Design-Build Contracts: Which is Right for You?

For designers who are accustomed to the design-bid-build system, many features of the design-build format may come as a surprise. One of the first issues that the potential design-builder has to confront is which contract to use.

“Standard form” contracts developed by the American Institute of Architects (AIA), the Associated General Contractors of America (AGC), the Engineers Joint Contract Document Council (EJCDC) and the Design-Build Institute of America (DBIA) are different from design-bid-build contract documents—and differ from one another. Engineers should become familiar with all of them and decide which risks—and which not—to take.

Who selects the designer?

In design-build, the owner and the design-builder have usually identified the project designers when they sign the contract. But if the parties to a design-build agreement have used EJCDC Form 1910-40 or DBIA Form 535, owners may unhappily learn later that they have given up any right to control whether the design-builder terminates a designer, or who the designer’s replacement might be. Moreover, the EJCDC and DBIA documents do not even seek to identify the designer, which means that the design-builder has the right and responsibility of selecting a designer, and the owner really has no say about it.

On the other hand, AIA Form A-191 and AGC Form 415 both require that the designer be identified in the actual design-build contract, but only the AIA contract specifies that the designer can’t be replaced without the owner’s consent.

There is good reason for design-builders wanting control of designer selection and replacement. They take complete responsibility for bringing the project in on time, on budget and meeting the owner’s program requirements. Without control over the designer, meeting those responsibilities can be difficult.

But the choice of a consultant is usually very important to the owner as well, and this aspect of design-build contracts should be discussed thoroughly, before any contract is signed.

Who owns the design?

Each of the standard-form design-build documents deals with the issue of ownership of design and design documents in its own way. DBIA’s contract, for example, states clearly that all “drawings, specifications and other documents … are deemed to be instruments of service and the Design-Builder shall retain the ownership and property interests therein, including the copyright thereto.” Only in the event of a termination for default can an owner use the documents without the design-builder’s permission, though it can use them “in connection with Owner’s occupancy of the Project” once the design-builder is paid in full and indemnified.

While there is a similar clause in the “General Conditions” of the EJCDC document, AGC’s contract gives the owner “ownership of the property rights” but no copyright, which has the same effect as prohibiting the owner’s reuse of the design. In essence, the AGC contract is clearer about an owner’s right to use the documents for “subsequent renovation and remodeling,” but it requires the design-builder’s consent.

Finally, the AIA design-build contract makes clear that the design belongs to the architect “or other provider of professional services,” not to the owner or the design-builder. Additionally, it even prohibits use of the design to complete or add onto the project being built, unless the design-builder is terminated for default. And even in a default situation, the owner must first make sure the architect working for the design-builder has been paid in full, presumably even if the owner doesn’t believe that the design-builder is entitled to any more money.

What will be insured?

Both the AIA and the EJCDC forms are written with the presumption that there will be no professional liability insurance at all . Since the AIA contract also omits any reference to surety bonds, the owner has to anticipate that there will be no recourse other than to the assets of the design-build entity itself and, under a negligence-intended beneficiary theory, the designer who stamped the drawings.

The DBIA contract deals with this sensitive point by leaving it up to the parties to fill in a blank, indicating whether there is such insurance. Similarly, the AGC form requires the parties to choose between “general office coverage” or “project specific coverage,” fill in the amount and state how long the policy will remain in effect after the job is completed.

What is warranted?

Traditionally, designers have not given contractual warranties of their designs. They generally promise to live up to the standards of their professional community. However, all of the standard-form documents have warranty clauses representing that some of what they are furnishing will be in conformance with the contract documents and will be free from defects in material and workmanship. They are all very careful to limit this representation to the “materials and equipment” (AGC) or the “construction” (AIA, EJCDC and DBIA). Only the AGC form explicitly disclaims all other warranties, in order to make sure that the court understands, even if the customer doesn’t, that no one is warranting that the owner will be happy with the final product.

Dealing with change

The change-order process is one area where design-build most inherently differs from design-bid-build—and where the design-build standard-form contracts differ most from one another.

In its design-build contract, the AIA treats changes much the same as it does in all its standard contracts. It does, however, specifically require the owner to pay for any change proposals that aren’t used, possibly to deter owners from tinkering with the design once it is underway.

