United States: A New Solution For Public Construction Projects: Sequential Designer-Led Design-Build - Part One

Regardless of complexity, most public construction projects share a few basic goals:

• High quality design and construction by companies that stand behind their work.

• Delivery of the project within the approved budget.

• Minimizing project duration and avoiding delays.

• Avoiding construction disputes and claims for additional compensation.

Public sector construction projects typically face more difficult problems and obstacles than private sector projects. The formality of the budgeting process renders cost overruns unusually troublesome, and the realities of public administration of the projects often result in delays and claims. The requirement of most public procurement laws that the construction contract be awarded to the lowest responsible bidder often leads to an adversarial claims process that is not only costly but also damages public perception of the project and the internal harmony among the participants.

The traditional construction process has not worked well for public projects. It consists of hiring an architect or engineer (A/E), waiting for the A/E to produce a full set of construction documents which are then distributed for competitive bidding, and then hiring the contractor with the cheapest bid to build the project. The primary advantage of this delivery structure is that it is old and familiar, so everyone knows what to expect. However, as most public entities have discovered to their detriment, this method has numerous and serious drawbacks:

• It maximizes project duration since bidding cannot begin until after construction documents are complete, and construction cannot begin until the bidding phase is complete and the construction contract awarded.

• The cost of the project is unknown until after bids have been received on the completed construction documents.

• It is difficult to establish a budget early in the design process with any degree of certainty.

• The bidding process is cumbersome and prone to challenge.

• Problems or omissions in the construction documents lead to contractor claims for extra compensation.

• The project is difficult to administer because of adversity between the A/E and contractor.

• The contractor's primary interest is to make money, not to ensure a high quality project.

• Many contractors "lowball" their bids, generating claims and change order requests to make up the difference.

• If there is a problem in the completed construction, the A/E and contractor often deny responsibility, blaming the other.

With such a long list of drawbacks to the traditional construction process, it is not surprising that municipalities and other public entities have experimented with and/or adopted other more innovative project delivery methods to try to better meet their goals. Some of these methods have worked to a greater or lesser extent, but none has been wholly satisfactory. Below are brief summaries of some of the more common methods used.

Fast Tracking. Where shortening project delivery times is of paramount concern, some public owners begin the competitive bidding process with preliminary drawings and award a construction contract prior to completion and final detailing of the construction documents. Although the ability to begin procurement and early construction activities before final completion of the drawings does save significant time, it plays havoc with cost control. Contractors use the late provision of design details as reasons to seek costly change orders and time extensions, and adversity between the contractor and A/E may lead to frequent and expensive claims and litigation.

Agency Construction Management. In this project delivery method, a contractor-type entity provides various types of pre-construction services and then supervises and coordinates the construction, but with no risk or liability for construction price, schedule or quality. Experience has shown this method to be marginally better at early price determination than traditional construction, but there have been many instances in which the estimate provided by the construction manager, who would not suffer any consequences from underestimating, proved to be unrealistically low when trade contractor bids were ultimately obtained and compiled. Rather than being reduced or eliminated, the A/E's adversity to the contractor was merely transferred downstream to the multiple prime trade contractors. Moreover, the owner became the target of claims by trade contractors for lack of coordination, items omitted in the buy-out, etc.

At-Risk Construction Management. In this structure, the construction manager becomes contractually responsible for the project costs and schedule, somewhat like ordinary general contracting where the contractor provides pre-construction services. At-risk construction managers are less willing to commit to early price determination because they are responsible for cost overruns and do not have control over how the construction documents are detailed and completed. As in traditional construction, the construction manager has adverse interests to those of the A/E and often asserts claims for additional time and/or compensation on account of real or fictitious errors or omissions in the construction documents.

Each of the above project delivery methods (and other less common methods as well) has strongly opinionated supporters and detractors. But most public officials experienced in construction know that none of these methods meets all of the above-listed goals or solves most of the problems with traditional construction. This has lead to a surge in popularity of design-build methods of project delivery which, while as old as the pyramids (literally), have enjoyed a meteoric growth in popularity in both the private and public sectors in this country.

In design-build, the A/E and contractor are hired as a team. Instead of the owner having one contract for design and a different contract with a different party for construction, the owner enters into a single contract (or series of contracts) with a single entity who agrees both to design and to construct the project. The design-builder may be a single entity with both design and construction capabilities; it may be some kind of joint business venture that consists of an A/E and a contractor; or the contract may be just with one member of the team, who then enters into a subcontract with the other.

