Discuss Your Partnering Relationship Up Front
Given the risks associated with design-build projects, the prudent design professional needs to make a strategic decision regarding when to negotiate and allocate risks between and amongst the design-build team. The DBIA suggests that developing an understanding of the design-build partners’ relationship and key commercial aspects of their relations should occur during the proposal phase. For most design professionals, however, the best time to negotiate and allocate risks between and amongst a design-build team is before the proposal phase, when the time-crunch of putting together a proposal may trump thoughtful negotiation and allocation of risk.
Key Liability Issues to Address When Bargaining Power Is the Greatest
It is critical to understand what role the design professional will have in preparing and submitting a proposal on a design-build project. The prudent design professional needs to ask the following questions before signing a teaming agreement or joint venture agreement:
Checklist of Contract Issues to Review
- Will the bid include a design contingency?
- Who will bear the costs associated with preparing the proposal?
- What input does the design professional have on the project schedule?
- Will the proposal include exceptions to the proposed prime agreement?
- How will disputes involving the design professional be resolved?
- What terms will be in the final design agreement for the project?
Each of these issues affects the risks assumed by the design professional and should be considered before proceeding with a design-build project.
The Importance of Design Contingencies
The design for a design-build project is not complete when proposals are submitted. To account for changes in scope, the unknown, and design errors and omissions, the design-build team may include contingencies in its proposal. The Architect’s Handbook of Professional Practice recommends that the design professional consider whether the client has set aside money for contingencies and whether that sum is sufficient. The same is true on a design-build project.
A recent study suggests that almost all owners (97%) have contingencies on at least some portion of their project; however, the perception amongst architects (42%) and contractors (32%) is that fewer than half of the projects they work on have contingencies. A contingency may be maintained by the owner or may be included in the design-team’s proposal (or both).
While the amount of the contingency included on a design-build project will vary depending on the form of the prime design-build agreement (e.g., fixed fee, cost-plus with a guaranteed maximum price, etc.), a construction contingency in the “range of 5 percent to 10 percent is common, based on the level of risk, difficulty, and complexity the contractor will face” on a design-build project and a design contingency in the range of 5 percent to 10 percent is appropriate. The amount of design development completed during the proposal phase can play a significant role in determining whether to include a contingency in the proposal. Design-build teams often include construction contingencies in their proposals, but rarely include design contingencies.
The prudent design professional should consider insisting on the inclusion of design contingencies in any proposal on a design-build project and defining the circumstances under which the design contingency will be used by the design-build team. Alternatively, the design professional may need to consider adjusting its fee to be included in the proposal to guard against increased construction costs associated with the development of the design that the contractor may seek to recoup from the design professional.
Cost of Proposal Preparation
While a contractor’s costs in preparing a proposal on a design-build project may be slightly greater than its costs on a design-bid-build project, the design professional’s costs in preparing a proposal on a design-build project are usually substantially greater than its costs on a design-bid-build project. As discussed above, the design professional needs to understand whether it will be reimbursed for its proposal phase services and, if not, the extent of the proposal phase services to be provided so that it can make an informed decision on whether to proceed with the project.
When providing proposal phase services as part of a teaming agreement, the design professional should provide the contractor a limited license for the use of its work product if forced to bear its own proposal costs. In the event that the project is awarded to the design-build team, ownership of the documents developed by the design professional as part of its “at risk” proposal phase services provides the design professional additional leverage in dealings with the contractor if the contractor fails to live up to its obligations under the teaming agreement to subcontract with the design professional for the project or if the contractor attempts to renegotiate the terms of the subcontract contemplated in the teaming agreement.
Preparing the Project Schedule
The design professional’s services are part of the critical path of a design-build project schedule. One study comparing project delivery methods concluded that design-build projects are delivered 33.5% faster than design-bid-build projects and are delivered 23.5% faster than CM-at-risk projects. Given the expedited schedule on design-build projects, the design professional needs to assure itself that the project schedule proposed by the design-build team provides sufficient time for the design professional to complete its services.
Taking on schedule-related obligations can create an uninsurable risk for the design professional:
A “time is of the essence” clause can impose undue risk on the Design Professional. Such a clause jeopardizes the Design Professional’s duty to perform within the standard of care and may result in a liability for delay without fault…If the Design Professional agrees to “time of the essence” clauses, it commits to something that the common law does not require. This then is an uninsurable promise or guarantee.
If the design professional is going to assume an uninsurable liability related the project schedule, the design professional should insist on having input in the project schedule and should disclaim any responsibility for delays caused, in whole or in part, by others. Unless the design professional is part of a design-build joint venture (and has agreed to share in the liabilities of the joint venture), the design professional should never assume responsibility for delays beyond the design professional’s control.
Input on the Prime Agreement
In its publication Design-Build Done Right: Best Design-Build Practices, the DBIA recognizes three “best practices” for the form of contracts on design-build projects:
- “Contracts used on design-build projects should be fair, balanced and clear, and should promote the collaborative aspects inherent in the design-build process.”
- “The contract between the owner and design-builder should address the unique aspects of the design-build process, including expected standards of care for design services.”
- “The contracts between the design-builder and its team members should address the unique aspects of the design-build process.”
While the DBIA recognizes that the “best practice” is for the prime design-build agreement to address the expected standards of care for design services, contractors who have limited experience contracting with design professionals are often ill-equipped to negotiate with the owner on standard of care issues.
