RTP Law Design Build Blog

DBIA NW Region Hosts Certification Workshop

2012-02-28T10:57:00.000-08:00

Are you looking to get that DBIA Certification and just haven't had the time, or do you just want to know about design-build best practices? DBIA will present a national cerfication workshop March 5-9 in Bellevue, Washington. I will be teaching the Contracts and Risk class on Wednesday and the Exam Prep class on Friday. Even better, Craig Unger will be teaching the Post Award class, and Bill Kent and David Gunderson are teaching the Fundamentals and Principles class.

You can get more information at http://www.dbianwc.org/ or http://www.dbia.org/.

NWCCC and DBIA NW Region Presents Seminar on Design-Build Best Practices

2012-02-27T22:23:00.000-08:00

I will be presenting at the Northwest Construction Consumers Council/DBIA NW Region conference on design-build best practices on Wednesday, February 29. My topic is "Legislating Best Practices". The DBIA NW Region is working with the Washington State Capital Projects Advisory Review Board to revise the design-build legislation in Washington. Our goal is to incorporate as many DBIA best practices as possible into the legislation.

You can get more information about the conference at http://www.nwccc.org/

A Truly Horrible Decision Justifies Caution for Federal Projects

2012-02-22T12:05:00.003-08:00

Have you ever worked on a project that just seemed cursed? The construction of the housing of the Marine Corps Base at Kaneohe Bay is the subject of Metcalf Construction Co., Inc. v. U.S., 2011 WL 6145128 (Fed. Cl. December 9, 2011), and although it is difficult to assess as an outsider, this project was clearly a disaster. It is also a case that illustrates the proposition that smart people can disagree as to the correct outcome of a case, and in some cases, a court can be flat out wrong. This project began with not one, but two bid protests. The project was eventually awarded to Metcalf Construction, and I’m fairly certain that Metcalf wishes it had not filed the protest. The final cost of the project was $49,947,872, but Metcalf claimed that it spent in excess of $76 million to complete the project. There are many claims in the extremely long decision by the Court of Federal Claims, but I just want to focus on a one that the court got right, and a few where I believe the court missed the mark.

The Owner Can Insist on Prescriptive Specifications, even in design-build.

Metcalf claimed that in a design-build project, it should have been able to determine means and methods such as the type of project software that it used. The specifications required that the design-builder use Primavera software, but Metcalf wanted to use Microsoft Project. Metcalf was simply incorrect on this argument. The case law is clear that even in design-build delivery, an owner can insist on certain prescriptive items. As I counsel owners, if there is an item that the owner knows that it wants, I encourage them to specify it rather make the design-builder guess at what the owner wants.

The Owner Should Be Responsible for Prescriptive Specifications in the RFP.

Here are two claims where I honestly think that the court got it wrong. The first claim involved soil conditions. The specifications incorrectly noted that the soils were “slightly” expansive, and the Navy affirmed in response to a question in the RFP process that if the actual conditions were materially different, then the Navy would issue a change order. As it turns out, the “expansiveness” of the soils was actually “moderate to high”, requiring a substantial change in the excavation of the footprint of the buildings. The court stated that the difference in the characterization of the soils was not a differing site condition because the specifications had a requirement that the design-builder perform its own soils test and that “expansive” soils were common in Hawaii. The second claim involved the remediation of Chlordane. The RFP was inconsistent with respect to the requirement to remediate Chlordane. In response to a question from one of the proposers, the Navy explicitly stated in the RFP process “No remediation action of the Chlordane contaminated soil is required . . ..” However, during the course of the project, the Navy, citing the inconsistent specification, did require remediation of the Chlordane. The court, once again, stated that because the design-builder knew that there was the possibility of Chlordane, then it took the risk of the remediation.

Both of these holdings fly in the face of long standing decisions such as Appeal of M.A. Mortenson Co, ASBCA No. 39978 (1993). The M.A. Mortenson decision, as well as many others, hold that the design-builder can rely on the information provided in the RFP, even if the design-builder is required to verify the information in the course of its work. The owner gets a benefit from allowing design-builders to do rely on the information. Essentially, the RFP acts as a snapshot in time that the proposers can use for the purposes of pricing. Without drawing some parameters around the RFP pricing, the risk on the design-builders is too great. Think about the court’s reading of the RFP risk: the existence of certain types of soils in Hawaii shifts all the risk of the possibility of the presence of those soils on the site, despite a soils report that states the opposite. The fact that Chlordane exists on the site shifts the risk of the remediation of the Chlordane, despite the fact that the Navy expressly stated that no remediation would be required. The cost for this project should have been outrageously expensive, but who knew that a court would interpret the risk this way? As I always state in my classes, no one can predict what will happen in court. Twelve people who couldn’t otherwise get out of jury duty aren’t the only ones in the courtroom who are unpredictable.

