Saturday, August 06, 2005

Pitfalls of Design & Build Contracts

Rodney Martin
BSc, LLB(Hons), MSc, MRICs, MCIArb
Executive Director James R Knowles (Malaysia) Sdn Bhd
July 2000

Design and build or turnkey contracting has become a popular method of procuring building works in Malaysia. Contractors should familiarise themselves with the various problems which can arise when taking on the more onerous obligations usually associated with design and build contracting. It therefore follows that design and build contracts should not be undertaken by contractors unless they are fully prepared for the obligations which will be imposed upon them with this method of procurement.

Under design and build arrangements the employer or owner, for whom the works are to be carried out, deals directly with the contractor who provides a complete service of both design and construction of the works. There are different types of arrangements under the design and build ‘banner’ each of which have separate and accepted terminology to describe them within the industry and it is important to be clear and accurate with the use of such terminology. Where the project to be procured is confined to building or civil engineering works this is usually known as, ‘design and build’ or ‘package deal’ procurement. However, where the contractor is required to provide not only the building or road etc., but also any machinery or equipment and associated works then the project is usually known as ‘turnkey’ procurement. The inference being that the employer or owner merely has to unlock the door to his new building, or facility and he will immediately be able to put it to it’s intended use.

One good reason for the employer/owner to choose design and build or turnkey contracting is that by approaching a contractor who is a specialist, that contractor will have the necessary skill and knowledge to design and execute the works where their nature requires such specialist input. Another reason for choosing this method of procurement is that there may be savings in cost and/or time by adopting this method of procurement as opposed to a more traditional route.

However although there may be clear advantages for the employer, the contractor’s obligations tend to be extended somewhat under a design and build or turnkey contract.

In the traditional method of procuring building work designers are engaged by the employer to carry out the design and a contractor is engaged to carry out the construction of the work. There is therefore a clear divide between responsibility for design and responsibility for workmanship and materials. The design is clearly the responsibility of the designers and the construction work is clearly the responsibility of the contractor.

In a design and build or turnkey project the position is different since the contractor not only takes on the task of constructor but also of designer. This has the effect of radically changing the contractor’s obligations in respect of design.

It is important to examine the nature of this shift of responsibility for design. If one considers the architect or engineer’s obligations to the employer under a traditional procurement arrangement one will find that the architect or engineer owes the employer a duty to use the reasonable skill and care of a designer. This raises the question of what is considered to be ‘reasonable’ in the context of a professional architect or engineer. The English courts have defined the professional man’s obligations to his client as the ordinary skill of an ordinary competent man exercising that particular art. Therefore the designer must act in accordance with the usual practice of his profession. This means that in carrying out his duties the architect or engineer must use the reasonable skill that can expected of an architect or engineer. By contrast, a design and build contractor will usually be required to take on the express obligation of providing a building which is fit for it’s intended purpose. This is an absolute obligation and is a greater obligation than the use of reasonable skill and care in the design.

In view of the responsibility taken on by contractors who design and build the works for a particular project caution must be exercised from the outset.

Upon receiving design and build tender documentation the contractor should examine the content carefully. In view of the fact that the contractor is to be responsible for design in this situation only minimum design input ought to have been provided by the employer in compiling the tender documents. There is much skill required in drafting the project brief (often referred to as “Employer’s Requirements”).

Too often the employer carries out much design work prior to tender which often restricts the options available to the contractor to develop the design post award. Excessive design work carried out by the employer at pre-contract stage can also cause difficulties in determining design responsibility once the contract has been awarded. The project brief should define the site and the works which may require drawings to be included. All relevant criteria which are to govern the works including quality and performance requirements should be provided. Skill is required by the draftsman who prepares the project brief on behalf of the employer when specifying quality. The terminology used should not be too detailed in case it reduces the contractor’s design responsibility, which is not after all the intention.

Neither should the terminology be so vague to cause difficulty in enforcing the requirements during the execution of the works. Most importantly the terminology should not require reliance on subjective language which will cause problems both at tender stage when the contractor is pricing and also later when the contract is being administered. An example of subjective language in this context would be to use the phrase “best quality” to define a standard of quality. Disputes would no doubt arise because of the different interpretations given to such a phrase by the employer and the contractor.

Ideally the project brief should set down just enough information so as to convey the employer’s requirements with respect to the scope of work intended to be included within the contract. The contractor will take note of these requirements and during the tender period will develop a scheme in principle which will meet the employer’s needs. The extent to which the tenderer is required to develop the design within his proposals to form the basis of his tender submission should be defined in the instructions to tenderers. Although the employer may want to receive a fairly detailed design proposal from each tenderer and indeed may request for such details to be included in the contractor’s proposals, in reality a contractor will be reluctant to carry out an expensive design exercise as part of his tender if he only has one chance in four or five of being successful. If the contractor’s tender is accepted he will then develop the design and it is the intention that the employer will interfere with this process as little as possible.

