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Project Delivery Systems (Part 1)

Understanding the myriad of options available for structuring the construction and design aspects of project development at an early stage in development can give an owner or developer maximum flexibility in setting up the project in a way that will maximize that project’s success – success being defined as consistency with the owner’s expectations and needs.  These options are generally referred to as project delivery methods, or systems.  Some of these methods go well beyond just construction, and may encompass project planning, design, financing, operations, maintenance, and other aspects of the development and completion of a particular facility.  There are often three primary delineations:

(a) where privity (contractual relationships) is established,

(b) how risk (and potentially reward) is allocated, and

(c) the timing of involving key players.

In addition to these differences, there can also be differences in the payment provisions.  One contracting method may be used in conjunction with a variety of payment options, although some methods more typically use certain types of payment arrangements.

This series of postings will discuss some of the more common methods for project delivery and their advantages or disadvantages, starting first with design-bid-build, the focus of this posting.  The next part will discuss design-build and engineer-procure-construct, and the third part will discuss construction manager at risk contracting.

Design-bid-build is generally recognized as the most traditional delivery method.  In this approach, the owner contracts directly with the architect.  After completion of design, the owner then enters into a construction contract.  The architect might or might not have any involvement once the project entered the construction phase. This method is generally very sequenced, which impacts the timing of completion.

The owner is the primary point of privity with the architect and, separately, with the contractor.

This type of scheme can give the owner a great deal of control. For example, it oversees the design and can dictate what the final product should be to a very finite level of detail if it so desires. The owner is responsible for financing the project and, after construction, maintaining and operating the facility (although the contractor would typically provide certain warranties for a limited period of time following completion of the project).

However, with control comes risk.  In most jurisdictions, these contractual lines dictate some amount of risk and liability.  For example, in many jurisdictions, the contractor cannot sue the architect directly for economic losses suffered by the contractor as a result of the architect’s design – instead, the contractor must seek recovery against the owner under the rights and restrictions set forth in the construction contract.  The owner can then decide whether to try to pursue recovery of any amounts it pays the contractor from the architect.  Under the particular law in a jurisdiction, the standard which the owner must meet vis-à-vis the contractor may be greater than the general standard of care owed the owner by the architect.

One of the most common payment methods for design-bid-build is referred to as lump sum or stipulated sum.  Because the design is complete (or should be complete), the contractor can provide set pricing for the construction.  This puts both the risk and reward on the contractor of unexpected costs.  The contractor may not recover additional costs simply because it cost more than planned; conversely, if the contractor is able to do the work for less than anticipated, the contractor gets to keep those additional profits.  The contractor is typically paid draws throughout the construction based upon the percent of the work complete and irrespective of the actual costs incurred during that payment period.

Alternatively, the contractor might be paid based on the cost of the work.  Unless capped, this puts the risk of increased costs on the owner, but also gives the owner the benefit of underruns.

Design-bid-build can be a very effective contracting method when

(a) the owner wants or needs to retain control,

(b) the owner has time for a sequenced approach, and

(c) the owner is comfortable with the standard risk allocations or modifies those allocations by its contract documents.

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We regularly update clients about changes in real estate law and on industry trends. This includes briefing clients on legislative proposals in the federal tax, housing and other legal areas affecting their businesses. Staying current enables you to anticipate and prevent legal problems as well as capitalize on new developments.
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