Risk Allocation Design Build

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Risk Allocation in Design-Build

Construction Projects

October 2003

Written By:

Mark C. Friedlandert [email protected]

SCHIFF HARDIN LLP6600 Sears TowerChicago, Illinois 60606

t 312.258.5500f 312.258.5600

www.schiffhardin.com


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IntroductionA few years ago, I served as a member of the Committeeon Outsourcing of Design and Construction ManagementServices for Federal Facilities, sponsored and organizedby the National Research Council. Part of the work of theCommittee was to interview representatives of numerousfederal agencies to determine their intent and goals for theconstruction projects for which they were responsible, aswell as their assessment of how successful or not pastprojects had been in achieving those goals. The Committeeinterviewed a fairly large cross-section of federal agencies:military and civilian, large and small, high tech and lowtech.

Ultimately, a fairly clear consensus seemed to emerge with

regard to the agencies objectives and concerns about theirconstruction projects. Three issues arose time and again.The first issue was the duration of the projects fromconception to completion: accelerating the process andavoiding delays. The second issue was a desire for greatercost certainty and control. The third issue was a desire toavoid what has come to be known as claims contracting,in which a contractor bids the project at an unrealisticallylow number expecting to make up its profit on changeorders. The agencies were concerned about this practicefrom both a cost and quality standpoint, as well as the drainon their own internal management resources.

More recently, I gave a video conference for several

Midwestern municipalities from which I received similarfeedback. Their concerns echoed the comments of thefederal agency representatives. Not surprisingly, all of themwere concerned about the speed, quality and cost of theirconstruction projects.

Of course, these concerns are typical of private sectorconstruction projects as well. The private sector, lessconstrained in its procurement of construction services, hasbeen leading a significant trend toward reduced reliance ontraditional construction project delivery methods. Inparticular, there has been a phenomenal increase in theuse of design-build methods of project delivery in anattempt to better meet the three objectives of speed, quality

and cost.

Design-build construction involves a single entity or teamthat contracts both to design and construct the project.Design-build contracts are not competitively bid in thetraditional sense although, particularly in public projects,the ownership entity often requests competitive proposalsfrom multiple design-builders. Statistics show that design-build project delivery methods have gained such popularity

that, if trends continue, they will become the majorityproject delivery method by the middle of this decade.

The purpose of this paper is to discuss, in a theoreticalframework, how risk allocation in design-build projectsdiffers from risk allocation in more traditional constructionprojects. For purpose of usefulness and simplicity, the firsthalf of this paper will subdivide the risks into the threecategories of greatest concern speed, quality and cost and will demonstrate how design-build methods aresuperior at achieving these objectives. The second half ofthis paper will examine one of the design-build modelcontract forms that has recently been published, and willanalyze its key terms in a chart-type format to illustrate howit allocates the various risks between the owner and thedesign-builder.

Speed in Project DeliveryIn traditional construction projects, a design professionalprepares a complete set of construction documents, whichare then bid or priced. The owner then selects aconstruction contractor who proceeds to build the project.Ordinarily, the bidding/pricing phase does not begin untilthe construction documents are complete, and theconstruction phase does not begin until the bidding/pricingphase is complete. The length of time from project initiationto completion is often longer than owners desire.

Several variations of these procedures have been andcontinue to be used in order to try to reduce overall project

duration. Some construction projects are fast-tracked,which means that construction commences while the finalfinishing details are still being added to the constructiondocuments. A less aggressive alternative is to bid or pricethe project from scope documents (construction documentswhich are approximately 70% complete) so that thebidding/pricing phase considerably overlaps the end of thedesign phase. Although both of these variations do reduceoverall project duration by creating overlap between thevarious phases, a common criticism of these variations isthat cost control suffers because, as the constructiondocuments are being completed, prices may changebeyond what the owner and design professional expect.

Fast-tracked projects are notorious for being prone tochange orders and claims.

Design-build presents an ideal structure for fast-tracking.The designer and constructor are the same entity or on thesame team. At least from the owners perspective, there isno issue of communications between them or of eachproperly understanding the others intent. In fact, a greatdeal of the communication of design intent between thedesign professional and the contractor is face-to-face or


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Design-build methods of project delivery involve a simplerand more logical method of assuring project quality.Instead of fragmenting responsibility of quality between

design professional and contractor, each owing separateduties to the owner, the design-builder assures projectquality by warranting the performance of the completedproject. By combining design and constructionresponsibility into a single entity or team, design-buildensures that there will be a party with sufficientresponsibility for the overall project that it can and oftendoes warrant the successful performance of the project.This overall project warranty is both implied as a matter oflaw and also explicitly written, usually in greater detail, intomost design-build contracts.

Skeptics of design-build project delivery methods oftensuggest that the absence of the architect or engineer asthe owners policeman, protecting the owner againstdefects and deficiencies in the contractors work, increasesthe owners risk of qualitative problems. Statistically theredoes not seem to be support for this position. Studies bythe Construction Industry Institute and Pennsylvania StateUniversity indicate that owners have fewer complaintsabout the quality of their design-build projects than theirtraditionally delivered projects. (The University of Reading,Englands study of design-build construction in that countryconcludes that owners subjectively believe that designquality is higher in traditional than in design-build projects;however, even this study does not suggest that there existthe qualitative construction defects that one might expect to

find as a consequence of the design professional ceasingto be the owners policeman during construction.)

