Achieving effective and balanced risk allocation in design-build (“DB”) subsurface projects has proven to be a challenging process and objective, as well as a controversial subject. Some have pointed to overly aggressive owner procurement practices and contractual terms as reasons for that experience. Others have pointed to overly aggressive design-builder pricing and inadequate contingency. The analysis and explanation, however, are more profound and complicated. The superficially simple DB characteristic of single-point responsibility does not automatically and necessarily produce or converge into risk allocation simplicity.
To date, there has been significantly less examination of other more intricate technical and contractual factors that account for the challenges and complexities in achieving effective and balanced risk allocation in DB subsurface projects. These factors involve the dynamics, interactions and interdependencies (“DII Factors”) between subsurface conditions and design adequacy risks, and risk allocation in those respects.
Consider the following issues that derive from the DII Factors:
- How does (and should) knowledge (data and evaluations) produced by 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 an alternative design approach?
- 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?
These are but a few of the basic issues, the analyses of which demonstrate the critical importance of the impact and influence of the DII Factors in the assessment and allocation of subsurface conditions and design adequacy risks on major subsurface projects.
In design-bid-build (“DBB”) projects, disputes arise between the owner and the constructor when subsurface conditions encountered during construction materially vary from those conditions reasonably expected based on (a) owner-furnished subsurface data and evaluations and (b) the implications or expectations derived from the contract documents, as to the constructability, compatibility and suitability of the owner-furnished final design in those conditions. Often, the owner’s consulting engineer (directly or indirectly) is involved in such disputes. Even with a differing site condition (“DSC”) contractual provision, reinforced and enhanced by a well-written Geotechnical Baseline Report (“GBR”), these disputes are often quite contentious and disruptive of project success.
A study of many of those disputes would demonstrate that the variability of outcomes does (and should) depend upon the specific (factual, technical, contractual, legal and other) relevant factors. However, such a study would also demonstrate that many of those disputes derive from (alleged or actual) material (more or less in degree) variations between the subsurface conditions actually encountered during construction and the conditions reasonably expected based upon subsurface data and evaluations available during the design development process, and upon which the final design approach is predicated. A closer probe in such a study would reveal that these disputes often arise from the incompatibility, unsuitability and unconstructability of the final design in the context of the subsurface conditions actually encountered during construction.
In DBB subsurface projects, constructor claims often are asserted on alternate and conjunctive theories of (a) entitlement under contractual DSC provisions and (b) breach of the owner’s implied warranty that the final design would be compatible, suitable and constructible in the contractually-indicated subsurface conditions. Courts typically collapse the defective (breach of implied warranty) design claim into a singular contractual DSC claim in circumstances in which those claims are factually and causally intertwined. That said, the duality of this claims approach underscores the important linkage between subsurface conditions and design adequacy risks, and the relevance and importance of the DII Factors.
Put another way, significant disputes experienced on major subsurface projects often arise out of misalignment and incompatibility between reasonably anticipated subsurface conditions and adequacy of the final design approach. This situation has resulted in significant cost overrun and schedule delay exposures for owners in DBB projects.
In DBB projects, the contractual allocation (or legal assignment) of these risks to the owner typically is reasonable and rationalized on the bases of the owner’s (a) responsibility for subsurface investigation, data evaluation, and report preparation; (b) control over the design development process; and (c) express or implied responsibility for the adequacy and suitability of final design, and its constructability, compatibility and suitability in the anticipated and actually encountered subsurface conditions.
So, what is the relevance of the preceding DBB discussion to DB subsurface projects?
That issue and the ensuing analysis reveal many of the complexities and uncertainties in achieving effective and balanced risk allocation on DB subsurface projects, and demonstrate that the process of achieving that objective is significantly more challenging than in DBB.
Why? In DB there are several interfaces between subsurface conditions and design adequacy risks that account for the complexities and challenges in this area:
Significantly Varying Risk Allocation Approaches
In DB, there are various, significantly different approaches to risk allocations for subsurface conditions and design adequacy. The relatively high degree of variability in approaches is due to many reasons, including that DB owners often are not constrained by procurement laws and regulations (otherwise governing in DBB) that mandate DSC risk sharing and, as such, those owners have more autonomy and flexibility to utilize (and experiment with) relatively non-conventional risk allocation approaches.
- Owners may furnish sufficient or insufficient subsurface data and evaluations.
- Owners may disclaim (in whole or in part) the design-builder’s right to rely upon owner-furnished subsurface data and evaluations.