The other problem with this case is that the Navy apparently managed the project as if it were in combat. One of the issues was the over-zealous inspector who would inspect items multiple times and reject items, even though these items probably should have been accepted. For example, in rejecting a countertop that 1/64^th of an inch off, he actually stated that “on any other job in the universe, he would not only accept [the] countertop but that it actually looked good.... [U]nfortunately this is a war ... no breaks.” One of the Navy’s Executive Officers ordered a response to a request for a change as a “pre-emptive strike.” The court even found the Navy’s project manager to be incompetent. The design-builder claimed that in managing the project incompetently, the Navy breached the covenant of good faith and fair dealing inherent in the contract. Although the court acknowledged the incompetence of the Navy, it held that the actions did not rise to the level of a breach of contract.

The Navy apparently won the war and has come close to destroying its opponent. I previously posted that the company was destroyed; however, I've spoken with Terry Metcalf, and he assures me that although the company is not doing business, it is still attempting to recover from the Navy. Mr. Metcalf has also assured me that no corners were cut, but that is only because he had the support of his bonding company and subcontractors. That would not be the case under most circumstances. In most cases, the design-builder would not survive such a project, and the owner would then have no one to stand behind the work. I am hoping that instead of winning this war, that it was only a battle, and the case, in the end, is decided approriately.

So, the precedent exists. What should parties do to deal with this issue?

First, design-builders should be much more careful when reviewing the RFP and should ask questions on even slightly ambiguous specifications. The questions and/or clarifications need to be very specific. Apparently, under this case, the design-builder is “aware” of just about any problem that could possibly exist. I strongly suggest a thorough statement regarding what the price includes and what it does not.

Second, owners should not rejoice. As noted above, this wasn’t a “win” for the Navy. If all construction is managed in this way, the industry would fail, and projects would be prohibitively expensive. Project management by combat is counter-productive and produces horrible projects. Plus, I believe that if this case is appealed, it should (if everything is right in the world) be overturned. Assign risk evenly on the party best able to manage the risk. Design-builders cannot and should not take the risk of all environmental and soils conditions on the ground. It is simply not feasible, particularly when the owner affirmatively misrepresents how it will handle the risk during the project.

I understand from the attorney representing Metcalf, as well as Terry Metcalf himself, that Metcalf has filed an appeal. I wish them luck.

DBIA National Board Approves New Form Teaming Agreement

2012-02-14T12:08:00.000-08:00

The DBIA National Board met on February 8 and approved two new form documents, the Standard Form of Teaming Agreement Between Design-Builder and Teaming Party and the Standard Form of Agreement Between Design Consultant and Design Sub-Consultant. I am proud to have been the leader of the Contracts Task Force that drafted and presented the agreements to the Board. The agreements will be published just as soon as the fine folks at DBIA format the documents (my word processing skills are, thankfully, limited), but I’ll give all of you a preview of the some of the more interesting features of the documents in this blog.

The DBIA Standard Form of Teaming Agreement is the first form teaming agreement specifically drafted for design-build. I've been teaching the DBIA Contracts and Risk Class for many years, and there have been many requests for a form teaming agreement. The EJCDC has a teaming agreement, but the instructions note that the document should be significantly revised if it is used for a design-build project. The DBIA Teaming Agreement is intended to be used when the design-builder is the prime contracting party (the “Design-Builder”) and will subcontract with other parties, such as designers, trade contractors and specialty design-build contractors (the “Teaming Party”).

Like all of the latest versions of the DBIA documents, the Teaming Agreement has many options so that the parties can customize the agreement with language from the document, rather than the parties creating their own language. The customization feature saves the parties time and money and avoids attorneys becoming creative with their own language. Trust me, the last thing the parties want is for attorneys to start getting cute with language. For example, there are many different options for the Design-Builder to pay the Teaming Party. There are also many different options for distribution of the honorarium or stipend paid by the owner.

One of the thorny issues in teaming agreements is enforceability of the document. If the parties do not agree on the material terms for the subsequent subcontract agreement (the “Subsequent Agreement”), then the courts are likely to hold that the portion of the Teaming Agreement that addresses the Subsequent Agreement is an unenforceable “agreement to agree.” That leaves the Design-Builder and/or the Teaming Party potentially out in the cold when it comes time to actually perform the project. In the Teaming Agreement, we dealt with this issue by 1) requiring the parties to negotiate the Subsequent Agreement terms and conditions with the Teaming Agreement and 2) requiring the Teaming Party to provide to the Design-Builder what is essentially a proposal to perform the scope of services in the Subsequent Agreement prior to the Design-Builder’s submission of the Proposal to the owner.

