Winter 2024
Addressing Design-Build Quantity Risk in Teaming Agreements
By: Hugh D. Brown, Shareholder, Fabyanske, Westra, Hart & Thomson, P.A.
Introduction
The design-build delivery method is increasing in popularity, due in large part to the advantages it provides owners in terms of speed, and decreased owner involvement in disputes. However, when design-build projects are paid on a lump-sum or guaranteed maximum price (GMP) basis, design-builders face the heightened risk inherent in pricing their construction work without the benefit of fully developed plans. When this risk ripens and design-builders find themselves with increased quantities to construct a fully developed design, they often turn to their design team partners for recovery of the added cost.
Allocation of this quantity risk on design-build projects defies easy solution. However, there are steps that both contractors and designer team members can take when forming their relationship during the bid phase of a project that will increase predictability. As a review of the cases discussing the issue shows, addressing quantity risk in a carefully drafted Teaming Agreement can go a long way to increasing predictability for all design-builders and designers.
Background
The design-build delivery method has grown in popularity.[1] Its advantages for owners include the ability to fast-track the work, minimizing owner involvement in disputes over design issues, and allowing early construction to proceed alongside final design work.[2] However, design-build projects often require the design-builder to commit to a fixed price long before it has a complete design from which to work. This is because the design-builder itself will be preparing the design as part of its contract scope after executing the design-build contract. Therefore, the design-builder frequently must estimate construction quantities from the concept drawings before it has spent the time necessary to prepare a more complete design.
In most instances, the design-builder does not have the requisite design capability in-house, so it retains an outside design partner to assist with generating a proposal for the work, and performing the design work if and when the design-builder gets the work. This occurs through the use of a “Teaming Agreement,” which is a document through which “contractors with diverse capabilities seek to define their relationships, rights, and responsibilities during both the pursuit of the contract award and, if a contract is awarded based on their joint efforts, their respective performance obligations regarding the awarded contract.”[3]
But difficulties can arise when the design-builder relies on the proposal phase design to estimate quantities for a final lump-sum bid. Providing a lump sum price for a design-build project necessarily requires the design-builder to estimate all of its costs, including construction quantities, before the final design is complete. Lump-sum contracts are the most prevalent pricing model in government contracts under the design-build delivery method,[4] as well as in private design-build contracts, so this issue can potentially affect most design-build contracts.
A handful of reported cases discuss the possible outcomes when design-builders and designers find themselves in disputes over increases in construction quantities that occur during the design process. These cases illustrate the extent to which properly formalizing the parties’ rights and responsibilities in a Teaming Agreement can affect the outcome.
In CL Maddox v. Benham Group, Inc.,[5] the designer entered into an oral agreement with the design-builder under which the designer agreed to complete proposal phase drawings and specifications, and provide equipment lists and quantity information. The design-builder relied on that information in preparing its formal proposal, which was accepted. The quantity information turned out to be inadequate. At trial, the jury returned a verdict in favor of the design-builder for $5,000,100, of which $2.7 million was attributable to bidding errors. Incidentally, the designer had received a total fee of $58,200 for the proposal phase services that generated this liability.
On appeal, the Eighth Circuit Court of Appeals held that the oral agreement was a separate contract, and therefore enforceable despite the existence of a later, separate integrated agreement for final design. The court also held that the designer had impliedly warranted information it supplied because it knew that the design-builder would rely on that information.[6] CL Maddox graphically illustrates the risks that both contractors and designers run when preparing a proposal. The designer undertook a highly unfavorable risk for a low fee as it was held strictly liable for errors in its design work.
The decision in CRS Sirrine v. Dravo Corp.,[7] also illustrates the heightened risk faced by a design professional participating in a design-build project. In that case, the design professional entered into a joint venture agreement with two related contractor entities for a power plant project for the United States Navy at the Norfolk Naval Shipyard in Portsmouth, Virginia. The design professional prepared the technical proposal for the project and the contractors prepared a bid exceeding $100,000,000 based on the design professional’s preliminary design and engineering. The contractors incurred losses on the project in excess of $30,000,000 and filed suit against the design professional seeking $12,500,000 for breach of contract and breach of the fiduciary duties owed by the design professional to the contractors as a part of the joint venture. The trial court awarded the contractors approximately $5,500,000.
