Considerations in Negotiating Design-Build Contracts

There are many considerations to be discussed in the negotiation of contracts between members of the design-build team — owner, contractor, design professional, subcontractors and subconsultants. This article provides a "checklist" of some of the most important.

Cultural Values

As the members of the design-build team develop their contracts to govern their own interactions, great care should be taken to assure that they share the same cultural values. They must be compatible. If one team member insists on shopping bids in order to squeeze out the lowest possible price, and others consider the low bid as sacrosanct there will be trouble. They should agree on general approaches to problem solving and dispute resolution. They must agree on who is the leader. Partnering can be effective in developing and refining these relationships.

Legal Provisions

Although non-attorneys often abhor the give and take of negotiating specific legal terms and clauses, often thinking that too much time is being spent on the negative potential of disputes, rather than the positive energy the project offers, such exercises are essential to a successful project. In addition to the obvious issues of choice of law, dispute resolution procedures, and confidentiality following are the areas most important to deal with in this area:

• Design Professional Issues
• Responsibility for design delays
• Responsibility for cost overruns
• Responsibility of actual physical coordination of design
• Professional liability insurance, and the scope of its coverage
• Scope of cross indemnifications
• Responsibility of owner for mistakes of the owner's consultants and subcontractors
• Responsibility of other team members for mistakes of the their consultants and subcontractors
• Who owns the design professional's work product, and what happens if the design-builder and/or the design professional are terminated
• Joinder of parties in dispute resolution procedures
• Construction Contractor Issues
• Surety bonding
• To what degree is the design insured
• Waiver of consequential damages
• What is the scope of cross-indemnification
• Are there gaps in insurance coverage
• Is the owner financially viable, and will payments be assured
• Subcontractor and Subconsultant Issues
• What are the design responsibilities
• What delay claim does the sub accept
• Are sub responsibilities insurable or bondable
• What is the scope of cross-indemnification
• Owner Issues
• Definition of the program requirements
• Assurance of quality
• Assurance of timely completion
• Assurance of budget compliance
• Insurance and bonding protection
• Clarification of the owner's role and responsibilities

Dispute Resolution

Nothing is more critical to a successful project than the knowledge that the inevitable difficulties will be worked out in a reasonable and fair manner. Negotiation, followed by mediation, followed by an agreed-upon formal dispute resolution procedure is essential. In many cases partnering, dispute review boards, and other innovative ways of dealing with issues before they become critical will be of significant value.

Whose Dollars Are At Risk?

In most cases the construction contractor will take the lead in a project because that entity has the highest capitalization and is better able to weather the financial requirements of a project. However, design professionals want to be rewarded for the risk that they undertake as well. Sureties may require indemnification.

Risk Management

In the many design-build projects insurance and surety bonding issues are some of the most difficult issues to get resolved. Construction defects, design defects, cost overruns, catastrophes, inflation, pollution, and indemnity are all essential issues to be covered in negotiations.

Financial Considerations

How profits and losses are shared, how cash flow issues at startup are handled, sources of capital, payment of taxes, retainage, and risk versus reward are key negotiation issues.

Wise members of the design-build team will consider these factors, and others specific to the project, in negotiating their contracts on design-build projects.

This article is intended to inform the reader of general legal principles applicable to the subject area. It is not intended to provide legal advice regarding specific problems or circumstances. Readers should consult with competent counsel with regard to specific situations.

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