In negotiating the Subsequent Agreement, the parties have the choice of checking a box for one of the many DBIA form sub-tier agreements, or they can attach their own form as an exhibit to the Teaming Agreement. Negotiating the Subsequent Agreement with the Teaming Agreement has many advantages. First, the parties discover whether they can actually negotiate the terms and conditions. If there will be serious problems with the terms of the Subsequent Agreement, the parties want to know about those problems long before the Design-Builder has promised to the owner that it will bring the Teaming Party to the project. Second, the Subsequent Agreement sets the baseline for how the parties will work together during the project, allowing the parties to assess risk and cost at an earlier date.

The proposal required from the Teaming Party is referenced in the Teaming Agreement as the “Teaming Party Price.” The Teaming Agreement assumes that the Design-Builder may negotiate further with the owner after the Design-Builder is selected for the project, and those negotiations may necessitate further negotiations with the Teaming Party (which is why it is a best practice for the Teaming Party to be involved in the negotiations). The Teaming Agreement protects the Teaming Party during these negotiations because the Design-Builder cannot make promises that differ from the Subsequent Agreement and the Teaming Party Price without the consent of the Teaming Party. The Teaming Agreement also contains an optional provision for liquidated damages, should the parties be unable to successfully negotiate the Subsequent Agreement. The Design-Builder has the option, however, of accepting the Teaming Party Price and forming a binding agreement for the Scope of Work in the Subsequent Agreement. Thus, providing many paths to the proverbial ride into the sunset happy ending, or more accurately, beginning.

The Teaming Agreement also deals with other issues such as exclusivity, ownership of Work Product, confidentiality and termination of the agreement. Look for further descriptions of these provisions in future blogs. If you have questions about the Teaming Agreement or think that you might be interested in utilizing the DBIA Agreement, feel free to comment on the blog or call.

Get It In Writing!

2012-02-06T08:00:00.000-08:00

In Nascent Group, JV v US, 2012 WL 176612 (Jan. 18, 2012), Nascent was the successful proposer for a contract to construct a border patrol station for the Army Corps of Engineers in my home state of Washington. Yes, we have a border up here. We just aren’t interested in putting up a big fence. The RFP requested bids for 2 stations: one in Blaine, Washington, and one in Linden, Washington. Nascent was the successful proposer for the Blaine project, which was clearly the first one out of the gate. The Corps had funding for the Blaine project, and the contract clearly listed the Linden project as an “option.” Nascent was very clear that the amount of its bid was based on the savings it would realize by constructing both projects, and there was some evidence that the Corps was less than clear regarding the availability of funding for the Linden project and whether it would go ahead with the Linden project. What is clear is the following: 1) There was never a contract to construct the Linden project; 2) The Corps representative told Nascent to make sure it was “whole” in pricing for the Blaine project in case the Linden project didn’t come through; 3) The Corps never signed a contract for the Linden project and despite some possible oral representations otherwise, no one at the Corps had the actual authority to enter into a contract to construct the Linden project because (among other things) the money was never allocated for the Linden project.

Nascent claimed that the representations regarding funding from the Corps contracting officer as well as the notation in its proposal regarding the pricing based on constructing both facilities created an “apparent authority” situation. That is, that even though the contracting officer did not have the actual authority to enter into the agreement, she had the apparent authority to do so. Apparent authority is applicable in the private sector; however the court flatly rejected it in the context of the federal government. Basically, the court found that there was never a contract to construct the Linden project and the government could only be bound by someone with actual authority.

No, this case isn’t a design-build case, but the federal government does a lot of design-build work, so I thought the case was instructive for two reasons. The first is that when it comes to the federal government, make sure that the commitment is in writing, and make sure the person making the commitment has the actual authority to do so. The second instructive point is the incredibly slow process of suing the federal government. The project began in 2004. The dispute was filed in 2009. It’s now 2012, and there are two courts that could potentially review the case after this one: the United States Court of Appeals for the Federal Circuit, and potentially the Supremes.

Leave My Liquidated Damages Alone!

2012-02-03T10:45:00.001-08:00

In US v. Dick Corp 2010 WL 4666747 (N.D. FL November 9, 2010), a Federal District Court upheld the assessment of liquidated damages against a subcontractor, despite the fact that the Navy had not assessed liquidated damages against the prime design-builder. The project involved the construction of four buildings at the Pensacola Naval Station. Dick Corp., the design-builder, subcontracted with James B. Donaghey, Inc., to install the plumbing and HVAC systems. Out of a $79 million design-build project, Donaghey’s contract was $8,900,000. The Court found that Donaghey delayed Dick Corp when Donoghey could not meet the performance requirements for the test and balancing approvals. Dick Corp claimed damages as a result of the delay on the project as well as the impact to the other sub-trades. The subcontract with Donahey contained a liquidated damages provision of $5,400 per day, and Dick Corp assessed them against Donaghey.

