+ All Categories
Home > Documents > Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting:...

Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting:...

Date post: 10-Oct-2020
Category:
Upload: others
View: 13 times
Download: 0 times
Share this document with a friend
44
Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- Build Projects Risk Management in Underground Construction Course March 10, 2020 David J. Hatem, PC Donovan Hatem LLP [email protected]
Transcript
Page 1: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design-

Build Projects

Risk Management in Underground Construction CourseMarch 10, 2020

David J. Hatem, PCDonovan Hatem LLP

[email protected]

Page 2: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

2

• Industry Trends in Design-Build Public Infrastructure Projects: Exit From Fixed Price Contracting

• Risk Allocation Principles: Subsurface Projects• Subsurface Conditions and Design Adequacy Risk Allocation in

Subsurface Projects – Alignment– Design-Bid-Build– Design-Build

• Subsurface Conditions Risk Allocation• Final Design Adequacy Risk Allocation

• Design-Build Risk Allocation Recommendations

Presentation Focus

Page 3: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Industry Trends in Design-Build Public Infrastructure Projects: Exit From Fixed Price Contracting

“Fixing the Industry’s Fixed-Price Conundrum”Engineering News-RecordNovember 18, 2019

Root Causes• Aggressive, Unrealistic Pricing and Contingencies• Imbalanced Risk Allocation

These root causes produce elevated adverse consequences on major subsurface projects

3

Page 4: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Industry Trends in Design-Build Public Infrastructure Projects: Exit From Fixed Price ContractingWhat do those root causes mean for Consulting Engineers?

“Engineer’s Fixed-Price Risk”Letter to the EditorEngineering News-RecordDecember 16, 2019 (published)

The article “Fixing Construction’s Fixed- Price Conundrum” (ENR 11/18-25 p. 28) definitely identified a critically important issue that materially impacts continued successful utilization of design-build and P3 approaches in North America.

The demonstrated negative impact on construction of DB and P3 fixed-price procurement, exacerbated by unreasonable and imbalanced contractual risk allocation, has another important negative by-product—the frequency and severity of professional liability claims asserted by design-builders against consulting engineer subconsultants. Significantly, many derive from the same problems and challenges discussed in the article. The trickle-down effect of fixed-price and imbalanced risk allocation on consulting engineers warrants equal attention.

4

Page 5: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Industry Trends in Design-Build Public Infrastructure Projects: Exit From Fixed Price Contracting

In the last decade, design-builder professional liability claims against consulting engineers in P3 and DB projects have risen dramatically. The trend is extraordinarily concerning. I am extremely cautious generalizing as to cause, but what underlies or motivates claims often is unfair risk allocation between owner and concessionaire in P3s or owner and design-builder in DBs. The design-builder’s inability to seek recourse against its upstream contracting partner produces the mechanism of a professional liability claim against its consulting engineer. The concerning claims experience for engineers in P3s and DBs derives directly and significantly from the same root causes that underlie the fixed price problem addressed.

The converged realities and negative consequences of aggressive and highly competitive pre-award pricing (with inadequate design development contingency) in the context of fixed-price/imbalanced risk typically are disguised and transposed into a professional liability claim. The engineer’s conceptual or preliminary pre-award design or studies, investigations or recommendations did not meet the standard of care, resulting in cost overruns that the design-builder is not able to recover from the owner.

5

Page 6: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Industry Trends in Design Build Public Infrastructure Projects: Exit From Fixed Price Contracting

The design-builder’s pre-award failures to identify and assess design development and related risks (and adequately price and carry contingency for them) often provides an important part of the defense or explanation of claims, but it is equally true that fixed-price and uneven risk allocation are significant underlying factors and reasons impelling them.

Despite recent court victories for consulting engineers in this claim context, this trend is simply not sustainable for contractors and engineers; the ENR article provides compelling and convincing evidence to that effect. Industry should not look to courts as the primary solution. It mainly rests with owners. Contractors, typically the design-build lead, and consulting engineers often are adversaries in this context, but they share a common concern about unfair risk allocation in the fixed-price P3 and DB contractual setting.

