Improving Risk Allocation on Design-Build Subsurface Projects

Recently, and increasingly, there has been much discussion and concern expressed by the design and construction industries about the perils of fixed price contracting on design-build (“DB”) infrastructure projects. Engineering News-Record reports that major civil works contractors are withdrawing from that market [1].

The root causes of this development primarily derive from imbalanced contractual risk allocation, and pricing and contingency strategies that do not realistically align with project scope, complexity, risk, and other uncertainties.

These root causes have acute and special relevance in the context of DB subsurface projects, and especially those projects delivered in a public-private partnership approach [2].

Public owners plan to yet further increase DB utilization on infrastructure projects, including tunnels. Given the critical importance and value of realistically fostering and attracting competition among qualified and responsible contractors in these project procurements, it is imperative that diligent and effective measures be prudently developed and implemented to address these concerns and, thereby, improve DB delivery.

DB Subsurface Projects: Risk Allocation Drivers and Interrelationships Factors

There are various sources that address the advisability of prudent procurement and contractual practices to achieve fair and balanced risk allocation on major DB subsurface projects [3]. Achieving that objective on such projects depends upon a fundamental recognition of the interrelationships and interdependencies among three factors:

1. The scope and quality of subsurface investigation.
2. The assessment and evaluation of available subsurface data relative to the final (permanent work) design and constructability (temporary works, means/methods) approaches.
3. The compatibility, suitability and constructability of those approaches in the reasonably anticipated subsurface conditions based upon available subsurface data and related evaluations.

Effective risk allocation on subsurface projects must account for the dynamics, interactions, and interdependencies among these factors (“DII Factors”) [4].

The conscientious consideration and balancing of these DII Factors need to address some basic questions:

• How does (and should) knowledge (data and evaluations) derived and produced from subsurface investigations inform and guide the development of a project’s final design approach?
• How are interfaces and interdependencies between anticipated subsurface conditions and the specific final design approach, and the compatibility and suitability of each relative to the other, evaluated and correlated during the design development process?
• Can the specific final design approach be reasonably constructed in the particular subsurface conditions?
• Can materially different subsurface conditions encountered during construction result in the need to revise that design, or to consider and implement alternative design or constructability approaches?
• If, based upon encountered subsurface conditions, the final design approach needs to be revised or an alternative design approach developed, who should bear the cost and time impacts of those design variations?
• Who should bear the risk of final design deficiencies attributed to an inadequate scope of subsurface investigation or unreasonable evaluations or interpretations of available subsurface data?

DB: Subsurface Conditions Risk Allocation

There are significant variations in approaches to risk allocation for subsurface conditions on DB projects [5].

For example:

• The Owner may furnish sufficient or insufficient subsurface data and evaluations.
• The Owner may disclaim (in whole or in part) the Design-Builder’s right to rely upon Owner-furnished subsurface data and evaluations.
• The Owner may transfer all subsurface conditions risk to the Design-Builder [6].
• Subsurface information and reports may be classified as “Contract Documents,” or merely as “Reference Information Documents,” with non-reliance and other (more or less specific) disclaimers as to the latter.
• The Contract Documents may or may not include a Geotechnical Data Report (“GDR”), or a Geotechnical Baseline Report (“GBR”), with differing orders of precedence or priority assigned to those reports.
• Governing statutes or regulations may mandate the inclusion of DSC or other risk sharing contractual provisions.
• The Contract Documents may or may not include a DSC or other provision for subsurface conditions risk sharing.
• The Contract Documents may contain a provision stating that the Owner’s acceptance of the Design-Builder’s alternative technical (design) concept may or will alter the otherwise governing risk allocation regime for subsurface conditions.

DB: Risk Allocation for Final Design Adequacy

In DB, the contractual expectation is that the Design-Builder is responsible for the adequacy, accuracy and suitability of final (permanent works) design, and compliance with Owner-mandated criteria and standards. The Contract Documents will likely (more or less specifically) disclaim Owner responsibility for design included in the RFP or otherwise furnished to the Design-Builder. The Owner-furnished design may be conceptual or preliminary in character; or significantly more detailed, mandated, and prescriptive in character.

Displacement of Contractual Risk Allocation For Design Adequacy in DB

The Owner may retain or assume design adequacy risk and responsibility in the following circumstances:
 Overly prescriptive design criteria or standards
 Relatively high degree of design development
 Imposed limitations on scope of subsurface investigation
 Mandated or directed characterization of subsurface conditions for design or construction purposes
 Broad scope of review/rejection over DB Team’s design submittals
 Unwarranted intrusion or interference with DB Team’s design discretion, judgment or prerogatives
 Mandated or prescriptive design or detailed specification of construction means/methods and equipment  [7]

Improving Risk Allocation on DB Subsurface Projects: Alignment of Relevant Interactions and Interdependencies

DB does not require total design and subsurface conditions risk transfer from Owner to Design-Builder. Appropriate project-specific risk sharing should be contractually-defined and stipulated. Risk allocation should be based on appropriate balancing of the dynamics, interdependencies and interrelationship factors for subsurface conditions and design adequacy risks. Achieving effective and balanced risk allocation in DB subsurface projects is challenging and complex, significantly more so than in Design-Bid-Build (“DBB”). In many contemporary DB risk allocation schemes seemingly precise and autonomous risk allocation boundaries (or triggers) for subsurface conditions and design adequacy risks often ignore the realities, impacts, and influences of the DII Factors.

