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In this issue:

  • Design-Build: Does It Guarantee Project Success?
  • The Catastrophe and Waiver of Subrogation

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Design-Build: Does It Guarantee Project Success?

By: Michael C. Loulakis, Esq.

The rapid increase in the use of design-build around the country is a testament to the benefits of this project delivery system. Single point responsibility for design and construction gives the owner an opportunity to receive early commitments for total project cost and speedier project delivery — while at the same time lowering the potential for disputes and change orders. It also makes design-build the system of choice when the success of the project is dependent upon output, throughput and other performance guarantees.

But is design-build the best choice for every project? The most frequently published case studies discuss success stories — projects where the parties understood what design-build does and does not deliver. This has lulled some owners into thinking that design-build is a cure-all for anything that can go wrong on a project. The reality is that owners who misuse the design-build process, or don’t understand the limitations of it, are likely to be seriously disappointed.

When you understand the issues that can create problems in a design-build relationship, you can better determine if this is the best system for your project. Whether you are an owner or someone who provides services to owners, make sure that the key factors driving the project can be best accomplished through design-build and the procurement and contracting methodology for the project. You should also remember that project success will not be determined solely by what project delivery system you use, but by how the overall project is managed and administered. Consider these thoughts.

Project Drivers

The design and construction of each project are controlled by a combination of unique factors and drivers. Some of these drivers are project specific — such as those affecting price, schedule and quality. Others are dictated by the personality of the owner and how it wants to manage the project. Project delivery systems are intended to establish a framework to help the owner achieve these drivers, with some systems being better than others at meeting specific drivers.

Consider, for example, an owner who wants to use design-build to accomplish three goals: (1) get a value engineered design; (2) eliminate any claims; and (3) obtain the lowest price possible. All of these goals are well-suited to the design-build process. Add to the equation the owner’s expectation that it will control the design — by using detailed, restrictive specifications developed by it’s A/E before the design-builder became involved. Can design-build be used in this scenario? Certainly. Will the owner’s objectives by met? Hardly.

The owner’s need for control seriously jeopardizes each of the project drivers. An owner stifles the ingenuity and creativity of the design-builder’s team when it requires the team to use its design ideas. As a result, the ability of a design-builder to achieve meaningful value engineering or cost savings is seriously impeded. Finally, the owner will likely be held responsible for any faulty design elements, eliminating the single point of responsibility benefit of design-build.

Many other examples show how misaligned project drivers can result in an unsuccessful design-build project. A number involve owners who select design-build for early project completion, yet insist on actions that delay the process (such as starting construction after all design is completed). In short, if you are an owner who (a) distrusts your service providers, (b) cannot make decisions to keep pace with tight schedules, and (c) micro-manages by committee, you should choose another delivery system.

Relationship of Procurement & Contracting Methodology

The design-build process merely establishes the roles and relationships among the key members of the project team. Owners sometimes forget that in order for specific project goals to be achieved, the delivery system must be compatible with the owner’s contracting methodology (e.g., lump sum, cost plus with GMP) and procurement process (e.g., direct selection, competitive best value). If any of these three elements are out of alignment, the owner’s expectations are not likely to be met.

If speedy project delivery is the major driver for selecting design-build, the owner should seriously consider using a procurement strategy based on qualifications and competitive negotiations — with price competition, if any, limited to fee and general conditions expenses. Owners interested in selecting the design-builder on the basis of a fixed low price usually spend significant time in the procurement process, eroding much of the time savings obtained in the merging of design and construction.

Matching an owner’s high quality expectations with its procurement and contracting preferences can also be problematic. When a design-builder is selected primarily on price, it may have little incentive to spend its money or time to consider life cycle costing issues or to give the owner quality that exceeds what is being specified. If quality is a significant driver, qualifications of the design-build team should be part of the selection process, as well as proposed life cycle costing approaches. Likewise, if the owner wants more control over what is being designed — which is particularly important in projects with rigorous architectural standards (such as courthouses and luxury hotels) — it should consider selecting the design-builder on qualifications, with a GMP set after the design has evolved and the owner feels comfortable with what it is ultimately buying.

Attributes of Successful Projects

Project success is not determined solely by the choice of delivery systems. Professor Victor Sanvido recently conducted a study on project delivery for the Construction Industry Institute. This study showed that the best performing projects have the following attributes:

  • · Adequate to excellent ability of owner to make decisions;
  • · Adequate to excellent scope definition,
  • · Excellent team communications
  • · Qualified contractor pool
  • · High ability to restrain the contractor pool through prequalification and shortlisting

Likewise, the worst performing projects were characterized by:

  • · Contractors engaged late in the design process,
  • · Limited or no prior team experience,
  • · Onerous contract clauses,
  • · An owner lacking ability to make decisions,
  • · No prequalification of bidders

It is clear that if a design- build project has all of these “worst-performing” features, it will probably be troubled.

What Should You Do?

If you are thinking about using design-build, what should you do? A successful project owner will begin by carefully considering whether its unique personality and goals can be addressed through design-build. You may do this analytically — by using a selection matrix process to compare the attributes of available delivery systems to the project drivers and your personality. If design-build scores well, then choose a procurement and contracting plan that takes advantage of this system’s strengths. Think through what you realistically need to review, approve and control in the design and construction. If your needs are too severe and restricting to the design-build team, they may impact your long-term project goals.

Above all, don’t delude yourself into believing that simply by calling your project “design-build” you have a fail-safe mechanism for meeting all your needs. You must carry the principles of design-build forward into your procurement, contracting and management of the project.

