What Are the Pros and Cons of a Vertical Design-Build Team Structure?
Vertical Structure Considerations
Most vertically structured design-build teams begin with a teaming agreement defining the roles and responsibilities of the contractor and the design professional during the proposal phase and, if the proposal is successful, conclude with a subsequent design agreement between the contractor and the design professional. There are a number of risks to consider when entering into a teaming agreement on a design-build project.
From a business perspective, one of the most significant risks to the design professional under a teaming agreement on a design-build project is the cost of preparing a proposal. While some design-build RFPs include bridging documents for the design-build team to review and develop in order to price the work to be performed, other design-build RFPs provide a basic framework for the project and require development by the design-build team. The cost and effort incurred by the design professional in developing the bridging documents (in whatever form they present themselves) will vary from project-to-project, and may depend on the amount of design development the team believes is necessary to prepare a competitive estimate for the cost of the work. Once the design professional is involved in developing the bridging documents further to assist the contractor in preparing an estimate, it is easy for the contractor to request the design professional spend a few extra hours developing a particular aspect of the design to facilitate the preparation of a more accurate estimate and it can be difficult for the design professional to say “no.”
To manage the investment made by the design professional during the proposal phase, the design professional needs to determine whether it will be compensated for its proposal phase services or whether it is providing its proposal phase services “at risk.” If the design professional is “at risk” for the cost of developing the limited design development documents, there is an inherent conflict of interest between the contractor and the design professional in terms of the amount of design development which should be completed during the proposal phase:
|Contractor’s Perspective||• Development of design documents to facilitate the preparation of detailed cost estimates for a successful bid||
• Incompletely developed design documents necessitate inclusion of allowances or contingencies in the bid
• Incompletely developed design documents may result in changes in the design documents which result in increased construction costs
|Design Professional’s Perspective||• Development of design documents to a level sufficient to allow the contractor to prepare reasonable estimates for a successful bid||
• The more the design documents are developed, the greater the cost to the “at risk” design professional
• The contractor relies on the completeness and accuracy of the design documents developed by the design professional and does not include allowances or contingencies for further design development
By investing more time and money in developing the design during the proposal phase, the design professional advances the design and increases the likelihood of the design-build team being awarded the project and enables the contractor to develop a detailed cost estimate without having to rely extensively on contingencies. But, if the design-professional is “at risk” for its proposal costs, then the appropriate incentives may not exist for the design professional to develop the design to the level desired by the contractor.
To manage this risk, the design professional and the contractor need to determine how much design development is required for the project, to agree on the effort expected of the design professional, and to memorialize that agreement in writing. If the design professional is to provide proposal phase services on an “at risk” basis, then one way to limit this risk—and avoid being pressured to increase its “at risk” investment in the proposal phase services on the design-build project—is to include a cap on the number of hours the design professional will invest in the development of the design documents on an “at risk” basis.
The lower risk practice, of course, is to negotiate to have the contractor pay for some or all of the design professional’s proposal phase services. The contractor’s costs for estimating construction costs on a design-build project are not dramatically different from the contractor’s costs for estimating construction costs on a design-bid-build project. By contrast, the design professional’s proposal phase costs on a design-build project can be significantly greater than the proposal phase costs on a design-bid-build project. By pointing out the potential conflict of interest associated with having the design professional front the cost of its proposal phase services and the greater costs faced by the design professional in pursuing a design-build project, the contractor may recognize the value in agreeing to pay the design professional for some or all of the design professional’s proposal phase services, regardless of whether the team is awarded the project.
From a liability perspective, one of the most significant risks to the design professional is a claim related to errors and omissions in the services provided by the design professional during the proposal phase. Specifically, the contractor claims that it developed its construction estimate based on a take-off performed by the contractor on the design professional’s development of the requirements of the RFP to determine quantities of materials needed. When the quantity of materials increases as the design is developed, perhaps dramatically, the contractor seeks to hold the design professional responsible for increased construction costs, arguing that the design professional was negligent in its provision of proposal phase services.
