Design-Build: A Realistic Solution for Owner Cost Overrun Risk?

Many public owners choose design-build (“DB”) as a delivery approach with the objective of reducing risk for cost overruns. In DB, the owner has the opportunity to transfer to the design-builder substantial design and construction risk and thereby significantly contain its contractual exposure for cost and time impacts that may be experienced by the design-builder. These risk transfer and containment objectives are especially important to the owner in the context of major DB subsurface projects (“subsurface projects”) in which not only design and construction risk, but varying and potentially significant, subsurface conditions risk may be allocated to the design-builder.

Contractual Risk Allocation

There are various DB contractual risk allocation provisions that seek to achieve these owner risk transfer and containment objectives, such as provisions: (a) negating any owner obligations for and disclaiming the reliability, accuracy and suitability of owner-furnished preliminary design, studies, reports (including subsurface data, and interpretative and other reports); (b) allocating to the design-builder entire risk and responsibility for adequacy of final design, including the risk of cost overruns and delays; and (c) to varying degrees, allocating to the design-builder substantial risk for differing subsurface conditions (“DSCs”). The cumulative effect of these (and related) provisions is to both transfer substantial design and construction risk to the design-builder and contain the owner’s risk for cost overruns.

DB Risk Allocation Principles

In general, prudent and balanced DB contractual risk allocation provisions and consistent owner practices in DB implementation are predicated in the basic and recognized principle that risks should be commensurately aligned with the ability to control the variables that impact the relevant risks.

In the specific context of DB subsurface projects, the application of that principle should translate to risk allocation for design, construction, and DSCs that provides for a significant and meaningful opportunity for the design-builder to: (a) exercise significant discretion and judgment in the process of design development and finalization; (b) investigate the subsurface conditions; (c) evaluate the adequacy and suitability of the final design approach in the reasonably contemplated subsurface conditions; and (d) have a fair and adequate equitable adjustment remedy when subsurface conditions encountered differ substantially or materially from objective (contractually) defined (baseline) expectations.

Owner Practices Affecting DB Risk Allocation

Certain owner practices – contractual and actual (performance) – in DB may lead to subversion of those basic risk allocation principles. These practices include:

• The mandated use by the design-builder of prescriptive and/or highly developed and detailed design.
• The unqualified negation of any design-builder reliance rights.
• The preclusion of any cost or time contractual remedy for substantially or materially different subsurface conditions.
• Broad and plenary rights of the owner to reject the design-builder’s design submittals on the basis of preferences, or alternative judgments.

The cumulative effect of these practices potentially is – notwithstanding contractual provisions to the contrary – to place the DB owner in a position of substantial control relative to the design development process and other important variables that impact design adequacy and subsurface conditions risk in subsurface projects. These practices produce a mis-alignment of control and risk reasonably expected in DB that, in turn, produce unfairness in risk allocation. In the context of such practices, it is likely that courts and other dispute-resolvers (such as arbitration panels or dispute review boards) will determine that application of contractually defined risk on the design-builder – in the absence of considering the pragmatic impact of such owner practices – would produce fundamental unfairness due to an imbalance as between control and risk. In such circumstances, the cost overrun exposure – contractually allocated to the design-builder – for design adequacy and subsurface conditions risk – may be re-allocated (in whole or in part) to the owner. Thus, contractual provisions ultimately may provide illusory protection for the owner in containing cost overrun exposure.

Another important factor – more subjective than contractual risk allocation provisions – involves the extent to which an owner “culturally” embraces DB, in the sense of adaptively and commensurately relinquishing its more conventional design-bid-build control over the design development and subsurface investigation and evaluation processes, required in DB to rationalize and justify the greater levels of risk allocation to the design-builder for design adequacy and subsurface conditions. More specifically, and irreconcilably, some owners are neither sufficiently trained, nor acculturated, nor willing to accept their diminished role in DB, but still expect substantial risk transfer to the design-builder.

Unbalanced contractual and performance practices of the owner in DB that significantly impact design adequacy and subsurface conditions risk allocation will likely produce a re-allocation or reversion of cost overrun exposure to the owner, and result in owner cost containment objectives failing to be realized.

DB is at an important developmental point in subsurface project delivery. Now is the time to assess procurement, contractual and performance practices as related to design adequacy and subsurface risk in those approaches. Acknowledging that risk allocation in these spheres is appropriately and significantly influenced by project-specific considerations, it is neither realistic nor desirable to contemplate that “best practices” may be generically prescribed or developed in a manner that is universally applicable in all DB contexts.

That said, guidelines should be designed to achieve fairness and balance in design adequacy and subsurface conditions risk allocation in DB subsurface projects. Those guidelines should focus not merely on contractual provisions, but also on providing recommendations as to performance practices in DB that are consonant with the respective roles and responsibilities of project participants and principles of fairness and balance in risk allocation.

David Hatem is a partner in the Boston-based law firm, Donovan Hatem LLP. Nationally recognized for his expertise in representing engineers, architects and construction management professionals, he leads the firm’s Professional Practices Group which serves design and construction professionals. He is regularly called upon by this country’s leading architect-engineering firms to provide risk management strategies and solutions, especially on major subsurface projects.