About the Author: Michael C. Loulakis is a nationally respected authority on design-build and an attorney in the firm of Wickwire Gavin, P.C. He advises owners, contractors, design professionals, and sureties on construction law issues. He may be contacted at Wickwire Gavin, P.C., 8100 Boone Blvd., Vienna, VA 22181; Phone (703) 790-8750 or by e-mail at mloulakis@wickwire.com. Article copyright ã 1999, Wickwire, Gavin, P.C. Originally published in the firm’s Summer 1999 issue of “Legal Foundations” newsletter. Reprinted by ConstructionRisk.com with permission.

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The Catastrophe and Waiver of Subrogation

By: William T. Kacerovskis, Esq.

The project was proceeding well. Suddenly, one night the structure inexplicably burns down. As usual, everyone says it was not their fault. Now what?

If the construction contract contains a typical insurance clause, the owner’s property insurer pays the claim and the insurance proceeds can be used to fund the cost of demolition and reconstruction.

(A) If the construction contract contains a waiver of subrogation clause, then this is typically the end of the matter. The property insurer agreed to insure against the risk and it must pay. Subrogation usually refers to the situation where a property insurer who has paid the loss attempts to recoup its loss from some party other than the owner (e.g. general contractor, subcontractors’ A/E’s , etc.). Waiver of subrogation clauses typically prevents the property insurer from pursuing such parties. Although the owner’s property insurer is ordinarily not mentioned in waiver of subrogation clauses, the property insurer who pays a loss steps into the shoes of the owner. If the owner has given up (i.e., waived) the right to pursue certain claims in the contracts, the legal effect is that the property insurer is bound by that waiver.

A typical waiver of subrogation reads as follows: “The owner and Contractor waive all rights against (1) each other and any of the subcontractors, sub-subcontractors, agent and employees, each of the other, [and] (2) the architect, architect’s consultants, . . . for damage caused by fire or other perils to the extent covered by property insurance obtained pursuant to this contract.

(B) If the contracts do not contain express waiver of subrogation clauses, then typically the property insurer will pursue claims (i.e., lawsuits) against the contractor, subcontractors and/or the A/Es, contenting that their negligence or other fault caused the fire or other catastrophe. Missouri law allows the insurer to file suit in the name of the owner (a definite advantage if the case is tried before a jury).

Limitations of Waiver of Subrogation Clauses

1. Typically, they apply “only to the extent covered by property insurance” obtained pursuant to the contract. Thus, if there is not coverage under the property insurance for any reason (exclusions, etc.), the waiver of subrogation clause does not apply, and the owner is free to pursue claims against anyone who allegedly caused or contributed to cause the event.

2. If the amount of the loss exceeds the amount of the property insurance limits of coverage, then the owner is free to pursue claims for all losses which exceed the amount of property insurance.

Implied Waiver of Subrogation Claims

Some courts outside of Missouri have held that when the contract requires the owner to purchase property insurance, there is an implied waiver of subrogation claims, even where the contract contains no express waiver of subrogation clauses. Although the Missouri Courts have repeatedly upheld express waiver of subrogation clauses in construction cases, they have not yet directly addressed the issue of implied waiver of subrogation in any construction cases. Implied waiver of subrogation has been found in Missouri in landlord-tenant cases.

Why Waiver of Subrogation Clauses Are Valuable, Even For Owners

They can prevent the great delay in the completion of the project which otherwise often ensues. The liability insurers for the general contractor, subcontractors and A/E’s frequently deny that their insureds are liable for the catastrophe. Litigation or arbitration is frequently needed to determine whose fault, if anyone’s, caused the accident. This takes time. In the meantime, the structure is not completed and the owner cannot begin to reap the economic benefits of the construction.

About the Author: William Kacerovskis is with the law firm of Brown and James, 705 Olive Street, Suite 1100, St. Louis, MO 63101; Phone (314) 421-3400. Article copyright ã 1999, Brown and James, first published in the firm’s Summer 1999 issue of their “Fault Line” newsletter. Reprinted by ConstructionRisk.com with permission.

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NEW PROJECT DELIVERY SELECTION GUIDE

RESTON, VIRGINIA — A/E/C Training Technologies, LLC has just released an innovative training and reference guide on project delivery entitled Construction Project Delivery Systems: Evaluating the Owner’s Alternatives. The author of this guide is Michael C. Loulakis, a member of DBIA’s Board of Directors and Chairman of the Manual of Practice Task Committee. Mr. Loulakis is a nationally recognized authority on design-build and played a major role in drafting DBIA’s family of contract documents.

The guide is presented on an interactive CD, using a creative combination of narration and on-screen text and graphics. The program also contains interactive questioning throughout each section to test the knowledge of the viewer. All major delivery systems, including design-build and construction management, are discussed in a practical and comprehensive manner. Among the specific topics addressed are:

The historical evolution of project delivery.

The role that procurement and contracting methods play in project success.

Strengths and weaknesses of each delivery system.

Contracting concerns for each player within the delivery system.

Research studies showing what can be expected in using a particular system.

Owners will particularly appreciate the program’s in-depth guidance on how to objectively select the best delivery system for a specific project.

The program (US$395) can be obtained from A/E/C Training Technologies (703-356-6637) or directly from the Design-Build Institute of America (202-682-0110). To view a sample of the program, visit A/E/C’s website at “www.aectraining.com.

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Copyright ã 1999, ConstructionRisk.com, LLC