RISK ALLOCATION IN CONSTRUCTION PROJECTS

1. RISK ALLOCATION IN CONSTRUCTION PROJECTS Lorman Education Services Eileen M. Diepenbrock William A. Lichtig Jay C. Davison, AIA September 2, 2004

2. ALLOCATING RISKS OF DESIGN ERRORS

3. The Dilemma for the Owner • Owner – Contractor • Implied warranty of plans • Responsibility for deficiencies • Recovery for extra work

4. The Dilemma for the Owner • Owner – Designer • No warranty of plans • Breach of contract • Professional negligence

5. The Dilemma for the Owner • Professional Negligence is ……………….. “the failure to exercise the skill, knowledge, and care ordinarily possessed by members of the profession”

6. The Dilemma for the A-E Are design fees adequate to produce high-quality documents?

7. Pressures on Design Fees • Fee scales established in industry, often by agencies • Increasing complexity of work • Increasing number of tasks and specialties • Increasingly litigious atmosphere in the construction industry

8. Pressures on Firm Profitability • Traditionally a low-profit business • Increasing salary pressure • Shortage of qualified personnel • Increasing complexity of work

9. Would Increasing Design Fees Result in Higher-Quality Documents? • Workload could be calibrated to available professional staff • Outside peer reviews could be initiated (and paid for) by A-E • More budget could be devoted to CA • Would owners have to “compete” for qualified design firms?

10. Completeness of Design Documents • What is shown/specified? • What is implied intent? • What is “good enough?”

11. Communication 1 • Design documents attempt to communicate the “intent” of the designer • Bids represent the contractors’ understanding of that intent • RFI’s represent confusion • Change orders represent misunderstanding

12. Communication 2 • Has the quality of designers’ communication changed? • Do different contractors understand and respond at different levels? • How might this communication be improved?

13. Trends in Document Preparation • Show/specify an item only once • Do not over-detail • Reduce required submittals • Use alternative media (e.g. photos) • Transfer design responsibility where possible to do so

14. Areas With High Potential for Problems to Arise • “Or equals” and substitutions • Changing trade standards • Proprietary specifications • “Complete and operating system”

15. Constructability Reviews as a Means of Improving the Quality of Construction Documents

16. What Means “Constructability Review”? • Coordination, conflict, & completeness (Quality Control) • Code compliance • Program compliance • Standards compliance • Constructability • Value engineering

17. Quality Control Review • When: documents 95% complete to avoid duplication of efforts • By whom: another design professional (peer) • Why: improve quality of documents to reduce potential misunderstanding

18. Code Compliance Review • When: early in design development • By whom: another design professional or an individual trained in code enforcement, e.g. licensed inspector • Why: avoid having to modify documents at the last minute to comply

19. Program Compliance Review • When: at the end of design development • By whom: the person who developed the program • Why: to ensure that the owner is getting all the items they asked for

20. Standards Compliance • When: After specifications are well developed (usually in CD phase) • By whom: the author of the standards or the departments that helped develop them • Why: to ensure that the designer is specifying the materials and systems the owner wants

21. Constructability Review • When: CD phase, after specifications are reasonably well developed • By whom: a contractor or other construction professional with actual “hands-on” experience • Why: to uncover details that might be difficult or costly to build, and materials and systems that are proprietary, or difficult to procure.

22. Value Engineering • When: early and throughout design • By whom: a certified value engineering professional • Why: to save cost without comprising quality or design intent

23. Important Issues • Cost vs. benefit • Backcheck: did review items get addressed? • Is this an additional service to the designer? • Who assumes design liability? • Potential bid delays

24. Owner Liability Issue • If a review identifies potential problems in the documents and appropriate corrections are not made, is the owner’s liability increased?