Historically, the design-build team has been controlled and dominated by the contractor. In the majority of design-build projects, the owner enters into a design-build contract with the contractor, who then subcontracts the professional design services to the A/E. Even in joint business ventures, the contractor tends to control the entity by virtue of being the recipient of approximately 90% of the project revenue. Traditionally, contractors are more likely to be risk-takers than A/Es, and they naturally tend to assume the prime position with the owner, responsible for guaranteeing price and schedule.

Design-build offers some significant advantages over traditional construction and avoids many of the problems that typically plague public construction projects. It allows construction to be fast-tracked without loss of cost control since the contractor cannot logically claim that it did not know how its own A/E teammate would complete the detailing of the plans. It allows prices and budgets to be determined at a early stage with cost input given constantly to the design professional so that the completed plans can be built within the budget and so that the owner can rely on the design-builder's conceptual estimating to forecast project costs at an early stage. Furthermore, the owner does not suffer from any adversity between the A/E and contractor, resulting in a significant reduction in claims and litigation. The federal government has experienced considerable success from and is encouraging design-build procurement, and many units of state and local government have begun to follow its lead.

But design-build is not without some criticism. The two most prevalent criticisms are interrelated and pertain to design quality. Some critics of design-build complain that design quality suffers because design-builders tend to focus on issues of cost, schedule and constructability rather than ultimate quality. A related criticism is that the A/E is loyal to the contractor rather than the owner and does not advise or consult with the owner regarding issues of quality in the design and construction. There is no way to prove or disprove empirically the validity of these criticisms, and there certainly have been some design-build projects of excellent quality, but the logic and prevalence of these criticisms force public officials to take them seriously. Fortunately, there is a small but growing variant of design-build – designer-led design-build – that preserves all of the advantages of design-build without the criticisms.

Designer-led design-build is merely a form of design-build in which the A/E contracts directly with the owner and leads the design-build team. It may subcontract the construction to the contractor or otherwise contractually bind the contractor to a relationship controlled primarily by the A/E. From a practical standpoint, this is a more logical structure than when the contractor leads the team. The design professional usually has the longer relationship with the owner and can be hired based on qualifications rather than low bid. Furthermore, design issues usually occur in a construction project long prior to construction issues, so it is natural for an owner to be working with an A/E even before a contractor has been identified.

The criticisms of design-build do not apply when the A/E leads the team. Design professionals dedicate their endeavors to achieving high design quality. Their reputation and future marketing depend on being associated with high quality projects. If anything, they are criticized for insufficient attention to cost issues in their pursuit of quality. Furthermore, the A/E is contractually prime to the owner and owes the owner its duties of loyalty and assistance. The A/E is free of the conflict of interests that results when it has been hired by the contractor, who may forbid it from communicating its concerns about design or construction quality directly to the owner.

There have been reasons suggested (usually by contractors) about why A/Es should not lead design-build teams, but upon closer examination these arguments appear to have little merit. In traditional construction, architects (and to a lesser extent engineers) are often criticized for over-designing projects and not being able to stay within budget. In designer-led design-build, this criticism is invalid for two reasons: (i) unlike traditional construction, in this delivery method the A/E receives constant feedback regarding costs from its contractor teammate during the design phase and can adjust accordingly; and (ii) as the design-builder, the A/E signs a contract guaranteeing a maximum price or lump sum, so the owner will not have to pay any cost overruns. Designer-led design-build has also been criticized because the A/E who leads the team rarely has sufficient finances to secure all of the construction obligations. However, its teammate, the contractor, typically does have sufficient financial resources to secure the construction, which are ultimately available as security to the owner through the upstream chain of contracts. And although contracted to the A/E, the contractor can have its performance bond name the owner as an additional obligee.

Most design-build public projects today are procured via a two-step approach. First, requests for qualifications (RFQs) are sent to potential design-builders and design-build teams. Based on the responses to the RFQs, 3-5 design-builders are short-listed and are given a Request for Proposal (RFP) seeking competitive submittals, the winner of the process being awarded the design-build contract.

This is the federal approach to design-build. (See Federal Acquisition Reform Act of 1996, 41 U.S.C. § 253M(a).) Numerous states and municipal entities follow a similar two-step approach to design-build public projects. At the end of this article is a fifty state survey of design-build legislation at both the state and local levels (as of early 2006), illustrating a broad acceptance of the two-step approach to procurement.