Instead, design-build projects rely on detailed programsand requests for proposals (RFP) to assure the quality ofthe completed project. The owner who plans a design-buildproject, often working with a professional known as acriteria consultant, prepares a detailed program or RFPthat clearly states the objectives of the project: all of thevarious design, construction and performance criteria thatthe completed project is to attain. It is advisable that theprogram or RFP contain sufficient detail so that if theproject meets all of the criteria contained therein, the ownerwill by definition be satisfied with the quality of the project.

Not coincidentally, the program or RFP may become thebasis of the design-builders express warranty. In most welldrafted design-build contracts, the program or RFP isincorporated by reference, and the design-builder warrantsthat the completed structure will meet or exceed the criteriain the program or RFP.

Specific remedies can be devised for failure of the projectto meet one or more of the criteria. For example, in a

project to build a facility that generates electricity, it iscommon for the design-builder to warrant that the finishedplant will maintain a minimum output of a given number of

kilowatt hours per unit time. The warranty may be that thefacility will achieve this output for a certain number ofmonths after completion. Alternatively, the warranty maystate that the facility will pass a performance test at thetime of completion demonstrating that it does achieve thestated output. Furthermore, liquidated damages may beprovided for failure to achieve this or other criteria, with theamount of damages linked to the market value of theshortfall in electrical output. Such a warranty and remedy,which represent a logical and balanced allocation of risks,are not possible in traditional project delivery systemsbecause the design professional and contractor only haveresponsibility for their own work, not for the overall

performance of the facility.

Related to this concept is a change in the allocation ofresponsibility for design errors and omissions. In traditionalconstruction, the architect or engineer is not held to astandard of perfection or guarantee of adequacy in theperformance of its services. As a professional, the A/E onlypromises to perform its services with the degrees of skill,care and diligence that the average typical designprofessional, similarly situated, would employ. At least intheory, it is possible for there to be errors or omissions inthe construction documents that may be the responsibilityof the owner rather than of the architect or engineer if it canbe demonstrated that they did not result from the design

professionals negligence.

This is somewhat counterintuitive to most owners (and tovirtually all contractors) who believe that the fees that theypay to the architect or engineer entitle them to a set ofconstruction documents free of errors and omissions, andthat the A/E should be responsible for reimbursing theowner for any damages resulting from errors or omissionsin the construction documents. They do not expect adesign professional to defend the failure of the design toachieve its expected results by claiming that there wasnever a guarantee that it would do so, and there is noliability in the absence of negligence.

As a practical matter, the design risk allocated to the ownerby the absence of a warranty on the A/Es services isprobably very narrow. It is extremely rare for a factfinder todetermine that the owner suffered damages because of aproblem caused by the design yet to hold that the designprofessional is not liable for the damages to the ownerbecause the design was not negligently prepared.Nevertheless, at least in theory, this is an important riskwhich in traditional projects is allocated to the owner. Itsimportance is underscored by the fact that owners attempt


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in their contracts to require the design professional towarrant the adequacy of its design to achieve the intendedresults, and by the limitations and exclusions in typical

professional liability policies which stipulate that there is nocoverage for an A/E who is accused of breaching such awarranty unless the design problem resulted from anegligent error or omission.

With regard to the owner, the standard of care for designproblems in design-build projects is different. The law is notwell settled, but courts have tended to view the designprofessionals role as subsumed within the objective of thedesign-build project to produce a completed structure thatfunctions adequately. Thus, a design-builders designobligations to the owner are deemed to be subject to theimplied warranty of adequacy of services in the design-build contract. A design-builder will remain liable to theowner for the failure of the completed structure to functionadequately as a consequence of a design problem, even ifit cannot be established that the design problem resultedfrom the design-builders negligent error or omission.

The theory of design-build, whereby the owner contractswith a single party or entity to undertake completeresponsibility for a project, offers extraordinary andunprecedented opportunities for owners to shift otherbusiness risks, over and above construction risks, to thedesign-build team. I have described how design-buildallows an owner to obtain a warranty for the overallperformance of the structure. By adding additional duties to

the design-build team, the owner can transfer otherbusiness risks to the design-build team. For example, in adesign-build-maintain-operate project, the owner hires adesign-build team to design, construct, maintain and runthe ongoing operations of the structure. The design-buildteam may also be hired to finance, subdivide, develop orlease the project and/or the property.

Modern business philosophy suggests furtherconcentration of duties in the hands of the design-buildteam. Business consultants often advise their clients tofocus on their core competencies and to outsource toother companies the routine non-core tasks. For example,a company that sells widgets would probably define its core

competency as the design and marketing of the widgets,not their manufacture or distribution. It may be logical andadvisable for such a company to hire a design-build teamto finance, design, construct, operate and maintain a facilityfor constructing and distributing the widgets. It would bereasonable to require the design-build team to warrant thata minimum number of widgets of a particular quality levelwould be manufactured and distributed over a defined unitof time. Thus, virtually all risks other than those involved in

sales and marketing of the widgets can be allocated to thedesign-build team.