6

Page 7: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Industry Trends in Design-Build Public Infrastructure Projects: Exit From Fixed Price Contracting

For the past decade, owners have had the advantage and benefit of significant competition among contractors and artificially low fixed-price cost for P3 and DB projects. The recent trend obviously moves decisively in a very different direction. Owners need to get the message about the importance of balance in risk allocation and recalibrate procurement and contract practices. For the last several years, I have predicted that unless something fundamentally changes in DB and P3s, there will be design and construction casualties. Public awareness is an important step in averting that consequence. Thank you for an excellent article that increases that awareness.DAVID J. HATEM, PC

Boston, Mass.

7

Page 8: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Risk Allocation Principles: Subsurface Projects

• Specialized Focus– Subsurface conditions– Design adequacy

• Subsurface Risk Interrelationships and Interdependencies– Scope of subsurface investigation– Character of subsurface conditions– Availability and reporting of subsurface data and interpretations– Design of permanent project work– Compatibility and suitability of permanent work design with anticipated subsurface

conditions• Lessons Learned – Improved Contracting Practices

– Adequate subsurface investigation– Information disclosure– Fair and appropriate risk sharing– Geotechnical baseline reports

8

Page 9: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

• DBB: Typical Roles and Responsibilities– Owner:

• Subsurface investigation and reporting• Preparation and furnishing of permanent works design – implied warranty

obligation• Risk sharing – differing site condition provision• Geotechnical baseline report preparation

– Contractor:• Selection, design and implementation of construction means/methods, and

equipment (unless prescribed or mandated by Owner)• Construction based on Owner-furnished design• Responsible for delegated (or performance-based) design or

proposed/accepted design variations

9

Risk Allocation Principles: Subsurface Projects

Page 10: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

• DB: Roles and ResponsibilitiesSignificantly more variation than in DBB

– Owner:- Subsurface investigation:

• To what degree?• Data, Evaluations, Reports Provided in DB RFP? • Disclaimers/reliance rights?• Risk sharing – differing site conditions provisions?• Geotechnical baseline report preparation?

- Design development: Pre-Award Factors• To what level? • Prescriptive criteria or standards? • Disclaimers/reliance rights?• Prototypcial Design v. Project-Specific Design

- Scope of review and authority regarding acceptance/rejection of Design-Builder’s design submittals

10

Risk Allocation Principles: Subsurface Projects

Page 11: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

– Design-Builder:• Subsurface investigation:

• Reliance rights on Owner-furnished information• Independent, or supplemental subsurface investigation; if so,

performed when?• Preparation of geotechnical reports• Relationship/relevance to final design approach?

• Design development: • Responsible for final design• Alternative technical concepts• Suitability/compatibility/constructability of final design relative to

reasonably anticipated subsurface conditions• Probable Negation of Owner-implied warranty obligation

11

Risk Allocation Principles: Subsurface Projects

Page 12: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Risk allocation for design adequacy and subsurface conditions in DB projects should derive from how certain underlying questions are addressed, including:

• Who is responsible for defining the scope of and performing the subsurface investigation?• Who is responsible for the assessment and evaluation of subsurface conditions/properties

relative to geotechnical design considerations?• Whether the owner provides site-specific subsurface information in the procurement

documents• Whether the design-builder has any right to rely upon subsurface information furnished by

the owner• Whether there are disclaimers as to the accuracy or suitability of subsurface information,

and the specificity of any such disclaimers.• Whether a differing site condition provision allows for an equitable adjustment if materially

different subsurface conditions are encountered in the design and construction processes from those indicated in subsurface information furnished in the procurement and contract documents

The answers to these questions will have profound influence, if not determinative effect, upon design adequacy and subsurface conditions risk allocation in DB.

