Chapter 8
Construction Agreements
Summary:
Key legal elements of construction contracts. Origins of standard industry agreements. General contractor agreements and Design-Build Agreements. The key clauses of prime contract and general conditions, including insurance coverage, licensing, bonding (including performance and payment bonds), wage rates, labor and materials provisions, and warranty provisions. Unique issues in design-build contracts are discussed.
§ 8.1 Key Concepts
Every elected leader engaged in public works must have a general understanding of the key legal concepts that govern construction contracts. They should also have a working knowledge of the typical contract provisions that must be considered for inclusion in a public works construction contract.
Many public entities have developed their own “pet” construction documents (including unique General Conditions), as will be discussed later. They can develop as a slow process of accretion, where each new generation of project leaders and attorneys contribute a little bit of “textual sand” to the emerging jagged coastline of a prime contract. Unfortunately, the result can be more like a tangled mangrove swamp than a warm stretch of Malibu beach.
Furthermore, unless a contractor raises those troublesome contract issues during the bidding and addendum phase, there will be no adjustment of those clauses and the bidders can either accept that language or decide not to bid the project. There is no negotiation of a project contract after the project goes through lump-sum bidding. Such negotiation would almost certainly be a reversible irregularity in a competitive environment, as it would favor the persuasive successful bidder over its straight forward competitors who took the contract at face value.
Construction contracts generally contain a bundle of various documents commonly referred to jointly as the “Contract Documents.” These documents may consist of bidding documents, the owner-contractor agreement, general conditions, supplementary conditions and/or special conditions, drawings and technical specifications, standard specifications, reference specifications, addenda and modifications.
These individual documents cross-reference each other in order to form the contract. The next few paragraphs briefly describe these contract documents.
1. Bidding Documents typically include an invitation to bid, instructions to the bidder (including an affidavit of non-collusion), and bid forms (the bidding process is discussed in detail in Chapter 12).
2. The Owner-Contractor Agreement consists of five elements, including the identity of the parties, description of the work to be performed, time for performance, contract price and payment schedules.
3. The General Conditions provide additional scope and detail and expressly state the various responsibilities, rights and duties of the parties. These conditions are usually standard provisions provided in all construction contracts and are not project specific. The CalTrans Standard Specifications for Public Works Construction (2018) and other standard contracts provide such general conditions.
4. Supplementary and/or Special Provisions are inserted for a variety of reasons, usually to provide for special circumstances or conditions unique to a particular project.
5. Drawings represent the actual layout, dimensions, and construction details of the project. They are utilized by the contractor to determine the quantity of material required for the project, as well as the cost of construction. More importantly, they are used by the contractor to construct the project and usually include architectural, structural, mechanical, and electrical drawings. The architect or engineer is responsible for preparing drawings or plans for the entire project.
6. Specifications are documents that supplement the drawings, providing detailed descriptions of various portions of the project. Technical specifications within the owner-contractor agreements provide further description of the engineering aspects of the project, as well as testing. Standard specifications include boilerplate written descriptions of steel, concrete, general conditions, materials, and so forth, which are common to almost every job. Reference specifications refer to accepted third-party specifications that are published by technical and engineering societies, public agencies, and other parties involved in numerous projects nationally. The engineer is typically responsible for preparing these specifications to conform to the project drawings.
7. Addenda are included as changes to the Special Provisions and are generally issued prior to the final bidding of the general contractor scope of work.
8. Modifications are any substantial written changes made after the execution of the owner-contractor agreement.
Several business terms must be kept in mind when drafting or choosing which provisions to include within a contract. A fixed-price or lump-sum contract anticipates a contractor agreeing to complete a project for a fixed price according to the contract documents. Unit-price contracts involve a fixed price per unit of material or quantity of work to be performed. Cost-plus or force-account contracts provide reimbursement for all costs of construction, plus a percentage amount to compensate for overhead and profit.
Public works contracts are interpreted in the same manner and under the same rules as are private contracts.77 More important, however, is the application of the parol evidence rule,78 which provides that if a written contract is a complete and final expression of the parties (complete integration), any contrary or inconsistent references, specifications or conflicting prior agreements or statements will be inadmissible to vary the terms of the written agreement.