In Skidmore, Owings & Merrill v. Intrawest I L.P.,[8] the designer contracted to provide the design-builder with complete architectural designs for a contemplated construction project so that the design-builder could establish a GMP. The design-builder construction manager used ostensibly complete drawings to determine building costs, and decided to undertake the project for a GMP based on those designs. During construction, it discovered that substantial design changes were necessary to produce a functional building. A jury found the designer liable for the costs that Intrawest incurred in performing and paying its contractors for the unanticipated work.
Because the designer contractually warranted that its defective designs were complete and knew that the design-builder would use them to develop the GMP for the project, the court of appeals affirmed the jury's damage award for the extra work costs and loan interest that the design-builder incurred as a result of the necessary design changes. The court rejected the designer’s claim that it agreed to handle the project on a “fast track” basis, meaning that Intrawest should have expected incomplete designs and budgeted for mid-construction changes. The court held: “The fast track design method is inconsistent with the GMP approach indicated by the parties' correspondences and contracts.” Again, the court found that the designer had impliedly warranted its designs.
It appears that designers and design-builders alike learned from these cases, and have worked harder to protect themselves by contract. Two modern cases resulted in very different results, largely due to careful drafting of the teaming agreements in question.
In Middlesex Corporation, Inv. V. Fay, Spofford & Thorndike, Inc.,[9] the designer successfully disclaimed any warranty of its design and limited its liability to that caused by its negligence. The Teaming Agreement stated:
9.... The Design/Builder acknowledges that as a design professional, the Engineer's performance of its service both pursuant to this Agreement and with regard to any services performed as part of a Subcontract for Design Services are subject to a professional standard of care. The Design/Builder and Engineer agree that the applicable standard of care for the Engineer's services shall be that degree of skill and care normally exercised by practicing professional engineers performing similar services on similar projects under similar conditions. No other representations or warranties, whether express or implied, shall be imputed to the Engineer's services ...
11. The Engineer will provide its professional opinion regarding the Design/Builder's construction estimate for quantities and comment on specific items of potential quantity growth, but the Engineer shall not have risk associated with estimate quantities and/or construction pricing. The Engineer will prepare its own independent estimate for use by the Design/Builder in making its assessment of quantities. The Design/Builder acknowledges that such estimates are based upon only limited and conceptual design development derived from the contents and requirements of the RFP. The Design/Builder shall verify quantities or other information furnished by the Engineer and shall use its knowledge and experience as a construction professional in developing its bid and pricing for the work, and shall include in such bid an appropriate degree of contingency for additional cost resulting from the post-award design development and finalization process.
(Emphasis added).[10] The designer was paid only $300,000 for its bid phase work. The design-builder bid a contingency of between 1% and 2%, which was inadequate to cover the eventual quantity increases it experienced. As in the cases above, the design-builder made claims against the designer, but unlike those cases, its claims were limited by the Teaming Agreement to those for negligence. Accordingly, the designer was ultimately held liable for a limited portion of the claim leveled by the design-builder. The court found that the designer had breached its standard of care and caused damages by a relatively small sum.
Finally, in Walsh/Granite JV v. HDR Engineering, Inc.,[11] design-builder Walsh/Granite Joint Venture and designer HDR Engineering, Inc. collaborated on the Pennsylvania Department of Transportation's Rapid Bridge Replacement Project pursuant to which 558 bridges were to be replaced throughout Pennsylvania. The designer agreed to provide bid phase services to assist the design-builder with bidding. However, the parties included an integration clause in their contract precluding reference to pre-Teaming Agreement representations, and furthermore established a quantity matrix for materials, and a design quantity change fund (essentially, a contingency) held by the contractor to fund construction costs incurred arising from quantity growth due to design errors and omissions. If the actual quantities exceeded the quantities in that matrix, the design-builder was to establish a contingency amount of $1,000,000 to absorb those overruns. Only once that fund was empty could the designer be held liable for quantity overruns for materials listed in the matrix.
The court held, based on the integration clause, that pre-contract representations did not create a warranty of the quantities established by the designer. However, the parties disagreed as to the designer’s liability for quantity growth for items outside the matrix. The designer claimed that it had no such liability, and the design-builder claimed that the designer was liable for all quantity growth for such items. The court held that the parties had failed to define their agreement either way, and, because the issue was before the court on summary judgment, left the question for another day. But for this omission, however, the parties had successfully defined their relative financial obligations concerning quantity overruns, and the designer had avoided liability for the full overrun that might have resulted under a warranty theory.