12

Risk Allocation Principles: Subsurface Projects

Page 13: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Relationship and Interdependencies among three factors:1. The scope and quality of subsurface investigation;2. The assessment and evaluation of available subsurface data

relative to the final design approach;3. The compatibility, suitability and constructability of that

approach in reasonably anticipated subsurface conditions based upon available subsurface data and related evaluations

Effective risk allocation on subsurface projects must account for the dynamics, interactions, and interdependencies among these factors*

* See D.J. Hatem, Subsurface Conditions and Design Adequacy Risk Allocation in Design Build: Dynamics, Interactions and Interdependencies, Tunnel Business Magazine, October 2018

13

Subsurface Conditions and Final Design Adequacy Risk Allocation in Major Subsurface Projects – Alignment

Page 14: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Subsurface Conditions and Final Design Adequacy Risk Allocation in Major Subsurface Projects – Alignment

Some Basic Issues• How does (and should) knowledge (data and evaluations) produced by subsurface

investigations inform and guide the development of a project’s final design approach?• How are interfaces and interdependencies between anticipated subsurface conditions

and the specific final design approach, and the compatibility and suitability of each relative to the other, evaluated and correlated during the design development process?

• Can the specific final design approach be reasonably constructed in the particular subsurface conditions?

• Can materially different subsurface conditions encountered during construction result in the need to revise that design, or to consider and implement an alternative design approach?

• If, based upon encountered subsurface conditions, the final design approach needs to be revised or an alternative design approach developed, who should bear the cost and time impacts of those design variations?

• Who should bear the risk of final design deficiencies attributed to an inadequate scope of subsurface investigation or unreasonable evaluations or interpretations of available subsurface data?

14

Page 15: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Subsurface Conditions and Final Design Adequacy Risk Allocation in Major Subsurface Projects –Alignment

DBB• Combined DSC and Defective Design Claims in DBB• Many Disputes Involve These Basic Issues and Combined

Contentions of (a) differing subsurface conditions (“DSC”) and (b) design adequacy deficiencies – i.e., incompatibility, unsuitability and unconstructability of final design in reasonably anticipated subsurface conditions (“Design Adequacy Risk”)

• Risk Allocation in DBB: Project Owner Primary Responsibility in DBB:– DSC Provision: Subsurface Conditions Risk Sharing– Owner Implied warranty obligation for adequacy, compatibility, suitability and

constructability of final design in reasonably anticipated subsurface conditions– Owner responsibility for subsurface investigation and evaluation

15

Page 16: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Subsurface Conditions and Final Design Adequacy Risk Allocation in Major Subsurface Projects –Alignment

DBGenerally, more variation in risk allocation approaches, with trend toward aggressive and imbalanced risk allocated to the Design-BuilderDesign-Builder Remedies When Final Design Approach is Not Suitable or Constructible in Reasonably Expected Subsurface Conditions.

Scenario 1: No Subsurface Conditions Risk Sharing with Owner• Design-Builder Remedy Against Owner?

Scenario 2: Subsurface Conditions Risk Sharing with Owner• Design-Builder Remedy Against Owner?

Relevant Factors• Design-Builder Obligations to Independently Conduct (Supplemental) Investigation

and Evaluations of Subsurface Conditions• Scope of Design-Builder’s Responsibility and Risk for Final Design Adequacy• Level/Degree of Owner Design Development and/or Design Prescription

16

Page 17: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Subsurface Conditions and Final Design Adequacy Risk Allocation in Major Subsurface Projects –Alignment

• Disclaimers (direct or implicit, specific or general) of Reliance Rights As to Owner-Furnished Subsurface Conditions Data or Other Information (“Subsurface Data”)

• Classification of Owner-Furnished Subsurface Data as part of Contract Documents, or merely as Reference Information Documents

• Disclaimers, Defense and Indemnification Obligations of Design-Builder as to Deficiencies in Owner-Furnished Design Criteria, Standards or Technical Details and Requirements

See Appeals of – John C. Grimberg Co., Inc., No. 58791, 2018 WL 611 3411 (Armed Serv. B.C.A. 2018), appeal pending Fed. Cir. (2-28-19).(Ruling that a FAR – mandated DSC provision applied on a DB contract even though the contractor contractually assumed design adequacy risk).

Scenario 3: Design-Builder Professional Liability Claims Against Its Consulting Engineer Subconsultant(s) in Scenarios 1 and 2?

