Design-Build Problems

The design-build model has gained popularity in North America. However, trends have arisen that show the model is not without its problems.

For a high risk and low initial reward, the design consultant is providing documents upon which the contractor is basing its tender, a tender that has a guaranteed maximum price. In other words, no price increases will be considered post award, as control of all aspects of the bidding process is in the hands of the contractor. The contractor has based its guaranteed maximum price on the design consultant’s preliminary drawings.

Once awarded, the design consultant proceeds to prepare detailed design drawings. Inevitably, when the final “ready for construction” drawings are produced, there are changes to the preliminary design. Previously, these changes haven’t posed a major problem as the contractor in the traditional model had not yet tendered its price. In the design-build model, however, the price has been fixed and the contractor usually has no recourse to recover any additional monies to cover the cost of the enhanced design.

Consequently, the contractor has a strong motivation to sue for any “design growth” that occurs between preliminary and final design.

A Case Study

A contractor teams up with a design firm and together they submit a tender for the construction of a 160-metre bridge across a deep ocean channel. The contractor offers to pay the design consultant $60,000 to prepare preliminary drawings. The design consultant responds with an estimate of $140,000 for preliminary sketches. They negotiate and agree on $77,000.

Preliminary sketches are produced by the design consultant, many without dimensions and containing broad specifications. In fact, some aspects of the project’s final design will depend on selections that will be made during the final detailed design by the contractor. The tender is submitted at $48.7 million.

One key component in determining the ultimate price for the job is the selection of a particular construction technique. The preliminary design was based on dry dock cais- son construction. Part way through the tender process, however, the contractor considers a floating caisson construction as an alternative.

The choice of the technique affects the design of a major portion of the work. The design consultant is under the assumption that the contractor is taking all these factors into account. The contractor later says it was relying on the design consultant to warn of the cost ramifications of the alternate versus the original design.

The contract is awarded to the design-build team that bids $7.2 million lower than the one other bidder.

The final detailed design is completed. The contractor has opted for a floating caisson design using their own barges. The project goes over budget to a total of $3.4 million. In the whole scheme of things, this represents only a 7% increase, which does not seem unreasonable. But on individual items, the increase is 200-300% and, in one case, over 10 times the original price tendered.

The contractor cannot claim back for any aspects of the over-budget items against the owner except for owner-requested changes. The contractor brings a claim against the design consultant, alleging design growth.

The Facts

The design consultant did not:

• recommend design contingency

• did not advise of the completeness of the drawings

• did not guarantee prices

• did not participate in the use of a contingency fund. The contractor:

• is experienced in bridge building

• is one of the country’s largest bridge builders with engineers on staff

• could have actually designed the project in-house.

Since the design consultants are not venture partners in this scenario and do not share in the construction profits, they should not have been exposed to the risk assumed by the contractor in determining the project costs.

What’s to be done

There are steps that can be taken in order to minimize exposure to such claims. Negotiate a written agreement that includes:

• price: the contractor is fully responsible for pricing and the tender

• drawings: the contractor assumes full responsibility for interpretation of drawings

• design: the contractor is aware that the preliminary design is subject to change as new information is developed/discovered

• contingency: the design consultant is not recommending the contingency amount or rate

• control: the design consultant retains joint control of the contingency fund.

Design changes between preliminary and construction drawings are almost certain to occur. It is up to the contractor, who has the experience and knowledge, to determine an adequate contingency fund.

It is imperative that a written contract exists between the parties that limits the risk of litigation for the design consultant. As always with loss prevention techniques, communication is the cornerstone upon which foundations are built. When initial contact is made between the contractor and the design consultant, the roles of the two players must be clearly defined and understood by each party. These responsibilities must be built into the contract in order to control the risk to the design consultant.

Stephen D. Panciuk, P. Eng. is vice president and manager, AE Underwriting with ENCON, in Ottawa .