An insular and fragmented approach to subsurface conditions and design adequacy risk allocation interposes artificial and imprudent boundaries; and, consequently, will likely not produce effective or balanced risk allocation decisions in DB. A more aligned and integrated, and contractually transparent and documented approach to risk allocation, is indicated so as to produce a substantially improved and more effective and balanced result.

Fair and balanced risk allocation critically depends on the following components:

o The Owner’s furnishing to tenderers adequate subsurface data and evaluations;
o The Design-Builder’s ability to rely upon and use that data and evaluations and, as appropriate, having adequate time to conduct its own investigations and evaluations;
o The Design-Builder’s adequate opportunity and time to preliminarily develop its permanent design basis and temporary works approaches to a level sufficient to validate the suitability, compatibility and constructability of that design in the anticipated subsurface conditions; and
o The Owner’s willingness to contractually commit to sharing with the Design-Builder subsurface conditions risk.

There is no precisely correct or prescriptive risk allocation approach, nor one that is universally applicable to all of the variable project-specific factors inherent in DB subsurface projects. Improvement of risk allocation in DB subsurface projects depends upon the underground industry’s enhanced receptivity and capacity to acknowledge, understand and balance subsurface conditions and design adequacy risks, with due consideration to the respective and differing roles, responsibilities and interests of the Owner and Design-Builder.

The root causes underlying the concerns about effective and efficient DB risk allocation for subsurface conditions and design adequacy derive from the following primary causes:

• Imbalanced Risk Allocation
• Unrealistic pricing and contingency
• Misalignment among DII Factors

Primarily, these causes are attributable to the temporal and informational misalignment between when (a) the Design-Builder is expected to contractually commit to a fixed price and to risk allocation terms and (b) there is available adequate information (subsurface data), data evaluation and appropriate levels of design development, all required in order to reasonably and realistically inform those commitments. These misalignments produce and account for major problems in DB subsurface projects.

What is so different and challenging about risk allocation and fixed price contracting in DB subsurface projects?

There are many aspects to the many answers to that complex question. However, most of the answers are grounded in the following factors and considerations to the extent understood at the point of fixed price commitment:

1. What is known or reasonably knowable about subsurface conditions?
2. To what extent is the available data sufficient to develop a final design approach?
3. What subsurface information has been furnished by the Owner in the procurement, and do bidders have the right to rely upon that information?
4. Has adequate and realistic evaluation of that information been performed by competing Design Build Teams?
5. What degree of design development is included in the Design-Builder’s Technical Proposal?
6. What standards will the Owner utilize in post-award review and evaluation of the Design-Builder’s design submissions?
7. What are the criteria to be utilized by the Owner in determining whether to accept the final design and issued for construction drawings?
8. Will the DB Contract include a DSC provision and a GBR; or will the Design-Builder be required to assume the risk of unforeseen subsurface conditions? Who will prepare (any of, or the) GBR?
9. Will the final design be developed in a manner that is suitable, compatible and constructible in the reasonably anticipated subsurface conditions?
10. What is known about the Design-Builder’s selected “means and methods” and how do those selections impact risks and responsibilities as between Owner and Design-Builder?

The overarching and macro question for each of these more specialized and subsidiary questions is when can answers reasonably and realistically be sufficiently known in a manner to adequately inform commitments as to contractual pricing and risk allocation terms.

On DB subsurface projects, it is neither realistic, reasonable, nor fair to expect that those answers can or should be known or knowable at the time/point of initial procurement and initial DB contract execution. The interrelationships and interdependencies between (a) subsurface conditions; (b) the evaluation of those conditions; (c) development of the final design approach to be utilized in those conditions; and (d) the selection, design and implementation of construction means and methods, typically require more data, studies, evaluation, design development and – quite simply – conscientious thought and consideration – than can realistically or reasonably be expected at the point of initial DB contract award and contractual commitments.

Some Owners may contend that the timing does not matter because bidders have the opportunity based on tender information (with likely disclaimers) in the RFP to make binding commitments as to pricing and risk allocation; and in any event, ultimately the Design-Builder will be responsible for final design and constructability in the anticipated subsurface conditions and within the fixed price commitment.