- 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 owner-furnished design may be conceptual or preliminary in character; or significantly more detailed, mandated, and prescriptive in character.
- 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.
- The “Contract Documents” may or may not include a DSC or other provision for subsurface conditions risk sharing.
- Under the “Contract Documents,” the owner may accept some degree of risk and responsibility for certain portions of the design (e.g., prescriptive design) that it furnishes to the design-builder; or, alternatively, elect to transfer to the design-builder all risk and responsibility for the adequacy of the final design.
- 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.
There are many other approaches, and nuanced variations within the above examples. How each of these issues is approached will independently impact risk allocation effectiveness and balance. Equally important, effective and balanced risk allocation will be impacted by the dynamics, interactions and interdependencies of each of those issues in relation to each other.
Absolute Risk Transfer Perspective
A DB owner may rationalize absolute risk transfer to the design-builder on the following reasoning:
Since the owner is contractually disclaiming any responsibility for accuracy, suitability or completeness of subsurface data and evaluations that it may furnish, with disclaimers and negation of any reliance rights, the owner should not be responsible for the cost or time consequences of any encountered subsurface conditions, even if materially different from any expectation (even if objectively reasonable).
Since the design-builder is responsible for the adequacy of the final design, and the owner has disclaimed any responsibility for the adequacy or suitability of any design (whether conceptual, preliminary or prescriptive) that it furnishes, the owner has no design risks or responsibilities.
Since risk allocation for subsurface conditions and design adequacy is (and should be) influenced and driven by the DII Factors, and given (a) and (b), it would be incongruent and discordant for the owner to share risks for subsurface conditions and/or design adequacy with the design-builder.
Imprecise Risk Allocation Parameter and Boundary Concerns
These concerns arise in the context of a DB owner who wants to share some degree of risk for certain subsurface conditions variations but also (reasonably) seeks to establish clear boundaries for this risk allocation. GBRs are a conventional and excellent approach in major DBB subsurface projects to achieve this objective. However, in DB, the conventional GBR approach may not account (adequately or at all) for the risk allocation implications of tender (or contemplated) final design approach that the design-builder will utilize in design development. Is or should that be a purpose of a GBR in DB? If the objective of including statements as to design assumptions or approaches is to define a basis for potential risk transfer to the owner, does that objective, given the DII Factors, undermine and subvert other Contract Document provisions exclusively (or even primarily) assigning design responsibility to the design-builder?
Perceived Subversion of Risk Transfer Objectives in DB
Some DB owners may perceive that any (and especially any significant) risk sharing for subsurface conditions may subvert or undermine Contract Document provisions assigning exclusive responsibility for design adequacy to the design-builder; and that given the DII Factors, it would neither be realistic nor manageable to share subsurface conditions risk without accounting for the impact and influence of the design-builder’s design adequacy risk on the triggers for subsurface conditions risk allocation.
Owners having this perspective are concerned that – given the DII Factors – by sharing subsurface conditions risk they may – by extension – assume adjunct and interdependent risk for design adequacy if the design-builder’s final design approach proves to be incompatible, unsuitable or unconstructable given the actually encountered subsurface conditions.
A related concern of those owners is that by contractually assuming some degree of risk for certain aspects of design adequacy (for example, for owner-furnished prescriptive design) they may directly or impliedly assume warranty or other responsibility for the compatibility, suitability and constructability of that design in the anticipated or actually encountered subsurface conditions. The latter concern is intensified in circumstances in which the owner has specifically disclaimed the accuracy, suitability and completeness of owner-furnished subsurface data or evaluations and has not agreed to share risk if the actual conditions are materially different from those anticipated.
Should these concerns be realized, the owner would be exposed to subsurface conditions and/or design adequacy risks that otherwise, by contract, are exclusively assigned to the design-builder. These concerns are valid, and emphasize the proximate connection and interface between subsurface conditions and design adequacy risks, and the need for clarity and coordination in the concerted definition of risk allocation boundaries in both of those respects.
Differing Subsurface Conditions Encountered During Design Development
On major DBB and DB subsurface projects, DSC claims are typically identified and asserted during construction. However, in DB, depending upon the particular contractual approach to subsurface conditions risk allocation, a design-builder may identify and assert a DSC claim during the design process when the design-builder’s (a) subsurface investigation, testing, studies, or evaluations, and/or (b) design development, demonstrate that (i) subsurface conditions are materially different than reasonably expected (or objectively stated in the GBR) and (ii) those differing conditions require an approach to final design substantially different from that required by the owner’s mandated criteria or standards and/or the basis of the design-builder’s tender design approach.