This very situation played out in C.L. Maddox, Inc. v. Benham Group, 88 F.3d 592, 596 (8th Cir. 1996). The prime design-builder contracted with an engineer to conduct an “in-depth study of equipment layouts, equipment sizing and to supply necessary information and assistance for [the prime design-builder] to prepare a final construction cost (lump sum) for the project.” The project did not go well based significantly on the engineer’s proposal phase services and the prime design-builder sought to recover more than $2.7 million from the engineer based on errors in the services provided by the engineer during its proposal phase services. The engineer argued that it did not warrant the accuracy of the information provided by the engineer as part of its proposal phase services and, therefore, could not be held liable for the claimed damages flowing from the prime design-builder’s reliance on that information. The Eighth Circuit rejected the engineer’s argument, holding that “when a company represents itself as being able to do work of a particular character, a warranty is implied that the work will be performed properly.”
Since the decision in C.L. Maddox, Inc., design professionals have included language in their design-build teaming agreements disclaiming the design professional’s responsibility for the contractor’s reliance on the design professional’s proposal phase services. An example of such language follows:
The parties agree that the design professional’s pre-award bid effort will be based on reasonable professional assumptions and the preliminary information as is available and known pre-bid. The design professional’s assumptions and preliminary designs may be subject to revision and further development when, after the prime design-build agreement is awarded, detailed physical investigations and designs are performed and completed. The contractor agrees that the contractor will be solely responsible for all pre-award quantity take-off based on the design professional’s pre-award bid effort. The design professional disclaims any warranty or guarantee related to any estimate prepared by, or analysis of information the design professional supplies to, the contractor related to the RFP.
If the design professional has chosen the right design-build partner and is able to effectively communicate with its design-build partner regarding the reasons for including such a provision in the teaming agreement, then there should not be much push-back on including such a provision in the teaming agreement. Alternatively, if there is push-back from the design-build partner on including such a provision in the teaming agreement, then the design professional may need to reassess whether it has chosen the right design-build partner.
Another significant liability risk for the design professional on design-build projects is the unintentional guaranteeing or warranting of the design. Many of the widely-used design build contracts between the owner and design-builder require the design-builder to guarantee and warrant its “work,” which is defined to include both the design and construction of the project. If this obligation is flowed-down to the design professional, it may present an uninsurable risk. One authority explains the uninsurable risk as follows:
A Design Professional has a duty to perform its professional services in a manner consistent with the standard of care that other Design Professionals would exercise on similar projects, in the same location and time, under similar circumstances. By agreeing to warrant that your professional services will produce any other result, including but not limited to an error-free design, you may be contractually liable based on breach of warranty even though you were not negligent in your performance. Professional liability insurance is intended to cover only those damages that arise out of your negligent performance. It does not cover express warranties and guarantees.
In order to manage this uninsurable risk, the design-build partners need to understand whether the design-build partners are willing to assume the risk of guaranteeing and warranting the design and, if so, which of the design-build partners will assume that uninsured risk and how, assuming that risk may affect the price included in the design-build partners’ proposal.
Does the Teaming Agreement Guarantee Your Role on the Project?
No. Simply having a teaming agreement does not guarantee the design professional’s role on the project, unless there is an agreement on the terms and conditions pursuant to which the design professional will provide its services on the project if the team’s proposal is accepted. If the design professional has chosen the right partner, this should not be a significant risk; however, this risk is readily managed by the prudent design professional.
To avoid the risk of the contractor “shopping” for a lower cost design professional after being awarded the project, the prudent design professional will insist that the parties to a teaming agreement agree on the terms and conditions for the design services on the project and append the parties’ contract for project work to the teaming agreement. Additionally, the design professional can include language in the teaming agreement providing the contractor only a limited license to use the design documents developed by the design professional during the proposal phase. If the contractor’s price is based on the design developed by the design professional, preserving ownership of the design documents developed during the proposal phase may provide the design professional leverage with the contractor in the event that the contractor reneges on its agreement to team with the design professional in preparing the proposal and the design services on the project.
By way of example, DBIA Document No. 580—“Standard Form of Teaming Agreement Between Design-Builder and Teaming Party” (the “DBIA Teaming Agreement”) requires the contractor and the design professional specify the form of the “Subsequent Agreement” to be entered into if the design-build team is awarded the project:
If the Design-Builder is awarded the Design-Build Agreement, the Parties shall enter into a Subsequent Agreement which shall be in the one of the forms identified below and shall include a Scope of Work for the Teaming Party. If the Parties use their own form or modify the terms of any of the DBIA form agreements set forth below, the Parties shall attach the Subsequent Agreement as Exhibit A to this Teaming Agreement.