However, more often than not the employer will want to retain an involvement in the design process and also order variations to the scope of work. This may lead to disputes and differences as to the valuation of the additional works ordered and time entitlement to carry out such variations. The intention of design and build is to leave the contractor alone to carry out design and construct the facility without hindrance. Continual interference during the design development stage by the employer will severely compromise the design and build philosophy and jeopardise the employer’s ability to receive the benefits that this type of procurement should render.

Since the contractor usually takes on an absolute obligation to provide a building, installation, or facility as the case may be, which is fit for it’s intended purpose, care must be taken to appoint designers with appropriate skills to execute the design required. Larger contracting organisations may have in-house design teams to provide this service. The adequacy and competence of such resources will therefore no doubt be reviewed and assessed periodically by the organisations’ management in the same way as would be the case for any other department. However, it is common practice for contractors undertaking design and build work to appoint independent designers to carry out design work for them. When doing so it is important that the contractor engages consultants who understand the subtle differences of working for a contractor as opposed to an employer/owner.

Traditionally a design will evolve from a designer’s drawing board and then a price will be put to that design. Under design and build practice the opposite is usually true whereby the design has to fit the price (assuming the price was reasonably calculated as part of the contractor’s tender in the first place). This requires perhaps an even greater commercial awareness on the part of the designer than might be exercised under traditional procurement arrangements. Another potential problem area to overcome is the fact that the designer’s ‘master’ is the contractor and not the employer which is the reverse of the traditional position. This becomes a potential problem in situations where the consultants have been novated from the employment of the employer to the employment of the contractor. A novation is a tripartite agreement by which an existing contract between A and B (for example designer and employer) is discharged and a fresh contract is made between A and C (for example designer and contractor) usually on the same terms as the first contract. Novation differs from assignment in that the consent of all parties is necessary although this may be inferred by conduct and need not be expressed. Novation of designers on the face of it seems a perfectly sensible proposition where a design concept has been initiated under the responsibility of the employer to describe his requirements and then later completed by the same designers once novated to the contractor. However, in practice consultants may find difficulty in turning their original design concept into a fully designed scheme while at the same time being constrained by the contractor’s commercial considerations defined by the tender price for the project.

A design and build project is usually awarded on a lump sum basis and is not subject to remeasurement. It is uncommon for detailed bills of quantites to be used due to the absence at tender stage of detailed drawings from which to measure such quantities. It is therefore essential from the contractor’s point of view to ensure that the contract sum is broken down into sufficient detail to permit the reasonably accurate valuation of the works for the purposes of interim payments.

The contractor should carefully scrutinise the payment provisions of the proposed conditions of contract at tender stage to identify in what manner and in what proportion he will be entitled to be paid during the execution of the works.

Occasionally contractors are faced with onerous terms which permit payment on an interim basis only upon overall completion of a part or section of the works. Under such circumstances a contractor might find himself being denied payment of considerable sums but for minor outstanding items which are of insignificant value. Contractors should therefore ensure that an adequate mechanism is in place under design and build contracts to permit interim payment as the work proceeds.
It is also important, in the absence of bills of quantities, to agree schedules of rates as far as possible for the evaluation of variations. These rates should also include for design work which would usually be recoverable in relation to any additional design resulting from such variations.

In summary, it is therefore important for the contractor to ensure, notwithstanding time and cost considerations, that his design and build tender proposal represents a fully considered scheme which meets the requirements of the employer with a price to match. It is quite usual for contract documents to be drafted in such a way as to place an obligation on the contractor to meet the employer’s requirements irrespective of any attempted qualifications set out in the contractor’s tender proposals. The employer’s requirements will have to be met for a lump sum without adjustment save for variations. The risks upon the contractor are therefore high and it is for this reason that any tender which is submitted on a design and build basis should have made provision as far as possible for the problems which may occur under this type of procurement.

1 comment:

Casey Dale said...

Risk management attempts to plan for and handle events that are uncertain in that they may or may actually occur. These are surprises. Some surprises are pleasant. We may plan an event for the public and it is so successful that twice as many people attend as we expected. A good turn-out is positive. However, if we have not planned for this possibility, we will not have resources available to meet the needs of these additional people in a timely manner and the positive can quickly turn into a negative.