The GBR Purpose is Risk Allocation, Not Design Basis Definition or Development
In some DB projects, disputes have arisen between and among owners and design-builders (and their respective consulting engineers), as to the following issues:
- Given the primary and Contract Document status of the GBR – considered relative to the diminished (e.g., lower priority) and frequently disclaimed and “no reliance” (e.g. reference information document) status of data, or other reports, such as the GDR – is the design-builder (and its consulting engineer) entitled to rely (exclusively or primarily) upon statements, characterizations, and descriptions of subsurface conditions in the GBR as a basis for design development? Alternatively, must or should that design development be based upon actual data (i.e., the product of subsurface investigation and testing) and not primarily or exclusively upon GBR “interpretive” or baseline statements? Put another way, is the GBR purpose limited to risk allocation, or is the GBR intended to provide a basis for reliance in the development of an adequate and suitable final design consistent and compatible with reasonably anticipated subsurface conditions?
- Is an owner entitled to mandate that (or otherwise constrain the professional judgment of) the design-builder (and its consulting engineers of record) accept and utilize, for example, ground classifications or characterizations articulated in the GBR, as the basis for design development and finalization?
These issues and the underlying interfaces – viewed discreetly and collectively – demonstrate and reinforce the connections and interdependencies (i.e., the DII Factors) between subsurface conditions and design adequacy risks, and the complexities and challenges involved in achieving effective and balanced risk allocation in DB subsurface projects.
Integrated Risk Allocation Baselines Approach
A less insular, fragmented and more universal and integrated approach to risk allocation for both subsurface conditions and design adequacy should be adopted.
The preceding discussion supports the following observations and recommended approach:
- In major DB subsurface projects, the Contract Documents should include composite and integrated baseline statements (“Integrated Risk Allocation Baselines” or “IRAB”) that objectively define and articulate the allocation of risks as between the owner and design-builder for both subsurface conditions and the anticipated final design approach basis for permanent work (“permanent design basis”).
- The IRAB approach is predicated upon the precedent and prudent owner decisions to (1) perform exploration and testing of subsurface conditions pre-tender sufficient to provide a reasonable basis for the design-builder’s reliance and use in the development of preliminary design compatible with the anticipated subsurface conditions; and (2) share subsurface conditions risk with the design-builder.
- The IRAB should evidence and confirm, as an integral part of the Contract Documents, the mutual risk allocation understandings and agreements of the owner and design-builder pertaining to the DII Factors that are relevant to the alignment and interaction of subsurface conditions and design adequacy risks.
- In DB projects the IRAB should be incorporated into the GBR. The discussion of the permanent design basis in the IRAB provisions of the GBR should be consistent with other portions of the Contract Documents that pertain to the permanent design basis.
- Alternatively, the discussion of the permanent design basis portion of the IRAB may be incorporated into a separate design basis report (“DBR”) that baselines the permanent design basis in the specific context of anticipated subsurface conditions.
- The GBR (and/or DBR) will be a part of the Contract Documents.
- The objective of the IRAB approach is to include in the GBR (and/or DBR) the relevant baseline statements in a unitary, consolidated, cohesive and integrated fashion that adequately address the DII Factors in the context of both subsurface conditions and design adequacy risk allocation.
- The IRAB provisions contained in the GBR (and/or DBR) should objectively and clearly articulate, and define (a) the anticipated subsurface conditions (based on underlying data and evaluations) (b) the contemplated permanent final design basis, and (c) the expectations as to the suitability, compatibility and constructability of the final design in the specific context of the baselined subsurface conditions. The IRAB should also address the anticipated behavior of subsurface conditions in the specific contexts of (a) the permanent design basis approach and (b) the design-builder’s contemplated construction means and methods. This approach, of necessity, would address the DII Factors as they relate to both subsurface conditions and the permanent design basis.
- Under the IRAB approach, the Contract Documents – which include the GBR (and/or DBR) – should provide a clear and objectively defined foundation to address how risk is allocated between the owner and design-builder, and whether the latter is entitled to a cost or time adjustment when:
- Identified/encountered subsurface conditions during post-bid design or construction processes are materially different from those conditions baselined in the GBR; or
- The permanent design basis needs to be substantially altered or revised due to material variations in identified/encountered subsurface conditions (from those baselined in the GBR (and/or DBR).
