Michael McKenna and Timothy Ryan | Cohen Seglias Pallas Greenhall & Furman
Design-build contracts (and their lesser utilized counterpart—engineering, procurement, and construction (EPC) contracts) are prevalent in the construction industry. Though far from a new contractual relationship, design-build contracts are increasingly chosen by owners in an attempt to reduce risks and costs. The design-build model differs from the “traditional” design-bid-build model in that, with the traditional model, an owner is often very involved in both the initial design of the project and design decisions during the course of construction. An owner is given the opportunity during the design-bid-build process to tweak the design so that it truly becomes what they want. Design issues based on incorrect original assumptions can be worked out with revisions to the design prior to putting it out to bid. Further, in the traditional model, a design professional is generally retained by an owner and serves as the owner’s representative throughout the duration of a project.
In a design-build contract, on the other hand, the process is “streamlined.” At some point, the contractor becomes responsible for both the design and construction of a project. There is no doubt that the owner buys themselves a single point of contact. However, in exchange for that single point of contact and “fixed” price, the owner forgoes the ongoing customization options available in the traditional model. In design-build, once a project goes “hard dollar” (i.e., the owner and the contractor come to a financial agreement), the owner is relegated to a far lesser role, limited to reviewing the contractor’s design documents to see if they meet the technical specifications prior to the start of construction. When the owner and contractor are on the same page with regards to obligations and expectations (and the contract is clearly drafted), the design-build model is a mutually beneficial endeavor. Unfortunately, oftentimes owners blur the lines by cherry-picking the most attractive aspects of each model: a single, guaranteed cost of construction (design-build) while simultaneously desiring to maintain a high level of involvement and implement mid-design/construct changes (traditional model). When an owner begins to blur the lines and overstep their authority, it is imperative for the contractor to document these oversteps because the owner’s actions may constitute a change in the design-build contract warranting additional compensation.
In the Armed Services Board of Contract Appeals (the Board) decision, RBC Construction Corp., the owner of the project required the contractor to provide additional information concerning the proposed design of an underground fire cistern as part of the design review process. Within its contract, RBC Construction was permitted to proceed with construction only upon the owner’s approval of the initial “fast track” design submittals for each construction phase. The primary issue was that the underground fire cistern designs were not a required part of the “fast track” submissions, but instead in the later “interim design package.” Though the Board held that the owner’s actions were reasonable (in light of the risks associated with installing an unground cistern), it also held that the owner’s insistence on receiving the fire cistern design at an earlier point in time interfered with the contractor’s work. This was because, in the interim, while the owner was demanding the fire cistern designs, the owner’s designer would not approve the contractor’s “fast track” submittals. Thus, the contractor could not proceed with construction resulting in time impacts and related costs.
The Board’s holding in RBC Construction Corp. demonstrates why it is important to document project issues with written records. In this instance, the contractor found itself negatively impacted and losing both time and costs due to an overzealous owner. With its thorough and contemporaneous documentation, RBC Construction persuaded the Board that the owner’s active and excessive involvement constituted a constructive change to the contract.
When working on a design-build project, proper written and contemporaneous documentation is vital to ensuring the parties’ contractual obligations are adhered to and that the owner does not overstep their authority and role. There is a surprisingly low number of court decisions addressing design-build contracts. As a result, as played out in RBC Construction Corp., courts generally defer to the language of a contract and require the parties to abide by the contractual language. This puts contractors in a financially dangerous position when an owner starts unilaterally making design and/or construction changes while refusing to pay for those changes. These owners commonly point to the language whereby the cost of construction is “fixed,” and the contractor is responsible for the changes. RBC Construction Corp. demonstrates this is simply not true. Once a contractor’s design is approved and the project goes to “hard dollar,” changes requested by the owner require compensation. RBC Construction Corp. also shows how important it is to document these change requests, as it is a contractor’s burden to demonstrate how the requests changed the design-build contract and impacted time and money.