Design-Build – The Owner’s Dilemma

Michael McKenna and Alexander Spilberg | Cohen Seglias Pallas Greenhall & Furman

The recent passage of the infrastructure funding seems likely to lead to a significant influx in construction projects. Given the desire to get “work out on the street,” we anticipate that many owners will be looking to use design-build as the procurement method of choice. Owners and other parties should carefully consider their decision at a project’s onset as design-build, or engineer-procure-construct (EPC), can bring unforeseen challenges from procurement onward; indeed, the more parties understand design-build’s nuances, the better prepared they will be.

Many times, owners have been sold a bill of goods and think that design-build is a panacea akin to “no change order procurement.” Too often, owners fail to understand the design-build process and its limitations, and the misunderstanding then leads to impacts to other members of the team, such as engineers and design professionals. Lack of clarity— or even the inverse of owners trying to be overly detailed—can, and has, led to a growth in claims, and prudent owners would be wise to understand the potential dilemma that can come with using design-build.

Going Hard Dollar

As a basic issue, owners do not seem to understand how much control they lose on a project once it goes hard dollar. There comes a point on a design-build project when the owner and the design-builder sign a contract where the design-builder agrees to perform the work for a certain dollar amount. We refer to this as “going hard dollar.” This is the ultimate hand-shake and the proverbial “meeting of the minds.”

Owners need to understand how much control they give up at that point as it relates to the final nature of the project. At this point, the project is now in the hands of the design-builder. A frequent concern is that the owner and design-builder never truly set a firm understanding, so throughout the project, there remains a difference between what the owner wants and what the design-builder understands to be the scope of work. The owner may not have explicitly and/or appropriately communicated its wants and needs to the design-builder, or, just as common, the owner did not fully comprehend what it wanted for the project until it began to see more of the design coalesce. The owner will often continue to make changes to the design after going hard-dollar while simultaneously not appreciating the financial impacts associated with those changes.

The Owner’s Design Dilemma

A starting point for every owner is determining the scope of the work to be performed. While this is often be done using a scope book in which the owner tells the design-builder what it wants to be performed, there normally is some initial modicum of design work needed to compile the scope book leaving the book with its own set of issues. The owner needs to know that the scope book will be used by the design-builder to determine what needs designing and the construction parameters. The design dilemma may begin when an owner fails to spell out its intent, wants, and needs in the scope book or in any preliminary design given to the design-builder. When there are later changes to the scope book or expressed design, it ultimately leads to the design-builder seeking a change order.

Most projects, however, cannot be sufficiently planned or detailed at a scope book stage or even until they are underway. This leads to an owner inevitably asserting an all-too-common refrain to the design-builder that “you should have known that is what I meant” or “you should have known what I needed.” This dialogue degrades into a dispute over the doctrine of contra proferentem (e.g., trying to hold the recipient’s reasonable interpretation against the drafter of the scope document, e.g., the owner). Ultimately, the owner has a responsibility to plainly state what it needs. If the scope book has ambiguity and the design-builder reasonably interprets what the scope book/partial design calls for, then the owner loses. The owner has the legal burden to detail its needs, although owners seldom appreciate—or fully understand—this responsibility.

As noted, commonly as part of a design-build project’s bid documents, an owner will also have some early design work done by a designer of its choosing. We have seen projects where an owner started out with only four sheets of plans. More typical, though, are situations in which an owner goes much further into the design process, even as far as “30% design drawings,” then seeks a design-builder to bid on completing the drawings and engineering/constructing the project. But whether four sheets or 30% design drawings, they nonetheless present a liability.

This partial design certainly may help to define the scope of work, but owners do not recognize that there are also concomitant liability issues that attach. If these partial designs contain errors, then the owner will remain responsible in the same manner as it does in design-bid-build. Likewise, if the owner then asks for a scope of work that is not reflected in those partial designs or not otherwise defined in the scope book, it remains financially responsible.

Further, one of the principal advantages of design-build is to give design-builder teams the ability to use their ingenuity and creativity in developing design concepts. The more design the owner performs, the more it undercuts the ability of a design-builder to utilize this advantage. Experience has shown that owners do not typically appreciate this give-and-take “design dilemma.” An owner makes significant choice in determining how much design work is done before awarding a contract to a design-builder. The less design that the owner does, the greater the chances the owner will need scope changes to get what it truly wants and needs. However, while the more design that the owner does could better define work scope, it can simultaneously decrease the benefit of shifting design responsibilities to the design-builder. This results in a tenuous balance to make sure the project is properly defined while not unwittingly taking on design risk or undermining the design-builder’s ingenuity.

For example, on one project, a design-builder’s engineer misinterpreted the owner’s criteria for the forces that a bridge pier had to withstand in the event of a marine collision. The engineer wrongly calculated the force based on the stated collision design requirements. This led to an issue between the design-builder and its engineer in which the designer’s errors and omissions policy would be responsible for payment to the contractor. Then, given that previous error, the engineer retained a leading bridge collision consultant. When it did, the bridge collision consultant advised that the owner’s original collision criteria contained in the design given to the contractor was improper as it did not meet necessary standards. The bridge collision consultant then gave the engineer the proper marine collision criteria. This change meant that the bridge pier design that was already increased in size/magnitude to accommodate the first error would now have to be significantly larger. Ultimately, while the design-builder was responsible for the first error caused by its engineer, the owner was responsible for the latter error due to the incorrect criteria in the initial materials given to the design-builder. The project continued to go downhill, leading to a mutually agreed-upon termination for convenience.

The above example is unfortunately not a rare occurrence. Owners are responsible for errors in the scope book or contained in any initial design drawings they provide to the design-builder.

The other side of the coin is just as common: when a dispute arises because an owner does not sufficiently detail its needs, or, during the course of the work, it makes scope changes, these too will inevitably lead to demands for additional compensation.

Other Owner Mistakes

Owner liability can also attach for a plethora of other reasons when parties find themselves in a dispute over design and execution. For example, liability can attach when an owner’s own engineering consultant becomes too involved with the design review process. This can happen, for example, when the owner’s engineering consultant makes changes to the design-builder’s design or when the owner’s consultant does not provide review and/or feedback that extends the time of project performance. Indeed, these issues can result in significant claims.

That said, design-build can be an effective procurement system if managed correctly, with risks properly shared, rather than shoved down to the contractor and designer. Design-build shifts the burden and responsibilities for the majority of design to the design-builder and its design team. This has significant benefits for project success, creative ingenuity, and financial mitigation. It also can be a more timely method of construction and can lead to economic growth, generally, by getting projects off and running more quickly. To reap these significant benefits, however, all parties—including owners—need to go into design-build arrangements with a better understanding of their roles and responsibilities and to provide clarity for expectations and project requirements without limiting ingenuity or overstepping into the design-builder’s responsibilities.

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