Many owners believe that design-build project deliverymethods offer superior opportunities for maintaining projectquality. It virtually eliminates claims contracting by puttingthe two ultimately adversarial parties, the designprofessional and contractor, on the same team, thusremoving the owner from the middle of any claims madebetween them. Defining project quality as the overallfunctioning of the structure eliminates the need to monitoror police individual events and procedures occurring in theproject, since any adverse effects that these events orprocedures have on the final project are addressable viathe project warranty. A less obvious source of qualitycontrol in a design-build project is simply the closer workingrelationship between the design professional and thecontractor in which design intent, construction informationand technical details are communicated more effectivelyand efficiently in traditional projects.

Cost ControlThe traditional design-bid-build method of project deliveryis not structured to allow an owner to obtain accurate earlycost information regarding the project. The traditionalstructure separates the designer and the constructor, anddesigners do not have access to the specific and detailedcost information that is compiled by and available tocontractors. Furthermore, in designing a project, architects

and engineers often do not take into account such issuesas ease of constructability and availability of materials.Although a design professional may be contractuallyobligated to design to a fixed limit of construction cost,often the A/E does not have the necessary constructioninformation to ensure that the bids on the contractdocuments will be within the budget.

Owners often discover that the project as designed anddrawn cannot be built within the agreed budget. However,they do not discover this information until after theconstruction documents have been completed and eventhe lowest bids are too high. Variations of the traditionalproject delivery methods have been developed in which a

contractor or construction manager works with the designprofessional during the design stages to provide greaterinput as to pricing, but this variation often is inconsistentwith the owners need or desire to competitively bid theproject. Furthermore, even detailed construction estimatesdeveloped by consultants during the design phase may besignificantly inaccurate if market conditions are differentwhen actual bids are solicited or if the estimator during thedesign phase operates on a different set of factualassumptions than those of the contractors bidding the


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project. Furthermore, the consultant providing estimatingservices during the design phases usually cannot providedefinitive numbers until the construction documents have

been significantly completed, and by then virtually all of thecritical design choices that may affect the construction costhave already been made.

By combining the design and construction functions into asingle entity or team, design-build project delivery methodsallow for much earlier cost determination. In the earlydesign phases, the architect or engineer works closely withthe contractors conceptual estimators. They jointly makethe early design decisions that may have significant impacton project cost and constructability. Even though thedocuments are at a relatively early stage, the design-buildteam develops the assumptions according to which thedesign will be completed and prices the project usingestablished techniques of conceptual estimating. Since themembers of the design-build team know that they will bethe ones responsible for completing the constructiondocuments, they have the confidence that they will havethe flexibility to do so consistent with the pricingassumptions developed during conceptual estimating.Experienced design-builders can provide firm prices with agreat deal of accuracy for sufficiently defined projects in thelate schematic and early design development phases.

Of course, it is not possible to develop accurate costinformation through conceptual estimating unless theproject scope has been sufficiently defined. This

underscores the need for owners in design-build projects tohave detailed and complete programs or RFPs that identifyall of the relevant project criteria. Many design-buildprojects undergo a preliminary phase in which the design-build team or a subset of it works closely with the owner todevelop a detailed program so that the next phase of theproject can result in a meaningfully priced proposal.

Of course, there is a trade-off between early cost certaintyand competitive pressure on pricing. It may be difficult topersuade a design-build contractor to get sufficientlyinvolved in a project to do detailed conceptual estimatingand pricing unless the contractor is assured that it willreceive the contract to build the project or at least be

favored to be awarded the project. To a more limitedextent, the same may be true of trade contractors andvendors whom the design builder involves during theconceptual stages of the project. Some owners reconcilethese competing concerns by holding design-buildcompetitions in which several design-build teams areencouraged to submit fully priced competitive proposals fora project, with the owner choosing the design-build teamthat offers the best value.

Although early cost determination is important, the ultimateaccuracy of the cost determination is at least equallyimportant. The tendency of construction projects to overrun

their initially projected budgets is well known and oftenaccepted as inevitable. It is a major goal for most owners tocontrol and limit cost overruns to the extent possible.

Cost overruns typically result from change orders or claims.On a traditional project, change orders and claims fall intoone of the following three categories: scope changes,surprises, and design problems. Scope changes mayinclude changes by the owner or those forced on theproject by an outside party, such as a regulatory agency oradjoining land owner. Changes in the surprise categoryusually arise from concealed conditions, force majeureevents, or other unexpected conditions outside the designand construction parameters. Changes on account ofdesign problems usually arise from errors, omissions,ambiguities or contradictions in the constructiondocuments.

In both traditional and design-build projects, the risk ofscope changes is usually on the owner. In both projectdelivery methods, an owner that changes its mind andimposes new requirements on the project is responsible forthe financial (and schedule) consequences of its decision.Similarly, if a regulatory agency requires a change to theproject before it will issue a permit, the owner is usuallyresponsible for the added cost, if any. However, in certaindesign-build projects which are performed on a turnkey

basis (in which the design-builder undertakes to presentthe owner with a completed, fully functioning facility), therisk of satisfying regulatory agencies and obtaining properpermits may logically and contractually be shifted to thedesign-builder.