The acute problems associated with procurement and contractual practices in DB subsurface projects that (a) require a fixed price at time of initial contract award and (b) mandate imbalanced risk allocation terms, need to be corrected and a more sensible path forward developed. The solution should address the temporal and informational misalignment issues previously discussed in this article. In general, the solution should allow for deferral of contractual commitments as to final price and risk allocation terms until the Design-Builder has had a reasonable opportunity to investigate subsurface conditions, evaluate relevant subsurface data, develop design to a reasonable degree, and demonstrate an appropriate and adequate understanding as to the compatibility and constructability of the contemplated final (permanent work) design approach in the reasonably anticipated subsurface conditions. (“risk allocation alignment objectives”).

The risk allocation alignment objectives may be implemented through a progressive design-build (“PDB”), or a construction manager/general contractor (“CM/GC”) method [8]. These approaches share the element and attribute of early contractor involvement in the design development process. Both PDB and CM/GC, conceptually, are intended to accomplish the risk allocation alignment objectives; however, PDB and CM/GC accomplish those objectives in different ways that impact roles, responsibilities and risk for final design as between the Design-Builder in PDB, or Construction Team in CM/GC, and the Owner, respectively [9].

In PDB it is generally expected that the Design-Builder will be responsible for the adequacy, suitability and constructability of the final design [10]. In CM/GC, the Owner contracts with an Engineer (the “EOR”) who is responsible for preparation of the final design; and the Owner retains control over the design development process; hence, the Owner generally has implied warranty responsibility to the Contractor for the adequacy and suitability of the final design.

These are important distinctions between PDB and CM/GC, with significant implications as to risk allocation for final design adequacy. In PDB, it would generally be expected that the Design-Builder would have responsibility for the adequacy of the final design, consistent with the basic DB principle of single-point responsibility of the Design-Builder for both design and construction of the project. In CM/GC, however, because the Owner retains the EOR and controls the design development process, it would generally be expected that the Owner will be responsible for the adequacy of the final design [11].

However, the nature and extent of the Construction Manager’s input and other involvement in the design development process in CM/GC will likely impact how the Owner’s design adequacy responsibility (or implied warranty obligation) applies, and the extent of any equitable adjustment remedy to the Construction Manager/General Contractor [12]. More specifically, courts and other dispute resolvers have struggled with the issue whether the involvement and input of the Construction Manager in CM/GC in the design development process (or related “design assist” input and involvement of contractors in the design development process) should result in some shared responsibility of the Construction Manager for final design adequacy to the extent that the latter is influenced by its participatory role in the design development process [13]. In addition, the inclusion and specificity of disclaimers purporting to negate or limit an Owner’s otherwise applicable implied warranty obligation are relevant factors in determining design adequacy risk allocation in CM/GC [14].

The early contractor involvement in both PDB and CM/GC provides meaningful and significant opportunities to achieve the risk allocation alignment objectives [15]. Meaningful involvement, interaction and collaboration among the Design-Builder in PDB, or the Construction Manager in CM/GC, and the Owner, on major subsurface projects should serve to improve their mutual understandings and transparencies of risk perceptions and positively influence pricing and contingency realism. Pricing, contingency and contractual risk allocation should also be better informed by that interaction and collaboration [16].

Consistent with the interaction and collaboration in the design development process prior to contractual commitments as to final pricing and risk allocation terms, the preparation of the Geotechnical Baseline Report (“GBR”) could and should serve as an opportunity to achieve the risk allocation alignment objectives [17]. This effort should be undertaken following completion (or near-completion) of subsurface investigation, and an adequate opportunity for both evaluation of available subsurface data and a reasonable degree of design development and design submittal review and comments [18]. As a further enhancement to achieving the risk allocation alignment objectives, the GBR may also document the Design-Builder’s (in PDB) or Construction Manager/General Contractor’s (in CM/GC) construction means and methods and other planned, predicted or anticipated aspects as to construction operations and performance based upon and informed by understandings and evaluation of available subsurface data and the final design approach (to the state of advancement) and its constructability in the anticipated subsurface conditions [19].

This interactive and collaborative GBR preparation effort allows for a reasonable opportunity for mutual transparency and communication between the Owner and the Design-Builder in PDB, or the Construction Manager in CM/GC, regarding issues relating to subsurface conditions evaluation and final design development and constructability approaches that are essential to reconciling and aligning the DII factors, and in achieving efficient, realistic and fair pricing and risk allocation and dispute mitigation. The GBR document, upon review and mutual acceptance, would become a Contract Document and a foundation upon which to predicate other contract terms that establish the basis and parameters of effective and balanced subsurface conditions risk allocation [20].

Conclusion

Some Owners may perceive these interactive and collaborative approaches – the effect of which is to defer contractual commitments as to final pricing and risk allocation terms until a point after initial award – as exposing them to either increased project costs or cost overrun exposures, or risk allocation terms that are less favorable than they have achieved in traditional DB delivery. Also, some Owners may contend that fixed price and aggressive risk transfer approaches in traditional DB procurement and contractual approaches have worked well for them; and, at least to this point, there is no discernable or compelling reason for any adjustment in those approaches.

