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Determine the Right Contractual Structure for the Project

The second factor to consider when evaluating the risks on a design-build project is determining how to structure your involvement on the design-build project. There are countless ways in which to structure design-build teams, including through teaming agreements, joint ventures, partnerships, and newly-formed companies owned by the members of the design-build team. The appropriate structure for a design-build team depends on a number of factors:

Checklist of Considerations for Evaluating Structure of Design-Build Team

  • The complexity and size of the project;
  • The jurisdiction of the project, including, but not limited to, the licensing requirements in that jurisdiction for both contractors and design professionals;
  • The insurance and bonding requirements for the project; and
  • The design-build partners’ preferred allocation of risk.

The organization of a design-build team is either a vertical relationship (e.g., a traditional prime contractor/subcontractor organization) or a horizontal relationship (e.g., a joint venture).[1]

A vertically structured relationship on a design-build project is governed by a teaming agreement “in which two or more independent companies join together for the specific purpose of obtaining and performing a negotiated or competitively bid contract with the intent to jointly perform the work if they are awarded the contract.”[2] The following organization chart is illustrative of a typical vertically structured relationship on a design build project:

The vast majority of vertically structured design-build teams are contractor-led, with the design professional serving as a subcontractor to the contractor; however, some design-build teams are led by the design professional.

A horizontally structured relationship on a design-build project is where a contractor and a design professional come together to form a joint venture, a partnership, or a new company to provide fully integrated design-build services. The most common horizontal structure used on design-build projects, the joint venture, is “a business undertaking by two or more persons engaged in a single defined project.”[3] The following organization chart is illustrative of a typical horizontally structured relationship on a design-build project:

Joint venture relationships typically include joint control over the joint venture’s decisions (as opposed to the prime contractor having control), liability for the joint venture’s losses (as opposed to liability for only the design professional’s losses), and profit sharing (as opposed to only the profit earned under the design agreement).[4]

The risks to the design professional on a design-build project vary depending on how they structure their involvement on the project. Good practice is for “[t]he design-builder and its designer(s) [to] develop an understanding, at the outset of their relationship, of the key commercial aspects of their relationship, including: (a) the designer’s compensation, if any, during the proposal period; (b) the designer’s role in reviewing/approving the proposal; (c) the contractual liability of the designer for problems, including delays, during execution; and (d) the designer’s right to use project contingency for its execution-related problems” and to memorialize these understandings in writing, either in the form of a teaming agreement or a joint venture agreement.[5] Once an understanding of the parties’ relationship is fleshed-out, a decision can be made as to how to structure the relationship.

[1] John T. Clappison and James F. Killian, “Pre-Bid Agreements,” Specialized Agreements for the Construction Project: Forms and Substance, p. 2 (2007).

[2] Id. at p. 3.

[3] Black’s Law Dictionary, Second Pocket Edition (2001).

[4] John T. Clappison and James F. Killian, “Pre-Bid Agreements,” Specialized Agreements for the Construction Project: Forms and Substance, p. 4 (2007).

[5] “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.


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