§ 8.2 “Standard Agreements”
Most construction contracts trace their ancestry through standard contract forms developed by the American Institute of Architects (AIA) (over 200 documents), ConsensusDocs (a set of over 100 documents), and the Engineers Joint Contract Documents Committee (EJCDC). There are also strong influences in industry contracts from the US Government Standard Contracts which are assembled from the Federal Acquisition Regulations (FARS) and its various predecessors.
The professional society forms are widely utilized within the public works departments of counties, cities, and special districts. Smaller cities and public agencies, especially special districts, use a variety of individually tailored fixed-price lump-sum forms that often incorporate major provisions from the construction industry professional groups listed above.
In California, the most commonly encountered public works contracts are: (1) California Department of Transportation Contracts; (2) State of California Department of General Services Contracts; (3) Southern California Contract and Specifications (Green Book); and (4) standard construction contracts of a few large cities and counties. The CalTrans contracts and forms are used by numerous cities, counties and special districts for roadway and bridge projects. The AGC of California publishes a highly influential set of Twenty-Five documents tailored for California construction projects. The most highly used are those regulating subcontracts, payment and releases.
A fairly high degree of standardization exists for contracts in categories 1, 2, and 3, above. The remaining contracts issued by California public entities are apt to contain clauses and provisions unique to the specific projects.
This patchwork quilt of “standard” agreements creates difficulties for both public agencies and the design and construction community. Unfortunately contractors make pre-bid comments regarding contractual provisions on only rare occasions. They should do so when those standard agreements provisions place unnecessary burdens on their operations or require disproportionate contingencies. Since these contractual provisions are issued to the bidding community largely on a “take it or leave it” basis, it is rare that a city or agency will have an opportunity to know the cost or scheduling impacts of its various “pet” provisions that it includes in its contracts.
In contrast to the private construction environment, where a contractor can negotiate various provisions in exchange for reductions in price and other concessions, the public entity may blindly incorporate onerous clauses without realizing their price impact. For example, excessive liquidated damages provisions in a repaving project may substantially increase the cost of the job without providing any substantial long-term benefit for a city or county government. On the other hand, the threat of large EPA enforcement fines may encourage an agency to attempt the pass-through fines of $25,000 per day, or greater, on a sewage treatment plant upgrade project.
While general contractors can theoretically suggest changes to contracts through requests for clarification or requests for an addendum on a particularly onerous clause, those requests and responding adjustments rarely happen in the heat of competitive bidding.
Thus, public entities must be careful not to draft contracts that are so protective of the owner that the number of bidders dwindles to a few, the spirit of competition is lost, and the ultimate bidders inflate their bids as a risk premium.
There are three stages to drafting a public works contract: First, the nature of the project needs to be carefully described, including an agreed set of “deal points,” the best estimate of the owner’s and contractor’s major risks. Second, a rough draft must be developed, often modeled on a contract for a similar project of similar scope and magnitude. Lastly, the final agreement must be completed, incorporating comments from various operating divisions and engineering professionals within the city or other public entity.
The final review of the public works contract should be conducted by an experienced construction attorney, including a thorough check of: 1) a standard contract checklist; 2) required and prohibited statutory clauses; 3) a careful review for conformity with: a) finance documents, b) the local charter, municipal codes or ordinances; and 4) the binding legal conditions of any financing arrangements or the funding conditions for any federal, state, or local grants.
Extreme rigor in preparing public works contracts and bidding documents is required, since contracts that: (1) result from improper bid processes, and/or (2) contain clauses that violate public policy or the grant documents may be found to be null and void.79 At a minimum, bid protests (as extensively discussed in Section 12.11) may substantially delay a project or force rebidding if all bids are rejected.
Generations of public entity attorneys have devised increasingly sophisticated clauses and provisions that can work against the general contractor. Often, in their zeal, public attorneys neglect to review the public contract code which prohibit, limit and void many of such clauses, especially involving delay and indemnity issues (as set forth in Chapter 9).
On the other hand, contractors and their attorneys are strongly urged to review in detail not only the special provisions, but also the so-called boilerplate provisions of any contracts that do not contain pre-printed standardized general conditions that may have been subject to prior legal or commercial review.
The concept of commercial review implies an analysis of the business aspects of the project contract, including hidden risks, costs, and profit potential, as opposed to a mere review of the purely technical or legal risks.