Donoghey protested, claiming 1) that the damages actually incurred by Dick Corp were far less than the liquidated damages amount; therefore, the LD amount was unconscionable and unenforceable; and 2) that the LDs were a “pass through” and should only be assessed if the Owner assessed damages against Dick Corp. The court sided with Dick Corp holding that assessment of the LDs was enforceable. First, it doesn’t matter what Dick Corp’s actual damages were. The parties specifically negotiated the LD amount, taking into consideration what Dick Corp’s potential damages might be. If the owner had, in fact, assessed LDs, Dick Corp’s actual damages would have been much higher. Second, the LD provision in the sub agreement was not conditioned on assessment of LDs in the prime.

Courts love liquidated damages because they want to encourage parties to resolve disputes outside of the courtroom. Honestly, courts are incredibly busy and don’t particularly want your business. They would be very happy if you didn’t file a lawsuit in the first place. Liquidated damages are an extremely useful tool in a design-build agreement, and parties should not limit their use to delays. The term “liquidated” in the law, simply means “agreed upon.” Parties can agree upon remedies for many potential breaches, such as failure to meet performance requirements, failure to meet O&M requirements, or failure to achieve sustainability goals. The liquidated damages limit what could be an astronomical assessment of actual damages. Can you imagine being required to re-work a building that didn’t meet LEED Gold status? LDs also provide certainty to parties who don’t want to litigate the cost later. One of the goals of a construction contract is to reduce disputes down the road, and LDs are a perfect example of limiting litigation costs as well as liability.

2012 DBIA Conferences

2012-01-20T08:00:00.000-08:00

Save the dates for the DBIA Conferences this year. Once again, the Water/Wastewater and Transportation conferences will be back to back, April 23-27 in Phoenix, AZ. I’ll be talking about the new DBIA Teaming Agreement and Design Subconsultant Agreement at the W/WW conference on April 24 from 11:30 to 12:30. The Federal Sector conference is in Washington DC on August 21-23. Finally, the DBIA National Conference is in New Orleans from November 7-9. I’m chairing the National Conference Committee, and the committee is working on making it a terrific event. We will be issuing the call for presentations for the National Conference soon, so start thinking of your ideas. Go to www.dbia.org for further information.

The Blog Is Back! Insurance in DB Contracts

2012-01-19T10:26:00.000-08:00

The Blog is Back! After a short-ish hiatus, the design-build law blog is back with more cases, updates and news.

A new case out of Arizona reminds us all of the importance of getting everyone, including the insurers, on the same page at the beginning of a project. In Travelers Idem. Co. v. Crown Corr, Inc., WL 6780885 (D. AZ December 27, 1011), a federal District Court held that Travelers insurance was bound by the insurance provisions in the design-build contract between the owner and the design-builder. This case involves damage to the University of Phoenix/Arizona Cardinals Stadium. A rainstorm caused 38 metal panels to fall off the stadium, causing significant damage to the façade, retractable roofs and sound system. Tourism and Sports Authority, the owner of the Stadium, was insured by Travelers, and Travelers brought the cause of action against Crown Corr, Inc., one of the subcontractors on the stadium.

The Stadium was constructed by Hunt Construction under a design-build contract. In the contract, the parties waived their subrogation rights with respect to the property insurance obtained by TSA. When parties waive subrogation rights, they promise not to sue each other if there is a loss that is covered by the insurance. Essentially, the parties recognized a risk, in this case damage to the property. TSA insured the risk through Travelers, and the parties agreed that if the risk occurred, the insurance, rather than any individual party, would cover the risk.

Although Travelers recognized that the parties had waived their subrogation rights against each other, Travelers claimed that because it was not a party to the design-build agreement, it was not bound by the waiver of subrogation. The court rejected this argument for several reasons, but it seemed primarily persuaded by the fact that the design-build agreement, complete with its waiver of subrogation, was entered into prior to the issuance of the insurance policy. The court found that Travelers had notice of the waiver of subrogation when it issued the policy. Further, the policy itself allowed for TSA to waive its subrogation rights. Travelers could not come back after the fact to deny the waiver of subrogation.

The case has a terrific discussion of the complex nature of construction contracts, particularly design-build contracts, and the necessity for the assertion of the economic loss doctrine. The economic loss doctrine disallows recovery outside of the remedies negotiated between the parties in the contract. It recognizes that the parties negotiate these contracts on a project by project basis and assign the risks associated with the projects to both parties and, in cases like this one, to an insurance policy.

