Four Questions for Owners to Ask About a Design-Build Contract
By Stephen P. Kelly
For owners, design-build projects can make a lot of sense. With one party responsible for the whole process, communication is simplified and less finger-pointing occurs when problems arise.
On the other hand, design-build projects also come with risks. There are no natural checks and balances that are present with a separate designer and contractor. Also, the one contractor could have limited resources and leave the owner inadequately protected. Following are four questions for owners to ask themselves when they choose the design-build option.
1. Have I spelled out what I want?
A good design-build contract clearly says what is to be designed and built. To achieve this, the contract should list project requirements. Think of these requirements as a project wish list. For example, will the building have any special temperature, air flow or other environmental conditions? Should the building qualify for a green construction standard? Should there be criteria for special equipment? If it's important, be sure it's in the contract.
2. Who is my design-builder?
Know the resources that stand behind the design-builder. For example, it's common for parties to form a joint venture for a design-build project. But what is known about the joint venture? The joint venture, for example, may not have adequate insurance or other assets to back up its work. Or the parties may have limited their liability in the joint venture agreement.
Take steps to ensure there is a full set of remedies – for example, reserve the right to have subcontracts assigned to you if the design-build contract is terminated. And if it is a joint venture, ask to see the joint venture agreement beforehand. If resources provide insufficient protection, look for additional assets – such as guarantees from joint-venturing parties. The design-build approach should enhance the success of the project, not limit an owner's rights.
3. Am I covered by insurance?
Because designers and contractors often don't have significant liquid assets available to pay claims, insurance is critical to protect an owner's rights. The design-builder's own insurance, however, may be inadequate. For example, the design-builder's professional liability insurance may not cover the work of the project designers. Or a joint venture may carry little insurance of its own.
A useful exercise is to chart the insurance of the design-builder and each of its subcontractors, so that the whole picture can be seen and coverage gaps can be spotted. Then come up with a game plan for insurance coverage and make sure the contract spells out insurance obligations for both the design-builder and its subcontractors.
4. When do I set the contract price?
This can be tricky. An owner's leverage is strongest before the contract is signed. But it's difficult to price construction before the design is complete, because the design-builder won't be able to secure firm pricing from subcontractors. To hedge against uncertainties, the design-builder will desire to include contingencies for cost escalation, bidding uncertainties, design adjustments and the like. A contract price negotiated before design is likely to include plenty of contingency fat.
On the flip side, setting a contract price after design poses its own challenges. If an owner negotiates the price after the design is done, the design-builder will have already worked on the project for months. At that point, it will be difficult – and expensive – to change design-builders. Because of this, all bargaining leverage will be lost.
To reduce this risk, establish a project budget from the start – and stick to it – and require the design-builder to submit cost estimates during each design phase. These steps won't prevent a tough price negotiation, but they will reduce the chance of a big surprise when the design-builder submits its proposed price.
Design-build can be a useful method of project delivery. Owners' chances of success will improve when they ask the right questions before contracts are signed.
Originally published in the Oregon Daily Journal of Commerce, March 2011.