Progressive Design-Build Claims

Introduction

As construction projects continually present new challenges, delivery methods have evolved to address them.  The rapidly shifting landscape of project risks, market constraints, and increasing complexity of critical infrastructure are driving the evolution of innovative means of addressing cost and schedule complications.  Progressive design-build (PDB) is among the methods that have started to become more common in the large to mega-project market, building on lessons learned with previous iterations of alternative delivery methods. 

Put simply, PDB is a two-phased design-build approach consisting of a preconstruction and design phase prior to establishing a price and construction schedule, which is thereafter followed by final design and construction.  The two-phased nature of the process affords time to consider project risks early in the process and before agreeing on a construction price.  The method, however, is not immune from challenges and can add a new flavor to the sorts of disputes that arise.

History and Overview of Progressive Design-Build

The traditional method of project delivery is known simply as Design-Bid-Build (DBB), wherein the project owner would design the project and then issue the signed, stamped design for bids, with the lowest responsible bidder winning the project.  The procurement process often does not entail any consideration of bidders’ qualifications.  DBB presented well-known challenges; namely, when the lowest price gets the work, the contractor is incentivized to reduce costs.  Over the years, owners faced numerous claims and delays on DBB projects, often stemming from constructability challenges and design errors, among the usual litany of construction-related claims.

In response to the challenges faced with low-bid DBB, the traditional Design-Build (DB) method gained traction. In the DB model, the owner engages a joint team of a contractor and designer to prepare the final design and then construct the work.  DB offered the opportunity to consider qualitative aspects of contractors other than price during the procurement process, including qualifications and approach to the work.  As price was not the sole criterion for evaluation and award of the contract, owners could incentivize things like higher quality and more innovative approaches to design and construction.  Moreover, as the design-builder is responsible for the project’s design, DB shifted the risk of design errors and constructability to the design-builder.

Nevertheless, DB faced its challenges.  In a typical DB procurement, the owner includes a partial design – often a 30% design – in the Request for Proposals, as well as technical specifications setting the parameters for final design and construction.  This means that the typical DB procurement involves design-builders proposing a lump-sum price based on a design that is only 30% complete, and based on technical specifications that can leave room for interpretation. 

While initially considered to be a response to the numerous claims on DBB projects, DB projects experience their own brand of claims, the most complex of which involve disputes over the interpretation of technical specifications.  The logic is not difficult to conceive.  Owners interpret their specifications to achieve higher quality while contractors – operating under a lump-sum price – interpret their charge as compliance with the specifications in a way that achieves a profit. 

PDB has evolved to address some of the challenges with DB though a phased approach.  A PDB procurement focuses heavily on contractor qualifications with minimal, if any, consideration of price.  Once the design-builder is selected, the design-builder advances the design to 60% or further before price negotiations commence, allowing the design-builder to base their cost estimate on a design that is advanced further than in a traditional DB project.  Moreover, the owner has the opportunity to provide input on the design, allowing for clarity on scope before establishing a construction price.  Additionally, while the design is progressing, the design-builder engages in other activities to identify and mitigate risk, including coordination with utility owners, preparation of permit applications, site investigation, long-lead materials procurement, and other similar activities that, when performed early, can add greater certainty to the construction price and schedule.  In a PDB model, the design-builder does not perform final design and construction unless there is agreement with the owner to a construction price and schedule, meaning that the owner can terminate the contract if negotiations are unsuccessful.

Nevertheless, PDB can give rise to claims similar to DB, as well as claims of a distinct nature.  While the progressive design-builder is responsible for the design and constructability, disputes may nevertheless arise over the nature and extent of the progressive design-builder’s opportunity and effort to mitigate risk during the preconstruction and design work.  Moreover, the owner’s input during the PDB design process adds a challenge that does not exist on traditional DB; in particular, how much input can an owner give before taking back some of the design and constructability risk.  Add to this the fact that speed is often a priority, and there is a recipe for complex claims even in the collaborative setting of PDB.