Similarly, in both traditional and design-build projects, theowner usually bears the risk of surprises duringconstruction. Virtually all construction and design-buildcontracts contain concealed conditions clauses that entitlethe contractor or design-builder to additional compensationand/or time in the event that unusual and unpredictedsubsurface or other concealed conditions are discovered.Although it is theoretically possible to shift this risk to the

contractor or design-builder, most owners do not deem itfinancially wise to do so because of the likelihood thathigher construction prices will be quoted to insure againstsuch events. In most traditional projects, the contractor isnot sufficiently involved in the investigatory and other pre-construction phases to be charged with the responsibilityfor the kind of detailed examination of the site necessary toreduce the likelihood of concealed conditions to anacceptably low probability. However, in some design-buildprojects, the design-builders earliest services may consist


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of surveying existing conditions, taking soils borings anddoing sufficient destructive testing that it is reasonable tocontractually require the design-builder to bear the risk of

concealed conditions.

The category of change order in traditional projects that isentirely eliminated in design-build projects is that of designproblems. Since the designer and constructor are the sameentity or on the same team, it is nonsensical for the design-builder to claim entitlement to additional cost or time as aconsequence of its own design mistakes. In contrast, underthe Spearin doctrine, the owner warrants to traditionalcontractors the accuracy and completeness of theconstruction documents prepared by the architect orengineer. Thus, what is probably the most common, andcertainly the most frustrating, kind of construction claim intraditional projects is completely inapplicable to design-build projects.

However, there is one situation in which design omissionsmay pose a risk to the owner in a design-build project. Adispute may develop when the design-builder refuses orneglects to build an element of the project because it is notshown on the construction documents, yet the ownerclaims that it should have been constructed because it waspart of the original criteria for the project contained in theprogramming materials or the RFP. This usually becomesa factual dispute, the resolution of which often depends onthe information in the project records. In essence, thedesign-builder claims that to add the element to the project

would be a scope change, entitling it to additionalcompensation, because the element was never part of theoriginal project criteria; whereas the owner asserts that theelement was part of the original project criteria that thedesign-builder is contractually obligated to provide, and itsabsence in the construction documents is simply a designomission for which the design-builder is not entitled tofinancial or schedule relief.

The DBIA Model Design-BuildContractsThe Design Build Institute of America (DBIA) is a not-for-

profit organization devoted to promoting the understandingand use of design build methods of project delivery. Themembers who operate and control the DBIA are the majordesign-builders in the United States. However, the DBIAsmembers also include architects, engineers, contractors,owners and others who are interested in design-build eitheracademically or for business reasons.

Recently the DBIA has published several new modelcontract forms intended to be used in design-build projects.

A few months ago, the DBIA published some related formsto be used to document the relationships among thevarious parties, such as between the design-builder and

architect and the design-builder and trade contractors. Thepurpose of the documents is to establish a fair andevenhanded contractual arrangement that reflects howdesign-build projects are actually performed.

For the most part, the documents achieve their purpose,although several of the provisions may be consideredobjectionable by some industry members. The modeldocuments are fairly flexible, useable in a large variety ofdesign-build projects in different industry niches. Given themembership of the DBIA, it is not surprising that they areslanted in favor of the design-builder, but not exceedinglyso.

The DBIA model contract documents assume that theowner will hire the design-builder under a preliminaryagreement to perform preliminary design and relatedstudies, resulting in a deliverable which would be aproposal to prepare the construction documents and tobuild the project for a stipulated sum or on a cost-plus-feebasis, possibly with a guaranteed maximum price. Thedesign-build contract forms can be used without thepreliminary agreement for those situations in which theowner has worked with a different design consultant toprepare bidding documents or preliminary designs andspecifications. Although the DBIA officially disapproves ofthe concept of bridging (when the owner and its design

consultant prepare the plans to a 30% or greater level ofcompletion, after which they are competitively bid tomultiple design-builders), the contract forms are sufficientlyflexible to accommodate such arrangements.

The design-build agreement may consist of as many asthree of the model documents: a Preliminary Agreement; aStandard Form of Agreement Between Owner and Design-Builder (either lump sum or else cost-plus-fee with anoption for a guaranteed maximum price); and StandardForm of General Conditions. The rest of this article consistsof a chart that analyzes and comments on the substance ofeach of the important provisions of the above documents,with particular emphasis on how common project risks are

allocated between the parties. Although I was formerly theChairman of the Professional Practice and ContractsCommittee of the DBIA, the opinions in the commentscolumn of the chart below are strictly my own and do notnecessarily reflect the official position of the DBIA.


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ANALYSIS OF DBIA MODEL DESIGN-BUILD CONTRACT

ProvisionNumber

Issue Substance of Provision

Preliminary Agreement Between Owner and Design-Builder

Section 1.1 Relationship Between the Parties. Agreement to cooperate and proceed on the basis of trust andgood faith.

Establishes a standa fiduciary/agency r

Section 2.1 Provision of Design Services. The Design-Builder shall comply with state licensing laws byproviding professional design services through licensedprofessionals who are either employees or independentcontractors. There is no legal or contractual relationship

between the Owner and any independent design professional.