“The Contracts were specifically negotiated with the Stadium project in mind and the Parties allocated risks and remedies in their agreements. The Parties did not agree to preserve tort remedies, but instead agreed to waive subrogation against all Parties, subcontractors, and design consultants. Tourism and Sports Authority had plenty of opportunities to assert its right to tort remedies, but instead chose to allow insurance to bear the burden of risk associated with the project. Because of the complex contractual relationships in construction defect cases, Courts have extended the economic loss doctrine to interrelated contracts where, as here, the Parties have had an opportunity to bargain for their rights.”

Given that the economic loss doctrine has taken some hits lately, particularly in my home state of Washington, I appreciate when courts recognize that sophisticated parties can recognize and assign rights and remedies in a contract and then be bound by the allocated risks.

Proprietary Meetings; To Meet or Not to Meet, That is the Question

2011-09-28T06:48:00.000-07:00

Whether 'tis nobler in the mind to suffer the slings and arrows . . . Oh, wait. Wrong blog.

I spent the morning at the DBIA Northwest Region Owner's Forum, sponsored by Mortenson Construction (Thanks, Jim.) Craig Unger and I spoke on the topic of proprietary meetings, those meetings between owners and design-build proposers that allow the parties to start the communication process, clarify the owner's program and exchange information prior to the submission of the proposal. Even though proprietary meetings are a DBIA best practice, they are often misunderstood and met with resistance from owners and owner's attorneys. Craig spoke about the mechanics of the proprietary meeting, while I talked about the legal issues.

Craig had participated in many procurements and suggested two sets of proprietary meetings, one during the RFQ process and then again during the RFP process.   His suggestion is to mark the first RFP as a "draft" to solicit suggestions from the finalists, then issue a final RFP incorporating any changes suggested by the proposers. This process provides the owner the opportunity to "test drive" it's program for feasibility and to flesh out any items that are unnecessarily driving the schedule or cost.

Proprietary meetings can be an excellent way for owners to clarify their program and communicate with proposers, but public owners need to be careful not to run afoul of their authorizing legislation. The basic tenets of fairness still apply in alternative procurement.   Owners cannot give an unfair advantage to one bidder over the others. Owners can and should solicit and evaluate innovations proposed by the finalists, but if a solution is not responsive to the RFP, the case law suggests that the owner should issue an addenda that addresses the issue or reject the proposal.

Attached is a link to my powerpoint presentation for the Owner's Forum.   http://rtp-law.com/uploads/Proprietary_Meetings.pdf There is more to come on this topic in future posts!

Where's the Proof?

2011-09-19T17:04:00.001-07:00

When teaching the DBIA Contracts and Risk Management class, I am often asked how one goes about proving professional negligence claims. The first thing that I explain is that being right and proving that you are right in court are two completely different things. The rules of evidence in court are arcane and often defy ordinary logic. Often, you have to go completely against your initial, gut reaction.

For example, in a 2010 case a laundry room caught on fire because the halogen lights above the counters ignited the sheets that were left on the granite counter space, which incidentally was the only place available in the room for the laundry. Dockhorn v. Kitchens v. Klewenco, 1020 WL 1196425 (2010). Even though the sheets were not touching the lights, they apparently were within 6 inches of the 12 inches available for stacking laundry on the counter.

As a mom of 3 tweens with a particularly busy laundry room, I would rule that the designer was not only negligent in specifying lights that prohibited the use of the only flat space in the laundry room, the designer should be publically berated for the mere act of making a mom’s life more difficult. I find it particularly cruel to have the only flat space available in the room inaccessible and even more diabolical because the space is nicely lighted. Any mom on the jury would hang the designer out to dry. However, the plaintiff was trying to prove professional negligence, not court ruled that to find professional negligence, the plaintiff had to introduce expert testimony. Despite the fact that the design defied all logic and decency, the court noted that the “common knowledge” exception to the requirement to produce an expert was not applicable.

“The Court holds that the common knowledge exception is not applicable here. Despite the ordinary experience of jurors with kitchens and home construction projects, the facts in this case involve the standard of care for a professional kitchen designer and a professional contractor. Here, the standard of care of a kitchen designer in selecting light fixtures for a kitchen and a contractor who installs those fixtures is outside the ordinary experience and common knowledge of the jury and beyond the capability of a lay person to decide. Instead, to establish the standard of care for a kitchen designer and a contractor, plaintiff must present testimony of someone who is competent to testify as to whether defendants’ respective actions conformed to the standard of care for their respective professions.”

So, the answer to the question of how one proves professional negligence is that a party must produce expert testimony. Thus, the old adage that legal proceedings are simply a means to make litigation more expensive gets more support.

How Does the Spearin Doctrine Apply in Design-Build?