To achieve the objective of the IRAB approach will require the collaborative involvement of both the owner (and its consulting engineers) and the design-builder (and its consulting engineers) in the joint preparation of the GBR (and/or DBR). The IRAB (and other portions of the GBR and/or DBR) provisions would need to be prepared when, during the tender phase, the design-builder (and its consulting engineers) has had a reasonable opportunity to (1) conduct its own subsurface investigations and evaluations required to support its final design approach, (2) validate subsurface data and evaluations furnished by the owner, (3) perform a sufficient level of preliminary development of the permanent design basis; and when the owner has given initial acceptance of a preliminary permanent design basis submittal prepared by the design-builder (and its consulting engineer).
Some commentators have suggested a sequential but collaborative approach in DB to GBR development: (1) a GBR for bidding (“GBR-B”), prepared by the owner and furnished during procurement with a focus on the anticipated physical conditions; and (2) a GBR for Construction, prepared by the design-builder, that augments the GBR-B and primarily addresses anticipated ground behavior based on the design-builder’s proposed construction means and methods, reviewed by the owner for concurrence and reasonableness.
The IRAB approach is distinguished from the preceding approach in explicitly and specifically requiring that the permanent design basis be expressly addressed in the GBR (and/or DBR) for risk allocation purposes. The IRAB approach contemplates that the GBR (and/or DBR) will (a) be jointly and collaboratively prepared by the owner and design-builder, (b) define the appropriate risk allocation baselines as to both subsurface conditions and the permanent design basis and (c) constitute an integral part of the Contract Documents. Significantly, the GBR (and/or DBR) in the IRAB approach is not limited to only subsurface conditions risk allocation and statements as to anticipated constructability (e.g., construction means and methods) considerations, but also addresses risk allocation pertaining to permanent design basis.
The collaborative process for preparation of the GBR (and/or DBR) facilitates and supports the fusion, contractual alignment, and documentation of the mutual understandings and expectations of the owner and design-builder as to anticipated subsurface conditions and permanent design basis, relative to the DII Factors.
Progressive Design-Build Approach
Progressive DB provides a framework for utilization of the IRAB approach. Progressive DB is intended to improve the process by which final contractual decisions as to subsurface conditions and design adequacy risk allocation may be informed and reasonably determined. The improvement is accomplished by providing a meaningful and interactive approach in which the owner and design-builder may more effectively synchronize their contractual and (design and construction) performance expectations pertaining to the DII Factors. In progressive DB, the particularization, clarity and documentation of contractual risk allocation decisions are enhanced through the owner and design-builder’s collaboration in the joint preparation of a GBR.
Progressive DB provides the opportunity within a contractual framework to defer final risk allocation decisions relating to subsurface conditions until the design-builder has the ability to (a) learn more about the reasonably anticipated subsurface conditions, (b) conduct an appropriate level of design development; and (c) validate the compatibility, suitability and constructability of its design approach in the specific context of the reasonably anticipated subsurface conditions.
In conjunction with progressive DB, the IRAB approach could function to provide a concerted series of consolidated and composite statements in the Contract Documents (i.e., the GBR and/or DBR) relevant to cohesive and comprehensive risk allocation for subsurface conditions and design adequacy risks that adequately account for the DII Factors.
The objective of the IRAB approach is to capture, define and contractually baseline the mutual expectations of the owner and design-builder as to (a) subsurface conditions, (b) the permanent design basis, and (c) the relevant DII Factors, all of which may impact the compatibility, suitability and constructability of that design in those conditions. That objective is principally accomplished in a manner that allows for more informed, refined and collaborative risk allocation agreements between the owner and the design-builder.
The essence of the IRAB approach is the achievement of transparency and the ascertainment, concerted refinement and definition, and documentation of mutual contractual expectations pertaining to subsurface conditions and design adequacy risks respectively, and specifically in relation to the DII Factors. This approach should significantly reduce the prospect of DSC and breach of implied warranty claims on major DB subsurface projects. Above all of those attributes, the IRAB approach is premised on, and an extension of, the sound principle of risk sharing which is essential to effective and balanced risk allocation.
As noted above, there is much opportunity in DB for significant variations in risk allocation approaches. The IRAB approach should produce greater proximity and contractual alignment in owner and design-builder risk allocation and cost/pricing expectations sooner and more efficiently than otherwise would occur if that alignment were deferred and achieved potentially through a series of avoidably contentious post-award DSC and breach of implied warranty claims asserted during the design and construction processes. That said, some owners, and some design-builders, may be content with, or even prefer, the otherwise prevailing uncertainties and gambles as to risk and cost/pricing, and the suspense of deferring the reconciliation in ultimate alignment of expectations through a claims dispute resolution process.
