April 28, 2011

Public agencies warm up to design-build projects

Hernandez

Collaboration between firms in design-build construction projects yields substantial benefits, and government agencies are taking notice.

Public design-build projects are becoming more prevalent across the country due to the time and money savings they usually provide an owner. These benefits are the result of a firm’s collaboration with project experts and consultants.

Lawmakers are poised to make it easier for the Washington State Department Transportation to award design-build contracts. Although usually reserved for complex and high-budget projects like the planned bored tunnel near the Seattle waterfront, pending legislation would allow WSDOT to use design-build contracts for significantly smaller projects.

Should it become law, the legislation would reduce the minimum threshold for design-build contracts from $10 million to $1 million. Thus more construction and design firms would be partnering to provide design-build services.

Before agreeing to collaborate with other firms to submit a design-build construction bid and/or carry out the actual work, construction and design firms alike should be aware of the unique and unfamiliar risks inherent in such collaboration and in design-build project delivery.

Unlike with the traditional design-bid-build project delivery method, where separate contracts and teams are responsible for each portion of the work, the design-build approach eliminates the option of blaming the “other party” when something goes wrong. A design professional can no longer point a finger at the contractor when mistakes and delays arise; and the contractor won’t be able to accuse the design professional when design defects cause problems.

To account for these risks, it is critical that design-build team members carefully define their relationships to one another, as well as their individual roles and responsibilities with regard to one another and the project. This can and should be done in the team’s governing documents.

Risk management

To manage the unique risks in a design-build project, a design-build team will likely form a single-purpose entity such as a limited liability company, S corporation, or joint venture. Although the method of forming each of these single-purpose entities differs, the governing documents and agreements must define team member roles and allocate risk fairly to an extent it reflects the risk tolerance of each team member.

Team members may face unfamiliar risks in a design-build project. For example, a construction firm may be exposed to defective design risks, or a design firm may be exposed to defective construction or occupational hazards. A good insurance program is thus also critical.

A contractor’s insurance policy usually excludes coverage for design defects, and an architect’s or engineer’s errors-and-omission policy usually excludes coverage for construction defects. Some insurance policies do not cover losses as a result of acts performed by its policyholder as part of a joint venture. Endorsements and other insurance programs may help address gaps in insurance coverage, and indemnity provisions within the teaming documents become crucial.

Teaming agreements — a commonly used contract whereby a prime contractor and subcontractor agree to combine resources to submit a project bid — offer a good vehicle to enlist sub-consultants with unique expertise and local knowledge. A design-build partnership will often even prepare two teaming agreements between each team member: One to address the planning and submission of the bid; and the other to address the roles and obligations of team members should the venture be awarded the contract.

Firms should be aware that teaming agreements may be regulated in some manner, especially on federal projects and/or where small or disadvantaged business entities are involved.

An extreme example of how teaming agreements are scrutinized by agencies involves a Skanska sister company in New York. The company agreed to pay over $19 million to resolve an investigation stemming from its teaming arrangement with a small business posing as a minority and women-owned enterprise. Considering such cases, firms must take steps to manage teaming agreements according to the terms of the agreement and the law.

Turning again to the bored-tunnel project as an example, the design-build team that was awarded the contract — Seattle Tunnel Partners — is a joint venture comprised of two large design-build firms with strong international experience. Once established, it then contracted with various specialty sub-consultants with unique expertise in certain aspects of the project. Such team building helps minimize costs and delays due to being included early in the project — a unique feature of a design-build project delivery.

Licensing issues

In addition to risk allocation and management, there are other issues that a design-build entity should plan for and address. For instance, it is important to determine how licensing will be addressed.

Architects, engineers, contractors and other project professionals are governed by different licensing laws. Other considerations include: which team member will be responsible for advancing the owner’s objectives and requirements; which team member will receive and process payment; how cost overruns will be allocated among the venture; and who will own any intellectual property generated as a result of the project.

The benefits of a design-build team are substantial. In any such arrangement, all of the issues mentioned above should be addressed, and done so in a way that maintains the collaborative environment inherent in such an approach.

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