Progressive Design-Build Process

Procurement

The procurement of a design-builder on a PDB project takes aspects from several other delivery methods where the primary emphasis of the procurement is qualifications and approach.  A PDB procurement can be either one or two steps, such that a separate qualifications and shortlist step is optional.  Whether one or two step, the procurement may evaluate such factors as:

• Past project history and success
• History and success of proposed key personnel
• Technical approach to the work
• Approach to subcontracting and cost estimating

There are numerous permutations of the qualitative aspects of a PDB procurement, but one element is considered essential: minimal, if any, consideration of price.  In the ideal situation, the procurement would focus only on qualifications without any consideration of a price component.  However, reality often dictates that the owner consider some form of price in the selection process.  The price components that owners use are beyond the scope of this article, but one thing is key: the price to perform the final design and construction work is not included in the procurement.  Rather, during procurement, requiring proposers to bid a price for final design and construction is premature and would deprive the design-builder and owner of the benefits of the design and preconstruction phase of the PDB method.

Phase 1 (Design and Preconstruction)

After the owner selects the design-builder, the Phase 1 work begins, consisting of design progression and preconstruction.  At this stage, the design-builder picks up on the design provided by the owner and may advance the design to 60% or further.  During the Phase 1 work, the design-builder also engages in preconstruction services with the goal of mitigating risk, which include, for example:

• Coordination with utility owners to finalize utility relocation plans and timing
• Coordination with permit agencies to commence permit applications and obtain permits
• Evaluation and procurement of long-lead materials
• Site investigations such as geotechnical evaluations, utility exploration, design and construction survey, landscape inventory, traffic counts, and existing conditions evaluation
• Scope validation
• Risk identification and quantification
• Consideration of alternative design concepts/value engineering
• Cost estimation and schedule preparation

The end game of the Phase 1 work is to reach agreement on a construction price and schedule under which the design-builder will continue into the Phase 2 final design and construction work. To accomplish this, once the design reaches the 60% milestone (or more if determined appropriate), the design-builder will submit a proposed price and schedule to perform the final design and construction work.  This begins the process of negotiation with the owner until they either reach an agreement and move into the next phase or negotiations conclude and the owner terminates the design-builder’s continued work.  In the event of termination, the owner may complete and package the design to date and use an alternative procurement method to engage a contractor. 

The key element of this process is that the design-builder submits its proposed construction price and schedule with the benefit of having advanced the design to 60% or more and having undertaken the risk mitigation activities described above.  The idea behind this is that the design-builder can achieve greater price certainty by reducing the unknowns that are present when basing a bid on a 30% design.  The same goes for schedule; by having a greater understanding of the constraints, and by having undertaken certain activities prior to establishing the schedule, the design-builder can create and propose a schedule with greater certainty.

Phase 2 (Final Design and Construction)

The Phase 2 process runs similar to a DB project in that the design-builder completes the project’s design and builds the project in accordance with the plans and specifications commenced during the Phase 1 work and finalized during Phase 2.  Construction administration does not differ significantly from other delivery methods, as the owner provides construction oversight, including quality verification, design acceptance, and other responsibilities provided in the contract for the work.

The difference between PDB and the other delivery methods concerns the allocation of risk.  Certain of the de-risking activities during the Phase 1 work may change how risk events materialize and which party bears responsibility for them, including whether the occurrence of a risk entitles the design-builder to a price increase or schedule adjustment.

Claims and Disputes

Initially, PDB is not immune from disputes that occur on all types of projects, regardless of delivery method.  Such claims may concern differing site conditions, the presence of hazardous materials, interference by other contractors, third-party approval delays, owner-caused scope changes, force majeure, and changes in law, among others. 

The resolution of these claims may, however, depend on the activities performed during Phase 1.  For example, differing site condition claims may turn on the investigations that the design-builder performed during Phase 1. The same goes for claims of unknown utilities, hazardous materials, and other issues that depend on the extent and permitted scope of site investigation activities.  Additionally, claims for third-party approval delays may depend on the extent to which the design-builder was able to coordinate with the offending third-party during Phase 1. These activities are all relevant questions for the dispute resolver when facing a claim of this nature.

An example illustrates how a PDB claim might unfold.  Six months into construction of a five-year roadway project, the design-builder submits a final permit application with the local authority with jurisdiction over a waterway crossed by the road.  The permit seeks permission to place a trestle in the water to construct a portion of the crossing and is compliant with the agency’s requirements.  The permit agency does not have written guidelines and is not governed by statute concerning the length of time it must respond to a permit application.  Sixty days after the design-builder submits the application, the agency has not returned a response and the design-builder submits a claim to the project owner asserting that the lack of a permit will delay construction of the bridge, which is on the critical path of the project schedule.  The contract between the owner and design-builder provides for cost and schedule relief when a third-party, including a permitting agency, delays the work by failing to respond timely to a permit application. 