The question is whether these or related perceptions and contentions are sound, sensible, or even sustainable in the long term, as evidenced by the recent and likely continued withdrawal of major contractors from traditional DB procurement and contractual fixed price and associated aggressive risk allocation terms.

In the opinion of the author, there is a compelling and present need to reassess the fixed price and imbalanced risk allocation approaches prevailing in many DB infrastructure procurements, especially in major subsurface projects. These concerns are all the more intensified as infrastructure projects become even more complex and procurement periods even more contracted. PDB and CM/GC may provide promising methods to achieve the risk allocation alignment objectives discussed in this article. The underground design and construction industry would benefit from a comprehensive discussion of this subject – both the underlying concerns and sensible solutions.

The experience of the past amply demonstrates the advisability of balanced risk allocation; and the promise of success in the future for the design and construction industry vitally depends upon it. It would be both shortsighted and unfortunate to regard present economic challenges as opportunities and rationalization for continued imbalanced risk allocation.

Footnotes

[1]See T. Schleifer, Seeking A Fix to the Fixed-Price Conundrum, Eng. News-Rec. (Nov. 18, 2019); T. Schleifer, View Point, Contractors and Design-Build: Let’s End Risk-Shift Madness, Eng. News Rec. (March 2/9, 2020); Jamie Peterson, What is Wrong with Design-Build Contracting, Under Constr. (Winter 2019); Constr. Super Conf. (December 16-18). Some of the concerning implications for consulting engineers of this development are discussed in D.J. Hatem, Letter to the Editor, published in Eng. News-Rec. (December 16, 2019).

[2] Virtually all public-private partnership (“P3”) projects utilize the DB approach.  While the risk allocation issues and concerns on P3 subsurface projects are quite similar to those involved in DB projects, P3s pose even more serious issues and elevated concerns. Section 12.3.2 of D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers, Washington: American Council of Engineering Companies (3d ed., 2020) contains a detailed discussion on the latter distinguishing characteristics of risk allocation on P3 subsurface projects.

[3] D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers, Chapter 12, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, Section 12.3.2, Washington: American Council of Engineering Companies (3d ed., 2020); R. Essex, D.J. Hatem, J. Reilly,  Alternative Delivery Drives Alternative Risk Allocation Methods, North American Tunneling, Washington, D.C., 24-27 (2018); N. Munfah, Controlling Risk of Tunneling Projects Implemented by Alternative Delivery Method, Soc’y for Mining, Metallurgy & Exploration (2019); D.J. Hatem, Subsurface Conditions and Design Adequacy Risk Allocation in Design Build: Dynamics, Interactions and Interdependencies, Tunnel Bus. Mag. (October 2018); D.D. Gransberg, Managing Geotechnical Risks in Design-Build Projects, NCHRP Project No. 24-44, Trans. Res. Board (2018); S. Briglia, M.C. Loulakis, Geotechnical Risk Allocation on Design-Build Constr. Projects: The Apple Doesn’t Fall Far From the Tree, J. of the American Col. of Constr. Lawyers, Vol. 11, No. 2 (Sept. 2017); D.D. Gransberg, Guidelines for Managing Geotechnical Risks in Design-Build Projects, NCHRP Res. Rep. 884, Trans. Res. Board (2018).

[4] See D.J. Hatem, Subsurface Conditions and Design Adequacy Risk Allocation in Design Build: Dynamics, Interactions and Interdependencies, Tunnel Bus. Mag. (October 2018). The interfaces between subsurface conditions and final design are addressed from a technical perspective in R. Vakili, Geo-Structural Challenges for Advancing Tunnel Design and Constr., Structure Mag. (December 2019).

A recent decision of the Armed Services Board of Contracts Appeals, Appeals of – John C. Grimberg Co., Inc., No. 58791, 2018 WL 611 3411 (Armed Serv. B.C.A. 2018), appeal pending Fed. Cir. (2-28-19), involves an interesting discussion of the DII Factors in the context of a differing site condition claim on a DB project. See Comment, Constr. Litig. Rep., Vol. 40, Issue 11, Nov. 2019, PP. 455-459.

The background of the Grimberg case may be summarized as follows:

• The RFP contained a preliminary Geotechnical Report describing subsurface conditions as predominately Karst, and advised as to potential variability of those conditions from one location to another. As to foundation design, the RFP stated that a deep foundation system of drilled piers or drilled micropiles, socketed into sound rock would be required.
• Two borings at locations closest to the proposed foundation footprint demonstrated rock of “relatively good quality,” i.e., limestone (stable) rock at depths of 21 feet and 15.4 feet, respectively. Borings taken at other locations consistently showed poor quality rock materials.
• Following award, Grimberg retained a geotechnical engineer to conduct a full geotechnical investigation. Grimberg’s geotechnical engineer issues a “Preliminary Geotechnical Recommendations” report emphasizing both the high variabilities of rock quality and depths required to be drilled to competent rock; and recommended that Grimberg should include “a significant allowance in their bid to compensate for probable unknown or unforeseen site conditions.”
• Grimberg’s pricing did not include any such allowance or contingency.
• Grimberg’s technical proposal stated, with respect to foundation design, that the foundation system shall consist of drilled caissons to have minimum 5 foot rock socket.
• During construction, Grimberg notified the Corps of a differing site condition (“DSC”) based on having encountered significant “voids and incompetent rock.” The Corps denied Grimberg’s DSC claim, and Grimberg appealed.
• At trial, Grimberg’s expert opined that Grimberg’s reasonably relied upon the expectation of consistently competent rock quality based on the data produced by the 2 borings taken at the locations closest to the foundation and that the conditions actually encountered were materially different from that expectation.
• The Corps’ expert opined that Grimberg should have included an allowance to account for the probability of encountering incompetent rock and that a DB contractor should assume more subsurface conditions risk than a DBB contractor.
• The Board made the following rulings:
• FAR 36.502 requires that a DSC risk allocation provision be included in both DBB and DB fixed price contracts; and, as such, the mere fact that a contract is DB in nature does not forfeit the Design-Builder’s right to rely on subsurface conditions information contained in RFP.
• Grimberg’s design obligations and risk, however, did affect its potential subsurface conditions DSC remedy.
• The Board found that Grimberg met its burden of establishing DSC entitlement.
• The Board did find that in light of the extensive indications in the Geotechnical Report and the inherent difficulties of drilling through Karst that “some ‘allowance’ for incompetent rock is appropriate.” The Board, therefore, added a 120-foot “allowance” of incompetent rock to Grimberg’s bid estimate.  In doing so, the Board distinguished between an “allowance” and “contingency”, stating that an allowance represents a more realistic quantification of risk based on reasonable consideration of contractual representations and indications.

The Board’s decision is predominately based on the legally mandated contractual inclusion of a DSC provision and the absence of relevant or specific contractual disclaimers.  Significantly, Grimberg was not required to conduct a subsurface investigation until after contract award.  Bidders were explicitly told in several locations in the RFP that they were entitled to rely upon the Geotechnical Report included in the RFP.  The Board’s distinction between “allowances” and “contingency” is interesting but – at root – the Board appeared to be stating that when a DSC clause is included (especially when legally mandated) bidders should not include contingency because if they do so, then one could question whether they would get “double recovery” for a DSC by including “contingency” in the bid and then obtaining a DSC equitable adjustment.  Put another way, the term “contingency” was characterized by the Board as “disfavored” because the presumption is that contingency, per se, is neither required or appropriate, in a DSC, risk sharing contractual regime.

Finally, the Board drew a distinction in DB between (a) DSC risk and (b) design risk.  These risks are more interrelated as discussed in the text of this article.  That said, those interrelationships were not presented by or relevant to the dispute in Grimberg.

[5] These various approaches are discussed in detail in D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers, Chapter 12, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, Section 12.3.2, Washington: American Council of Engineering Companies (3d ed., 2020); D.J. Hatem, Subsurface Conditions and Design Adequacy Risk Allocation in Design Build: Dynamics, Interactions and Interdependencies, Tunnel Bus. Mag. (October 2018).

[6] This approach to subsurface conditions risk transfer is embodied in the FIDIC Silver Book, discussed in D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers, Chapter 12, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, Washington: American Council of Engineering Companies (3d ed., 2020),  ¶¶12.12, 12.3.2.

[7] For more detailed discussion of these displacement factors, see D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers, Chapter 12, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, Section 12.5.2, Washington: American Council of Engineering Companies (3d ed., 2020).

[8] This article does not address under statutory or other regulatory procurement requirements relating to the availability or implementation of PDB or CM/GC utilization under the various federal, state or local laws.

[9] There are several excellent sources that discuss the utilization of PDB and CM/GC generally, see M.C. Loulakis, A Look at Progressive Design-Build in the Water Sector (June 4, 2013); J. T. Folden, Construction Management at Risk and Progressive Design-Build, Maryland Dept. of Trans; D. Alleman, D. Papajohn, D.D. Gransberg, M. El Asmar and K. Molenaar, Exploration of Early Work Packaging in Construction Manager-General Contractor Highway Projects, Trans. Res. Rec. (2017); D.D. Gransberg and K. Molenaar, Critical Comparison of Progressive Design-Build and Construction Manager/General Contractor Project Delivery Methods, Trans. Res. Rec. (2019); J. Reilly & R.A. Sage, Benefits and Challenges of Implementing Construction Manager/General Contractor Project Delivery: The View From the Field, Chapter 3; Alternative Procurement & Contracting for Megaprojects; and D.D..Gransberg & K.R. Molenaar, Critical Comparison of Progressive Design-Build and Construction Manager/General Contractor Project Delivery Methods, Trans. Res. Rec. (2019).

