Fewer Contracts and More Coordination Point to Design-Build Becoming Even More Popular

When contractors and owners elect a certain project delivery method for their project, it can affect all aspects of the construction, including costs, time to complete the project and amount of exposure to liabilities for each involved party. Owners and designers have long viewed the “Project Delivery Method” as the comprehensive process including planning, design and construction required to execute and complete a building facility or other type of project. Choosing the right project delivery method is integral to a successful project. Currently, there are at least four types of common project delivery methods: construction management at risk (CMR), design-bid-build (DBB), design-build and multi-prime (MP). There is a growing trend showing the more traditional design-bid-build product delivery method is losing its appeal and other options, like the design-build delivery method, are taking its place.

To understand why the design-build process is growing in popularity, it is helpful to discuss three areas where the four processes are different: number of phases and essential parties, number of essential contracts and the liability exposure under the contracts within each method.

NUMBER OF PHASES AND ESSENTIAL ‘PRIME’ PARTIES

Traditional design-bid-build is the familiar, drawn-out process where the owner of the property contacts a designer to create plans and specifications. Once complete, the owner takes the plans and specifications and begins the bidding process. After a bid is accepted, only then can construction begin. The CMR and MP methods use similar processes, though the owners may contract to different parties instead of contracting with the general contractor (we’ll discuss this more later). Under design-bid-build, CMR and MP methods, a minimum of three players is necessary in every project: the owner, designer and the contractors in their various forms.

The design-build method uses an “integrated” process, whereby the designers and contractors are one-and-the-same entity. The process of designing and constructing occurs simultaneously and thus eliminates the lag time between an owner’s receipt of a design and the acceptance of a bid. Also, because there is only one entity performing the design and construction, the only two necessary “prime” parties are the owner of the project and the design-build entity.

NUMBER OF ESSENTIAL CONTRACTS

Another closely related factor to the number of phases and essential parties is the number of contracts created during the project. The traditional design-bid-build project first requires the owner to form a contract with a designer that will design the building or project in isolation and without any input from the construction team. CMR operates similarly again; however, it allows for input from the construction team as to what materials would be the most cost-effective and merchantable for the desired purpose. In these two processes, two contracts exist: one between the owner and designer and one between the owner and construction-management constructor.

MP requires the owner to contract directly with each contractor and subcontractor instead of with one general contractor. Under this process, a minimum of two contracts exists between the owner and the designers and contractors, likely increasing as the size of the project increases.

Conversely, the design-build process merges the designer and builder into one entity. Because the one entity handles both jobs, the contracting process is streamlined and results in only one contract between the owner and design-build entity.

LIABILITY EXPOSURE UNDER THE CONTRACTS

As the volume of contracts involved in the project increases, the more fragmented the liability exposure becomes. In the design bid-build, MP and CMR methods, the owner first secures the designs from the designing entity. When the owner hires the constructing entity, he or she warrants to the constructing entity that the designs and specifications are sufficient for its hired purpose. The designer and the contractors are independently responsible for their work product, but the owner is still held responsible for any representations made to either entity. Although the CMR method attempts to foster the communication between the designer and contractors, no contract exists between the two and, therefore, liability remains on the owner for all
representations made. Further, any change orders, which frequently arise, and any other “gaps” are solely the responsibility of the owner.

Design-build removes the wall that is frequently erected when construction projects go wrong. Frequently during litigation involving the design-bid-build process, designers will attempt to avoid liability by pointing the finger at the contractors and vice-versa. Design-build, by creating a merged entity including the designer and the contractor, places the responsibility of designing and constructing with that one entity, which facilitates problem resolution instead of gearing up for an adversarial proceeding. Therefore, the design-builder is responsible not only for designing the project so that it will satisfy the desired standards, but it must also complete the project required by the owner in the contract.

As for “gaps” with the design-build process, they are essentially eliminated. The entity is performing both roles. Should the owner provide the design-builder with prescriptive designs and specifications, however, the design-build contractor is the party
responsible for discovering any inconsistencies with the performance standards by which they are bound. Any consistencies found will be the financial responsibility of the owner.

FEWER BUMPS

It is easy to see why the design-build process is growing in popularity. Costs are decreased by streamlining the process in many ways: an overlapping process of concurrent designing and constructing, fewer required contracts, and the ability of the contracting entity to adapt to the changes in design and construction. Although liability exposure is more concentrated in the design-build entity than in the other methods, the benefits of coordination between the designer and contractor will surely outweigh its detriments.

In addition to making the project delivery process easier, fewer bumps along the way will surely decrease the time and costs associated with the completion of a project. As we follow the trend toward a more design-build-focused construction industry, we will likely experience a positive effect on the litigation process, where claims will arise only between two parties as opposed to the requisite three parties in a traditional design-bid-build-based action.

Single Insurance Policies that Insure All Parties on a Specific Construction Project Offer Benefits and Risks

With the use of wrap-up insurance policies on the rise for commercial construction projects, many contractors and subcontractors have questions about how these policies work and what unique concerns and questions they present.