The provision probaregulations. The procontractual relationswho is not indepen

Sections 2.2.1and 2.2.2

Owners Project Criteria. The Owner either provides the Design-Builder with its projectcriteria or else works with the Design-Builder to develop them.

The Owners Projecone of the Owners project, particularly Program.

Section 2.3 Schematic Design Documents. The Design-Builder prepares Schematic Design Documents andmodifies them in accordance with the parties discussion.

Use of the term Schreflects DBIAs posishould include only

Section 2.4 Design-Builders Proposal. The Design-Builders deliverable from this preliminary contractis a proposal to complete the design-build project. (Similar to the

AIA concept). The Proposal is to include a contract price (lumpsum or cost plus with possible GMP), a schedule andsubstantial completion date, time limit for acceptance of theProposal, and any other information necessary to enter into thefinal contract.

The Proposal must be consistent with)

Design Documents.is supposed to identOwners Project Crit


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ProvisionNumber


Preliminary Agreement Between Owner and Design-Builder

Article 5 Contract Time. Commencement is initiated by a Notice to Proceed, and thecompletion date is defined as a fixed number of days thereafter.Interim milestone dates may be added in a separate exhibit.

There is no provisio3.1 requires the OwDesign-Builder. Theessence.

Article 7 Payment. No payment procedures are specified; they are to be agreedupon by the parties. Interest commences five days after

payment is due. (The percentage is left blank).

There is no space uagreement regardin

lien waivers, sworn

Section 8.1 Dispute Resolution. Broad-form ADR clause for mediation/arbitration through theAmerican Arbitration Association.

A bare bones claulimitations, joinder oon the award.

Section 8.7 Other Provisions. Each party represents to the other possession of adequatefinancial resources and necessary corporate approvals. There isa large blank space for other provisions.

There is no provisiotrue as of any date l


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ProvisionNumber


Standard Form of Agreement (Lump Sum) Between Owner and Design-Builder

Section 5.5 Early Completion Bonus. The Owner may agree to pay a bonus to the Design-Builder atthe time of final payment based on the number of days prior tothe scheduled substantial completion date that substantialcompletion is achieved by filling in a blank in the provision.

There is a provisionearlier than the schworthwhile to add athat final completionsubstantial complet

Article 6 Contract Price. The Owners payment of a lump sum to the Design-Builder is

subject to adjustments for changes. There is a space foragreement on markups to be allowed on change orders.

Due to the possibilit

provision stating thathe Design-Builder. priced on a unit pric

Section 7.2 Retainage on Progress Payments. There is a fill in the blank retainage percentage, but theprovision specifies that no further retainage will be withheld afterthe project reaches 50% completion. The Owner also agrees toreasonably consider reducing retainage for Subcontractorscompleting their work early in the Project. Upon substantialcompletion, all retainage is released except for the reasonablevalue of the punchlist.

Although it is commthe project is half cowritten into a standadetermining the valucost of hiring someoinvariably more than

Section 7.5 Retention of Cost Records. The Design-Builder is required to keep full and detailed records

using generally accepting accounting principles for three yearsafter final completion for all Work performed on a cost basis.

Note that this provis

sum or unit price ba


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ProvisionNumber


Standard Form of Agreement (Lump Sum) Between Owner and Design-Builder

Article 8 Termination for Convenience. The Owner has the right to terminate the contract forconvenience but must pay to the Design-Builder all costs andlosses including those attributable to termination anddemobilization plus overhead and profit and a fill in the blanktermination fee consisting of a percentage of the remainingbalance of the Contract Price.

Even if there is an aclear that it should bcosts, as opposed todepending on whethdefinition of at what deemed to have stacommencement of p

Article 9 The Parties Representatives. The Owner and the Design-Builder each designates tworepresentatives: one with authority for day-to-day decisions, anda Senior Representative who has the authority andresponsibility for avoiding and resolving disputes.

This is an interestingnegotiation procedmediation/arbitratio

Article 10 Bonds and Insurance. General provisions requiring procurement of insurance and(optionally) bonds in accordance with the provisions of theGeneral Conditions.

The contract conteman exhibit and leaverequired. Section 10insurance but does insurance requirem

Section 11.1 Other Provisions. Same as Section 8.7 of the Preliminary Agreement. During the construc

parties have the righSection 3.3.1 does ninformation to any p


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ProvisionNumber


Provisions Unique to the Cost-Plus Agreement

Section 2.1 Contract Documents. The Design-Builders Proposal and Deviation List from thePreliminary Agreement are not Contract Documents. Instead, aGMP exhibit is listed in the first subsection as a ContractDocument.

If there is no GMP tProposal from the Pcontractual status. TDocuments, which mrequirements in the

Section 6.1 Contract Price. The Owner pays the Design-Builder the Cost of the Work plus

the Design-Builders fee, subject to any GMP.

Specific, identified w

This may allow the padditional preliminathe GMP exhibit.

Section 6.2 Design-Builders Fee. The Design-Builders Fee is defined as a lump sum or as apercentage of the Cost of the Work, but is expected to beadjusted (by filling in a blank) for changes in the Work.