The EJCDC document has long and complicated clauses on changes, defining what may or may not be included in change order pricing, and even sets out markups for design-builder fees.

The AGC and DBIA contracts both provide that in the event the owner and the design-builder can’t agree on the value of work to be added to the contract, the owner is required to pay 50% of the design-builder’s estimate of the work’s value up front, and the parties will fight over the issue later.

Handling delays

The AIA approach to handling delays is simple: any delay beyond their control entitles design-builders to more time. Taken literally, this means that design-builders are not responsible for delays on the part of their own subcontractors and suppliers, or delays in delivery of their own materials. No notice of potential claim for more time is required.

In contrast, the EJCDC document is stricter, holding the design-builder responsible for the delays of its subs and suppliers. The AGC and DBIA contracts use this same approach: The design-builder gets more time for delays, but not if they are on the part of design-builder or anyone for whom it is contractually liable to owner.

In the AIA contract, liquidated damages are not mentioned. Instead, it states that “costs caused by delays or by improperly timed activities or defective construction shall be borne by the party responsible therefor.”

Assessing damages

But this language only appears in the “Miscellaneous” section on “Work by Owner or Owner’s Contractors,” as if to imply that it is not intended in situations of pure delay by the design-builder.

The AGC contract provides that the owner pays for all “actual costs” for any delay due to weather, strikes or accidents, but that the design-builder shall not receive a fee on top of this. But there is nothing in the AGC contract that talks about what happens if the design-builder is responsible for a project delay.

The EJCDC contract is just the opposite: It assumes there will be liquidated damages. If the owner delays the work, the design-builder can collect but only for “delay, interference or disruption directly attributable to the actions or inactions of [owner or owner’s consultants].” The document specifically prohibits compensation if the delay was due to third parties, weather or acts of God.

The DBIA contract includes liquidated damages and specifies that they are “in lieu of all liability for any and all extra costs, losses, expenses, claims, penalties and any other damages incurred by Owner…” It is the only one of the standard forms that goes on to provide for an early completion bonus in exchange for these liquidated damages. A design-builder who is delayed by the owner also gets a price adjustment, presumably, costs plus fee.

Modify the boilerplate

Finally, other provisions in standard contracts must be considered: Who will be the owner’s rep? Will the project be bonded? How much should be held as retainage? How will disputes be settled?

All of these issues may be handled differently and could impact the designer differently, depending on which form contract is being used.

The wise design-builder will first consult with an attorney to reach an understanding of these documents, then sit down with other project-team members and the client to go over the issues. He or she will probably have to educate the client as to what is or is not economical or workable and help the client arrive at decisions with which both parties are comfortable. Most likely, it will be necessary to modify standard-form contracts. In fact, after a careful consideration of a chosen standard contract, the parties may change to a different one.

Specifications in the E-Generation

Communication is the essence of specification writing. An architect or engineer must communicate project-specific requirements to specification writers completely and concisely.

The specification writer, in turn, must communicate to owner and contractor, in sufficient detail, everything required for the project. He or she can facilitate the process by providing systematic and organized transmission of specs.

Standard checklists are available for compiling this information; however, most seasoned specification writers have devised their own. Computers have made possible the creation of electronic checklists, some of which are progressively created, with each new question determined by the response to the question that precedes it.

There are, however, distinct advantages to having this checklist available, in its entirety, in printed form. This allows the architect or engineer to more efficiently solicit input from others members of the project team. It also decreases the possibility that the specification writer will make assumptions in editing the checklist.

Problems with obtaining and maintaining information are further compounded when a specification writing group is in multiple offices. Not only must checklist consistency be maintained among the spec writers, but also, the architects and engineers in the various offices must have access.

The good news is that the e-generation is streamlining the specification writing process to levels unimagined just a few years ago. For example, one software application provides a password-protected intranet site where a spec writer creates and stores custom project checklists. Clients are also provided with password-protected sites in order to compile checklists for their individual projects. Their completed workbooks are then submitted to the spec writer who prepares the specifications and posts them to the client’s site for review and further action.

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