2011-09-14T12:00:00.000-07:00

Spearin v. US was decided by the Supreme Court in 1918, an ancient case by legal precedent standards. The case stands for the proposition that the owner warrants the sufficiency of the plans and specifications provided to the contractor. In the many years since Spearin was decided, it has been cited 1929 times. Through this case law, the courts have essentially created a “strict liability” standard for owners, which means that despite the fact that owners typically neither design nor construct the building, the owner becomes responsible to the contractor for problems associated with the design. Of course, the owner can look to the designer for responsibility for these problems, but the designer is only responsible for problems that rise to the level of negligence, and practically, the owner can only expect that the designer will contribute its terribly expensive and woefully under insured professional liability policy. This situation is what DBIA has termed the “liability gap,” and the “elimination” of the liability gap is one of the reasons touted by many for the use of design-build.

However, Spearin is still alive and kicking in the design-build world. In fact, in the decision denying the summary judgment in the K-Con case cited above (the denial of the summary judgment is K-Con Build. Systems, Inc., v. US, 97 Fed. Cl. 41 (2011)), the court noted that even in design-build projects, owners are responsible for any design or prescriptive specifications provided to the design-builder. “There is no question that “[w]hen the Government provides a contractor with design specifications, such that the contractor is bound by contract to build according to the specifications,” a contractor that fully complies with the specifications is “not responsible for the consequences of defects in the specified design.” White v. Edsall Constr. Co., 296 F.3d 1081, 1084–85 (Fed.Cir.2002) (citing United States v. Spearin, 248 U.S. 132, 136, 39 S.Ct. 59, 63 L.Ed. 166 (1918))”

That’s serious longevity for such an old case. Owners need to be careful, then of the use of prescriptive specifications. Clearly, it is a fine line that owners have to balance. On the one hand, if an owner knows that it will only accept one solution, or if it has regulatory compliance issues or other limitations on its design, then a prescriptive specification is necessary. In fact, it is the rare design-build project that has no prescriptive requirements. However, owners should try when possible to convert what it perceives as a prescriptive need to a performance requirement. I often joke in my classes that owners need to wrest their cold dead hands off the control of the design of the project, but the benefits have a huge impact on the project. First, the owner shifts the risk of compliance to the design-builder. Second, the owner allows the design-builder room to innovate and create a cost effective solution.

Owners should focus on end results, rather than control. After all, it is the end result that matters, right?

Study Shows Design-Build Market Analysis

2011-09-13T14:14:00.001-07:00

A recent study by RS Means reviewed information on construction projects between 2005 and 2010. The study encompasses 80-90 percent of the construction performed in the United States, including approximately 95% of public work and 75% of private work. According to the study, the design-build method of delivery constitutes approximately 40.9% of the current non-residential construction market. Design-bid-build is 52.9% and CM-at-risk is 6.3%. One stunning statistic accumulated by the study was that for military construction projects over $10 million, design-build was used in approximately 80% of the projects. For all projects over $10 million in 2010, just over half the projects were design-build.

The study clearly shows the rise of the use of design-build, particularly in the public sector. The challenge is to try to make sure that the projects are being performed in a way that utilizes best practices.

September DBIA NW Region Events

2011-09-03T08:41:00.000-07:00

The DBIA NW Region will have several events this month:

September 7, 2011, Breakfast Meeting: "Public Owner's Project Pipeline", which will feature Washington public owners discussing their upcoming projects.

September 21, 2011, 5-7 pm: Annual Meeting. We will be discussing the state of the Region and electing the officers for the 2012-2014 term.

September 26, 2011: Post Award Design-Build. This class is a terrific way to explore what happens after you get the contract and will be taught by the amazing Craig Unger and Greg Gidez. We are incredibly lucky to get these two terrific instructors for this event.

September 27, 2011: Owner's Forum. This event is focused on owners. Craig Unger is our keynote speaker and will be discussing proprietary meetings. I will follow with the legal issues surrounding proprietary meeting. We will also have some terrific Washington owners.

All of these events are better described on the DBIA NW website: http://www.dbianwc.org/index.php?option=com_mc&view=mc&Itemid=81. Hope to see you there!

You either talk to each other, or you talk to the lawyers.

2011-08-30T13:25:00.001-07:00

The US Court of Federal Claims has decided an interesting case involving liquidated damages, delays and changes in a design-build contract. See K-Con Building Systems, Inc., v. US, ____ Fed. Cl. ___, 2011 WL 3634164 (Fed. Cl. August 19, 2011). As noted in my previous blog entry, the dispute all boils down to a lack of communications between the parties. K-Con was the design-builder of prefabricated structures and outdoor smoking shelters for the Coast Guard. The contract was awarded by the US General Services Administration and administered by the Coast Guard. The Owner’s Program contained numerous performance requirements for the building, including the approximate square footage, the minimum clear height for the building’s shop bays as well as code compliant systems. K-Con submitted a proposal that altered some of the requirements of the Owner’s Program, and the Coast Guard appeared to accept these alterations.