DBIA Teaming Agreement Best Practices.
These cases show that negotiating and executing a pre-bid Teaming Agreement is an essential practice for designers and design-builders.[12] These days, parties will often elect to use some of the template Teaming Agreement forms established by the Design-Build Institute of America (“DBIA”) (the DBIA 580) or American Institute of Architects (“AIA”) (the AIA C102). It is worth reviewing these Teaming Agreements to determine whether contracting parties and their counsel can do more to define and mitigate quantity risk than the bare forms set forth. The following are a few items that should be carefully considered by the parties. Note that these items are discussed in the context of a contractor-led team where the contractor hires the designer.
Standard of Care: Both the DBIA 580 and the AIA C102 define the designer’s standard of care as the care and skill ordinarily exercised by members of the same profession in the same or similar locality and circumstances. This standard should be acceptable to both the contractor and designer, and should be insurable under typical professional liability policies.[13] However, in and of itself, it may not be sufficient to protect the contractor from quantity overruns on a lump-sum contract if those overruns are the result of the designer’s non-negligent work. Hence, design-builders will, if possible, want to explore additional protections such as specifically quantifying a percentage of overruns beyond which the designer may face liability or receive savings if the estimated quantities under-run by a certain percentage. Designers may, of course, resist such provisions.
Warranty: Neither the DBIA 580 nor the AIA C102 makes any reference, positive or negative, to the designer’s warranty obligations with respect to its pre-bid design work. Although the integration clauses included in each contract may preclude any warranty being implied from pre-contracting representations, it remains possible that a court could read such an express warranty into existence in the Teaming Agreement itself from careless drafting of the contractual scope of work. If the design-builder expects a warranty and the parties are able to agree on express language so providing, it should do so. If the designer wishes to avoid any argument over such a warranty, it may wish to include an explicit disclaimer. As things stand, there is the potential for disputes and uncertainty over warranty obligations.[14] Further, in a few jurisdictions, courts may imply such a warranty even without express warranties.
Responsibility for Quantity Estimates: The strongest protection for the designer may lie in including language similar to that used by the designer in Middlesex, in which the Teaming Agreement in question expressly stated that the designer “shall not have risk associated with estimate quantities and/or construction pricing.” It is unlikely that design-builder will agree to that language. A shared cost risk/reward for quantity over-runs and under-runs is sometimes chosen as a compromise risk allocation.
Limitation of Liability & Waiver of Consequential Damages: The parties might also agree to a specific limitation of liability to a dollar figure or percentage of the designer’s contract price. Additionally, the waiver of consequential damages may provide some protection to the designer and limit the design-builder’s recovery if the damages in question are deemed to be other than direct. However, “direct” and “consequential” are not self-defining terms. For example, do additional out-of-pocket costs incurred to perform work based on a changed design constitute direct or consequential damages? It is easy to see how reasonable minds could differ on this question.
Contingency: Quantity over-run risk can potentially be managed through the use of adequate contingencies, but on public projects, the need to be the low bidder may lead to inadequate contingencies being established as shown by the Middlesex case. However, if adequately calculated, a contingency may represent the best way to mitigate foreseeable risk. Over and above the contingency, the parties can define who will be responsible for quantity growth. This option gives the parties the greatest predictability and may be most appropriate where the range of possible loss can be quantified within a defined range. If the project is private, some design-builders and designers have found success by proposing an adequate contingency but promising to releasing the quantity contingency back to the owner once the risk of quantity over-run has passed, which is a way to include all three interested parties – the design-builder, the designer, and the the owner - in the quantity risk calculus.
Appendix
DBIA and AIA Contract Language
Section 2.6 – Each Party shall have the sole discretion to establish its price for its respective Scope of Work. Each Party will establish its price in good faith to meet anticipated competition, and the Parties shall consult for the purpose of establishing an overall competitive Proposal Price; however, the Design-Builder shall have the sole discretion to establish the Proposal Price.
Section 2.11 – If design processional services are performed by the Parties pursuant to this Teaming Agreement, the standard of care for all design professional services shall be the care and skill ordinarily used by members of the design profession practicing under similar conditions at the same time and locality of the Project.