Other sources more particularly focus on the application and advantages of PDB and CM/GC in the specific context of tunneling and other major subsurface projects.  See I.G. Castro-Nova, G.M. Gad & D.D. Gransberg, Assessment of State Agencies’ Practices in Managing Geotechnical Risk in Design-Build Projects, Trans. Res. Rec. (2017); I.G. Castro-Nova, Geotechnical Risk Decision Tools for Alternative Project Delivery Method Selection, Iowa St. U.; D.D. Gransberg & B. Cetin, Subsurface Risk Management Tools for Alternative Project Delivery, ASCE Geo-Congress (2020); I-70 Twin Tunnels Risk Assessment and Project Delivery Selection, Colorado Dep’t of Trans. Innovative Contracting Advisory Committee; M. Fowler, M. Keleman, C. Fischer, M. Hogan & S. Kim, I-70 Twin Tunnels Widening Using Drill and Blast Under CM/GC Contract, Soc’y for Mining, Metallurgy and Exploration Inc (2015); J. O’Carroll, A. Thompson & T. Kwialkowski, A Study in the Use of Design-Build for Tunnel Projects; S.V. Stockhausen, E. L.D. Sibley and D. Penrice, Progressive Design-Build – Is it Coming to a Project Near You?

[10] This general statement is subject to the displacement factors previously discussed in this article.

[11] The Owner responsibility for final design adequacy is often described as a Spearin or implied warranty obligation. For further discussion of that obligation, see D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers, Chapter 12, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, note 308, pp. 649-654, Washington: American Council of Engineering Companies (3d ed., 2020). For further discussion of this and other important distinctions between PDB and CM/GC, see D.D. Gransberg and K. Molenaar, Critical Comparison of Progressive Design-Build and Construction Manager/General Contractor Project Delivery Methods, pp. 265-266, Trans. Res. Rec. (2019).

[12] See D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build:  Opportunities and Risks for Consulting Engineers, Chapter 12, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, Washington: American Council of Engineering Companies (3d ed., 2020), page 615 and footnote 309; D.D. Gransberg & K. Molenaar, Critical Comparison of Progressive Design-Build and Construction Manager/General Contractor Project Delivery Methods, Trans. Res. Rec. (2019); and N.R. Sellers, Do Construction-Manager-at-Risk Contracts Alter the Spearin Doctrine, Fabyanske Westra Hart & Thomson.

[13] See J. Heusinger, Ambiguity Breeds Conflict:  The Importance of Defining “Design Assist” in the Construction Industry, J. of the American Col. of Constr. Lawyers, Vol. 11, No. 1, Winter 2017, p. 117; D. J. Hatem, Recent CM-At-Risk Massachusetts Supreme Judicial Court Decision – What Does It Mean for Project Participants, ACEC Insights (Summer/Fall 2015); Construction Management At Risk Project Delivery Method Does Not Negate Public Owner’s Implied Warranty Design, Constr. Litig. Rep., Vol. 36, No. 11 (Nov. 2015).

In Coghlin Electrical Contractors, Inc. v. Gilbane Building Co., (36 N.E. 3d 505 (Mass. 2015)) (“Gilbane”), the Supreme Judicial Court of Massachusetts (SJC) addressed the issue of whether an Owner’s implied-warranty obligation as to design adequacy, which applies in traditional DBB, also applies in the construction-manager-at-risk (CMR) context.  The SJC held that the Owner’s implied-warranty obligation applied in the CMR context; however, the scope of that obligation “is more limited than in a design-bid-build project.”  Specifically, the SJC held:

“Although the owner’s implied warranty applies in a public construction management at risk contract, the differences between the responsibilities of a general contractor in a design-bid-build project and those of a CMAR affect the scope of the implied warranty. The general contractor in a design-bid-build project may benefit from the implied warranty where it relied on the plans and specifications in good faith, but the CMAR may benefit from the implied warranty only where it has acted in good faith reliance on the design and acted reasonably in light of the CMAR’s own design responsibilities. The CMAR’s level of participation in the design phase of the project and the extent to which the contract delegates design responsibility to the CMAR may affect a fact finder’s determination as to whether the CMAR’s reliance was reasonable.

The greater the CMAR’s design responsibilities in the contract, the greater the CMAR’s burden will be to show, when it seeks to establish the owner’s liability under the implied warranty, that its reliance on the defective design was both reasonable and in good faith. See generally Sweet & Schneier, supra at § 14.04 (“all of the modern variations [on the design-bid-build method] have as a common denominator: a blurring of the lines of responsibility”). Therefore, the CMAR may recover damages caused by the breach of the implied warranty, but only if it satisfies its burden of proving that its reliance on the defective plans and specifications was reasonable and in good faith. The amount of recoverable damages may be limited to that which is caused by the CMAR’s reasonable and good faith reliance on design defects that constitute a breach of the implied warranty.”

