Legal Issues and Risk Allocation in Design-Build

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Construction Law and Public Contracts

by Jack Rephan

he design-build project delivery DESIGN-BUILD DEFINED • Different insurance requirements must Tmethod has caught on, especially dur- Design-build is a construction delivery be met. The contractor’s commercial ing the past ten years. Of three hundred method in which one entity has responsi- general liability policy may not cover billion dollars spent on nonresidential bility for both the design and construction liability for design errors. Design team construction in the United States in 1996, of a project. should have its own errors and omis- 23 percent or sixty-nine billion dollars was sions policy. The cost of insurance may spent on design-build projects. Virginia Code § 11-37 defines a design- be more than in traditional construction build contract as “a contract between a methods. Gaps in coverage may exist According to a 2005 survey conducted by public body and another party in which and coverage may not be available for Pinnacle One, a construction management the party contracting with the public body added risks. and consulting firm in Phoenix, Arizona, agrees to both design and build the struc- more than 37 percent of the public own- ture, roadway or other item specified in THE DESIGN-BUILD CONTRACT ers participating in the survey either cur- the contract.” For public projects, the form of contract rently use or are planning to use usually will be the one prescribed by the design-build on some of their projects. Advantages public agency. Opportunities for modifica- • Single contract simplifies the lines of lia- tion may be limited because of the com- The percentage of municipal governments bility and responsibility for design and petitive requirements of federal or state using or planning to use design-build was construction. law. On federal projects, the form of the 45 percent according to the survey. • Owners do not have to deal with dis- design-build contract may also be dictated Design-build has become the preferred putes between designer and contractor. to some extent by the Federal Acquisition delivery method for many federal pro- • Design-builder warrants all of the work, Regulations. jects. In Virginia, the Department of including the design. Transportation and other state and local • Opportunity for shortening project dura- For private projects, there are a number of public entities have begun to increase tion and reducing costs. standard form agreements available for their use of design-build. Industry ana- use in a design-build project, including lysts expect that, ultimately 50 percent of Disadvantages those promulgated by American Institute nonresidential construction will be • Designer no longer in the role of pro- of Architects, American General design-build. tecting owners’ interest. Contractors of America, Engineers Joint • Possibility of adverse relationship Contract Documents Committee, and Design-build involves different and poten- between designer and builder. Construction Management Association of tially greater risks than more traditional • Not suitable for competitive bidding. America. These can be modified to meet forms of construction contracting. This • Bonding requirements may be more dif- the requirements of a project. article will examine the benefits, risks, lia- ficult to meet because of exposure bility and other legal issues relating to beyond that normally undertaken by a The American Institute of Architects has design-build. performance or payment bond surety. issued a new design-build form, AIA A-

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Construction Law and Public Contracts

