There is a continuing trend by public agencies to favor a design-build project delivery system for major infrastructure projects. This makes sense for public agencies – the typical design-build contract is well-drafted from the Owner’s perspective with a focused attempt to allocate nearly all risk to the Contractor, and to identify the Contractor as a single point of responsibility for all issues that affect the design or construction. As with most contracts of this type, the primary question is how much risk the Contractor is willing to assume. This is where it gets tricky: typical limitations on risk transfer in the traditional hard bid scenario of design-bid-build are being pushed by public agencies in the design-build scenario.

What Are The Limits Of Risk Transfer?

As a general premise, risk should be allocated to the party that controls the risk and, for bidding purposes, the risk should be able to be priced. For example, traditionally, bidding contractors expect that, if the project is critically delayed by the Owner or a third party not controlled by the Contractor, a time extension will be granted on a day for day basis. There is a current trend, however, in design-build contracts to shift third-party delay risk to the Contractor. A typical clause may provide that “the Contractor shall be entitled to a one-day extension of any affected Completion Deadline for every two days of delay in the Critical Path that is directly attributable to a delay.” In other words, not only is the Contractor at risk for the assessment of liquidated damages for a delay it neither controls nor causes, it will not receive any additional compensation for all of the delay.

Similarly, public agencies are not allowing time extensions for concurrent delay. A typical design-build contract provision may provide:
Any extension of a Completion Deadline allowed hereunder shall exclude any delay to the extent that it:

a. Did not impact the Critical Path affecting a Completion Deadline;

b. Was due to the fault or negligence, or act or failure to act of any Contractor-Related Entity;

c. Could reasonably have been avoided by the Contractor, including by re-sequencing, reallocating or redeploying its forces to other portions of the Work (provided that if the request for extension involves an Authority caused delay, the Authority shall have agreed, if requested to do so, to reimburse the Contractor for its costs incurred, if any, in re-sequencing, reallocating, or redeploying its forces); or

d. Was concurrent with any other delay for which the Contractor is not entitled to an extension.

(Emphasis supplied).

 

In the traditional hard-bid scenario, many jurisdictions have placed legal limitations on a public agency’s ability to limit damages for delays not caused by the Contractor or for the assessment of liquidated damages when there is concurrent delay. The current design-build trend of shifting certain third-party and concurrent delay risk to the Contractor raises potential issues of enforceability in these jurisdictions. Public agencies claim that such clauses knowingly allocate delay risk and that only a portion of delay damages are being limited. Although such limiting provisions may be tested in future court decisions, it is fair to say that the traditional risk allocation for third-party and concurrent delay is being challenged in the modern design-build contract, and this risk should be priced, to the extent it is quantifiable.

Another area where traditional concepts of risk allocation are being tested is differing site conditions. Under the hard-bid scenario, Contractors need not build into their bids contingencies for differing site conditions because the law generally provides that the Contractor is to be compensated for the extra costs caused by such conditions. Public agencies are now limiting the definition of a differing site condition and the remedies available with increasing frequency. Again, a public agency’s ability to transfer this risk may be tested in the future, but for now it is a contingent risk that should be priced by the Contractor in its design-build bid.

The circumstances and events that give rise to a change order are also being significantly limited in design-build contracts. Although the typical design-build contract may appear to have an extensive list of events that give rise to a change order, in reality, the contract terms frequently limit recovery for most of the events. Again, the issue really becomes how much risk the Contractor is willing to assume and how that risk is priced. In this regard, besides limitations on the events that give rise to a change order, the contractual requirements for obtaining a change order can be burdensome. On a major design-build project, adequate resources must be devoted to the change order process so that each change order requirement is met in a timely and appropriate fashion. The failure to adhere to the contract’s process may preclude otherwise meritorious requests for contract adjustments.

Conclusion

Public agencies are pushing the limits on risk transfer in the modern design-build contract. Consistent with the design-build philosophy, public agencies seek to allocate most of the design and construction risk to the Contractor. The limits of allowable risk transfer may be tested in future legal decisions. For now, the design-build Contractor should carefully assess the risk allocation of the modern design-build contract and understand the events and circumstances that may give rise to a time or price adjustment under the contract’s terms. Although beyond the scope of this article, contract terms dealing with indemnity, dispute resolution, waiver of disruption claims, limitation of home office overhead damages, parent company guarantees, and events constituting a default likewise may be aggressively drafted in favor of the public agency and require close analysis by Contractors.