In Gilbane, the SJC made the following observations:

• While an implied warranty obligation may be disclaimed by clear and specific contractual terms, no such disclaimer was found in the CMR contract at issue. The decision leaves open the potential that an Owner, through express and specific contract terms, may disclaim or negate an implied warranty obligation. The SJC’s decision in Gilbane emphasizes that in deciding whether a Construction Manager may prevail on a breach of implied warranty obligation claim, a court will need to focus on the specifics pertaining to the Construction Manager’s contractual and actual roles, responsibilities, and performance in the design-development process, as well as on whether the CM explicitly and by agreed to release any right of recovery for such a breach, and whether the Owner specifically disclaimed any otherwise applicable implied warranty obligation.
• The record before the SJC was insufficient to allow the Court to evaluate the CMR’s role and responsibilities in design development.  The lower court had granted the Commonwealth’s motion to dismiss, the ruling, as a matter of law, that an Owner had no implied-warranty obligation in the CMR context. By the motion to dismiss procedural approach, the Commonwealth was, in effect, contending that in no set of circumstances—i.e., no matter what the evidentiary record may demonstrate may an Owner owe any implied warranty obligation to a CM. In response, Gilbane contended that the traditional Owner implied warranty obligation applied in CMR to the same extent applicable in the traditional DBB method. Based on the record before it, the SJC, in effect, held that neither of these polar and absolute positions asserted by the Commonwealth or Gilbane was correct. The SJC’s rejection of both competing absolutist contentions reflects a balanced and conscientious decision, holding that the implied warranty obligation, while potentially applicable in the CMR context, provides a more limited right of recovery to the Construction Manager and that recovery depends upon the latter meeting certain burdens of proof (good faith reliance and reasonableness and proof of specific damages flowing from any breach of the implied-warranty obligation). The SJC also held that the Construction Manager’s entitlement to recovery may only be made based on an adequate evidentiary record as to the contractual and actual roles, responsibilities, and performance of the Construction Manager in the design development process and on consideration of relevant risk-allocation (including any disclaimer) contractual terms.

• While a Construction Manager that provides design input does not necessarily or automatically possess the degree of control over the design development process to negate the Owner’s implied warranty obligation, the scope of the latter’s obligation (and the Construction Manager’s corresponding ability to recover for a breach of that obligation) may be diminished (and perhaps entirely eradicated) depending upon the degree of the Construction Manager’s contractual and actual roles, responsibilities, and performance in relation to the design development process.
• There is a long history of legal precedent in Massachusetts (and in most states and under federal law) declaring that in DBB, an Owner impliedly warrants to a constructor the adequacy of the final and detailed design that it furnished, and the Owner consequently bears the risk of additional costs caused by defects in that design. In DBB, the rationale supporting the Owner’s implied warranty obligation is based on the premise that the owner controls the design development and finalization process and retains a design professional who is professionally responsible for preparing and stamping the final, detailed design. Moreover, the Contractor in DBB typically has no opportunity to participate or otherwise provide meaningful input in the development of that design and is obligated to construct in strict conformance with it.

[14] See Coghlin Electrical Contractors, Inc. v. Gilbane Building Co., 36 N.E. 3d 305 (Mass. 2015); Metcalf Construction Co. Inc. v. United States, 742 F. 3d 984 (Fed. Cir. 204); D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers, Chapter 12, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, pp. 475-79, Washington: American Council of Engineering Companies (3d ed., 2020); S. Briglia, M. Loulakis, Geotechnical Risk Allocation on Design-Build Construction Projects: The Apple Doesn’t Fall Far From the Tree, J. of the American College of Constr. Lawyers, Vol. 11, No. 2 (Sept. 2017).

[15] The Lake Mead Intake No. 3 project utilized the DB approach in a manner that maximized early contractor involvement during the RFP process in the identification, allocation and management of design and construction risks prior to final price and risk allocation contractual commitments.  For more detailed discussion, see M. Feroz, E. Moonan, J. Grayson, Lake Mead Intake No. 3, Las Vegas, NV:  A Transparent Risk Management Approach Adopted by the Owner and the Design-Build Contractor and Accepted by the Insurer, RETC Proceedings (SM&E 2009), pp. 559-65; J. Hurt, C. Cimiotti, Lake Mead Intake No. 3, Engineering 3 (2017), Elsevier, Ltd., pp. 880-87; M. Feroz, E. Moonan J. Grayson, Southern Nevada Water Authority (SNWA) Risk Management Strategy to Create a Win-Win Situation for the Contractor, the Insurer, and the Owner on the “Lake Mead Intake No. 3”, Proceedings of the 36^th ITA-Aites World Tunnel Congress, 2010, Vancouver, Canada.  Another article relating to that same project discusses the reasons for the Owner’s selection of the particular DB approach based on a comparison with other delivery approaches, including DBB and CM/GC.  M. Feroz, E. Moonan, J. McDonald, Project Delivery Selection for Southern Nevada’s Lake Mead Intake No. 3, RETC Proceedings (SM&E 2009), pp. 503-15.