Finally, where a general contractor encounters clauses that pose unacceptably high risks and the public agency is unwilling to reconsider or modify those clauses, the contractor may decide to make a “no bid” decision. The walk-away technique is also appropriate when a public entity fosters a reputation of unfairness or willingness to assert false claims allegations without significant justification. When the contractor makes this business decision, it is generally appropriate for the contractor to notify the public entity regarding the offensive clause or management practices, so that the opportunity for change is at least offered.
§ 8.3 Key Clauses in Prime Contracts
The complexity of large public projects results in a wide variety of clauses commonly employed in public works contracts. In addition, the U.S. construction insurance market influences the language used in certain types of clauses that the underwriters have found pose excessive risks for contractors.
An example of a Table of Contents for a Prime Contract for a large and complex project is reproduced below:
Table of Contents
Division I - INTRODUCTION
ARTICLE 1 SCOPE OF WORK
ARTICLE 2 PROJECT SCHEDULE
ARTICLE 3 PARTIES’ REPRESENTATIVES
Division II - PROJECT EXECUTION
ARTICLE 4 CONTRACTOR’S OBLIGATIONS
ARTICLE 5 COMPANY’S ASSISTANCE
ARTICLE 6 SUBCONTRACTORS
ARTICLE 7 LABOR AND GOOD FAITH EFFORTS
ARTICLE 8 CUSTOMS AND IMPORTS
ARTICLE 9 INSPECTING, TESTING AND ACCEPTANCE
ARTICLE 10 DEFICIENT WORKS AND REJECTION
ARTICLE 11 PROCEDURES AND DOCUMENTS
Division III - FINANCIAL CONSIDERATIONS
ARTICLE 12 AGREEMENT PRICE
ARTICLE 13 INVOICING AND PAYMENT
ARTICLE 14 TAXES AND DUTIES
ARTICLE 15 CLAIMS AND LIENS
ARTICLE 16 AUDITS AND ACCOUNTS
ARTICLE 17 BANK GUARANTEES
ARTICLE 18 PROPERTY IN DRAWINGS, PATENTS & CONFIDENTIALITY
ARTICLE 19 TITLE
Division IV - WARRANTIES AND RISK ALLOCATION
ARTICLE 20 WARRANTIES
ARTICLE 21 ALLOCATION OF LIABILITIES
ARTICLE 22 INSURANCE AND INDEMNITIES
Division V - ADJUSTMENTS
ARTICLE 23 VARIATIONS
ARTICLE 24 SUSPENSION
ARTICLE 25 TERMINATION
ARTICLE 26 FORCE MAJEURE
Division VI - INTERPRETATION
ARTICLE 27 AGREEMENT INTERPRETATION
ARTICLE 28 INDEPENDENT CONTRACTOR
ARTICLE 29 COMPLIANCE WITH LAWS
ARTICLE 30 NOTICES AND ADDRESSES
ARTICLE 31 SURVIVAL OF PROVISIONS
ARTICLE 32 CONFLICT OF INTEREST
ARTICLE 33 ASSIGNMENT
ARTICLE 34 WAIVER
ARTICLE 35 ENTIRE AGREEMENT
ARTICLE 36 DEFINITIONS
EXHIBIT A. PROJECT SCOPE
EXHIBIT B. PROJECT EXECUTION MANUAL
EXHIBIT C. PLANS & SPECIFICATIONS
§ 8.4 Project Execution
One of the major ways to ensure the effective administration of public megaprojects is a “Project Execution Manual.” Such a document provides the explicit expectations of the owner and designer prior to the bidding of the project. As such, the Appendix contains a useful Table of Contents for the subject covered by a Project Execution Manual for an extremely complex construction project.
§ 8.5 Design-Build Agreements
As previously mentioned, design-build is a project delivery system under which a single entity (known as the design-builder) is contractually responsible for both the design and construction of a project. The design-builder is generally: (1) a general contractor that employs its own architects or engineers or retains them on a consulting basis, or (2) a joint venture between a general contractor and a design firm. On rare occasions, the design-builder is an architecture or engineering firm that subcontracts the construction phase.
§ 8.6 Home Improvement Contracts
There are very exacting and specific requirements for home Improvement Contracts contained in Business and Professions Code § 7151, et seq. If the contractor does not follow them, the penalties are severe: 1) contractor license discipline, 2) Imprisonment of up to a year and 3) a fine of up to $5,000. The penalties are even more severe for pool contractors who do not follow the rules. See: Business and Professions Code §§ 7158 and 7165-7168.
