Tuesday, February 28, 2012

DBIA NW Region Hosts Certification Workshop

Are you looking to get that DBIA Certification and just haven't had the time, or do you just want to know about design-build best practices?  DBIA will present a national cerfication workshop March 5-9 in Bellevue, Washington.  I will be teaching the Contracts and Risk class on Wednesday and the Exam Prep class on Friday.  Even better, Craig Unger will be teaching the Post Award class, and Bill Kent and David Gunderson are teaching the Fundamentals and Principles class.

You can get more information at http://www.dbianwc.org/ or http://www.dbia.org/.

Monday, February 27, 2012

NWCCC and DBIA NW Region Presents Seminar on Design-Build Best Practices

I will be presenting at the Northwest Construction Consumers Council/DBIA NW Region conference on design-build best practices on Wednesday, February 29.  My topic is "Legislating Best Practices".  The DBIA NW Region is working with the Washington State Capital Projects Advisory Review Board to revise the design-build legislation in Washington.  Our goal is to incorporate as many DBIA best practices as possible into the legislation.

You can get more information about the conference at http://www.nwccc.org/

Wednesday, February 22, 2012

A Truly Horrible Decision Justifies Caution for Federal Projects

Have you ever worked on a project that just seemed cursed?  The construction of the housing of the Marine Corps Base at Kaneohe Bay is the subject of Metcalf Construction Co., Inc. v. U.S., 2011 WL 6145128 (Fed. Cl. December 9, 2011), and although it is difficult to assess as an outsider, this project was clearly a disaster.  It is also a case that illustrates the proposition that smart people can disagree as to the correct outcome of a case, and in some cases, a court can be flat out wrong.  This project began with not one, but two bid protests.  The project was eventually awarded to Metcalf Construction, and I’m fairly certain that Metcalf wishes it had not filed the protest.  The final cost of the project was $49,947,872, but Metcalf claimed that it spent in excess of $76 million to complete the project.  There are many claims in the extremely long decision by the Court of Federal Claims, but I just want to focus on a one that the court got right, and a few where I believe the court missed the mark.
The Owner Can Insist on Prescriptive Specifications, even in design-build.
Metcalf claimed that in a design-build project, it should have been able to determine means and methods such as the type of project software that it used.  The specifications required that the design-builder use Primavera software, but Metcalf wanted to use Microsoft Project.  Metcalf was simply incorrect on this argument.  The case law is clear that even in design-build delivery, an owner can insist on certain prescriptive items.  As I counsel owners, if there is an item that the owner knows that it wants, I encourage them to specify it rather make the design-builder guess at what the owner wants. 
The Owner Should Be Responsible for Prescriptive Specifications in the RFP.
Here are two claims where I honestly think that the court got it wrong.  The first claim involved soil conditions.  The specifications incorrectly noted that the soils were “slightly” expansive, and the Navy affirmed in response to a question in the RFP process that if the actual conditions were materially different, then the Navy would issue a change order.  As it turns out, the “expansiveness” of the soils was actually “moderate to high”, requiring a substantial change in the excavation of the footprint of the buildings.  The court stated that the difference in the characterization of the soils was not a differing site condition because the specifications had a requirement that the design-builder perform its own soils test and that “expansive” soils were common in Hawaii.  The second claim involved the remediation of Chlordane.  The RFP was inconsistent with respect to the requirement to remediate Chlordane.  In response to a question from one of the proposers, the Navy explicitly stated in the RFP process “No remediation action of the Chlordane contaminated soil is required . . ..”  However, during the course of the project, the Navy, citing the inconsistent specification, did require remediation of the Chlordane.  The court, once again, stated that because the design-builder knew that there was the possibility of Chlordane, then it took the risk of the remediation.
Both of these holdings fly in the face of long standing decisions such as Appeal of M.A. Mortenson Co, ASBCA No. 39978 (1993).  The M.A. Mortenson decision, as well as many others, hold that the design-builder can rely on the information provided in the RFP, even if the design-builder is required to verify the information in the course of its work.  The owner gets a benefit from allowing design-builders to do rely on the information.  Essentially, the RFP acts as a snapshot in time that the proposers can use for the purposes of pricing.  Without drawing some parameters around the RFP pricing, the risk on the design-builders is too great.  Think about the court’s reading of the RFP risk:  the existence of certain types of soils in Hawaii shifts all the risk of the possibility of the presence of those soils on the site, despite a soils report that states the opposite.  The fact that Chlordane exists on the site shifts the risk of the remediation of the Chlordane, despite the fact that the Navy expressly stated that no remediation would be required.  The cost for this project should have been outrageously expensive, but who knew that a court would interpret the risk this way?  As I always state in my classes, no one can predict what will happen in court.  Twelve people who couldn’t otherwise get out of jury duty aren’t the only ones in the courtroom who are unpredictable.
The other problem with this case is that the Navy apparently managed the project as if it were in combat.  One of the issues was the over-zealous inspector who would inspect items multiple times and reject items, even though these items probably should have been accepted.  For example, in rejecting a countertop that 1/64th of an inch off, he actually stated that “on any other job in the universe, he would not only accept [the] countertop but that it actually looked good.... [U]nfortunately this is a war ... no breaks.”  One of the Navy’s Executive Officers ordered a response to a request for a change as a “pre-emptive strike.”  The court even found the Navy’s project manager to be incompetent.  The design-builder claimed that in managing the project incompetently, the Navy breached the covenant of good faith and fair dealing inherent in the contract.  Although the court acknowledged the incompetence of the Navy, it held that the actions did not rise to the level of a breach of contract.