141. The new A-141 adopts certain risk Contracting for construction services with- then be made to the offeror submitting shifting provisions, such as when part of out a license, but with actual knowledge “an acceptable technical proposal at the the design is proposed by the owner of the licensing requirement, may also lowest cost . . . ” before the engagement of the design- result in a forfeiture of the contractor’s builder. The A-141 anticipates that the right to payment.6 Contracts with Other Public Bodies owner will provide some “design criteria” Design-build contracts may be awarded for which the owner will remain responsi- The Design-Build Entity by public bodies other than the ble. However, the design-builder must cer- There does not seem to be a specific commonwealth on a “fixed price or tify that the design documents are requirement in Virginia for the licensing of not-to-exceed price.”8 consistent with the design criteria. Unlike the design-build entity as long as both the the traditional AIA documents, which des- designer and contractor licensing require- The public body must first obtain ignate the architect as the party with ments are met. approval of the Design-Build/Construction authority to initially resolve disputes, A- Management Review Board.9 Additionally, 141 allows the parties to nominate a “neu- DESIGN-BUILD ON PUBLIC PROJECTS the public body must make a determina- tral,” for this purpose but if no neutral is IN VIRGINIA tion that design-build is more advanta- named in the contract, the owner is Contracts with the Commonwealth geous than competitive sealed bidding. charged with resolving disputes. Only fixed-price design-build contracts are authorized.7 The public body must also adopt proce- PRICING OF DESIGN-BUILD CONTRACTS dures for award of design-build con- Design-build contracts are, in most all The department, agency or institution tracts, including a two-step competitive cases, awarded on either a fixed-price or a wishing to award a design-build contract negotiation process consistent with that cost-plus fixed fee, with or without guar- must first request authority to use design- required in the case of contracts with the anteed maximum price, basis. build. The request must justify that design- commonwealth. build is more advantageous to the state In Virginia, design-build contracts with the than competitive sealed bidding. The award must be made “to the fully commonwealth must be awarded on a qualified offeror who submits an accept- fixed-price basis.1 Other public bodies able proposal at the lowest cost” in may award contracts on a fixed-price or a response to the request for proposals.10 “not to exceed price” basis. There does not seem to be LEGAL BASIS FOR DESIGN-BUILD ON LICENSING REQUIREMENTS FEDERAL CONTRACTS Design Team a specific requirement In Virginia, all architects and engineers or Design-build is expressly authorized by any person or entity offering to practice in Virginia for the statute for executive agencies.11 architecture, engineering or land surveying Contracting officers must make a determi- services must be licensed.2 licensing of the design- nation that “two-phase selection proce- dures are appropriate for use in entering Licensed contractors are not required to be build entity as long as into a contract for design and construction licensed to perform architectural, engi- of the project.” neering, or land surveying services under both the designer and design-build contracts as long as the archi- contractor licensing After development of a scope-of-work tect, engineer or land surveyor offering statement, proposals are requested from and rendering such services is licensed.3 requirements are met. prospective offerors who first submit technical proposals without any detailed A person or entity offering architecture, design or cost information. engineering or land surveying or landscape architecture must register with the The design-build procurement requires The technical proposals are reviewed and Board of Licensing of Architects, the offeror to submit its qualifications and the agency selects the offerors to partici- Professional Engineers, Land Surveyors then the commonwealth selects not more pate in the second phase, in which the and Landscape Architects.4 than five offers. offerors submit the design concepts and Contractor cost proposals. After evaluation of the The contractor must be licensed under Thereafter, a request for proposals is phase-two proposals, the agency will Chapter 11 of Title 54.1 of the Virginia Code. issued and the offerors then submit tech- negotiate with one or more of the offerors nical and cost proposals. The common- and then make its selection. Note that Contracting for or bidding upon construc- wealth then evaluates the technical price alone will not necessarily result in an tion services without a license is a Class 1 proposals and may negotiate an amend- award as would normally be the case misdemeanor.5 ment to the cost proposals. An award may under traditional sealed bidding.

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Construction Law and Public Contracts