§ 8.7 New Single Family Homes
There are also specific requirements for what is to be included in a contract for constructing a single family home. These are contained in Business and Professions Code § 7164. While the penalties may not be as severe as with Home Improvement Contracts, they will subject the contractor to discipline by the Contractors State License Board, as well as other contract ramifications.
The design-build concept competes with the more established “design-bid-build” system, where design is completed separately prior to competitive bidding of the construction. This older approach, long used for private and public works, was established to produce facilities at the lowest cost to the public. Fierce competition has been fostered among contractors, each bidding a lump sum on an identical set of design documents.
Among U.S. federal agencies, the U.S. Postal Service, the General Services Administration, and the U.S. Army Corps of Engineers utilize the design-build approach for significant portions of their construction procurement budgets.
Unlike manufacturing, where design and production are inseparable, the design-bid-construct approach features a designer who remains independent of the contractor. The designer is then expected to provide: (1) an excellent design for the owner; (2) reasonable cost and schedule estimates; and (3) independent and objective inspection and enforcement of quality standards in the contract. Furthermore, the bid competition is thought to assure the lowest price for a fixed scope of work.
The lump-sum contract is by far the most common type of contract in the construction industry. In it, the contractor agrees to perform the specified work for a fixed price within a fixed time. If the cost of the work exceeds or falls below the fixed price, the contractor absorbs the loss or reaps the gain. Owners think they know exactly what services they will get before they agree on the price and begin construction. Unfortunately, the result of the design-bid-construction approach can be a highly contentious jobsite. Designers may be isolated from the financial pressures of construction. Their cost and schedule estimates are notoriously inaccurate (and their E/O carriers exclude coverage for their attempts). They are unaware of newer construction means and methods, lack field experience and construction savvy, and, therefore, provide designs that are often unconstructable or outdated. While they are independent with regard to inspection, they are usually prohibited from conducting inspections by their E/O insurance carriers who limit this valuable involvement to “observation from time to time of general construction progress.”
Low-bid public projects, often with unclear and ambiguous plans, have fostered a significant number of serious contract disputes and lawsuits. As a result, owners, designers, and constructors have been pursuing alternative methods to make the interfaces in project delivery systems more workable. Design-build is an answer to these problems on selected projects.
While the U.S. public sector predominantly uses the design-bid-build project delivery system, the use of design-build is increasing. Firms such as Bechtel, Fluor, and other international constructors have long offered their clients this form of one stop shopping on major projects in the nuclear, petrochemical, pharmaceutical and industrial sectors. The public sector has used design-build for prisons, public and military housing, educational facilities, physical fitness facilities, warehouses and other projects where the scope of work can be easily developed and replicated.
The public sector in California, specifically CalTrans, has used design-build and privatization, an emerging public works management system, whereby the government contracts with a private entity to undertake some or all phases of the system that have traditionally been the responsibility of the government, including project financing, land acquisition, design, construction and operation. California projects that utilize design-build include the San Joaquin Transportation Corridor and the Eastern Transportation Corridor (Transportation Corridor Agencies, Santa Ana) and the high Occupancy Vehicle Lanes Project - State Route 91 (California Private Transportation Corporation, Orange and Riverside Counties).
The legislature has expanded public entity authority to engage in “design-build” or so called “best value” procurement, including Public Contract Code § 20133 (since repealed, but involved Counties of Alameda, Contra Costa, Sacramento, Santa Clara, Solano, Sonoma and Tulare), § 20175.2 (since repealed, but involved City of Brentwood, the City of Hesperia, the City of Vacaville, and the City of Woodland), § 20190 (Value-effective acquisition for municipal utility districts), § 20209.5 (since repealed, but involved transit districts), and § 20301.5 (since repealed, but involved Santa Clara Valley Transportation District).