This provision is littlconsiderable flexibil

Section 6.3 Cost of the Work. A listing of reimbursable costs when reasonably incurred byDesign-Builder in the proper performance of the Work. Only themore interesting or unusual cost items are discussed below.

The list is more gen7 of AIA Document

Sections 6.3.1

and 6.3.2

Wages and Salaries. Wages of direct employees, supervisors and administrative

personnel, both on or off-site, if engaged in performing orexpediting the Work, with design professional employees billingat market rates for independent design professionals.

Off-site personnel m

design professionalseems to create a h

Section 6.3.3 Office Personnel. The parties may identify specific functions performed bypersonnel at the Design-Builders principal or branch offices thatare reimbursable with mark-up for overhead.

It is more likely in dehome office employspecific work for the


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ProvisionNumber



Section 6.3.7 Correcting Defective Work. The costs of repairing or correcting defective or damaged work,but only if the cause of the problem was ordinary mistakes orinadvertence or beyond the reasonable control of Design-Builder and not resulting from the design-build teamsnegligence. Any insurance proceeds subsequently received willbe appropriately credited to the Owner.

It will be difficult to dfrom negligence.

Section6.3.16

Legal Costs. Excluding disputes between the Owner and the Design-Builder,legal costs, including dispute resolution procedures, arising fromthe Work.

There is no exclusioBuilders negligenceobligated to indemnwhen the legal coststo collateral issues.

Section6.3.18

Defending Patent InfringementClaims.

Costs Incurred in defending patent infringement claims resultingfrom the Owners specification of a process or product.

This provision is limDesign-Builders, reOwner to indemnifythe costs incurred c

Section6.3.21

Other Costs. A catch-all category for other costs incurred in performing theWork to the extent approved in writing by the Owner.

This is the reverse oexplicitly listed as re

compromise in this costs in writing.

Section 6.4 Non-Reimbursable Costs. Compensation for home office personnel, overhead and generalexpenses, cost of capital, and costs in excess of the GMP.

There is no automatdesign-build teamspersonnel and overforth in Sections 6.3


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ProvisionNumber



Section6.5.1.1

GMP Established with the Agreement. The parties fill in the project GMP and identify as the GMPexhibit the documents which form its basis, but the Design-Builder is responsible only for the aggregate GMP, not anyspecific line item.

Presumably the DesAgreement will be p

Section6.5.1.2

Contingency. A contingency is established as part of the GMP for the Design-Builders exclusive use, even to correct negligent errors. The

Design-Builder notifies the Owner of charges against thecontingency, but it is not available to the Owner for any reason.

Contingencies are csum jobs a mechan

the unused portion o

Section 6.5.2 GMP Established After theAgreement.

The Design-Builder prepares a detailed GMP proposal includingall necessary information, assumptions and limitations, includinga time limit for acceptance. The parties meet to discuss andnegotiate the GMP proposal, and if the Owner accepts it, eitheras originally written or as revised after negotiation, it isincorporated into the Agreement by amendment.

The information in thBuilders proposal in

Section6.5.2.4

Rejection of the GMP Proposal. If the Owner rejects the GMP proposal (or fails to accept it withinthe time limit), the Owner may (i) continue to negotiate it, (ii)authorize the Design-Builder to proceed without a GMP, or (iii)

terminate the Agreement for convenience (although without theDesign-Builder receiving the additional payment set forth inSection 8.2). If the Owner fails to act, the Design-Builder maycontinue to proceed with the work without a GMP or suspendperforming the work (again without the extra payment set forth inSection 8.2).

The array of optionsproceed on a time astops the work. The

the GMP proposal isrepresentations.


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ProvisionNumber


General Conditions

Section 2.1.4 Initial Meeting. The parties meet within a week of signing the Agreement todiscuss administrative and procedural issues.

It is important to reccontractual significaadministrative proce

Section 2.2 Design Professional Services. The Design-Builder provides professional design services fromlicensed A/Es either employed by the Design-Builder orindependent.

Same as Section 2.

Section 2.3.1 Standard of Care. Design professional services will be performed with the usualstandard of care except that they shall be sufficient to meet anyperformance standards for the project.

Many courts have hadequacy of the properformance standa

Section 2.4.1 Design Development Documents. The Design-Builder will provide and explain interim designsubmittals for the Owners review and approval.

No mechanism is prto agree upon whichOwner rejects an int

Section 2.4.2 Construction Documents The Design-Builder submits to the Owner constructiondocuments consistent with the prior interim design submittal forthe Owners review and approval, and proceeds to construct inaccordance with the approved construction documents.

There is no proceduconstruction documdetail required for thdocuments often ten

documents.

Section 2.4.3 Owners Review and Approval. The Owners review and approval of drawings and specificationsis not intended to transfer design liability to the Owner.

Doesnt the Owner tsubmittal because tcode requirement o


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ProvisionNumber


General Conditions

Section 2.4.4 Fast-Tracking. The Design-Builder may fast-track by starting parts of theconstruction even though design of other parts is not complete.