RISK SHIFTING AND LEGAL architect to the owner. Where the architect LIABILITY IN DESIGN-BUILD is not insulated from liability by the design- Owner’s Responsibilities An architect or an build entity selected—such as a joint ven- and Liabilities engineer can be held ture or general partnership—the architect Under what is known as the Spearin doc- may still have liability to the owner. trine, which has evolved from the 1918 liable for professional case of United States v. Spearin, 248 U.S. negligence in the design Economic Loss Rule 132 (1918), and which is followed in Under the traditional owner/architect/con- Virginia,12 a contractor is not responsible of the project where tractor arrangement, there is a common- for defects in the plans and specifications the defect causes injury law legal principle in many jurisdictions, furnished by the owner. In essence, the including Virginia, known as the “eco- owner impliedly warrants that the plans to persons or property. nomic loss rule.” and specifications are accurate and that the owner may be liable to the contractor Under this rule, absent privity of contract for any damages resulting from the defec- considered to be a breach of contract, between the parties, one party may not tive plans and specifications. Under the especially where the cost of correcting or hold another party liable for economic design-build method, because the contrac- replacing the nonconforming work is dis- damages based upon a negligence or tor agrees to design and build the project, proportionate to the damages resulting other theory. Thus, an architect has no the Spearin doctrine generally will not from the nonconforming work. duty to protect the contractor from purely apply. Nevertheless, if the owner provides economic loss, and, absent a contract faulty preliminary information on which DESIGNER’S RISKS AND between the architect and the contractor, the design is based, the owner may be RESPONSIBILITIES an architect has no liability for the con- liable to the contractor for any added costs An architect or an engineer can be held tractor’s damages caused by the architect’s resulting from the defective design.13 liable for professional negligence in the negligent performance.18 Consequently, design of the project where the defect under the traditional construction delivery CONTRACTOR’S RISKS causes injury to persons or property. The method, while the owner may be liable to AND LIABILITIES architect may also be liable to the owner the contractor for defective design under Under the traditional competitive-bid for defective design that causes damages the Spearin doctrine, in most jurisdictions method of delivery, the Spearin doctrine to the owner. the contractor will not be able to look to generally relieves the contractor of any the architect for damages caused by the responsibility for defects in design. In In Virginia, the law states that the architect architect’s defective design. design-build, however, the design-build does not guarantee a perfect plan or satis- team, not the owner, warrants the accu- factory result. However, in the contract of In design-build, because a contractual racy of the design. The plans and specifi- employment, the architect impliedly war- relationship generally exists between the cations are created by the team, while the rants that he or she possesses the neces- contractor and the designer, the lack of owner merely provides the design goals or sary competency and ability to enable him privity of contract will no longer insulate program and some basic information. to furnish plans and specifications pre- the designer from liability or preclude the However, if the information furnished to pared with a reasonable degree of techni- contractor for looking to the designer for the design-build team by the owner is cal skill.16 damages resulting from the designer’s inaccurate, there can be a shifting of risk defective design. Moreover, the designer back to the owner. In addition to design responsibility, an may be exposed to liability for defective architect in a traditional agreement may design to subcontractors where a contrac- In Virginia, a contractor impliedly warrants also have an obligation to oversee compli- tual relationship exists between the that the building will be erected in a rea- ance by the contractor with the plans and design-build team entity and the subcon- sonably good and workmanlike manner, specifications. The architect may also have tractor(s). This would not be the case and when completed will be reasonably fit an obligation to detect any defects in the under the traditional owner/architect/con- for its intended purpose.14 This warranty design and to recommend to the owner tractor relationship. may be voided, however, by the terms of any necessary changes and corrections as the contract.15 Also, a basic principle on construction progresses.17 In design-build, THE DESIGN BUILD ENTITY any construction project is that the con- the architect’s contract is often no longer Contractor/Subcontractor tractor must perform its work in accor- with the owner, but with the contractor. As Under this arrangement, the contractor dance with the requirements of the plans a result, duties that the architect normally awards a subcontract to the design firm for and specifications. An exception to this owes to the owner will be owed to the architectural/engineering services. Under rule in federal and other construction is contractor, and the architect may have lia- the economic damage rule, the designer known as the doctrine of substantial com- bility to the contractor for those instances may be insulated from liability to the pletion—minor deviations from the of negligence or defective design that owner for design errors, but the contractor requirements of the contract will not be would normally result in the liability of the will not be.

