indication that the court system will strictly construe any such limitations contained in design-build contracts given the comprehensive nature of the services intended.

A Pennsylvania Supreme Court case, cited with approval in Koppers Company, Inc., supra, may have captured the sentiments of many courts when it held:

"The intention to diminish, curtail or deny any of the normal rights which accrue from a given relationship must be manifested with the greatest particularity. The writing relied upon as an expression of the intention must be construed strictly against the party seeking to invoke it." [24] 

The architect/engineer's liability for design errors has historically accrued on completion of the design and issuance of construction documents. By placing these services in a single contract, it appears that the accrual date will commence on completion of the overall project. [25] 

Dispute Resolution

As with design-bid-build contracts, when drafting and negotiating design-build contracts, parties must be alert to inconsistent dispute resolution clauses contained in the various documents. In the case of The Hillier Group, Inc. v. Torcon, Inc., the design-builder had an arbitration clause with its designer-subcontractor but no arbitration clause with the owner. [26] When design problems arose on the project, the design-builder was forced to litigate with the owner and arbitrate the same issues with the designer-subcontractor.

Summary

Design-build is a familiar term for a series of project delivery methods that provide the owner with a single point of contact for both design and construction. The concept, which dates back at least to the "master builders" of ancient Greece, has gained great popularity in recent years as owners seek greater simplicity in directing and executing their new projects.

As with all contracts, a basic awareness of the unique financial and liability risks associated with design-build is essential to avoiding some of the surprises that can await the owner, architect, engineer, and contractor.