The Seven Legal & Business Issues Unique to Design-Build

By:

Mark C. FriedlanderPartner

Schiff Hardin LLPConstruction Law Group

Definition of Design-Build

• Design Professional and Contractor are “on the same team.”

• Fallacy: NOT a single contract for both design and construction

• Design-Build may involve multiple “back-to-back” contracts comprising a complete project

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Seven Legal Issues Unique to Design-Build• Relationship of the parties• Standard of care of design work• Availability of performance warranties• Entitlement to change orders• Unique licensing problems• Unique insurance/bonding problems• Unique problems with competitive bidding

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Seven Legal Issues Unique to Design-Build• Relationship of the parties• Standard of care of design work• Availability of performance warranties• Entitlement to change orders• Unique licensing problems• Unique insurance/bonding problems• Unique problems with competitive bidding

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Types of Design-Build Relationships

• Integrated Company• Contractor Prime, Engineer Sub• Engineer Prime, Contractor Sub• Engineer Prime, Multiple Trade Subs• Design-Builder Prime, Engineer and

Contractor each Subs• Joint Business Venture by Engineer and

Contractor

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Issues for Design-Build Teaming AgreementsI. Structure of the Team.

A. Structure of the Business Relationship1. One party prime, and the other as subcontractor2. Joint business venture:

a. Legal structure of venture: joint venture (partnership), corporation, limited liability company

b. Organization and control of the joint business venturec. Capitalization and financial issues

3. Lines of Communication

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Issues for Teaming Agreements (Cont’d)

II. Sharing of Risks and RewardsA. Compensation

1. Amount2. Timing of payment3. Conditions

B. Project Profits and Losses1. Allocation of savings if project exceeds goals2. Allocation of losses if project fails to meet goals

C. Other Risks and Rewards1. Identify and describe each2. Allocate consequences between the parties

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Issues for Teaming Agreements (Cont’d)

III. Design Phase Services (that may be different from traditional projects)

A. Services Provided by the Contractor1. Costing, estimating2. Value engineering3. Assistance in analyzing owner-provided information4. Constructability analysis5. Preliminary scheduling6. Checking design to anticipate problems7. Acquisition of long-lead items8. Procuring subcontractor participation and quotes9. Negotiation with subcontractors/vendors

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Issues for Teaming Agreements (Cont’d)

B. Services Provided by the Engineer1. System-by-system design, with “looping” feedback from

trade contractors2. Informal communications rather than “defensive detailing”3. Greater (lesser) number of alternative designs4. MEP design only schematic, completed by trade

contractors5. Acceptance of greater-than-usual price constraints6. Out-of-sequence provision of design details7. Heavier reliance on performance specifications

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Issues for Teaming Agreements (Cont’d)

IV. Construction Phase Services (that may be different from traditional projects)

A. By the Contractor1. Anticipation and avoiding or minimizing the consequences of

design problems2. Fast-tracking the construction

B. By the Engineer1. Informal provision of supplemental design information2. Cooperative approval of substitutions3. Cooperative trouble-shooting and problem-solving

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Issues for Teaming Agreements (Cont’d)

V. Protective Business ProvisionsA. Confidentiality of InformationB. Exclusive Relationships or Agreements Not To

CompeteC. Future Marketing/Sales Efforts

1. Responsibility of each party2. Provisions regarding mutual commitment,

exclusivity

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Issues for Teaming Agreements (Cont’d)

VI. Risk TransferenceA. Insurance Provisions

1. Coverage to be procured by each party, including limits, terms, etc.

2. Allocation of cost of insurance

B. Surety Bonds (if any)1. Description of bonds to be procured, by whom, terms,

etc.2. Provisions for allocating cost of bonds

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Issues for Teaming Agreements (Cont’d)

C. Indemnity Provisions1. Engineer to indemnify contractor for claims

arising out of breaches of Engineer’s duties2. Contractor to indemnify Engineer for claims

arising out of breaches of Contractor’s duties3. Provisions for cooperative defense or splitting

costs of claims common to both parties4. Provisions for indemnification by others

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Issues for Teaming Agreements (Cont’d)

VII. Dispute ResolutionA. Commencement of the Dispute Resolution Process

1. For claims initiated by or involving third parties, dispute process not to begin until third party aspects of claim are resolved