25. Shifting the Risk of Design Errors to the Contractor

26. Pre-Bid Review of Construction Documents • Owner’s warranty of plans • Contractor’s obligation to review • How to allocate the risk

27. Pre-Bid Review • Time • Design • Bidding • Information Available • Owner-furnished • Publicly available • Contractor-generated • Contract Requirements

28. Level of Review • “Reasonable review” given thepurpose of pre-bid review • “Patent” or “Obvious” • Not required to second guess owner/designer

29. Coordination and Lay-Out Drawings • What are they • When • Who prepares • Purpose

30. Striking a Balance • Designers must accommodate identified systems • Contractors must coordinate identified systems

31. Resolving Conflicts • Not enough space • Routing conflicts with structuralcomponents • Components conflict with each other • Design deficiency? • Coordination error?

32. Composite Drawing of Typical Lab

33. Corrected Composite Drawing of Typical Lab

34. Field Verification • What is required • When • Examples • Existing construction • New construction

35. Financial Responsibility • No additional compensation • Affirmative liability to owner • Level of knowledge • Contract allocation

36. Who Should Bear the Risks?

37. EVERY PROJECT COSTS A CERTAIN AMOUNT • Costs of Design • Costs of Construction • Costs of Risks

38. How Can the Risks be Mitigated? • Owner Keeps the Risks and Tries to Get the Best A/E and Contractor • Owner Gives the Risks to the A/E • Owner Shifts the Risks as Much as Possible to the Contractor

39. HOW CAN THE PARTIES WORK TOGETHER TO COLLECTIVELY REDUCE THE RISK?

40. ALLOCATING RISKS OF UNEXPECTED SITE CONDITIONS

41. TYPE I DIFFERING SITE CONDITION • Site Condition Which Differs Materially From That Indicated in Contract Documents • Contract Documents Indicate Type of Conditions to be Expected • Representation Must Differ Materially from Actual Conditions Encountered • Contractor Must Have Reasonably Relied on Contract Representations to its Detriment

42. TYPE II DIFFERING SITE CONDITION • Unknown Site Condition Which Differs Materially From That Reasonably Expected as Inherent in the Nature of the Work to be Performed • Examine Contract Documents Closely for Disclaimers and Definition of “Contract Documents” • Are site investigation studies provided “for information only”?

43. TYPE II DIFFERING SITE CONDITION • Heavy Burden of Proof: • What was actually known about the site • Why condition encountered was unusual • The DSC is materially different from what is considered ordinary

44. RISK ON OWNER Lower Bids Equitable Adjustment No Restrictions RISK ON CONTRACTOR Higher Bids May Not Be Allowed On Public Projects THE DIFFERING SITE CONDITION CLAUSE

45. SHIFTING RISK: DISCLAIMERS • Disclaiming Geotechnical Information From the Contract • Disclaiming the Accuracy of Plans and Specifications • Disclaiming Inferences Drawn From Existing Conditions • Combination of all

46. DISCLAIMING GEOTECHNICAL INFORMATION FROM CONTRACT • Intent is to Prevent Type I Claim • Disclaimer is Frequently Enforced • Examine Disclaimer Carefully • General Disclaimer is Insufficient • Disclaimer Must Caution Against Reliance on Data

47. DISCLAIMING WARRANTY OF ACCURACY • May be Restricted by the Spearin Doctrine • May be Restricted by Positive Misstatement of Conditions • May be Restricted by Statutes (Public Projects)

48. DISCLAIMING WARRANTY OF ACCURACY • Enforceable if Makes Reliance on Data Unreasonable • Effective to Disclaim Contractor’s Subjective Interpretation of Data

49. DISCLAIMING INFERENCES FROM SITE INFORMATION • Effective to Shift Risk of Conclusions from Data • Limits Implied Warranty of Data • Assumes Accuracy of the Date Itself

50. SHIFTING RISK: SITE INSPECTION CLAUSES • No Apparent Restrictions • Enforceable to Waive Conditions Reasonably Discoverable • Failure to Comply can Cause Loss of Claim