Generally, wrap-up insurance refers to single insurance policies written to insure all parties involved in a specific construction project—providing coverage for the job-site risks of the owner, construction manager, general contractor, contractors, subcontractors and design firms—instead of the individual parties each purchasing and carrying their own insurance policies. Wrap-up insurance policies are most commonly used on very large commercial or public projects. Many project owners and general contractors have found that using these policies is an effective risk-management technique for handling loss exposures related to single and multiple-site construction activities.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control.

Benefits

There are two primary types of wrap-up insurance policies: Owner Controlled Insurance Policies (OCIPs), in which the project owner is the primary sponsor, and Contractor Controlled Insurance Policies (CCIPs), which are controlled by the general contractor. Additionally, owners and general contractors can cover multiple projects under a single program in Rolling Controlled Insurance Policies (RCIPs). Typically, wrap-up insurance policies include general liability, workers’ compensation/employer liability, excess liability and builder’s risk as standard coverages, but many owners also add coverage for project environmental liability and project design team errors and omissions.

The benefits of using wrap-up insurance are numerous, especially for the owners or contractors who sponsor them. A successful wrap-up insurance program can significantly reduce risk for owners or contractors, giving them more control over insurance coverage for all the parties and avoiding unpleasant surprises about the extent of coverage parties have. Under the traditional model, owners or general contractors establish minimum insurance requirements for subcontractors and require them to furnish a certificate of insurance specifying coverage areas and limits. However, because all insurance policy terms differ slightly, there is no guarantee that a given subcontractor’s insurance will be adequate, or still in force, at the time of a loss. Furthermore, contractors and subcontractors normally have to build their insurance costs into their contract costs, and this increases bid amounts.

With wrap-up insurance, the cost and extent of coverage are generally within the owner’s control. When sub-contractors no longer have to increase their bids to factor in insurance costs, owners claim they can utilize the cost savings to fund the costs of the wrap-up insurance. And the potentially more streamlined process for handling claims can make prospective litigation less time-consuming and costly.

Risks

OCIPs and CCIPs, of course, come with their own set of risks and drawbacks for owners, contractors and subcontractors, and the parties who are asked to enroll in these policies do not always look upon them favorably. Some subcontractors and contractors have found that enrolling in wrap-up insurance policies is administratively burdensome and that the resulting decrease in volume of insurance purchases for their companies can increase the costs of other insurance they must purchase. Additionally, subcontractors should make an effort to understand the limits of coverage; it may differ from the coverage in the policies they have been accustomed to using. This should be done at the procurement stage, before a project begins, and not later, after project contracts have been signed.

Those investigating the level and limits of coverage will want to determine how responsibility for any injuries, losses or damage will be addressed and confirm that the responsibility is outlined in the building contract or the written wrap-up policy. One potential source of misunderstanding is builder’s risk coverage. Often, builder’s risk insurance is carried by the builder. With wrap-up policies, owners and general contractors may be particularly concerned with the scope of the builder’s risk coverage. For example, if a wrap-up policy excludes property damage occurring during construction but the builder’s risk policy excludes faulty workmanship, a potential gap in coverage would exist. The wrap-up insurer might take the position that it won’t pay for what is essentially a builder’s risk claim. To prevent such an outcome, owners may find they need to add coverage to the builder’s risk policy to cover faulty work or at least repairs.

Pages: 1 2

NRDC and EDC Sue EPA Over Stormwater Standards

The Natural Resources Defense Council (NRDC) and the Environmental Defense Center (EDC) have sued the Environmental Protection Agency (EPA) to strengthen standards to prevent pollution from stormwater, one of the nation’s most widespread forms of water pollution. More than a decade ago a federal appeals court ordered EPA to strengthen those protections, but the agency has failed to take action.

The dirty water that runs off roads, parking lots and other hard surfaces in cities and suburbs when it rains is the prime cause of beach closings around the country, and is responsible for fouling tens of thousands of miles of streams and hundreds of thousands of acres of lakes, ponds, and reservoirs. In addition, sediment-laden runoff from forest roads threatens drinking water supplies and kills fish and other aquatic life.

“This inexcusable delay in obeying a clear court order is, unfortunately, all too typical of EPA foot-dragging on the crucial stormwater pollution problem. The agency has repeatedly promised a much-needed update of all its stormwater protections, and repeatedly failed to come through,” said NRDC senior attorney Larry Levine.

The suit, filed late Thursday with the U.S. Court of Appeals for the Ninth Circuit in San Francisco, charges EPA has failed to implement that court’s 2003 ruling ordering the agency to correct and strengthen rules for urban runoff that flows through municipal sewer systems. EPA also ignored the same court’s order to decide whether it has an obligation under the Clean Water Act to regulate runoff from forest roads that wash damaging sediment into water bodies. The ruling in EDC v. EPA resulted from a successful challenge brought by EDC and NRDC against EPA’s 1999 stormwater regulations.

“EPA’s failure to act deprives the public—and the environment—of the important clean water victory that EDC and NRDC achieved over ten years ago. Our waterways continue to remain at risk from stormwater pollution, which threatens public health, wildlife, and recreation. ” said Maggie Hall, Staff Attorney at EDC.