2. Provision tolling statute of limitations for claims involving third parties

B. Sequence of Dispute Resolution Actions1. Step negotiations between senior management2. Non-binding mediation3. Binding arbitration (or court litigation)

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Seven Legal Issues Unique to Design-Build• Relationship of the parties• Standard of care of design work• Availability of performance warranties• Entitlement to change orders• Unique licensing problems• Unique insurance/bonding problems• Unique problems with competitive bidding

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Problem of the Flow-Down Warranty• Design-Builder typically warrants results to

Owner• But A/E’s are only held to a “standard of

care”• Design Professionals’ warranties are not

insurable• Design-Builder has narrow “window of

liability” that can’t be passed downstream

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Seven Legal Issues Unique to Design-Build• Relationship of the parties• Standard of care of design work• Availability of performance warranties• Entitlement to change orders• Unique licensing problems• Unique insurance/bonding problems• Unique problems with competitive bidding

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Central Illinois Tire Processing Facility: Financeable Only Via Design-Build• Burning tires yield “carbon black” plus energy• Construction to be financed by sale of municipal bonds• Bond underwriter required engineer or contractor to

guarantee performance– Contract would quantify $ value of shortfall in kilowatt hours– Performance shortfall would be assessed as liquidated damages

• Neither Engineer nor Contractor could warrant performance because problem might be within the other’s scope

• Design-Build team could warrant performance because design, procurement and construction all within scope

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New Jersey Wastewater Treatment Facility: Exception to Full Scope• Turnkey contract using patented process to clean

wastewater and produce fertilizer• Facility failed: liquids solidified and “gummed up”

mechanical machinery• Municipality sued design-builder since design, process,

procurement and construction all within its scope• But the cause of problem was that the average size of

particulate matter in wastewater significantly exceeded contractual feedstock parameters

• Owner was contractually responsible for feedstock

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Seven Legal Issues Unique to Design-Build• Relationship of the parties• Standard of care of design work• Availability of performance warranties• Entitlement to change orders• Unique licensing problems• Unique insurance/bonding problems• Unique problems with competitive bidding

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Three Kinds of Change Orders

StandardConstruction

Design-Build

Scope Changes:- By Owner- By Municipality

√√

√Possibly

Surprises:- Force Majeure Events- Concealed Conditions

√√

√Possibly

Design Errors or Omissions √ No

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Seven Legal Issues Unique to Design-Build• Relationship of the parties• Standard of care of design work• Availability of performance warranties• Entitlement to change orders• Unique licensing problems• Unique insurance/bonding problems• Unique problems with competitive bidding

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Licensing Issues• Licensing is a state function; rules are

different in each state• Design-Builder typically must have a design

professional license and a contractor’s license

• Laws and regulations often permit Design-Builder to subcontract to (or employ) licensed individuals/companies

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Seven Legal Issues Unique to Design-Build• Relationship of the parties• Standard of care of design work• Availability of performance warranties• Entitlement to change orders• Unique licensing problems• Unique insurance/bonding problems• Unique problems with competitive bidding

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Insurance/Bonding Problems Largely Resolved

• Design-Builder wants to insure professional liability risks– Can rely on Engineer’s E&O policy plus indemnity– Contractors can now purchase their own E&O

insurance• Performance bonds have evolved to include

professional obligations in design-builder’s scope if design professional is properly insured

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Seven Legal Issues Unique to Design-Build• Relationship of the parties• Standard of care of design work• Availability of performance warranties• Entitlement to change orders• Unique licensing problems• Unique insurance/bonding problems• Unique problems with competitive bidding

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Issues With Competitive Bidding

• Design-Build generally is not compatible with competitive bidding– Often the trades and vendors can be competitively bid– Exception: competitive proposals, but “apples & oranges”

• Problems with competitive proposals– Engineer’s contribution to proposal is disproportionate– Rarely any (or sufficient) stipend for unsuccessful proposals– Sparkman problem: too many proposing teams– Solution: shortlist based on qualifications

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For More Information Contact:Mark C. Friedlander

Schiff Hardin LLP233 South Wacker Drive

Suite 6600Chicago, Illinois 60606

(312) 258-5546/Fax: (312) 258-5600mfriedla@schiffhardin.com

http://www.schiffhardin.com/design-build/

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