Demystifying Design-Build

Virginia Association of Governmental Purchasing March 22, 2007

By: Thomas R. FolkReed Smith LLPPhone: 703-641-4294E-mail: tfolk@reedsmith.com

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Design-Build Design-build is a construction project delivery

method that provides an alternative to the traditional design-bid-build delivery method and the construction-manager delivery method.

Under design-build, the owner has a contract with the design-builder, who provides both A/E and construction services

Owner typically has developed program and conceptual design prior to contract with design-builder, and typically contracts with design-builder when at about 30% design development

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Design-Build (con’t.)

Design-build is widely used in the private sector

Design-build becoming more prevalent in federal sector

Design-build was rare, but now used more by Virginia public entities due to the Virginia Public-Private Education Facilities & Infrastructure Act of 2002 (“PPEA”) and 2006 amendments to the Virginia Public Procurement Act

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Design-Build by Virginia Public Entities - PPEA

Design-build may be used under Virginia Public-Private Education Facilities Infrastructure Act of 2002 (“PPEA”), Va. Code § 56-575.1, et seq.

Under the PPEA, design-build, procured by competitive negotiation, is the prevalent project procurement and delivery method

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Design-Build Under Virginia Public Procurement Act - Commonwealth

Section 2.2-4306 of the Virginia Public Procurement Act (“VPPA”) gives the Commonwealth authority to use design-build

Commonwealth must act in accord with implementing procedures adopted by Virginia Secretary of Administration, which are in Chapter 11 of The Construction and Professional Services Manual

Limitations to certain types of construction and requirement for written approval

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Design-Build Under Virginia Public Procurement Act – Other Public Bodies

Section 2.2-4308 of VPPA gives authority to other public bodies to use design-build

However, stated statutory preference is for traditional competitive sealed bidding and design-bid-build

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Prerequisites Under VPPA

1. To do design-build, must be fixed price or not-to-exceed price contract

2. Public body must use Architect/Engineer to advise and assist with RFP and selection process

3. Public body must get approval from Design-Build/Construction Management Review Board in Richmond

4. Before July 1, 2006, public body had to make award to the lowest cost acceptable proposal

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Amendments Made by Senate Bill 732, Effective July 1, 2006, Make Design-Build A Bit Easier

1. Governing body of locality with population in excess of 100,000 can get one-time determination from Design-Build/Construction Management Review Board in Richmond for multiple projects

2. May now make “best-value” award rather than “lowest cost”

3. Must use procedures consistent with two-step competitive negotiation

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What Are the Design-Build Delivery Method's Potential Advantages and Disadvantages?

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Potential Advantages of Design-Build

1. Potentially less adversarial and more flexible.

2. Risks for design errors and omissions are shifted from the owner to the design-builder, who presumably can resolve them more efficiently.

3. The constructor is involved in the design process and can contribute valuable insights as to constructability and value engineering.

4. The owner or the design-builder can order long lead-time items earlier in the process with greater certainty.

5. Faster project delivery.

6. In a market with rising material costs, the owner or design-builder can achieve earlier procurement at lower prices.

7. The potential for claims, particularly delay claims, is significantly reduced.

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Potential Disadvantages of Design-Build1. Less control by owner over design process.

2. Owner no longer has architect to assist it in contract administration.

3. Ensuring scope and quality of work within a specific budget much more difficult.

4. Results may depend on design-build experience of constructor and architect and their experience working together previously.

5. May limit field of contractors and subcontractors willing to compete.

6. Because of the more subjective method of constructor selection, the price at the front-end of a design-build project may be higher (possibly 3% to 5% higher) than the price of a design-bid-build project. However, the owner may make that difference up at the back end in reduced claims, value engineering, and other considerations.

7. Bond premiums and the design-builder's fee/profit are higher than under design-bid-build.

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What Are The Project Owner's Particular Concerns In Using Design-Build The Owner’s basic concerns are similar to any construction

project and relate to quantity (scope), quality, price, and schedule.

Some concerns, such as differing site conditions and environmental, are unaffected by whether a design-build or design-bid-build method is used.