The Navy apparently won the war and has come close to destroying its opponent.  I previously posted that the company was destroyed; however, I've spoken with Terry Metcalf, and he assures me that although the company is not doing business, it is still attempting to recover from the Navy. Mr. Metcalf has also assured me that no corners were cut, but that is only because he had the support of his bonding company and subcontractors.  That would not be the case under most circumstances.  In most cases, the design-builder would not survive such a project, and the owner would then have no one to stand behind the work.  I am hoping that instead of winning this war, that it was only a battle, and the case, in the end, is decided approriately. 

So, the precedent exists.  What should parties do to deal with this issue?
First, design-builders should be much more careful when reviewing the RFP and should ask questions on even slightly ambiguous specifications.  The questions and/or clarifications need to be very specific.  Apparently, under this case, the design-builder is “aware” of just about any problem that could possibly exist.  I strongly suggest a thorough statement regarding what the price includes and what it does not. 
Second, owners should not rejoice.  As noted above, this wasn’t a “win” for the Navy.  If all construction is managed in this way, the industry would fail, and projects would be prohibitively expensive.  Project management by combat is counter-productive and produces horrible projects.  Plus, I believe that if this case is appealed, it should (if everything is right in the world) be overturned.  Assign risk evenly on the party best able to manage the risk.  Design-builders cannot and should not take the risk of all environmental and soils conditions on the ground.  It is simply not feasible, particularly when the owner affirmatively misrepresents how it will handle the risk during the project. 
I understand from the attorney representing Metcalf, as well as Terry Metcalf himself, that Metcalf has filed an appeal.   I wish them luck.

