Legal Issues in Design-Build Construction

By Joe Dirik.

The use of design-build as a project delivery method is becoming increasingly important in Texas, particularly in public projects. For example, the Texas Department of Transportation is using design-build construction to help attract private investment in toll roads. Design-build, in its simplest form, is a project delivery system in which the contractor performs the design and engineering after receipt of a contract. Under the traditional design-bid-build delivery method, the owner obtains the design using a third party designer and asks the contractor to bid on that design.

In a workshop titled Design-Build Legal Issues, Cordell Parvin, a shareholder in our firm's construction practice group, covers the following key legal issues.

Teaming and Forms of Relationships
The contractor and designer should establish the nature of their relationship before preparing the proposal. This is often accomplished through a teaming agreement, followed by a joint venture (or other entity agreement). In some cases, a joint venture is formed initially between the parties. In Texas, joint ventures are treated essentially as a general partnership. In fact, a teaming agreement could inadvertently become a partnership agreement if it meets all the elements of a general partnership. Joint venturers (and general partners) have joint and several liability for the venture's obligations, and each venturer is an agent of the venture. A consortium is a form of joint venture, in which each member usually has a defined scope, provides a lump sum for its scope and is responsible for consequences of performance/breach of that scope.

The parties are not limited to a traditional joint venture. Limited-liability partnerships, or limited- liability corporations can be formed to purse design-build projects.

Contract Solicitation and Award
Design-build projects generate controversy because subjective criteria are often used to solicit and award projects, sometimes increasing litigation. Poorly prepared requests for proposal or scopes of work could indicate potential future problems in the solicitation and award process.

At least three specific design-build selection procedures are employed. The low-bid approach is not recommended. Second, is the adjusted bid with a qualitative composite scoring formula. The third type employs a combination of costs and qualifications to determine the highest composite score. Using this approach, a hypothetical project could, for example assign, 55 percent to price, 25 percent to the proposer's qualifications and 20 percent to time of completion. This recommended "best-value" approach is flexible and allows an owner to tailor the criteria to suit its needs.

The Design-Build Contract
Unlike most design-bid-build projects, a design-build contractor might be able to negotiate terms for a public project contract. This is an important opportunity to address topics, including but not limited to, scope of work, differing site conditions, permits and easements, delays, cost growth, scheduling provisions, hazardous material, force majeure, indemnification, and the standard of care on design. These provisions address much of the risk faced by the design-build team. A well-prepared design-build team will be ready to negotiate these provisions and will understand the impact each has on the contract price and project risk profile.

The Contractor - Designer Relationship
A good working relationship between the contractor and designer is essential. The parties' agreement should clearly state that the contractor take the lead role or majority interest and have a contractual right to exercise that control. Controlling costs is inherently in everyone's best interest and the contractor is usually best suited for this role. For example, if not closely monitored by the contractor, a designer's actions might cause the design to grow beyond the conceptual design, translating to higher construction costs. Working closely together, an effective team can maximize constructability, minimize costs and satisfy the conceptual design.

Design liability is an important component of design-build risk. The contractor should avoid accepting design risks. The better practice, if possible, is to place disclaimers of liability in the agreement of the design-build team with the owner. The team can accomplish this by negotiating limitations on the standard of design care, or by placing a dollar cap on the total amount of liability due to negligent design.

Warranties
Warranties are used in traditional projects, indirectly, to encourage attention to quality by contractors. In the design-build context, warranties serve to enhance quality and to shift and reduce risk.

Design services are rarely expressly warranted. This is because a professional's conduct is governed by an appropriate standard of care. And in most jurisdictions under a traditional design-bid-build contract, the owner warrants the suitability of the design for its intended purpose.

In design-build the contractor team faces a serious problem. The state of knowledge required to provide a full warranty on workmanship rarely exists in an undesigned project. One way to address this problem is to condition warranties on use, maintenance and other factors beyond the design-builder's control. Another approach involves limiting performance warranties to passing tests, followed by a short warranty expiration period.

Insurance
Insurance policies for the construction industry were designed with the underlying assumption of separate design and construction functions. Professional liability or errors and omissions policies protect a designer from liability for negligent design. Many commercial general liability policies cover losses from design performed by a contractor that is incidental to construction means and methods. Neither policy, however, protects against "design challenges" imposed by a contract. Design liability coverage for the design-build team presents new challenges for the insurance industry.