The “competitive negotiation” method is also authorized for large transit projects under Public Contract Code § 20229.1 (electronic equipment and specialized rail transit equipment). An innovative statute has been California’s Infrastructure Financing Act which is intended to provide California public entities with new sources of private sector investment capital to design, construct, maintain, rebuild, repair, and operate revenue-generating public infrastructure facilities.80 The act may be used by any California city and/or county (including a chartered city or county), school district, community college district, public district, county board of education, joint powers authority, transportation commission or authority, or any other public or municipal corporation.81
Infrastructure Projects are defined under the Financing Act as including the design, construction, or reconstruction by, and lease to, private entities for the following types of fee-producing infrastructure projects: irrigation, drainage, energy or power production, water supply, treatment, and distribution, flood control, inland waterways, harbors, municipal improvements, commuter and light rail, highways or bridges, tunnels, airports and runways, purification of water, sewage treatment, disposal, and water recycling, refuse disposal, structures or buildings, except structures or buildings that are to be utilized primarily for sporting or entertainment events.82
Infrastructure Projects may be proposed by the private entity and selected by the government agency at the discretion of the agency. Projects may be proposed and selected individually or as a part of a related or larger project.
The competitive negotiation process must utilize as the primary selection criteria the demonstrated competence and qualifications of the contractor for the studying, planning, design, development, financing, construction, maintenance, rebuilding, improvement, repair, or operation, or any combination thereof, of the facility.
The selection criteria must also ensure that the infrastructure facility is operated at fair and reasonable prices to the user of the facility’s services. The competitive negotiation process cannot require competitive bidding. The selection and contract award process is exempt from the California Environmental Quality Act (CEQA). However, the entity selected must proceed with CEQA compliance.
It is generally assumed that Proposition 218 does not apply to privatized infrastructure. If so, the California Infrastructure Financing Act may be the only feasible alternative for many local projects where there is localized opposition to raising taxes or imposing new user fees. In addition, the approval of a variable user fee tied to the consumer price index, a long-term rate schedule, or a multiple of future actual costs incurred in delivering the services may exempt local public entities from seeking future rate increases that may prove problematic under Proposition 218.
Traditionally, the design professions have resisted design-build, perhaps out of fear that their professions would be marginalized by large, integrated, design-build firms led by general contractors. That resistance appears to be diminishing. As evidence of this change in attitude, the AIA has issued its own set of design-build documents, as discussed below. Additionally, as early as October 1994, the National Society of Professional Engineers (NSPE) issued a discussion paper on design-build in the public sector in which design-build is recognized as “an established and acceptable process.”
In its major policy statement entitled “Design-Build in the Public Sector,” the NSPE states: “In the public sector, design-build is used as a specialized delivery system in certain limited situations. The federal government’s experience with design-build is rather recent. The U.S. Department of Defense has used design-build only since 1987, when it received authorization to do so under the Military Construction Act of 1986. Some civilian federal agencies are also using design-build under their federal acquisition authorities.”
The principal benefit of design-build contracts to the owner is a single point of responsibility for both design and construction. In addition, design-build provides other benefits, as discussed below.
a) Cost Savings
Project costs may be lower because of the close working relationship between designers and constructors. This may lead to the incorporation of more economical design features and the application of cost-saving construction methods.
b) Team Atmosphere
Projects may proceed more efficiently because designers and constructors are members of the same “team.” The interface between designer and constructor, often adversarial within design-bid-build systems, may become more open and foster a cooperative exchange of ideas to produce a profitable project. When problems arise on a project, the owner will not be faced with an architect, construction manager, and contractor each blaming the other. The designer-builder takes the responsibility for completing the project according to the owner’s requirements, on time, and within a guaranteed maximum price.
c) Efficiency
Construction efficiency may be improved because design efficiencies can be woven throughout the construction process and because the designer, as a member of the design-build team, can participate directly in resolving design issues that surface during construction.
d) Critical Flaw Analysis
The design-build team has a greater chance of seeing critical flaws early in the design stage when they can be avoided or mitigated. These flaws comprise a broad array of design and construction risks that a joint team is better prepared to address than a designer alone.
e) Rapid Response on Design Issues
A design-build team can react faster and with more clarity when design flaws are noted or ambiguities arise. In the traditional design-bid-construction approach, the response to design flaws or ambiguities is often defensive and hostile. The design-build team must react immediately since it owns the problem and must therefore correct it immediately. In a design-build project, the design professional, or the A/E, is not the owner’s or agency’s consultant, but rather the contractor’s teammate. The team either negotiates or presents a competitive proposal for both the design and construction of a particular project. Design-build projects can be accomplished in a variety of formats:
— The competitive lump-sum pricing format can be used with the design-build approach. Where this format is utilized, the lump-sum price may be determined for the entire project in advance before the design phase is completed, or it may be split into a design fee and a construction cost, with the lump-sum construction cost to be determined after the design phase is completed. Generally, lump-sum jobs must have a clear definition of the project (e.g., roadway plan and profile views) and a very exacting set of design guidelines for the design-builder to follow (e.g., CalTrans standards).