It is striking that a review of fifty-one jurisdictions (the fifty states and the District of Columbia) uncovered only eight instances where there is no authority whatsoever for the use of design-build. Although a number of states and/or municipalities allow design-build to be used only (1) for limited public purposes (e.g. transportation projects), or (2) for test or pilot programs, or (3) by certain governmental entities, most states have experimented with the use of the design-build procurement method. Indeed, in one of the most compelling illustrations of the utility and flexibility of the design-build procurement method, the Louisiana legislature enacted legislation in the wake of Hurricane Katrina allowing the Department of Transportation to utilize the design-build method on any transportation infrastructure project in an area impacted by a hurricane, pursuant to a two-step RFQ/RFP procedure. (See LSA-R.S. § 250.4.)

This two-step process may not be the most advantageous for a public owner who desires to procure design-build services for a construction project. Its traps or drawbacks include the following:

• The need to prepare an RFP often forces the owner to hire an additional design professional (often called the "criteria professional") who can develop preliminary design documents to be included in the RFP package.

• There may be a lack of continuity between the "criteria professional" and the "design-build team" in which owner goals and objectives are lost.

• The RFP documents may be prepared with more detail than is optimal, depriving the owner of some of the design-builder's creativity.

• The cumbersome bidding process for traditional construction is replaced by an equally cumbersome RFQ/RFP process.

• Many good companies/teams may refuse to participate in the process because the cost of preparing competitive proposals outweighs the profits from the percentage of projects actually awarded to them.

• It may be difficult effectively to require the design-build team to be led by the A/E.

• There may still be "lowball" claims contracting: the disputes would concern the scope of the project and errors or omissions in the RFP documents rather than in the construction documents.

There is a different way for a public owner to procure designer-led design-build services when the leader of the design-build team is the A/E. It is a more gradual process, involving multiple contracts over time, but it is ultimately more advantageous for the owner. The process involves three steps:

Step One: The A/E and public owner enter into an ordinary contract for design services. The contract includes an option that permits the owner to request the architect to issue, at a mutually agreeable future time, a lump sum (or guaranteed maximum price) proposal to complete the plans and to manage construction of the project.

Step Two: Early in the project, usually during design development, when scope of the project is sufficiently defined, the A/E issues the formal design-build proposal for the owner to accept or decline at its option. The proposal is prepared with the assistance of the A/E's contractor teammate and promises to complete the design and manage construction of the project at-risk for cost and schedule.

Step Three: After the owner has accepted the design-build proposal, when the project is far enough along to begin procurement and/or construction, the public owner and A/E enter into a new contract, which supersedes the previous contracts between them, which provides for the A/E to complete the construction documents and act as construction manager at-risk in accordance with the terms of the design-build proposal issued in step two.

Through this three-step process, the A/E becomes the design-builder by virtue of being contractually responsible both for design and construction. Price competition is maintained by the fact that the trade contracts can be required to be competitively bid. As construction manager at-risk, the A/E may be required to procure the trade contracts on an "open book" basis, after owner input, and award the work to the low bidder or in accordance with established criteria – similar to how many construction management projects are structured today.

There is a significant additional advantage to the public owner from employing this sequential method of designer-led design-build: the owner does not have to commit to a design-build method of project delivery at the onset of the project. Instead, the owner can start the project traditionally, contracting for the usual A/E services. After the owner has become comfortable with the concept of designer-led design-build, and with the work of the chosen A/E, it can elect whether or not to exercise its option to convert the project to design-build. This is not possible with the two-step procurement process, nor with contractor-led design-build.

Sequential designer-led design-build is a construction procurement method that appears to meet all of the criteria frequently articulated by public construction officials. It has been used in the private sector with considerable success. Although sequential designer-led design-build is not yet very frequent or common in the public sector, it is both more logical and more comfortable for most public entities.

Furthermore, many jurisdictions recognize construction management as a professional service, subject to qualifications based selection, rather than competitive bidding. Indeed, even in some of the jurisdictions which provide no specific authority for design-build, such as Kansas and North Dakota, construction management is recognized as a professional service and is excluded from the competitive bidding requirements.

In light of the increasing acceptance of design-build in many jurisdictions, together with the increasing recognition of construction management as a professional service, sequential designer-led design-build in the public sector is a concept whose time has arrived. Public officials should consider talking to their A/E consultants about leading a design-build team for the next project.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.