The Facts: K-Con was required to submit drawings at 50%, 90% and 100% and was authorized to commence construction at the approval of the 50% drawings. The Coast Guard initially asked if several of the performance requirements could be changed but eventually decided not to move forward with the requested changes. During the design process, the Coast Guard made comments on K-Con’s proposed design. However, K-Con never gave notice pursuant to the contract that either the proposed changes or the comments increased the time for performance of the work. Further, although the parties negotiated several changes to the final cost, the contractual substantial completion date was never altered. Although it is difficult to piece together the actual communications, it appears that there were little, if any. The Coast Guard didn’t do a very good job of deciding what it really wanted, and K-Con didn’t do a very good job of managing expectations with respect to owner requested changes. K-Con also didn’t understand the difference between “suggested” changes and “required” changes and treated all comments by the Coast Guard as requirements.

K-Con did not finish the work by the contractual substantial completion date, and the Coast Guard assessed liquidated damages. The daily amount of the liquidated damages was $590, and the total assessment was $107,787. You can do the math -- K-Con was extremely late. K-Con disputed the assessment of liquidated damages on several fronts. First, K-Con argued that the original calculation of the LD amount was not justified and constituted a penalty. Second, K-Con argued that all of the Coast Guard’s comments were actually changes to the work, and K-Con should be entitled to an extension of the contract time.

Holding #1: Quit whining about the substance of a contract you signed. The court ruled that the time for determining the appropriate liquidated amount was at the beginning of the contract and would not entertain K-Con’s nit picking after the fact. The government was entitled to include both overhead and administrative costs in its calculation. The contracting officer doesn’t have to be perfect in his or her estimate of potential damages that the government will incur. As long as the overall amount was reasonable, the court will not examine the details as to how it is calculated.

Holding #2: Don’t play games with notice. Although K-Con never provided specific notice under the contract that the Coast Guard’s comments on the proposed designs were “changes”, the court held that there was an issue of fact as to whether the Coast Guard had actual notice of the changes and whether the Coast Guard was prejudiced by any failure to provide notice. If there was no prejudice, the design-builder would be entitled to an extension of time, despite the lack of notice. The court noted the following standard for trial:

“Thus, “[i]f the contracting officials have knowledge of the facts or problems that form the basis of a claim and are able to perform necessary fact-finding and decisionmaking, the Government is not prejudiced by the contractor's failure to submit a precise claim at the time a constructive change occurs.” Calfon Constr., Inc., 18 Cl.Ct. at 438–39. Conversely, “[w]here contractor silence would foreclose less costly alternative solutions or the ability of the Government to avoid contractor claims, timely notice is required.” Id. at 439.”

Holding #3: Communicate, communicate, communicate. The court then addressed whether the comments by the Coast Guard actually constituted actual changes by classifying the comments into two different types: 1) “recommendations” made by the Coast Guard to insure compliance by the design-builder to the original requirements of the contract; and 2) changes to the original contract requirements. If the comment was merely a reminder to the design-builder of the contractual requirement and a suggestion that the design proposed would not meet those requirements, the court determined that the comment was not a change. For example, a reminder that the contract required adequate ventilation for the telecommunications room and a suggestion that the design-builder’s design may not accomplish that goal was simply a “recommendation.” However, if the comment mentioned requirements that were either additions to or contrary to the original program, the comment was a “change.” For the comments in the second category, the court ordered a trial to determine whether the comment actually constituted a change. Therefore, a comment that requested hose bibs be installed on two sides of the facility would be evaluated as to whether the hose bibs were necessary under good practice or a referenced code.

The case is instructive as to the analysis of each comment and whether the court felt that a trial was necessary. However, the better practice for K-Con would have been to tell the Coast Guard, “Sure, we are happy to include the hose bibs; however, that change will be a change and an increased cost to the contract.”

What we learned today: The lawyers are the only ones who win. The real lesson from this case is not one of the enforceability of liquidated damages or notice of claims provisions. As I said earlier, it all goes back to the parties’ lack of communication. If the design-builder had established an open communications process with the owner and documented changes during the design process, and if the owner had clearly identified its objectives and requirements, then the dispute would not have occurred. However, neither party did a particularly good job of working with the other to avoid later disputes. Owners should feel free to discuss potential changes with design-builders; however, owners need to make final decisions within a reasonable time. Design-builders need to provide owners with clear expectations with respect to potential changes and inform owners of the effects of changes as well as any claim that an owner’s actions will eventually result in a change. Although the owner seems to have gotten a win out of this case, remember that the case is not over. They still have to battle over what should have been discussed in the first place. The only people who win when a case goes through this much litigation are the lawyers.