The Owner’s concern most affected by design-build is to obtain a project of a known quality and specific scope at a fixed price that is reasonable.

A special Owner concern is that entities with substantial resources stand behind all obligations in the design-build contract. This is a particular concern with ad hoc design-builders who offer services through limited liability companies with no resources of their own.

The Owner also has a special concern that professional liability insurance protects against errors and omissions and is for the benefit of the Owner, who is not in privity of contract with the architect.

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What Standard Form Documents Are Available And What Ones Do Owners Prefer?

The AIA, DBIA and AGC documents are the primary standard-form design-build documents used in the private sector.

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What Standard Form Documents Are Available And What Ones Do Owners Prefer? (con’t) None of these documents were drafted by

an owner’s group or with the primary interest of owners in mind. Each set of documents has provisions favoring the constituency whose organization drafted them. Each set has differences with the other, some of which are more preferable to the owner. All these standard documents generally should be modified by an owner before agreeing to their use.

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AIA

Formerly AIA A191-1996 series, with A201 General Conditions

Now AIA A141-2004 series

(A141, A142, B142, B143, G704 (DB))

No use of A201General Conditions now. No separate documents for fixed price and costs plus fee contracts. Instead, exhibits to AIA A141 offered for these purposes.

(Exhibit A to A141 - Terms and Conditions, Exhibit B - Determination of the Cost of the Work, and Exhibit C - Insurance and Bonds.)

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DBIA

DBIA No. 525-1998 (Lump Sum)

DBIA No. 530-1998 (Cost Plus Fee-GMP)

DBIA No. 535-1998 (General Conditions)

Use DBIA No. 525 or No. 530

with General Conditions at No. 535

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AGC

AGC No. 410-1999 (Cost Plus Fee with a GMP)

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What Standard Form Documents Are Available And What Ones Do Owners Prefer? (con’t)

Except as to provisions on ownership/use of documents, professional liability insurance, and arbitration, where the AGC document has been more favorable to the owner, prior to 2005, the DBIA documents were preferable to owners because the AIA A191-1996 document was both cumbersome in its two-part format and unfavorable to the owner. The DBIA Nos. 525, 530 and 535 documents were easier to use and relatively even-handed, although still slanted toward the design-builder and needing modification.

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What Standard Form Documents Are Available And What Ones Do Owners Prefer? (con’t) The AIA's 2004 design-build contracts (A141, A142,

B142, B143, and G704(DB)) are a tremendous improvement over the 1996 AIA documents and are now preferable to the DBIA documents from an owner’s perspective. However, the new AIA design-build documents still have major shortcomings from an owner's perspective. Owners’ attorneys now generally prefer to use the AIA A141 document and modify it. Particular areas needing modification are ownership/rights of use for documents, professional liability insurance, the design development process, and arbitration.

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Some Selected Issues

1. Ownership of Work Product

2. Design Development Process

3. Waiver of Consequential Damages

4. Professional Liability Insurance

5. Changes and Payment for Disputed Changes

6. Compensation for Delay

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Ownership of Work Product

1. AIA provisions are the worst

2. Should modify all to give owner greater rights

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Design Development Process

1. All are too sketchy and give owner little control

2. Additional control to a point is good, but too much owner involvement is not good due to costs of administration, potential to create claims

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Waiver of Consequential Damages

Should always get waiver of home office overhead claims. DBIA document does not waive home office overhead claims.

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Professional Liability Insurance

Should always require. AIA and DBIA documents do not expressly require

Ensure coverage extends from beginning of project to sufficient period after project completion (e.g., five years)

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Compensation for Delay

Limit to owner-caused delays for which written notice given, that impact critical path, and that are not reasonably avoidable

DBIA and AGC documents require owner to compensate for some force majeure. Delete those provisions

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Changes and Payment for Disputed Changes

AGC and DBIA approaches not acceptable to owner. AGC is worst.

AIA approach more owner-friendly and reasonable

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Conclusion

Increasing use of design-build

PPEA and amendments to VPPA make use by public entities easier

Design-build method has advantages and disadvantages

Pay close attention to contract documents, and modify AIA, DBIA and AGC documents