Section 8.3 – Notwithstanding anything to the contrary elsewhere in their Teaming Agreement, no Party shall be liable to the other Party for indirect, incidental, special or consequential damages, including but not limited to, loss of revenue, loss of profit, cost of capital, loss of business reputation or opportunity whether such liability arises out of contract, tort (including negligence), strict liability, or otherwise.
Section 10.9– This Teaming Agreement constitutes the entire understanding and agreement of and among the Parties with respect to the Team, the Statement of Qualifications, the Proposal and the Project, and supersedes all prior representations and agreements, verbal or written.
AIA C102
Section 3.3.1 – The Team Member shall perform its services under this Agreement consistent with the skill and care ordinarily provided by professionals, consultants or other construction industry participants performing services or work in the same or similar locality under the same or similar circumstances.
Section 7.5 – Unless otherwise provided for in the Solicitation, the Team Manager and Team Member waiver all claims for consequential damages arising out of or relating to this Agreement.
Section 10.1– This Agreement represents the entire and integrated agreement between the Team Manager and the Team Member and supersedes all prior negotiations, representations or agreements, either written or oral.
[1] See DBIA Report, at 10 available at https://dbia.org/wp-content/uploads/2021/09/FMI-DB-Market-Research-2021_2025.pdf.
[2] Design-Build contracts have the following advantages:
They typically place design, construction, and material and equipment procurement responsibilities under a single contract, and thus maximize the cooperative and early involvement of design and construction professionals working together as part of a project team.6 Under this project delivery method: (1) commencement of work can be “fast tracked,” (2) costs can be better controlled by early contractor involvement in the estimating and material procurement process, (3) disputes over interpretation of and omissions from plans and specifications can be minimized because of the “single source” responsibility and early involvement of the entire design-build team,7 (4) time between commencement of design and completion of the project can be significantly reduced by early issuance of “front end” bid packages (such as site excavation and foundations) prior to completion of final design documents,8 and (5) “green building” objectives can be better achieved.9 The legal relationships of the design-build method minimize the owner's detailed involvement in management of the design and construction process.10
§ 2:17. Project delivery methods—Design-build and turnkey, 1 Bruner & O'Connor Construction Law § 2:17.
[3] § 2:9. Express contracts—Definite contract or “agreements to agree”—Teaming agreements, 1 Bruner & O'Connor Construction Law § 2:9
[4] See, e.g., John R. Heisse et al, Turning A Battleship: Design-Build on Federal Construction Projects, The Construction Lawyer, Vol. 31 (most federal construction contracts are awarded as lump sum or guaranteed maximum prices, “which are, in a practical sense, fixed price with a possibility of shared savings.”); MnDOT Design-Build Manual (Rev. 2019) at 13 (“Design-build contracts are lump sum contracts”).
[5] 88 F.3d 592 (8th Cir. 2001).
[6] This decision is somewhat anomalous in its application of the implied warranty to design work. See 5 Bruner & O'Connor Construction Law § 17:24.
[7] 213 Ga. App. 710 (Ga. Ct. App. 1994)
[8] 87 Wash. App. 1054 (1997)
[9] 2019 WL 3552609 (Super. Ct. Mass, June 28, 2019).
[10] Id. at *2-3.
[11] Civ. A. No. 17-558, 2019 WL 1382957 (W.D. Pennsylvania, March 27, 2019).
[12] See also Aileen Cho, Teaming Agreements, Collaboration Are Best for Design-Build, Engineering News Record, (November 6, 2022).
[13] 5 Bruner & O'Connor Construction Law § § 17:13.30 (“Design professionals are, for good reason, reluctant to enter into contracts containing language that directly alters their standard of care. Not only does the language add confusion as to the scope of the undertaking but can also compromise the designer's coverage under its professional liability policies.”).
[14] It is unlikely that the designer would face an implied warranty claim. “Most jurisdictions that have addressed the issue have rejected the application of implied warranties to professional services. Nor have the courts been particularly receptive to the concept that a designer warrants or guarantees satisfactory results.” 5 Bruner & O'Connor Construction Law § 17:24. However, there are courts that have held otherwise. Id.; Skidmore, Owings & Merrill v. Intrawest I L.P., 87 Wash. App. 1054 (1997) (“Where a person holds himself out as qualified to furnish, and does furnish, specifications and plans for a construction project, he thereby impliedly warrants their sufficiency for the purpose in view.”) (citing Prier v. Refrigeration Eng'g Co., 74 Wash.2d 25, 29, 442 P.2d 621 (1968)).