In urbanized areas, according to the suit, stormwater “picks up contaminants, including suspended metals, algae-promoting nutrients, used motor oil, raw sewage, pesticides, and trash,” that flows untreated through municipal sewer pipes directly into streams, lakes and the ocean. It is, the suit says, “one of the most significant sources of water pollution in the nation, at times comparable to, if not greater than, contamination from industrial and sewage sources.”

The appeals court found that EPA’s urban runoff rules for communities with populations under 100,000 don’t comply with the Clean Water Act because they rely on self-regulation by local municipalities and don’t allow for public participation when local pollution controls are being set.

Unpaved forest roads throughout the West are a major threat to water quality, undermining the billions of dollars that is spent on the recovery of native runs of salmon and steelhead, and harming other valuable fisheries and drinking water supplies.

In 2003 the court said the agency had given no justification for its failure to regulate runoff from forest roads and ordered the agency to address this issue.

In 2009, EPA announced it would undertake a major overhaul and upgrading of its urban stormwater rules, which NRDC and EDC welcomed as an opportunity for the agency to obey the court order on urban runoff. NRDC also encouraged the agency to promote green infrastructure—roof gardens, permeable pavements and the like—that would allow more rainfall to soak directly into the ground, and sharply limit runoff volume.

However, EPA never completed the new rules and recently disclosed it was abandoning the effort. EPA had been under heavy pressure from developers not to act.

EPA announced in 2012 that it was considering options for regulating forest road runoff, and that regulation may be appropriate. However, the agency has offered no timeline for a decision.

In the lawsuit, EDC and NRDC seek a court order imposing clear deadlines for EPA to act. “We hope this suit spurs EPA to get back into the business of modernizing its whole stormwater program, which badly needs updating and could greatly benefit from new green technologies,” NRDC’s Levine said.

Read more about this issue and the lawsuit, and find the pdf of the lawsuit at Larry Levine’s blog.

Forum-selection Clauses and Their Impact on the Construction Industry

With the national housing market poised for slow but steady growth in 2014, U.S. contractors expect a good year for business, and the number of contracts and subcontracts for construction work is expected to increase. Many of these contracts will contain forum-selection clauses, and a recent U.S. Supreme Court ruling brings to light the importance of these clauses and coming changes in their enforceability.

WHAT IS A FORUM-SELECTION CLAUSE?

A forum-selection clause is a contractual provision in which the parties establish the place for specified litigation between them. These clauses have become increasingly common in construction contracts, particularly with general contractors who do business in two or more states. Often, general contractors have a form subcontract agreement they require or ask all subcontractors on a particular project to sign. If general contractors work in multiple states, forum-selection clauses can help them make potential litigation less costly and easier to manage by guaranteeing the litigation will take place in the company’s home state, where its executives and attorneys likely work.

An example is a general contractor based in New York but working on a North Carolina project and entering into a roofing subcontract with a North Carolina roofer. The general contractor can present the subcontractor with a forum-selection clause mandating any legal claims arising from the subcontract may only be brought in a New York court. For a North Carolina contractor, finding counsel and filing suit in New York will likely be more difficult and costly than doing so in North Carolina, especially when evidence and witnesses are located in North Carolina. In this example, the forum-selection clause makes litigation more predictable and cost-effective for the general contractor and also decreases the likelihood the subcontractor will actually be able to sue, so it most likely favors the general contractor.

To protect local contractors, many state laws have declared out-of-state forum-selection clauses unenforceable in construction contracts. These states include Arizona, California, Connecticut, Florida, Illinois, Louisiana, Minnesota, Montana, Nevada, New York, North Carolina, Ohio, Oregon, Pennsylvania, Tennessee, Utah, Virginia and Wisconsin. Additionally, state laws in Nebraska, Rhode Island, South Carolina and Texas make forum-selection clauses unenforceable in certain circumstances that sometimes, but do not necessarily, encompass construction contracts. In the first category of states, local contractors have been able to file suit locally despite forum-selection clauses because courts in these states can apply the state laws and disregard the clauses. However, the U.S. Supreme Court’s recent decision on these clauses will severely limit the reach of these laws and will ensure that forum-selection clauses are enforced in many more cases.

CASE BACKGROUND

In December 2013, the U.S. Supreme Court issued a unanimous decision in the case of Atlantic Marine Construction Co. v. United States District Court for the Western District of Texas. The court held that defendants in federal court can use forum-selection clauses to transfer their cases to the state specified in the clause, even if the suit is brought in a state with a law deeming these clauses unenforceable. Essentially, forum-selection clauses may be enforced by a venue transfer motion.

The case involved Atlantic Marine Construction (AMC) Co., a general contractor based in Virginia. AMC won a federal contract from the U.S. Army Corps of Engineers to construct a building at Fort Hood, Texas. AMC subcontracted with J-Crew Management, a local Texas company, to perform some of the work. AMC’s contract, which J-Crew Management signed, included a forum- selection clause dictating that any legal disputes between AMC and J-Crew Management arising from the contract had to be brought in state or federal court in Norfolk, Va.

Pages: 1 2