17

Page 18: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB: Subsurface Conditions and Design Adequacy Risk Allocation

• DB Risk Allocation Approaches:– Subsurface Conditions– Final Design Adequacy

18

Page 19: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB: Subsurface Conditions Risk Allocation

DB: Subsurface Conditions Risk AllocationSignificant Variations in Approaches For example:• Owners may furnish sufficient or insufficient subsurface data and

evaluations.• Owners may disclaim (in whole or in part) the Design-Builder’s right to rely

upon Owner-furnished subsurface data and evaluations.• Subsurface information and reports may be classified as “Contract

Documents,” or merely as “reference information documents,” with non-reliance and other (more or less specific) disclaimers as to the latter.

• The “Contract Documents” may or may not include a Geotechnical Data Report (“GDR”), or a Geotechnical Baseline Report (“GBR”), with differing orders of precedence or priority assigned to those reports.

19

Page 20: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB: Subsurface Conditions Risk Allocation

DB: Subsurface Conditions Risk Allocation

• The Contract Documents may or may not include a DSC or other provision for subsurface conditions risk sharing.

• The Contract Documents may contain a provision stating that the Owner’s acceptance of the Design-Builder’s alternative technical (design) concept may or will alter the otherwise governing risk allocation regime for subsurface conditions.

• Scope validation approach• Progressive DB

20

Page 21: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB: Subsurface Conditions Risk Allocation

DB: Absolute Risk Transfer Perspective:Rationalizations

• Owner Cost Certainty• FIDIC Silver Book Approach• Design-Builder Responsibility for Design Adequacy • Disclaimers as to Subsurface Conditions Risk and Design Adequacy• Design-Builder Responsibility for Subsurface Conditions Investigation and

Evaluation• Explicit (Contractual) or Implied Design-Builder Responsibility

21

Page 22: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB: Subsurface Conditions Risk Allocation

Some Questions and Thoughts:

DBB: Imbalanced Subsurface Conditons Risk Allocation• Conventional Rationales for Risk Sharing

– Promote Qualified and Competitive Bid Submissions– Eliminate/Reduce Undisclosed Contingencies in Bid Pricing

DB: Imbalanced Subsurface Conditions Risk Allocation• Do the Conventional DBB Rationales Apply?

– Reduced Competition?– Higher Bid Prices?– Adequate Contingency?

22

Page 23: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB: Subsurface Conditions Risk Allocation

What are the implications of these potential DBB v. DB distinctions for:• Owner Decisions as to Subsurface Conditions Risk Allocation in DB?• Design-Builder Profitability on Major Subsurface Projects with Imbalanced

Risk Allocation Provisions?

Subsurface Conditions Risks = Cost/Time Impacts• Are there genuinely any significant subsurface conditions risks that are

cost/time neutral?• Is it simply and realistically a matter of who bears the cost/time impacts and

when the subsurface conditions risks materialize?

“The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings.” Shakespeare, Julius Caesar (i, ii, 140-141).

23

Page 24: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB: Design Adequacy Risk Allocation

DB: Risk Allocation for Final Design Adequacy• Contractual Expectation – Design-Builder is responsible for adequacy,

accuracy and suitability of final design, and compliance with Owner-mandated criteria and standards

• The Contract Documents will likely (more or less specifically) disclaim Owner responsibility for design included in the RFP or otherwise furnished to the Design-Builder.

• The Owner-furnished design may be conceptual or preliminary in character; or significantly more detailed, mandated, and prescriptive in character.

• Under the Contract Documents, the Owner may accept some degree of risk and responsibility for certain portions of the design (e.g., prescriptive design) that it furnishes to the Design-Builder; or, alternatively, elect to transfer to the Design-Builder all risk and responsibility for the adequacy of the final design.