Tuesday, February 14, 2012

DBIA National Board Approves New Form Teaming Agreement

The DBIA National Board met on February 8 and approved two new form documents, the Standard Form of Teaming Agreement Between Design-Builder and Teaming Party and the Standard Form of Agreement Between Design Consultant and Design Sub-Consultant.  I am proud to have been the leader of the Contracts Task Force that drafted and presented the agreements to the Board.  The agreements will be published just as soon as the fine folks at DBIA format the documents (my word processing skills are, thankfully, limited), but I’ll give all of you a preview of the some of the more interesting features of the documents in this blog.
The DBIA Standard Form of Teaming Agreement is the first form teaming agreement specifically drafted for design-build.  I've been teaching the DBIA Contracts and Risk Class for many years, and there have been many requests for a form teaming agreement.   The EJCDC has a teaming agreement, but the instructions note that the document should be significantly revised if it is used for a design-build project.   The DBIA Teaming Agreement is intended to be used when the design-builder is the prime contracting party (the “Design-Builder”) and will subcontract with other parties, such as designers, trade contractors and specialty design-build contractors (the “Teaming Party”). 
Like all of the latest versions of the DBIA documents, the Teaming Agreement has many options so that the parties can customize the agreement with language from the document, rather than the parties creating their own language.  The customization feature saves the parties time and money and avoids attorneys becoming creative with their own language.  Trust me, the last thing the parties want is for attorneys to start getting cute with language.  For example, there are many different options for the Design-Builder to pay the Teaming Party.  There are also many different options for distribution of the honorarium or stipend paid by the owner. 
One of the thorny issues in teaming agreements is enforceability of the document.  If the parties do not agree on the material terms for the subsequent subcontract agreement (the “Subsequent Agreement”), then the courts are likely to hold that the portion of the Teaming Agreement that addresses the Subsequent Agreement is an unenforceable “agreement to agree.”  That leaves the Design-Builder and/or the Teaming Party potentially out in the cold when it comes time to actually perform the project.  In the Teaming Agreement, we dealt with this issue by 1) requiring the parties to negotiate the Subsequent Agreement terms and conditions with the Teaming Agreement and 2) requiring the Teaming Party to provide to the Design-Builder what is essentially a proposal to perform the scope of services in the Subsequent Agreement prior to the Design-Builder’s submission of the Proposal to the owner. 
In negotiating the Subsequent Agreement, the parties have the choice of checking a box for one of the many DBIA form sub-tier agreements, or they can attach their own form as an exhibit to the Teaming Agreement.  Negotiating the Subsequent Agreement with the Teaming Agreement has many advantages.  First, the parties discover whether they can actually negotiate the terms and conditions.  If there will be serious problems with the terms of the Subsequent Agreement, the parties want to know about those problems long before the Design-Builder has promised to the owner that it will bring the Teaming Party to the project.  Second, the Subsequent Agreement sets the baseline for how the parties will work together during the project, allowing the parties to assess risk and cost at an earlier date.
The proposal required from the Teaming Party is referenced in the Teaming Agreement as the “Teaming Party Price.”   The Teaming Agreement assumes that the Design-Builder may negotiate further with the owner after the Design-Builder is selected for the project, and those negotiations may necessitate further negotiations with the Teaming Party (which is why it is a best practice for the Teaming Party to be involved in the negotiations).  The Teaming Agreement protects the Teaming Party during these negotiations because the Design-Builder cannot make promises that differ from the Subsequent Agreement and the Teaming Party Price without the consent of the Teaming Party.  The Teaming Agreement also contains an optional provision for liquidated damages, should the parties be unable to successfully negotiate the Subsequent Agreement.   The Design-Builder has the option, however, of accepting the Teaming Party Price and forming a binding agreement for the Scope of Work in the Subsequent Agreement.   Thus, providing many paths to the proverbial ride into the sunset happy ending, or more accurately, beginning.
The Teaming Agreement also deals with other issues such as exclusivity, ownership of Work Product, confidentiality and termination of the agreement.  Look for further descriptions of these provisions in future blogs.   If you have questions about the Teaming Agreement or think that you might be interested in utilizing the DBIA Agreement, feel free to comment on the blog or call.

Monday, February 6, 2012

Get It In Writing!