The DBIA Teaming Agreement then provides a list of DBIA form contracts which might be used as the Subsequent Agreement for the project. If the design professional signs the DBIA Teaming Agreement without identifying its scope of work and fee in the “Subsequent Agreement,” there is a risk that, if a dispute arose between the contractor and the design professional regarding the design professional’s scope of work and fee after being awarded the project, the contractor may argue that the DBIA Teaming Agreement created an unenforceable agreement to agree.
The design professional may face some resistance from the contractor to negotiating the terms of the “Subsequent Agreement,” not wanting to negotiate terms and conditions of a contract that would not come into existence if the design-build team’s proposal is not accepted. Instead, the contractor may prefer to simply attach an unmodified form contract to the teaming agreement. While this may seem reasonable, the reasonableness of the contractor’s position depends on whether the “Subsequent Agreement” includes uninsurable or extraordinary risks for the design professional.
If the owner plans on using the DBIA’s standard owner/design-builder contract, then the prime design-builder will be required to guarantee and warrant the “Work,” which includes both the design and construction of the project. While the contractor, as the prime design-builder, may be willing to assume this risk, the design professional—who understands that its professional liability insurance does not cover guaranties or warranties of the design professional’s services—may not be willing to assume this risk.
It may be appealing to postpone negotiation of the specific terms and conditions to be included in the “Subsequent Agreement”; however, postponing negotiation of the specific terms and conditions to be included in the “Subsequent Agreement” raises a question as to whether the teaming agreement obligates the contractor to retain the design professional if awarded the design-build project and jeopardizes the design professional’s role on the design-build team. If the contractor and the design professional are unable to reach agreement on the terms and conditions of the “Subsequent Agreement” post-award, the contractor may argue that there was no agreement between the contractor and the design professional as to the material terms and conditions of the “Subsequent Agreement” and that the teaming agreement is merely an unenforceable “agreement to agree”. Where the design professional is “at risk” for its proposal phase costs, it is particularly critical to avoid any conduct which may be construed as undermining the enforceability of the Subsequent Agreement for the project itself.
In the recently issued AIA C102-2015 Document, the AIA recognizes and attempts to address the issue of negotiations over a “Subsequent Agreement” by making the follow-on agreement part of the teaming agreement. Given the costs associated with negotiating the follow-on agreement, only time will tell whether design-build contractors adopt and use the new AIA C102-2015 Document; however, it should be noted that the AIA C102-2015 Document, as drafted, does not include a “flow through” provision. As most contractors will insist on “flow through” language (regardless of the project delivery method), the prudent design professional must be vigilant to exclude (or carve out) the assumption of any guarantee or warranty obligations assumed by the design-build contractor in the prime agreement which the design-build contractor may seek to “flow through” to the design professional.
Important Vertical Design-Build Structure Provisions
The risks associated with a vertically structured design-build team will vary from project to project; however, there are several provisions which should be considered for inclusion in any design-build teaming agreement:
- An obligation to subcontract if the team is awarded the contract—as discussed above, simply signing a teaming agreement does not guarantee your role on the project if the project is awarded to the design-build team;
- Decision-making authority for the design-build team’s proposal price—the design professional needs to know how decisions regarding the design-build team’s proposal price will be made, including how decisions regarding the inclusion of contingencies (both design and construction contingencies) will be determined and quantified, as the design professional may want to consider adjusting its fee if the design-build team’s proposal price does not include an adequate design contingency;
- Scope of work to be completed in furtherance of the proposal—as every design-build project is different, the design professional needs to understand what level of design detail is anticipated by the contractor, how the contractor anticipates subcontracting the work (including any trades which will be let on a design-build basis), and how much effort is expected of the design professional during the proposal phase;
- Reliance by the contractor on the design professional’s proposal phase services—recognizing that the design is not fully developed during the proposal phase, the design professional should require the contractor to assume sole responsibility for take-offs performed based on the design professional’s proposal phase services;
- Identifying how proposal costs will be borne by the parties—the design professional needs to understand whether it will be fully reimbursed for its proposal costs or whether it will provide proposal phase services on an “at risk” basis or something in between;