24

Page 25: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB: Subsurface Conditions Risk Allocation

DB: Risk Allocation for Final Design AdequacyDisplacement of Contractual Risk Allocation: - The Owner may retain or assume design adequacy risk and responsibility in the following circumstances:

• Overly prescriptive design criteria or standards• Relatively high degree of design development• Imposed limitations on scope of subsurface investigation• Mandated or directed characterization of subsurface conditions for design

or construction purposes• Broad scope of review/rejection over DB Team’s design submittals• Unwarranted intrusion or interference with DB Team’s design discretion,

judgment or prerogatives• Mandated or prescriptive construction means/methods and equipment

25

Page 26: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

26

MBTA Greenline Extension DB Project, Massachusetts

• Subsurface Conditions Risk Allocation- Article 15.7 – Differing Site Conditions

“15.7.1 Site Investigation and Due Diligence Activities

15.7.1.1 DB Entity has, prior to submitting the Proposal, in accordance with Good Industry Practice, (i) reviewed geotechnical information, (ii) visually inspected and examined the Site and surrounding locations to the extent accessible but without undertaking any destructive or subsurface investigations, and (iii) undertaken other appropriate activities sufficient to familiarize itself with surface conditions and subsurface conditions affecting the Project to the extent DB Entity deems necessary or advisable for performing its obligations under the Contract Documents, but only to the extent such conditions were accessible for visual inspection or were shown in the information supplied by the MBTA, and without undertaking destructive or independent investigation of subsurface conditions. As a result of such review, inspection, examination and other activities, DB Entity is familiar with and accepts the physical requirements of the Work. DB Entity acknowledges and agrees that it has been afforded the opportunity to review information and documents and to conduct visual inspections of the Site and surrounding locations, and that such information has provided an adequate background on the condition of the Site enabling DB Entity to develop the GLX Lump Sum and Additive Options Price. DB Entity’s activities as described in this Section 15.7.1.1 (“Due Diligence Activities”) included the following:

(a) reviewing available geotechnical and subsurface information provided to DB Entity by the MBTA;

Page 27: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

27

MBTA Greenline Extension DB Project, Massachusetts

• Subsurface Conditions Risk Allocation- Article 15.7 – Differing Site Conditions

(b) reviewing available as-built information regarding existing structures and improvements provided to DB Entity by the MBTA;(c) participating in Site visits;(d) recommending specific testing or exploratory measures to be performed b the MBTA and reviewing the results of such testing or exploratory measures to the extent provided to DB Entity by the MBTA; and(e) reviewing, understanding and establishing pricing that takes into account the descriptions in Section 15.7.1.2 of the types of conditions that are ordinarily encountered and generally recognized as inherent in work of the character provided for in the plans and Contract Documents.

15.7.1.2 As a result of the Due Diligence Activities, DB Entity agrees that the following conditions are ordinarily encountered at the Site during the performance of the Work and generally recognized as inherent in the Work, and that the GLX Lump Sum, Additive Options Price and Milestone Deadlines take into account and include all cost and time impacts for encountering such conditions:

(a) soil strata elevations variations of plus or minus five (5) feet than those shown on the Contract Documents or Reference Information Documents;(b) top of rock elevations variations range of plus or minus five (5) feet than those shown on the Contract Documents or Reference Information Documents;(c) rip-rap, seawalls or old foundation elements wherein the volume removed in any one location is three (3) cubic yards or less;

Page 28: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

28

MBTA Greenline Extension DB Project, Massachusetts

• Subsurface Conditons Risk Allocation- Article 15.7 – Differing Site Conditions

(d) abandoned rail ties and track;(e) abandoned sewer, water or drain lines that are equal to or less than 12 inches in diameter;(f) abandoned earth support and utility support systems components equal to or less than one (1) cubic yard in

diameter;(g) boulders that are less than three (3) cubic yards in size;(h) water table elevations that vary up to 10 feet from the elevations indicated in the Contract Documents or

Reference Information Documents;(i) existing utility locations, including signal and power lines, depicted in the Contract Documents or Reference

Information Documents which are determined to be located within three (3) feet (in any direction) of the locations identified in the Contract Documents or Reference Information Documents, provided, however, that this clause (i) shall not prejudice DB Entity’s rights to claim a differing site conditions pursuant to Section 15.7.2 for existing utilities that are depicted in neither the Contract Documents nor the Reference Information Documents; and

(j) surface water in the area within the Millers River watershed that accumulates on account of rain events.