The competing perspectives and preferences, and associated decisions (or imposed outcomes rendered by default through the vagaries of legal process) on these issues are simply representative of the dynamics and options inherent in the macro spectrum of considerations that influence and account for the significantly variable approaches to risk allocation in DB subsurface projects.
Achieving effective and balanced risk allocation in DB subsurface projects is challenging and complex, significantly more so than in 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 among the DII Factors; disregards and is dissociated from the impacts and influences of the DII Factors; is dysfunctional; and, consequently, will likely not produce effective or balanced risk allocation decisions in DB.
A more integrated, concerted, cohesive, comprehensive and contractually transparent and documented approach to risk allocation is indicated so as to produce a substantially improved and more effective and balanced result.
The efficacy of the IRAB approach critically depends on the following components:
- The owner’s furnishing to tenderers adequate subsurface data and evaluations;
- 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;
- The design-builder’s adequate opportunity and time to preliminarily develop its permanent design basis approach to a level sufficient to validate the suitability, compatibility and constructability of that design in the anticipated subsurface conditions; and
- 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. The search and quest for such approaches are not realistic objectives. Rather, the objective should be focused on communication and discussion of alternative approaches that may improve and guide the goal of achieving effective and balanced risk allocation.
Improvement of risk allocation in DB subsurface projects depends upon the underground industry’s enhanced receptivity and capacity to acknowledge, understand and balance the DII Factors with due consideration to the respective and differing roles, responsibilities and interests of the owner and design-builder. The sources of most problems primarily originate with those parties, and those same parties should primarily (and collaboratively) be responsible for the solutions.
One of the few certainties is that DB risk allocation will remain controversial; but a subject that needs to be confronted and candidly discussed, especially among those in the industry; and in a manner that encourages and fosters new ideas and robust dialogue, and balanced consensus transcending purely partisan interests. To not do so will, with parallel certainty, exacerbate the complication, frustration, and risk for all involved.
“The fault, dear Brutus, is not in our stars, but in ourselves, that we are underlings.” Shakespeare, Julius Caesar (i, ii, 140-141).
NOTE: Guidelines regarding the risk allocation issues addressed in this paper will be included in two publications to be released in 2018: Gransberg, D, Guidelines for Managing Geotechnical Risks in Design-Build Projects, NCHRP, Research Report 884 (Transportation Research Board, September 2018); The Emerald Book, The International Federation of Consulting Engineers (2018 publication, pending).
In a series of other articles and publications the author has addressed several aspects of risk allocation for subsurface conditions and design adequacy in DB and public-private partnership projects, and the risk and professional liability exposure for consulting engineers involved in such projects. See, for example: J. Reilly, R. Essex, D.J. Hatem, Alternative Delivery Drives Alternative Risk Allocation Methods, North American Tunneling (2018); Hatem, D.J. 2017 Design-Build: A Realistic Solution for Owner Cost Overrun Risk? TBM: Tunnel Business Magazine (October 2017); Hatem, D.J. and P. Gary, ed., 2017 Public-Private Partnerships and Design Build: Opportunities and Risks for Consulting Engineers, 2nd ed. Washington: American Council of Engineering Companies, pp. 343-562; Hatem, D.J. 2014 PPP and DB: Who is Responsible for Risk: A Call for Guidelines. North American Tunneling Journal, October; Hatem, D.J. 2014 Design-Build and Public-Private Partnerships: Risk Allocation of Subsurface Conditions. GEOSTRATA, ASCE Geo-Institute, August; Hatem, D.J. 2016 Diverse and Bifurcated Design Roles: Distinguishing Design Responsibility and Design Risk Allocation. Donovan Hatem LLP Design and Construction Management Professional Reporter, Dec.; Hatem, D.J. 2017 Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and Design-Build Projects. In: D. Hatem and P. Gary, ed., Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers, 2nd ed. Washington: American Council of Engineering Companies, pp. 343-562; Hatem, D.J. and Corkum, D. 2014 Purpose and Preparation of Geotechnical Baseline Reports in Design-Build and Public-Private Partnership Subsurface Projects. In: Geo-Congress 2014, American Society of Civil Engineers. Atlanta; G. Brierley, D. Corkum and D. Hatem, eds. Design-Build Subsurface Projects, Second Edition (Society for Mining, Metallurgy and Exploration, Inc. 2010).
In many of the above sources the author has addressed the impacts of ineffective and imbalanced risk allocation between the owner and design-builder on the professional liability risk of consulting engineers.
David J. Hatem, PC, is a partner with Donovan Hatem LLP, Boston, Massachusetts.