- Ownership of design documents developed during proposal phase—the design professional should provide the contractor a limited license to use the design documents developed by the design professional during the proposal phase;
- Waiver of liability for unsuccessful proposals—as there are a number of factors beyond the design professional’s control which may result in an unsuccessful proposal, any vertically structured teaming agreement should include language waiving the design professional’s liability for unsuccessful proposals;
- Limitation of obligation to guarantee or warrant design, other than agreeing that services will be provided in accordance with the standard of care—the design professional should limit, and disclaim (if possible), any obligation to guarantee or warrant its design services in both the teaming agreement and the design agreement for the project, irrespective of the obligations ultimately assumed by the contractor under the prime design-build agreement;
- Right to participate in negotiation of prime design-build agreement—the design professional should require its teammate to provide the design professional input on the terms and conditions of the prime design-build agreement (assuming it will be incorporated into the design agreement), as the contractor is likely to focus its attention—and negotiating capital—on different provisions than the design professional;
- Exclusivity provision limiting a teaming party from participating on a competing team for the project—the design professional needs to be aware of any exclusivity provisions in the teaming agreement and evaluate whether the provisions are acceptable;
- Confidentiality and non-disclosure clauses—the design professional needs to be aware of any confidentiality and non-disclosure clauses, which may impose onerous (and unrealistic) obligations on the design professional;
- Covenants not to hire the other party’s employees—as working on a design-build project may provide the contractor with exposure to the design professional’s talented employees, the design professional may want to request that the contractor covenant not to hire the design professional’s employees; and
- Acknowledgement that the teaming agreement does not create a joint venture—as joint ventures may be created by an express or an implied agreement between the parties, the design professional should acknowledge that the teaming agreement does not create a joint venture relationship to avoid the unintentional assumption of joint and several liability and fiduciary duties (discussed in greater detail below).
 This paper focuses on the terms and conditions to include in the teaming agreement. While some of the terms and conditions discussed in this paper should be included in the subsequent agreement, there are many important provisions to consider in the subsequent agreement—indemnity, standard of care, etc.—that are not discussed in detail in this paper.
 See, generally, “Design-Build Teaming Checklist,” Joint Committee of the American Institute of Architects and the Associated General Contractors of America, http://www.aia.org/aiaucmp/groups/secure/documents/pdf/aiap016384.pdf, last accessed February 5, 2016.
 See, also, Bennett D. Greenberg, “Maximizing the Benefits of Design-Build Contracting by Identifying and Managing Project Risk,” Proceedings of the 48th Annual Meeting of Invited Attorneys (2009).
 C.L. Maddox, Inc. v. Benham Group, 88 F.3d 592, 596 (8th Cir. 1996).
 Id. at 600.
 J. Kent Holland, Jr., Contract Guide for Design Professionals, p. 221 (3d ed. 2012).
 Falls Garden Condo. Ass’n v. Falls Homeowners Ass’n, Inc., 2015 Md. LEXIS 10 (Md. January 27, 2015)(enforcing a letter of intent where there was mutual assent on all material terms to a contract); Cyberlock Consulting, Inc. v. Info. Experts, Inc., 939 F. Supp. 2d 572 (E.D. Va. 2013)(a teaming agreement which did not attach as an exhibit the contract to be entered into if the team’s proposal was successful was an unenforceable agreement to agree); Celerity Q, Ltd. v. CSDC Sys., 2010 U.S. Dist. LEXIS 46508 (S.D. Ohio Apr. 14, 2010)(finding that the teaming agreement bound the bidder to retain subcontractor if awarded the project); Trianco, LLC v. IBM, 271 Fed. Appx. 198 (3d Cir. 2008)(finding a teaming agreement was an unenforceable agreement to agree, notwithstanding the defendant’s agreement to award a subcontract to the plaintiff if awarded the project, because there was no agreement on terms, conditions, and pricing for the subcontract); Atacs Corp. v. Trans World Communs., 155 F.3d 659 (3d Cir. 1998)(finding a teaming agreement created an enforceable contract requiring bidder to contract with subcontractor if awarded project); W.J. Schafer Assocs. v. Cordant, Inc., 254 Va. 514 (1997)(a teaming agreement was an unenforceable agreement to agree because “[t]here was no mutual commitment by the parties, no obligation on the part of [one party] to sell the [product] or on the part of [the other party] to purchase them, no agreed purchase price for the product, and, indeed, no assurance that the product would be available when needed”).
 This risk is not addressed in the AIA C102-2015 Document. If using the AIA C102-2015 Document, it is recommended that the design professional add language limiting the design-build contractor’s right to rely on proposal phase services provided by the design professional.