Page 29: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

29

MBTA Greenline Extension DB Project, Massachusetts

• Subsurface Conditions Risk Allocation- Article 15.7 – Differing Site Conditions

15.7.1.3 DB Entity acknowledges and agrees that Section 15.7.1.2 does not provide an exhaustive list of those conditions that may be ordinarily encountered at the Site during the performance of the Work or generally recognized as inherent in the Work, and that DB Entity has the burden of proving entitlement to any adjustment to the Change Order Value or Milestone Deadlines for other conditions encountered at the Site in accordance with Section 15.7.2.

15.7.2 Differing Site Conditions Claim15.7.2.1 If during the progress of the Work, DB Entity or the MBTA discovers that the actual subsurface or latent

physical conditions encountered at the Site differ substantially or materially from those shown on the plans or indicated in the Contract Documents, either DB Entity or the MBTA may request an equitable adjustment in the Change Order Value applying to Work affected by the differing site conditions. A request for such an adjustment shall be in writing and shall be delivered by the Party making such claim to the other Party as soon as possible after such conditions are discovered. Upon receipt of such a claim from DB Entity, or upon its own initiative, the MBTA shall make an investigation of such physical conditions, and, if they differ substantially or materially from those shown on the plans or indicated in the Contract Documents or from those ordinarily encountered and generally recognized as inherent in work of the character provided for in the plans and Contract Documents and are of such a nature as to cause an increase or decrease in the cost of performance of the Work or a change in the construction methods required for the performance of the Work which results in an increase or decrease in the cost of the Work, the MBTA shall make an equitable adjustment in the Change Order Value or Milestone Deadlines and this DB Contract shall be modified in writing accordingly.

Page 30: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Subsurface Conditions Risk AllocationObservations

• Proof of entitlement for a DSC depends upon substantial or material difference in encountered conditions from those indicated in the “Contract Documents” (¶15.7.2, Vol. 1 DB Contract)

• Definition of “Contract Documents”, ¶1.2.1(b) excludes Reference Information Documents”

• “Reference Information Documents” includes Geotechnical Reports and Testing Data (Exhibit 1B, Sections 15.2, 15.3)

• MBTA has disclaimed accuracy or completeness of Reference Information Documents and negates on Right to Rely upon same. (Vol. DB Contract, ¶¶3.1.1, 3.1.2 and 3.1.3).

• G.L. c. 149A, §20(d) Mandates Inclusion of a DSC Provision• DSC Equitable Adjustment Contractual Relief – Significantly Illusory?

30

Page 31: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Risk Allocation for Final Design Adequacy

• SECTION 2. SCOPE OF WORK; SCHEDULING OF WORK; WORK RESTRICTIONS; ROLE AND RESPONSIBILITIES OF PARTIES

• 2.8 DB ENTITY OBLIGATIONS• 2.8.3 Subject to DB Entity’s rights and remedies under Section 15, DB Entity

shall be responsible for the following as part of the Work:• (a) DB Entity shall correct any errors, omissions, inconsistencies and other

defects in the Technical Provisions so as to ensure that DB Entity’s Release for Construction Submittals and Final Design Documents, for which DB Entity and its Architects of Record and Engineers of Record bear sole responsibility, satisfy the requirements of the Contract Documents and provide a constructible design in all respects.

31

Page 32: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Risk Allocation for Final Design Adequacy• 3.1.2 The MBTA does not represent, warrant or guarantee the accuracy or completeness of the

Reference Information Documents or the information contained in the Reference Information Documents or that such information is in conformity with the requirements of the Contract Documents, Governmental Approvals or Laws. The MBTA shall not be responsible or liable in any respect for any causes of action, claims or losses by DB Entity or other Person by reason of any use of information, opinions or recommendations contained in, any conclusions DB Entity or other Person may draw from, or any action or forbearance in reliance on, the Reference Information Documents.

• 3.1.3 DB Entity is obligated to conduct all studies, analyses, and investigations as it deems advisable to verify and supplement information in the Reference Information Documents. Any use of information in the Reference Information Documents in performance of the Work is at DB Entity’s own risk. To the extent DB Entity uses such information in the Reference Information Documents in any way, such use is made on the basis that DB Entity, not the MBTA, has approved and is responsible for said information.

32

Page 33: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Risk Allocation for Final Design Adequacy

• 3.1 REFERENCE INFORMATION DOCUMENTS• 3.1.1 The MBTA has provided the Reference Information Documents to DB Entity.

