By Lanna Carter Broyles

Only within the last decade has the design-build philosophy taken root in the United States. "The general contracting market is much better at handling design management than they were 10 years ago," said Michael Loulakis, who recently partnered with WPL Publishing for a 90-minute webinar presentation on lessons learned in the development of design-build case law.

Loulakis is president and CEO of Capital Project Strategies, a construction consulting firm in greater Washington, D.C. Before starting Capital Project Strategies, Loulakis was the chairman and president of national construction law firm Wickwire Gavin, P.C., where he spent 28 of his 30-year law career representing parties engaged in all aspects of public and private construction.

The concept of design-build is as old as the building industry itself, though builders here have viewed it as a non-traditional format until recently. Simply stated, design-build is when the design and construction of a building happen collaboratively to streamline the overall process. Unlike the more accepted design-bid-build format, one entity - either a contractor or a designer - contracts with the owner, and then leads the project, subcontracting with the other major players. Under this arrangement, the lead often contractually assumes the liability for the project.

Design-build holds particular interest for owners, who are always interested in shifting liability, said Loulakis. "If we use design-build as an owner, we don't have to worry about anybody coming after us for a claim," he said. But, he added, the process and case law are not as linear as owners would like. "Owners still have a need for control, [which] comes into play both at the procurement stage and the execution stage."

When that control conflicts with what contractors want, "contractors are going to protect their commercial position," he said. They'll fight for what they believe is right.

It is at this juncture that owners and contractors enter the judicial arena. Though the amount of design-build case law is growing, the current data available is minimal. "Only a small sliver of cases go to a reported decision," said Loulakis, who shared more than 10 cases and their lessons learned with webinar participants. For those on the path to trial, most settle before entering the courtroom. For those whose contracts mandate arbitration, most decisions are not appealed, so the record is unavailable. But regardless of the avenue a contractor and owner take, the process is expensive.

Loulakis said that there are nine areas he sees that receive repeated attention in discussions and problems with design-build.

1. Single point of responsibility is alive and well. "While the design-builders really need to take liability seriously and price it accordingly, this is not like at-risk construction management. Owners have to remember that if they assume control, they have responsibility."

2. Risk of site conditions may actually be borne the way the contract says. If a contract shifts all site-condition risk to the contractor, the contractor had better be prepared for the consequences if a differing site condition occurs, Loulakis said. That includes pre-bid site inspections and verifying all bid documents and specs.

3. Owners bear the risk of errors in design documents they provide to design-builders. The Spearin doctrine is alive and well in design-build case law. "If the owner represents something and the design-builder reasonably relies upon it, the design-builder gets the benefit of the doubt," Loulakis said.

4. Owners and design-builders are challenged by performance specifications. Many builders do not know how to bid performance specs, Loulakis said. And, they do not have carte blanche to disregard design specs. Likewise, "owners face the risk of having differing design and performance specs." Side-by-side comparisons of the specs early on can save time, headaches and money once the project is well underway.

5. Standard of care issues may become more complicated as the scope of services expands. Even when the owner provides flawed design specs, "the design-builder owes a duty of care to make recommendations that fully specify all the risks," he said, such as pointing out if a system will not function the way the owner intends. But, contractors aren't mind readers, and if the owner approves the design and progress work, its negligence claim against the contractor will be unsuccessful.

6. The big fight is frequently at the subcontractor level. "Design-builders are very adept at passing risk down to subcontractors," Loulakis said. Relationships are fragile, and if a sub isn't careful, it may lose out.

7. Courts appear to be giving a fresh look at provisions addressing warranties, limitations of liabilities and consequential damages. If the owner disregards its warranty, it may lose its rights against the design-builder's work.

8. Courts afford public sector owners broad discretion to make their procurement decisions. Loulakis has seen many disputes where owners do not follow provisions of their bidding procedures. "For the most part, as long as they're acting within their discretion, owners win those arguments," he said.

9. Actions for fraud and bad faith dealings will be on the upswing with the increase in design-build and IPD delivery systems. Loulakis said, "Over the years that I've published [articles on] design-build lessons learned, there have been 15 or so cases that have had some sort of fraud element to them." These have included improper claims submissions, False Claims Act violations, Truth and Negotiation Act violations and outright fraud. This is not limited to contractors. "Owners are not immune," he said, citing instances in which owners thought they could withhold information from their contractors.

Most disputes arise over contract ambiguities, contract formation challenges and insurance issues, Loulakis said. In summary, he advises, "Protect your position if something goes wrong."

The "Lessons Learned: Recent Developments in Design-Build Case Law" webinar and presentation materials are available for purchase on CD. Visit the following website for more information: http://stores.homestead.com/ConstructionOnline/Detail.bok?no=134.

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