When the design professional has a “seat at the table” when it comes time to negotiate the prime design-build agreement, the design professional is able to identify and potentially modify those provisions which increase the design professional’s exposure to uninsurable claims. If the design professional is not consulted regarding the terms and conditions of the prime design-build agreement, this can create increased risk for the design professional without a corresponding increase in compensation. While providing input on the prime design-build contract does not guarantee that the design professional’s requested modifications are accepted by the owner, the design professional is afforded the opportunity to discuss risk factors with the contractor so that the design professional’s teammate understands the risks assumed in the prime design-build agreement (from the design professional’s perspective) which may, or may not, be passed through to the design professional.
Resolution of Disputes
While design professionals may be wary of the risk of claims on a design-build project, contractors find that design-build delivery reduces their risk of litigation more so than design-bid-build projects or CM-at-Risk projects. If the contractor and the design professional are able to collaborate effectively, communicate, and work as a team, then the design professional may be better able to control risks on a design-build project than on a design-bid-build project, where a more adversarial dynamic can play out.
Nonetheless, it is important to recognize, and account for, the risk of the contractor serving as the initial arbiter of disputes between the design professional and the contractor’s construction subcontractors. Some examples of disputes which have been reported in recent years include increased subcontractor-reliance on the design-professional’s approval of submittals (as everyone is on the same team) and increased construction costs associated with discrepancies between plans and specifications.
There are two risks associated with the contractor serving as the initial arbiter of such disputes:
- The contractor is naturally oriented towards guaranteeing and warranting its work, without consideration for standard of care issues; and
- The contractor, more so than the owner on a design-bid-build project, may be more inclined to withhold payment from the design professional based on change orders issued to its subcontractors related to issues perceived to have been caused by the design professional.
The design professional may guard against these risks by including provisions in the design agreement (appended to the teaming agreement) that preserves the design professional’s ownership of the design documents (providing the design professional leverage in the event of a dispute) and that precludes the contractor from exercising setoff rights (by withholding payment from the design professional) without the design professional’s consent. While the design professional may be better positioned to resolve design-related issues on a design-build project than on a design-bid-build project, the design professional should also include contractual safeguards to limit its liability to the contractor.
Terms in the Design Agreement
When a proposal is prepared for a design-build project, the design professional’s fee is based on certain assumptions by the design professional, including, but not limited to, the scope of services, the anticipated project schedule, the partners on the design-build team, and the terms of the design agreement. Just as on any project, the terms of the design agreement significantly affect the risk assumed by the design professional on a design-build project and ought to be considered on a project-by-project basis.
There are various form agreements used by contractor’s and design professionals when engaging on a design-build project together. The appropriateness of any such form agreement, however, will vary from project-to-project and depend largely on how the standard terms are modified from the “off-the-shelf” version. Whether a proposed design-build agreement is an AIA form document or DBIA form document or a custom document, some of the key terms to consider for a design-build project include (but are not limited to) the following:
- Standard of Care—as discussed above, the design professional should not assume any guaranty or warranty obligations the design-build contractor may want to “flow through” from the prime design-build agreement, but instead should insist on providing its services in accordance with the applicable standard of care;
- Limitation of Liability—the design professional should seek to limit its liability to its fee or, at the very least, to its available insurance proceeds at the time of settlement or judgment;
- Waiver of Consequential Damages—the design professional should seek a mutual waiver of consequential damages in order to avoid the risk of being held responsible for lost profit claims leveled by either the owner or the design-build contractor;
- No Damages for Delay—the design professional should seek a clause that limits the design-build contractor’s ability to assert significant claims against the design professional in the event of a delay;
- Design Contingency—the design professional should seek to include a provision confirming that a contingency was included in the prime agreement for the project in recognition of additional construction costs associated with the development of the design from what is available at the time of the proposal; and
- Betterment—the design professional should seek to include a provision limiting its responsibility for costs which provide betterment, upgrade, or otherwise enhances the value of the project.
This list provides several key issues which the design professional should consider when negotiating a design agreement for a design-build project, but is not a substitute for consulting with an attorney familiar with the law of the jurisdiction in which the project is to be constructed.
 “Design-Build Done Right: Best Design-Build Practices” dated August 19, 2013, Design Build Institute of America, p. 7, http://www.dbia.org/resource-center/Documents/bestpractices130819.pdf, last accessed February 5, 2016.
 The Architect’s Handbook of Professional Practice, Fourteenth Edition, p. 753-755.
 “Managing Uncertainty and Expectations in Building Design and Construction,” September 2014, McGraw Hill Construction and AIA Large Firm Roundtable, http://www.dbia.org/resource-center/Documents/mcgrawhill2014managinguncertainty.pdf, last accessed February 5, 2016.
 “Managing the Contingency Allowance,” David H. Hart, AIA, http://www.aia.org/aiaucmp/groups/secure/documents/pdf/aiap026970.pdf, last accessed February 5, 2016.
 “Comparison of U.S. Project Delivery Systems,” Mark Konchar & Victor Sanvido, Journal of Construction Engineering and Management, Vol. 124, No. 6 (1998), pp. 435-444 (cited in “Fundamentals of Project Delivery” dated 2011, Design Build Institute of America, http://www.dbia.org/resource-center/Documents/cii_penn_state_study.pdf, last accessed February 5, 2016).
 J. Kent Holland, Jr., Contract Guide for Design Professionals, p. 221 (3d ed. 2012).
 “Design-Build Done Right: Best Design-Build Practices” dated August 19, 2013, Design Build Institute of America, p. 5-6, http://www.dbia.org/resource-center/Documents/bestpractices130819.pdf, last accessed February 5, 2016.
 “Project Delivery Systems: How They Impact Efficiency and Profitability in the Buildings Sector,” August 2014, McGraw Hill Construction, http://www.dbia.org/resource-center/Documents/project_delivery_systems_smartreport140806.pdf, last accessed February 5, 2016.