Reference Information Documents are not Contract Documents and are provided solely for the purposes of disclosure.

33

Page 34: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Risk Allocation for Final Design Adequacy3.3 ACKNOWLEDGMENT BY DB ENTITY

DB Entity acknowledges that it has full responsibility for the design and construction of the Project, regardless of the fact that the MBTA has supplied certain preliminary design work for certain portions of the Project to the DB Entity. DB Entity acknowledges that it has diligently reviewed and verified the Technical Provisions for errors, omissions, inconsistencies or other defects, and, subject to DB Entity’s rights and remedies under Section 15, has incorporated into the GLX Lump Sum and Additive Options Price all costs associated with correction of any such errors, omissions, inconsistencies and other defects. DB Entity specifically acknowledges and agrees that:(a) the Technical Provisions were developed to establish the minimum baseline requirements that shall be equaled or exceeded by DB Entity. DB Entity further acknowledges that while some of these documents have been advanced to a significant level of development, DB Entity is required to provide Release for Construction Submittals and Final Design Documents that are stamped, sealed and certified by its own Massachusetts Registered Architect and Professional Engineer of Record (as applicable) for review and acceptance by the MBTA and possible third parties, and that DB Entity is responsible for the constructability of the Release for Construction Submittals and Final Design Documents;

34

Page 35: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Risk Allocation for Final Design Adequacy

(b) the MBTA does not warrant the adequacy of the Technical Provisions, the RIDs or the other RFP Documents, and DB Entity's reliance upon such documentation and the information therein shall be at DB Entity's sole risk; (c) the Project can be constructed as contemplated by the Contract Documents and within the properties made available by the MBTA....;(d) the MBTA shall have no responsibility or liability for errors, omissions, inconsistencies or defects in the Contract Documents;(e) DB Entity shall bear responsibility and liability for errors, omissions, inconsistencies and defects in the Contract Documents;(f) DB Entity has independently determined that the Technical Provisions present a feasible concept for the Project and can and shall be used as the basis for the design, construction and completion of the Project, and agrees that it shall have no right to seek additional compensation or a time extension to a Milestone Deadline based on any errors, omissions, inconsistencies or other defects in the Technical Provisions;

35

Page 36: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Risk Allocation for Final Design Adequacy

• (g) DB Entity’s Warranties and indemnities hereunder cover errors, omissions, inconsistencies and defects in the Project even though they may be related to errors, omissions, inconsistencies or defects in the Technical Provisions.

36

Page 37: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Risk Allocation for Final Design Adequacy

15.4 DB ENTITY INITIATED CHANGE ORDERS15.4.2 Price Adjustments15.4.2.1 Subject to strict compliance with the requirements of this Section 15.4 and any other applicable requirements and limitations set forth in the Contract Documents, DB Entity may request a Change Order for increased costs in the Work directly caused by the following events or circumstances (“Compensable Event”):…(m) correcting defects in any prescriptive requirements in the Mandatory Specifications; provided that: (i) DB Entity could not have discovered such defects through the exercise of reasonable diligence in accordance with Good Industry Practice prior to execution of this DB Contract; (ii) DB Entity discovered and corrected such defects by no later than submission of the Intermediate Design Submittal for the applicable portion of the Work; and (iii) DB Entity’s recoverable costs are limited to those design and construction costs necessarily incurred to correct the defects in prescriptive requirements in the Mandatory Specifications and were independent of DB Entity’s other Work.

37

Page 38: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

MBTA Greenline Extension DB Project, Massachusetts

• Risk Allocation for Final Design Adequacy

23.0 INDEMNIFICATION AND RELEASES23.1 INDEMNIFICATIONS BY DB ENTITYSubject to Section 23.2, DB Entity shall release, defend, indemnify and hold harmless MassDOT, MBTA .... the “Indemnified Parties”) from and against....…(i) any claims, damages, losses, liabilities and costs, including attorneys’ fees, arising out of, relating to or resulting from errors, omissions, inconsistencies or other defects in the Work, regardless of whether such errors, omissions, inconsistencies or defects were also included in the Technical Provisions, subject to DB Entity’s rights and remedies under Section 15.