Whether to fast-trackinput, but may be lim

Section 2.5.2 Changes in the Legal Requirements. The Design-Builder is entitled to a change order if codes orother laws change after the date of the Agreement or ofestablishment of a GMP.

What happens if theinterpreting it differe

Section 2.6 Government Approvals and Permits. The Design-Builder pays for and obtains all permits andapprovals except for those identified in an Owners Permit Listattached to the Agreement.

This provision placeBuilder.

Section 2.7.1 Design-Builders Construction PhaseServices.

General list of all construction phase services to be provided bythe Design-Builder.

The provision includfrom Section 1.1 of t

Section 2.7.2 Quality and Control Over Services. The Design-Builder agrees to perform all construction servicesadequately and to exercise exclusive control over means andmethods of construction.

This service warranrequirements of the

Section 2.7.3 Subcontractors. The Design-Builder must employ appropriate subcontractors towhom the Owner may object provided that it compensates the

Design-Builder for consequences of the rejection.

How can the Designthe Owner insists tha

subcontractor?

Section 2.8.1 Project Safety. The Design-Builder is responsible for all safety precautions anddesignates a safety representative who makes daily inspectionsand holds weekly meetings.

The safety represenbe the project forem


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General Conditions

Section 2.9.1 Warranty of Materials. The Design-Builder warrants that the materials and equipmentare new, of good quality, free from defects and in conformancewith the Contract Documents.

The warranty is simto a particular length

Section 2.10 Correcting Defective Work. Through one year after substantial completion, the Design-Builder agrees to correct non-conforming work after receipt fromOwner of a seven day notice. The Design-Builder merely needs

to take meaningful steps to commence correction of theoffending work, but if it doesnt the Owner may send a secondnotice and subsequently correct the work itself (not required foremergency situations).

Similar to the AIA onlimit any rights the OAgreement.

Section 3.2 Information Provided by the Owner. The Owner provides a survey, geotechnical information,information regarding zoning and incumbrances and a legaldescription as well as, to the extent available, as-built/recorddrawings and environmental studies.

Same as Article 3 of

Section 3.3.2 Adjacent Land Owners. The Owner secures necessary agreements with adjacent landowners and bears all related costs.

This division of respwhich the Design-Bservices.

Section 3.3.1 Owners Financial Information. The Owner must furnish evidence of satisfactory funding to theDesign-Builder upon request or else the Design-Builder maystop the work.

The provision contatimes that the Desig


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General Conditions

Section 3.3.2 Cooperation with Lenders. The Design-Builder will cooperate with the Owners lenders butneed not sign any certificate that would expand its obligations orresponsibilities.

Similar to the AIA prcertificates for lende

Section 4.1 Hazardous Conditions. Upon encountering a hazardous condition, the Design-Buildermay stop work until the Owner retains qualified experts toinvestigate and remediate the condition and certify that it is safe

and proper to proceed. The Design-Builder is entitled to achange order, and the Owner indemnifies the Design-Builderagainst any consequences of the hazard. However, if theDesign-Builder introduced the hazardous material to the site,then the Design-Builder must indemnify the Owner against theconsequences.

There is no provisiomaterials that it introfrom its duty to com

Section 4.2 Differing Site Conditions. The Design-Builder is entitled to a change order to the extentthat concealed or latent Type I or Type II differing site conditionsimpact its work. The Design-Builder must provide prompt noticeof the condition to the Owner (no later than fourteen days) and,if possible, before the condition has been substantiallydisturbed or altered.

Providing notice befthe notice occur con

Section 5.1 Design-Builders Insurance. The Design-Builder provides the usual insurance, pursuant to anexhibit to the Agreement, for bodily injury, property damage andcontractual liability of its indemnity obligation, with any design-build exclusions deleted and with certificates evidencing thecoverage provided to the Owner.

Section 5.1.5 only rewith certificates, in cprovides the Designupon occupancy).


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ProvisionNumber


General Conditions

Section 9.3 Minor Changes in the Work. The Design-Builder may make any changes within the intent ofthe Contract Documents that do not materially and adverselyaffect the Work or involve an adjustment in contract price ortime, provided that it subsequently notifies the Owner.

The provision does project. The Owner changes.

Sections 9.4.1and 9.4.2

Pricing of Change Orders. Change orders may be based on unit prices, mutually agreedlump sums or time and materials, which is the fallback position

in the event of a failure to agree. Additions and deletions thatnet to an increase, but not a decrease, are marked-up foroverhead and profit. Unit prices may be adjusted if thedifferences in the character or quantity of the units results insubstantial inequity.

There is some inconpreparing the chang

of pricing. The absechange orders is conoverhead for investinot. The opportunityprices renders it pruunderlying the unit p

Section 9.4.3 Resolving Payment Disputes. As part of negotiating the resolution of change order disputes,the Design-Builder furnishes a good faith cost estimate; if theOwner requires the Design-Builder to perform the servicesdirected by the Owner, it must pay 50% of the estimate, butneither party waives its right to contest the issue fully at a laterdate.