In Nascent Group, JV v US, 2012 WL 176612 (Jan. 18, 2012), Nascent was the successful proposer for a contract to construct a border patrol station for the Army Corps of Engineers in my home state of Washington.  Yes, we have a border up here.  We just aren’t interested in putting up a big fence.  The RFP requested bids for 2 stations:  one in Blaine, Washington, and one in Linden, Washington.  Nascent was the successful proposer for the Blaine project, which was clearly the first one out of the gate.  The Corps had funding for the Blaine project, and the contract clearly listed the Linden project as an “option.”  Nascent was very clear that the amount of its bid was based on the savings it would realize by constructing both projects, and there was some evidence that the Corps was less than clear regarding the availability of funding for the Linden project and whether it would go ahead with the Linden project.   What is clear is the following:  1)  There was never a contract to construct the Linden project; 2) The Corps representative told Nascent to make sure it was “whole” in pricing for the Blaine project in case the Linden project didn’t come through; 3) The Corps never signed a contract for the Linden project and despite some possible oral representations otherwise, no one at the Corps had the actual authority to enter into a contract to construct the Linden project because (among other things) the money was never allocated for the Linden project.
Nascent claimed that the representations regarding funding from the Corps contracting officer as well as the notation in its proposal regarding the pricing based on constructing both facilities created an “apparent authority” situation.  That is, that even though the contracting officer did not have the actual authority to enter into the agreement, she had the apparent authority to do so.  Apparent authority is applicable in the private sector; however the court flatly rejected it in the context of the federal government.   Basically, the court found that there was never a contract to construct the Linden project and the government could only be bound by someone with actual authority. 
No, this case isn’t a design-build case, but the federal government does a lot of design-build work, so I thought the case was instructive for two reasons.  The first is that when it comes to the federal government, make sure that the commitment is in writing, and make sure the person making the commitment has the actual authority to do so.  The second instructive point is the incredibly slow process of suing the federal government.  The project began in 2004.  The dispute was filed in 2009.  It’s now 2012, and there are two courts that could potentially review the case after this one:  the United States Court of Appeals for the Federal Circuit, and potentially the Supremes.   

Friday, February 3, 2012

Leave My Liquidated Damages Alone!

In US v. Dick Corp 2010 WL 4666747 (N.D. FL November 9, 2010), a Federal District Court upheld the assessment of liquidated damages against a subcontractor, despite the fact that the Navy had not assessed liquidated damages against the prime design-builder.  The project involved the construction of four buildings at the Pensacola Naval Station.  Dick Corp., the design-builder, subcontracted with James B. Donaghey, Inc., to install the plumbing and HVAC systems.  Out of a $79 million design-build project, Donaghey’s contract was $8,900,000.  The Court found that Donaghey delayed Dick Corp when Donoghey could not meet the performance requirements for the test and balancing approvals.  Dick Corp claimed damages as a result of the delay on the project as well as the impact to the other sub-trades.  The subcontract with Donahey contained a liquidated damages provision of $5,400 per day, and Dick Corp assessed them against Donaghey.
Donoghey protested, claiming 1) that the damages actually incurred by Dick Corp were far less than the liquidated damages amount; therefore, the LD amount was unconscionable and unenforceable; and 2) that the LDs were a “pass through” and should only be assessed if the Owner assessed damages against Dick Corp.  The court sided with Dick Corp holding that assessment of the LDs was enforceable.  First, it doesn’t matter what Dick Corp’s actual damages were.  The parties specifically negotiated the LD amount, taking into consideration what Dick Corp’s potential damages might be.  If the owner had, in fact, assessed LDs, Dick Corp’s actual damages would have been much higher.  Second, the LD provision in the sub agreement was not conditioned on assessment of LDs in the prime. 
Courts love liquidated damages because they want to encourage parties to resolve disputes outside of the courtroom.  Honestly, courts are incredibly busy and don’t particularly want your business.  They would be very happy if you didn’t file a lawsuit in the first place.  Liquidated damages are an extremely useful tool in a design-build agreement, and parties should not limit their use to delays.  The term “liquidated” in the law, simply means “agreed upon.”   Parties can agree upon remedies for many potential breaches, such as failure to meet performance requirements, failure to meet O&M requirements, or failure to achieve sustainability goals.  The liquidated damages limit what could be an astronomical assessment of actual damages.  Can you imagine being required to re-work a building that didn’t meet LEED Gold status?  LDs also provide certainty to parties who don’t want to litigate the cost later.   One of the goals of a construction contract is to reduce disputes down the road, and LDs are a perfect example of limiting litigation costs as well as liability.