38

Page 39: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB Risk Allocation Recommendations

• DB does not require total design and subsurface conditions risk transfer from Owner to Design-Builder

• Appropriate project-specific risk sharing should be contractually-defined and stipulated

• Actual performance of parties should conform to contractual risk allocation terms and underlying principles

• Appropriate balancing of the dynamics, interdependencies and interrelationship factors for subsurface conditions and design adequacy risks

39

Page 40: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB Risk Allocation Recommendations

• Achieving effective and balanced risk allocation in DB subsurface projects is challenging and complex, significantly more so than in DBB.

• In many contemporary DB risk allocation schemes seemingly precise and autonomous risk allocation boundaries (or triggers) for subsurface conditions and design adequacy risks often ignore the realities, impacts, and influences of their interrelationships and interdependencies.

• An insular and fragmented approach to subsurface conditions and design adequacy risk allocation interposes artificial and imprudent boundaries; and, consequently, will likely not produce effective or balanced risk allocation decisions in DB.

• A more integrated, concerted, cohesive, comprehensive and contractually transparent and documented approach to risk allocation is indicated so as to produce a substantially improved and more effective and balanced result.

40

Page 41: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB Risk Allocation Recommendations

• Fair and Balanced Risk Allocation critically depends on the following components:– The Owner’s furnishing to tenderers adequate subsurface data and evaluations;– The Design-Builder’s ability to rely upon and use that data and evaluations and, as

appropriate, having adequate time to conduct its own investigations and evaluations;– The Design-Builder’s adequate opportunity and time to preliminarily develop its permanent

design basis approach to a level sufficient to validate the suitability, compatibility and constructability of that design in the anticipated subsurface conditions; and

– The Owner’s willingness to contractually commit to sharing with the Design-Builder subsurface conditions risk.

• There is no precisely correct or prescriptive risk allocation approach, nor one that is universally applicable to all of the variable project-specific factors inherent in DB subsurface projects.

41

Page 42: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB Risk Allocation Recommendations

• Improvement of risk allocation in DB subsurface projects depends upon the underground industry’s enhanced receptivity and capacity to acknowledge, understand and balance subsurface conditions and design adequacy risks, with due consideration to the respective and differing roles, responsibilities and interests of the Owner and Design-Builder.

• One of the few certainties is that DB risk allocation will remain controversial; but a subject that needs to be confronted and candidly discussed, especially among those in the industry; and in a manner that encourages and fosters new ideas and robust dialogue, and balanced consensus transcending purely partisan interests.

• To not do so will, with parallel certainty, exacerbate the complication, frustration, and risk for all involved.

42

Page 43: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

DB Risk Allocation Recomendations

Sources:• D. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for

Consulting Engineers, Chapter 11, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, Washington: American Council of Engineering Companies (3d ed., 2020).

• Essex, R., Hatem, D., Reilly, J., “Alternative Delivery Drives Alternative Risk Allocation Methods,” North American Tunneling, Washington, D.C., 24-27 (2018)

• N. Munfah, Controlling Risk of Tunneling Projects Implemented by Alternative Delivery Method, Society for Mining, Metallurgy & Exploration (2019)

• D.J. Hatem, Subsurface Conditions and Design Adequacy Risk Allocation in Design Build: Dynamics, Interactions and Interdependencies, Tunnel Business Magazine, October 2018

• D. Gransberg, Managing Geotechnical Risks in Design-Build Projects, NCHRP Project No. 24-44, Transportation Research Board (2018)

• Gransberg, D., Guidelines for Managing Geotechnical Risks in Design-Build Projects, NCHRP Research Report 884, Transportation Research Board (2018)

43

Page 44: Perils of Fixed Price Contracting: Imbalanced Subsurface ... · Perils of Fixed Price Contracting: Imbalanced Subsurface Conditions Risk Allocation on Design- ... – Design of permanent

Contact Information

David J. Hatem, [email protected] Direct: 617-406-4800Donovan Hatem LLPExchange Place53 State StreetBoston, MA 02109

Donovan Hatem LLP © 2020

44


Recommended