[16] It is generally recognized that the advantages of PDB and CM/GC particularly on subsurface projects, include the ability of the Owner Team and DB or Contractor Team to be better informed and aligned as to both perceptions and realities of critical risk variables and contingencies – such as those involving evaluation of subsurface conditions and assessments as to final design feasibility and approach – prior to reaching contractual commitments on price and risk allocation terms. See C.B. Farnsworth, R.O. Warr, J.E. Weidman, & D. M. Hutchings, Effects of CM/GC Project Delivery on Managing Process in Transportation Construction, J. Constr. Eng. Manage. (2016); D.Q. Tran & K.R. Molenaar, Risk-Based Project Delivery Selection Model for Highway Design and Construction, J. Constr. Eng. Manage. (2015); I.G. Castro-Nova, G.M. Gad, A. Touran, B. Cetin and D.D. Gransberg, Evaluating the Influence of Differing Geotechnical Risk Perceptions on Design-Build Highway Projects, ASCE-ASME; D.D. Gransberg, Construction Manager – General Contractor Project Delivery, TR News 285 (March-April 2013); N. Munfah, Controlling Tunneling Project Risk Implemented by Alternative Delivery, Tunneling Online; S. R. Kramer, Using Alternative Delivery Methods to Increase Competiveness on Tunnel Projects (August 14, 2017); Guide for Design Management on Design-Build and Construction Manager/General Contractor Projects, Nat’l Cooperative Highway Res. Program; Geotechnical Information Practices in Design-Build Projects, Nat’l Cooperative Highway Res. Program, Nat’l Cooperative Highway Res. Program; Guidelines for Managing Geotechnical Risks in Design-Build Projects, NCHRP Res. Rep. 884; and S. Briglia & M.C. Loulakis, Geotechnical Risk Allocation on Design-Build Construction Projects: The Apple Doesn’t Fall Far From the Tree, J. of the American College of Constr. Lawyers, Vol. 11, No. 2 (Sept. 2017).

[17] It has been suggested that the purpose and scope of the GBR should be limited to baselining subsurface conditions and not address design or constructability considerations, the latter of which may be cohesively addressed in an independent separate memorandum or report that is included as part of the Contract Document.  See D.J. Hatem, Subsurface Conditions and Design Adequacy Risk Allocation in Design Build: Dynamics, Interactions and Interdependencies, Tunnel Bus. Mag. (October 2018).

[18] Some label the product of such a post-award GBR as “GBR-C”, or GBR for Construction.  In the context of the collaborative approach, it is more accurate to label as “GBR for Design and Construction.” D.J. Hatem & P. Gary, ed., Public-Private Partnerships and Design-Build:  Opportunities and Risks for Consulting Engineers, Chapter 12, Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and DB Projects, Washington: American Council of Engineering Companies (3d ed., 2020); D.J. Hatem, Subsurface Conditions and Design Adequacy Risk Allocation in Design Build: Dynamics, Interactions and Interdependencies, Tunnel Bus. Mag. (October 2018).

[19] Consideration and balancing of the interactions, interdependencies and alignment (or misalignments) among the (a) reasonably anticipated subsurface conditions, (b) final design approach; and (c) construction means and methods on major subsurface projects, are essential to effective risk allocation and dispute minimization. See D.J. Hatem & D. Corkum eds., Megaprojects: Challenges and Recommended Practices, ACEC (2010), ¶6.4, pp. 520-538; D. Del Nero, Means and Methods of Construction: Whose Domain Is It?, North American Soc’y for Trenchless Technology (2012); D. Del Nero; Means and Methods – In the Engineer’s Domain, Col. Sch. of Mines (2015); G. Brierley & D.J. Hatem, Contractor Submittals for Tunneling Projects (to be published in 2020); V. Tirolo, G. Almeraris, Suggested and Prescriptive Means and Methods – Are They Really in the Owner’s Interest, 2005 RETC Proceedings, p. 20 (2005).

The collaborative preparation of a GBR in PDB and in CM/GC that addresses the above considerations (a) – (c) and the DII Factors, in an integrated manner, would significantly enhance alignment of subsurface conditions and design adequacy risk allocation on DB subsurface projects.  The GBR – upon completion and acceptance by the Owner and Design-Builder (in PDB) or Construction Manager/General Contractor (in CM/GC) would constitute a Contract Document. See D.J. Hatem, Subsurface Conditions and Design Adequacy Risk Allocation in Design Build: Dynamics, Interactions and Interdependencies, Tunnel Bus. Mag. (October 2018).

[20] Notably, a more comprehensive and integrated GBR that addresses both final design and constructability approaches should assist and facilitate in the evaluation of any DSC claims based on contentions that encountered physical or behavioral subsurface conditions materially or substantially differ from those reasonably anticipated or indicated in the Contract Document.

More specifically, the merits of any such contentions could be evaluated in the specific, relative and comparative context of the objective baselines for final design and constructability approaches as defined and articulated in the GBR.

David J. Hatem is a partner in the Boston-based law firm Donovan Hatem LLP. A version of this article with more detailed footnotes may be requested by emailing dhatem@donovanhatem.com.