This is an interestingover entitlement to efaith requirement inthe extra at 200% of


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ProvisionNumber


General Conditions

Section 10.1 Notice of Claims. Both the Design-Builder and Owner must provide the other withreasonable advance written notice not in excess of twenty-onedays of any claim (unless it reasonably takes longer torecognize the problem). The notice must sufficiently advise theother party of the circumstances giving rise to the claim, thespecific relief requested and the basis of the request, and ifpossible, should occur prior to incurring any cost or expense.

The provision does untimely notice is giuntimely notice. Alloproblem is difficult toprovision, particular

Section 10.2 Step Negotiations. The Owners and Design-Builders field representatives will firstattempt to resolve any dispute, and if they are unsuccessful, thesenior representatives will meet within thirty days to try toresolve it. If they cannot do so, the matter is referred to theAmerican Arbitration Association for non-binding mediation.

Contractually providdisputes is a practicnot include any consfaith.

Section 10.3 Arbitration. If mediation is unsuccessful, the dispute is arbitrated underAmerican Arbitration Association rules. The arbitration may bejoined or consolidated with any other necessary parties, and theprevailing party is entitled to recover all legal fees andexpenses.

The joinder provisiobe subjected to sepaare not awardable uarbitration.

Section 10.4 Continued Performance DuringDisputes.

The Design-Builder and Owner both agree to continueperforming the contract unless the contract provides to thecontrary.

This provision is of dpermitted to stop wo


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ProvisionNumber


General Conditions

Section 10.5 Waiver of Consequential Damages. Both parties waive consequential damages except for thepayment of any stipulated liquidated damages.

Consequential damaof use, profits, busininterpreted to bar thein connection with a

Section 11.1 Owners Suspension of Work. The Owner may for its convenience suspend the work for sixty(but not to aggregate in excess of ninety) days, and the Design-

Builder shall be compensated by change order as appropriate.

The provision does or suspends the wor

Section 11.2 Owners Termination for Cause. If the Design-Builder persistently breaches the agreement, thenthe Owner may terminate the contract if the Design-Builder failsto cure the problems after receipt of two successive seven daynotices. Upon such termination, the Owner may take possessionof and complete the work, backcharging the Design-Builder forall resulting expenses and damages other than waivedconsequential damages. If the termination is wrongful, it will beconverted into a termination for convenience.

The requirement of tprocess of taking ovtermination for causthe Owner an incentcause.

Section 11.3 Design-Builders Right to Stop Work. The Design-Builder may stop work for non-payment or failure ofthe Owner to provide appropriate financial assurances. The

Design-Builder may provide the Owner with a seven-day noticeof its intent to stop work if the breach is not cured and is entitledto a change order for the consequences of the work stoppage.

The provision does stop the work after p

Owner.


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General Conditions

Section 11.4 Design Builders Termination forCause.

In the event of the Owners excessive suspension of the work orfailure to cure the breaches in Section 11.3, the Design-Buildermay terminate the contract after providing two consecutiveseven day notices to the Owner during which time the Ownerfails to reasonably commence curing the default, in which casethe Design-Builder is entitled to the same damages as set forthunder Article 8 of the agreement (Termination for Convenience).

The provision does terminate after sendentirely clear how thstop work in Section


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ConclusionAlthough design-build methods of project delivery haveexisted since before the pyramids (and were reportedlyused to construct them), they are only beginning to re-emerge in a significant way into our modern society ofhigh-speed business and litigation. Traditional constructioncontracts have been fire tested for nearly 100 years in thecrucible of the twentieth century. Design-build contractshave received only a fraction of that scrutiny, so their risksand issues are less well understood, and contractualprovisions for resolving them are less well settled. TheDesign Build Institute of America model contractdocuments represent an interesting and useful allocation ofrisks for design-build projects and may in fact evolve intoan industry norm for such contracts, much like the AIA

model documents in traditional construction projects.


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About the AuthorMark C. Friedlander is a partner in the Construction LawGroup at the law firm of Schiff Hardin LLP. He obtained hisB.A. from the University of Michigan in 1978 and his J.D.from Harvard Law School in 1981. He is currently anadjunct professor at the University of Illinois at ChicagoSchool of Architecture and a lecturer at NorthwesternUniversitys Engineering School, and had lectured at theIllinois Institute of Technology School of Civil Engineeringfrom 1987-89, at the Engineering School of the Universityof Wisconsin in 1988 and 1990, and the ArchitectureSchool of the Georgia Institute of Technology in 1997-98.Mr. Friedlander concentrates his practice in constructionlaw and litigation with particular emphasis on design-buildmethods of project delivery.

About Schiff Hardin LLP

Schiff Hardin LLP was founded in 1864, and we areChicagos oldest large law firm. In the past 140 years wehave grown to more than 325 attorneys, with additionaloffices in New York, New York; Washington, D.C.; LakeForest, Illinois; Atlanta, Georgia; and Dublin, Ireland.

As a general practice firm with local, regional, national, andinternational clients, Schiff Hardin has significantexperience in most areas of the law. For more informationvisit our Web site at www.schiffhardin.com.

This article has been prepared for general information. It is not meant to provide legal advice with respect to any specific matter.The reader should consult a lawyer regarding specific legal advice.

Available on the Schiff Hardin Web site at http://www.schiffhardin.com/media/news/media.204.pdf.