— The negotiated price format can be used to establish an initial design budget; then the scope and price of the project can be negotiated as the project design proceeds. Cost savings through value engineering, creative construction technologies, and scheduling efforts can be extremely significant.
— The reimbursable cost format can be used from the beginning of a project with both design and construction done according to pre-agreed rates and overhead markups. A guaranteed maximum price can be negotiated or bid at any time in the project.
— Fast-track procedures allow certain elements of construction to proceed concurrently with the design process. This method allows work on one element of a project to proceed prior to the design for the structure being finalized. Fasttrack procedures can overlap and compress the design and construction phases. Thus, the total time from conception to completion is greatly reduced. For example, the foundation or structural steel work may be released for bids prior to the completion of the building design or before bids are solicited on the electrical, plumbing, or heating, ventilating and air conditioning (HVAC) work.
The design-build selection process is another issue that must be addressed. The owner may select the design-builder by: (1) directly selecting sole source design-builders; (2) negotiating with a group of pre-qualified design-builders; or (3) soliciting lump-sum proposals from design-builders through competitive bids.
Direct selection is typically used by a private owner or independent agency. The owner will usually select the design-builder based on a past relationship between the parties or by the reputation of the design-builder. Thus, developing a design-build clientele requires marketing effort rather than just bidding.
When utilizing a negotiation approach to selecting a design-builder, the owner will usually use the same criteria as in a direct-select method, but will also consider the fee, scheduling and costs. In public works projects, the selection approach is highly formalized. The owner may issue a “criteria” package and then issue requests for proposals (RFPs) to design-builders.
The proposals or packages and costs are reviewed by a committee appointed by the public owner. The criteria for selecting the best proposing design-builders varies from state to state, as well as from statute to statute, but generally includes successful performance of prior projects, résumés of project executives, the qualifications of the designers, financial strength and whether the design-build team has worked together previously. The project is then awarded to the lowest successful bidder.
The NSPE has advocated developing criteria for a two-step selection process. In the first step, the involved agency would select at least five offerors on the basis of their qualifications. In the second step, each of the offerors would be required to submit detailed proposals, including cost information. A single offeror would then be selected.
This process greatly reduces the cost of proposal preparation by the initial candidates. Another consideration of the selection process should be the use of model contracts. At one time, the only model contract forms available for the design-build industry have been the AIA forms, specifically, AIA document A141, Standard Form of Agreement between Owner and Design-Builder. Now, however, the AGC and others have published families of model contracts for design-build projects. These model contract forms are extremely helpful in establishing the legal relationships between the various project parties. For example, the AGC now has available AGC Document 420, Standard Form of Agreement between Contractor and Architect/Engineer for Design-Build Projects. In 2014 the AIA also updated their family of Design-Build Contracts to include forms for Contractor and Subcontractors, and Architect and Consultant on a design-build contract.
Of course, it is always important to remember that using the model contracts can have significant legal consequences. It is recommended that a design-builder always consult with an attorney before use or modification of these documents. In order to promote the more widespread and consistent use of design-build by public agencies, the American College of Construction Lawyers (ACCL) and the Building Futures Council (BFC) developed a Design-Build Model Procurement Code for adoption by state and local governments. It provides an excellent first step toward establishing criteria, soliciting proposals and making awards. States may consider adopting the model code, which will result in more uniform and consistent implementation of design-build procurement procedures.