Posting from Desolation Sound

2011-08-23T10:33:00.000-07:00

Posting from Cortez Island in Desolation Sound. It's between Vancouver Island and mainland British Columbia. As I spend the next week on a boat with my family (husband, twin 10 year olds and a 9 year old), I am reminded about the benefits of communication and teamwork. In every single construction dispute I have witnessed, the genesis of every problem was the lack of communication. The problem with the design-bid-build system and the legitimate fear that Owners have of falling in the Spearin liability gap is that is stifles rather than promotes good communication. Even though problems that are solved early are solved easily, design-bid-build prohibits the designer and the constructor to work problems and issues out during design, when they are less costly. Owners further the problem by creating contracts that restrict innovation and promote conflict.

Back to cruising the Sound.

New Intellectual Property Case

2011-08-18T10:43:00.000-07:00

The Seventh Circuit has decided a very interesting case involving the intellectual property rights in a design-build case. Nova Design Build, Inc., v. Grace Hotels, LLC, ___ F.3d. ___, 2011 WL 3084929 (CA7 July 26, 2011). Grace Hotels hired Nova Design Build, Inc., to perform architectural services in the design of a Holiday Inn Express in Waukegan, Illinois. The designs were to be based on the Holiday Inn Express prototype. The parties also contemplated that Nova would perform the construction work; however, the contract provided that Grace would have the right to use Nova’s design even if Nova did not perform the construction, provided that Nova was paid in full, including an additional $15,000 fee. The parties’ relationship became strained. Grace terminated Nova hired another company to construct the hotel.

Nova registered a copyright for the designs and then sued Grace for copyright infringement, arguing that it was not paid the fee required for Grace to utilize the drawings without Nova performing the construction work. (The parties disputed this issue, but it became irrelevant given the court’s order.) The court found that Grace had the right to use the drawings because they were not protectable under copyright law. The court noted that to be protectable, the drawings had to be original. “The protectable elements are those that possess originality. Originality requires that the elements be independently created and possess at last some minimal degree of creativity.” Id at p. 4. Because the designs were based on the Holiday Inn Express prototype, Nova did not identify “anything in these particular designs that was original and thus protectable.” Id. Nova argued that the drawings had added features such as an extra floor, larger meeting area, different closet and door placements and a different pool, laundry and exercise area. The court didn’t buy the argument. “Though Nova’s designs do possess added features (and these additional are the only elements that may be protectable), they are devoid of originality. Merely adding an extra floor, identical to the floor layout of the prototype is not original.” The other features, noted the court, were specifically requested by Grace. Therefore, the plans were insufficiently original to qualify for copyright protection.

What is the take away for design-builders? There remained a contract claim on Nova’s right to the $15,000 payment. What Nova lost was the hammer present in copyright infringement cases, the ability to stop the project through an injunction. Parties may still contract for these types of payments; however, a party attempting to enforce copyright claims should objectively review the designs to see if there are any elements that can, in fact, be copyrighted.

Blogging

2011-08-16T15:38:00.001-07:00

The goal of this blog to further discussion regarding construction delivery methods. I focus on design-build construction, but I am always interested in any delivery method or technique that has been successful. As a lawyer, I do not subscribe to the delusion that I perform a useful function in society. Let’s face it. If stuck on a desert island, the ability to draft a legal pleading is not the “go to” skill. Therefore, I like to think I contribute by helping others build buildings.

Twenty years ago, when I first started practicing construction law, I was stunned to discover that the prevailing attitude between owners, architects and contractors was distrust. The first task after the signing the construction contract was hiring the claims consultant. After representing owners, contractors and designers, I have learned all of these wonderful people are simply trying to accomplish the same task: create a successful project that 1) accomplishes owner’s goals; 2) comes in on time and on or under budget; and 3) is an asset to the community.

Studies from the world of construction and manufacturing show that the best way to create a fabulous project is for all of the parties to communicate, cooperate and collaborate. Involving the constructor early in the process and solving problems at the earliest possible time However, the prevailing design-bid-build delivery method and price only procurement does not foster an environment where the parties can work together. Rather, design-bid-build and price only procurement encourages the “claim first, talk later” attitude that was prevalent when I first started practicing. My inclination was that there has to be a better way. I became fascinated with design-build because it represents that better way. It is the only delivery method that places the risk in the hands of the party best able to manage the risk. Design-build, when implemented correctly, fosters a collaborative environment where the parties can communicate, innovate and create amazing results.