How is this claim resolved?  On a DBB project, assuming the permit application is compliant and all other bases for the claim are established, the contractor is likely to get relief.  The same goes for DB.  The main reason for this is that the timing of third-party approvals is not within the contractor’s control.  Even though there is no statutory period for approving the permit application, a 60-day time period for a compliant application is likely to be considered untimely under the circumstances.

On a PDB project, there is one other fact to consider, which is: how much interaction did the design-builder have with the permitting agency prior to agreement on the construction price and schedule?  If the design-builder was able to engage with the permitting agency and the permitting agency generally represented that permits would be returned within 90 days of receipt of a compliant application, then it would be unreasonable to consider the response untimely when only 60 days have passed.  The design-builder would be expected to build a 90-day turnaround time into the schedule and would not be afforded relief after only 60 days.  However, if the permitting agency had represented that 60 days would be the expected turnaround time, and the design-builder relied on that representation, then the failure to respond within 60 days might establish entitlement to the design-builder’s requested relief.

Another example shows how PDB might be different than traditional DB.  During Phase 1 of a PDB bridge project, the design-builder submits a 60% design for the bridge’s foundations consisting of a single package with the entirety of the substructure.  During collaborative meetings discussing the design, the owner comes up with a suggestion to use partially hollow columns to save costs.  At the owner’s request, the design-builder prices this out, performs a constructability analysis, and ultimately incorporates the hollow columns into the design going forward.  The use of hollow columns is incorporated into the price and schedule assumptions and forms the basis for the price and schedule accepted by the owner that allows the project to proceed into Phase 2.  During Phase 2, the design-builder finalized the substructure design and the owner accepts the Released for Construction plans, allowing construction to commence.

One year into construction, the design-builder begins to pour the columns in the water following a design with partially hollow columns.  As the columns near completion, the design-builder discovers that the columns are trapping condensation from high levels of humidity during the summer, which prevents the concrete from setting properly, leading to defects in the pours.  The solution devised is to pour additional layers of concrete, which the design-builder estimates will cost $5 million and delay the critical path by 30 days.  The design-builder files a claim with the owner asserting that the constructability and design challenges stem from the owner’s proposed concept to use the hollow columns.  The owner denies the claim, arguing that this is a design defect and constructability issue for which the design-builder is responsible. 

On a traditional DB project, the design-builder takes on responsibility in full for the design, picking up the design where the owner left off in the procurement documents and advancing the design to completion.   The design-builder is responsible for constructability risks and for any errors in its own design, other than errors in the technical specifications.  If the hollow columns had been required by the specifications, the design-builder would more than likely be entitled to relief on the ground that the specification was defective.  In contrast, if the design-builder had proposed the hollow columns as an alternative technical concept during procurement, responsibility would likely fall on the design-builder.

On a PDB project, the question is more complicated.  On the one hand, the owner was the party who requested the concept.  On the other hand, the design-builder evaluated the concept, incorporated it into the design, and performed a constructability analysis of building the hollow columns and built a schedule that included building them in the summer during periods of high humidity. 

The question is where does the owner start to assume design or constructability responsibility for design concepts proposed during the Phase 1 process?  The answer lies on a spectrum that assesses the degree to which the owner developed the design concept or required it to be incorporated into the construction price.  If the owner insisted that only by incorporating hollow columns would the price fall within the project budget, leaving the design-builder with little choice, the owner might be liable for the claim.  If, however, the concept of hollow columns was developed in concert, or was merely proposed by the owner and the design-builder ran with the idea, responsibility may fall on the design-builder.

Conclusion

PDB continues to evolve as a delivery method and as more projects use this model, there will inevitably be more claims and disputes that provide further guidance on how claims unfold.  The use of PDB and evolution of delivery methods in general underscores for dispute resolvers that similar types of claims can warrant different factors to consider depending on the contracting method.  As delivery methods grow, so too must dispute resolution practices, and dispute resolvers must keep a watchful eye on the contexts in which new disputes arise to achieve a proper resolution.