Until recently, most public agencies required competitive bidding and awarded contracts to the lowest responsible bidder.83 However, now numerous exceptions exist to the State’s competitive bidding requirements, as well as, contracts with private architecture and engineering firms.84 In addition, some public agencies utilizing joint exercise of powers agreements, under which a project is constructed according to an agreement between two or more public agencies, may construct such projects without competitive bidding.85 Further, California authority provides that the Department of General Services (DGS) may enter into design-build agreements for office and parking facilities in the City of San Bernadino.86
Projects that are exempt from the Public Contract Code include those construction or improvement projects whose costs are less than $25,000. Other exemptions include emergency work94 and specialized personal services (e.g., the services of architects, engineers, land surveyors and construction project management services).87
The emergency exception is critically important in a state prone to flooding, earthquakes, massive landslides, roadway accidents (especially those affecting bridges and tunnels) and associated calamities. In those instances, a variety of statutes provide emergency relief from the competitive bidding requirements.88
In a twist very important to the design-build industry, competitive bidding is not required when it fails to produce an advantage and when the advertisement for competitive bids is undesirable, impractical, or impossible. For example, in the case of Graydon v. Pasadena Redevelopment Agency (1980) 104 Cal.App.3d 631, the Court rejected the need for competitive bidding, stating that if the municipality had complied with competitive bidding requirements, a 14-month delay in construction probably would have resulted, substantially impairing the municipality’s ability to repay the bond issue that was used to finance the construction. The Court went on to say that where it is practically impossible to obtain what is required and to observe such form, competitive bidding is not applicable.
In 1989, the California legislature enacted statutes to empower CalTrans to contract with private developers to construct and operate tollway facilities under lease agreements with the State.98 These statutes arose from a legislative determination that “public sources of revenues to provide an efficient transportation system have not kept pace with California’s growing transportation needs, and alternative funding sources should be developed to augment or supplement available public sources of revenue.”
In Professional Engineers in California Government v. Department of Transportation,89 the Court reviewed Assembly Bill 68 and the agreements between CalTrans and the private developers. The Court found that where letting of any service contract or franchise might open the door to the spoils system, the legislature can adopt other measures to prevent such abuse. Further, the Court found that to discourage this type of experimentation would denigrate a key purpose of the civil service mandate — to promote efficiency and economy in state government.
Similarly, in Professional Engineers in California Government v. Kempton (2007) 40 Cal.4th 1016, the California Supreme Court upheld the contracting out provisions of Proposition 35 allowing private procurement of engineering services and held it impliedly repealed prior and inconsistent regulatory regulations and statutes that previously restricted such private awards of engineering services.
The risks involved with the design-build approach apply to both the contractor and the public agency owner. The most apparent risk for the contractor is inflation of the scope and quality of a project and resultant impacts on cost and schedule. In a typical construction contract, the contractor is usually entitled to a change order when there has been a change to the scope of work, changed conditions, or errors or omissions in the plans and/or specifications. In a design-build contract, the design-builder may b entitled to a change order when the owner requests certain changes in scope or when unforeseen conditions are encountered; but, since the design-builder is responsible for the design, plans and specifications, it cannot claim entitlement to a change order as a result of its own error or omission (“E/O”).
Once the design-builder assumes the responsibility for design, it also assumes the responsibility for the accuracy of the drawings and specifications. However, a general contractor who has contracted for the design services may bring an E/O claim against its design firm partner or consultant, depending on the contract.
For the owner, the combination of the designer and the builder contractor may result in a sacrifice in the owner’s ability to control the design. Additionally, the checks and balances inherent in the owner-designer-builder relationship are largely eliminated.
Another area of concern for the owner is design and construction quality. When the design professional serves as an employee or subcontractor of the design-builder, conflicts may arise between the design professional’s duty to its immediate employer or client and an independent duty to the owner. Also, more opportunities exist for the design-builder to lower the quality of the plans, specifications, and other areas, often in subtle ways that the owner may not be able to easily detect.
Insurance and liability are other key issues that must be addressed in the design-build context. A designer may be hesitant to participate in a design-build project because of the increased liability exposure. Such exposure includes the presence of guaranty/warranty clauses in design-build contracts. Ordinarily, an engineer (or architect) is held responsible only for exercising the degree of skill or care that the average, similarly situated engineer would employ and does not warrant or guarantee a successful outcome for its services.
The design-build contractor should keep in mind that insurance coverage for the design-build team is generally a manuscript-type coverage negotiated with the insurance carrier for the specific project. Similarly, contract language, particularly guaranty/warranty and insurance provisions, must be specially drafted to fit the situation or project.
Lastly, these are a few specialized issues that arise in design-build contracts:
Design Approvals Design Standards
Description of Services Party Responsibilities
Construction (Requirements) Operation and Maintenance
Design Fee Contract Price
Dispute Finance/Payments
Indemnification Bonding
Insurance Warranties
Changes/Extra Work Suspension of Services
Default Acceptance