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Joint Venture conducted by its manager or managers. An ments that serve as the foundation of their This type of entity is used frequently in LLC is treated as a partnership for tax pur- relationship must be carefully drafted to design-build team arrangements. The con- poses but as a corporation for all other define their rights and responsibilities. q tractor and the architectural/engineering purposes. Generally members of an LLC firm form a joint venture for the purpose of are not liable for debts and obligations of Endnotes: entering into a contract for design-build the LLC. However, it is uncertain whether 1 Virginia Code § 11-41.2(a). services. A joint venture is generally gov- the designer can fully insulate himself 2 Virginia Code § 54.1-406. erned by the same rules of law as a part- from liability through the use of an LLC. 3 Virginia Code § 54.1-406(f). nership,19 and there need not be much 4 Virginia Code § 54.1-411 evidence of the existence of a joint venture Employer/Employee 5 Virginia Code § 54.1-1115. other than a few formalities and the parties’ Under this option, the contractor hires the 6 Virginia Code § 54-1-1115(c). conduct in light of other facts and circum- architect or engineer as an employee. Both 7 Virginia Code § 11-41.2. 20 stances. Each party is liable for the debts the contractor and the architect must meet 8 Virginia Code § 11-41.2:2(A). and obligations of the joint venture. licensing requirements. Under the doctrine 9 Virginia Code § 11-41.2:5. of respondeat superior, the contractor will 10 Virginia Code § 11-41.2:2(B). Limited Partnership be liable for design errors. 11 41 U.S.C. § 253m. Under this concept, the contractor and an 12 Southgate v. Sanford & Brooks Co., 147 Va. 554, architectural/engineering firm form a lim- CONCLUSION 137 S.E. 485 (1927) ited partnership. Generally, only the gen- Because design-build offers advantages to 13 Two decisions of the Armed Services Board of eral partner will be liable for the debts or owners not found in more traditional con- Contract Appeals illustrate this principle. In Pitt- Des Moines Inc., ASBCA 42838,96-1#BCA ¶ 27, obligations of the partnership. Because of struction delivery methods, there is an 941 (1995), the contractor was allowed to recover the necessity of having active participation increasing interest in the use of the design- its increased costs under the differing site condi- in the project by both the contractor and build rather than competitive sealed-bid- tions clause because the actual wall thickness of the existing building was found to be thicker the designer, a limited partnership may not ding or other methods of awarding than shown in four (4) drawings depicting the be practical. contracts for construction. However, it is existing building which were supplied with the Request for Proposals. In the earlier case of M.A. important that owners, designers and con- Mortenson Co., ASBCA 39978, 93-3#BCA ¶ 26, Limited Liability Company tractors be aware of the changes in their 189 (1993), the government was held liable for a design-builder’s increased costs in constructing A limited liability company (LLC) affords relationships which will occur under the the foundation of a building as a result of faulty all of the benefits of both a partnership design-build concept, and the parties also information contained in the government’s draw- and a corporation. Under this arrange- must be aware of the different and poten- ing which was included in the RFP. ment, the contractor and design firm form tially greater risks and liabilities that the 14 Mann v. Clowser, 190 Va. 887, 59 S.E. 2d 78 (1950). a limited liability company and the con- designers and contractors will be assuming. 15 33 Va. Cir. 265, 267 (Citing 184 Va. 588). tractor and designer become members of If the team concept is to work, its members 16 Surf Realty Corp. v. Standing, 195 Va. 431, 78 S.E. the company. The business of the LLC is must be carefully selected, and the docu- 2d 901 (1953). 17 Virginia Military Institute v. King, 217 Va. 751, 232 S.E. 2d 895 (1997). Jack Rephan is a founder and senior partner of Rephan Lassiter PLC, in 18 Blake Construction Co. Inc. v. Alley, 233 Va. 31, Norfolk. He holds a bachelor of science in commerce and a law degree from 35 S.E. 2d 724 (1987) See also Sensenbrenner v. Rust, Orling and Neale, Architects Inc., 236 Va. the University of Virginia. A Virginia and District of Columbia attorney since 419, 374 S.E. 2d 55 (1988). 1959, he concentrates his practice in construction and government contract 19 See, e.g., Roark v. Hicks, 234 Va. 470, 475, 362 law. He has served as chair and is currently a member of the board of gover- S.E.2d 711, 714 (1987). nors of the VSB Construction and Public Contract Law Section. 20 Smith v. Grenadier, 203 Va. 740,744, 127 S.E.2d 107, 111 (1962).

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