One of the primary motivators for owner decisions to use design-build is to shift the risk of liability for defects in the design. Owners should be aware, however, of a line of cases creating opportunities for design-builders to claim that the owner retains liability for costs alleged to arise from conflicts or ambiguities in the design requirements established in the procurement and contract documents. This article discusses three of these cases as well as some of the steps owners can take to avoid the pitfalls they represent and to transfer design risk to design-builders successfully.
White v. Edsall: General Disclaimer Not Sufficient to Avoid Owner Design Liability
In White v. Edsall Construction Co., Inc., 296 F.3d 1081 (Fed. Cir. 2002), the United States Court of Appeals affirmed a decision of the Armed Services Board of Contract Appeals holding that the contractor was entitled to rely on a design drawing in the request for proposals (RFP), despite a disclaimer on the drawing.
The drawings included in the RFP showed cables attached to hanger doors at three “pick points.” One of the drawings included the following disclaimer.
CANOPY DOOR DETAILS, ARRANGEMENTS, LOADS, ATTACHMENTS, SUPPORTS, BRACKETS, HARDWARE ETC. MUST BE VERIFIED BY THE CONTRACTOR PRIOR TO BIDDING. ANY CONDITIONS THAT WILL REQUIRE CHANGES FROM THE PLANS MUST BE COMMUNICATED TO THE ARCHITECT FOR HIS APPROVAL PRIOR TO BIDDING AND ALL COST OF THOSE CHANGES MUST BE INCLUDED IN THE BID PRICE.
After the contract award, the contractor discovered that the three-pick-point design was not feasible and claimed its additional costs for a proposed four-pick-point design.
Citing the Spearin doctrine, the court stated that when the government provides a contractor with prescriptive design specifications, such that the contractor is bound by contract to build according to the specifications, the contract carries an implied warranty by the government that the specifications are free from design defects. (In United States v. Spearin, 248 U.S. 132 (1918), the U.S. Supreme Court held that project owners are liable for costs incurred by construction contractors due to defects in the owner’s design.) The court noted that the implied warranty does not apply to performance specifications that merely set forth an objective without specifying the method of obtaining the objective.
According to the court’s ruling, the level of detail in the design supplied by the Army resulted in an implied warranty that it was suitable for the purpose intended, and that the general disclaimer requiring the contractor to check plans and determine project requirements did not overcome the implied warranty. The court explained: “This [disclaimer] requires contractors to clarify patent ambiguities, but does not require them to ferret out hidden or subtle errors in the specifications.” Only express and specific disclaimers suffice to overcome a Spearin warranty.
The court focused on the Army’s decision to include the three-pick point design as a design requirement. As support for its holding, the court noted that the disclaimer required any changes from the design shown on the plans to be approved by the Army. While the disclaimer suggested the possibility of minor problems in the drawings (it required the contractor to verify general “details,” such as door weight and dimensions), it did not shift the risk of design flaws to the contractor (e.g., that the Army’s design might not work for its intended purpose).
The opinion stated that the Army could have drafted a contract and specifications that shifted the risk of design defects to the contractor. Thus this case highlights the importance of carefully considering the legal implications of decisions made by the owner and of drafting contract provisions that clearly reflect the owner’s intent and satisfy legal requirements. It appears that the Army could have avoided design liability by providing a performance specification instead of providing a prescriptive design requirement. It also appears that the Army could have transferred the risk of a failure of the owner’s design by including a disclaimer that more specifically described the risks intended to be transferred.
Donahue Electric: Contractor Not Liable for Defect Inherent in Prescriptive Specification
Donahue Electric, Inc., VABCA No. 6618, 2003-1 B.C.A. (CCH) P32,129 (2002), involved a dispute over requirements for a boiler for a Department of Veterans Affairs (VA) Ambulatory Care Center. The requirements for the boiler were stated in the RFP as follows:
Install a new Government-furnished Steris Washer/Sterilizer in the SPD area . . . Install new steam boiler (196 LB/hr of 50-psig steam from RO water).
The RFP included 50 percent drawings showing a seven-horsepower boiler, and the contractor included a seven-horsepower boiler in its bid. After the contract was awarded, the contractor determined that the boiler shown in the drawings would not meet the instantaneous burst requirements under the Steris specifications and submitted a claim for the cost of a larger boiler. The VA argued that the contractor had total design responsibility, with no right to rely on the 50 percent drawings and that the contractor should have obtained the Steris specifications, hired an architect/engineer, developed its own design and purchased whatever was necessary for the installation of the VA-furnished sterilizer. This position was supported by language in the RFP stating that “Drawings are included for informational purposes only and should in no manner be used, or considered, as as-built drawings.” The VA claimed that the “information only” note on the drawings effectively prevented bidders from using or relying on the drawings in any way.
The Board of Contract Appeals disagreed with the VA, holding it liable for the additional cost of upsizing the boiler. The decision stated:
Specifications included in a design-build contract, . . . to the extent specific requirements, quantities, and sizes are set forth in those specifications, place the risk of design deficiencies on the owner. Thus the VA reassumed the risk and warranted the accuracy of the specifications with regard to the 196 LB/hr boiler output.
The Board stated that the “information only” note was not consistent with the expectation that the successful bidder would use the 50 percent drawings to complete the design and construction of the project and that the VA’s position would require the bidders to design the project prior to bid. The Board noted that the VA did not adequately explain how any bidder could formulate a bid without using the provided drawings unless the bidder completely designed the project prior to bid.
Similar to the Edsall decision, the opinion in Donahue Electric acknowledged that the VA could have transferred the risk of design defects to the contractor with a properly written contract. The Board noted that the VA could have avoided liability by drafting the boiler requirement as a performance specification rather than by including a prescriptive design requirement. “The VA could simply have stated, ‘install the Steris 3400 GFP sterilizer and a boiler to operate it.’ Such a specification would have made [the design-build contractor] responsible for choosing a boiler that would properly operate the sterilizer.”
The Board did not suggest any other changes that could have been made to the RFP. Further, although the Board stated that the “information only” note was inconsistent with the parties’ expectations, the decision did not explain how the Board reached that conclusion. Presumably the Board would have reached a different conclusion had the RFP clearly advised the proposers that they were expected to perform design work prior to submitting their proposals and that any decision to rely on the 50 percent drawings as the basis for a proposal would be at the proposer’s risk.
The RFP for the Transportation Expansion (T-REX) design-build project provides one approach that owners may wish to consider using. The RFP allowed approximately five months to prepare proposals and provided for payment of $1 million to the unsuccessful proposers, making it clear that they were expected to perform design work in connection with their proposals. Additionally, the instructions to proposers included an explicit disclaimer regarding the status of the drawings, as follows:
The Contractor is not required to conform to the drawings included in the Reference Documents although such documents contain design solutions and other information that the Proposer may find valuable in meeting the Contract requirements and in reducing Project costs. The Reference Documents may, in many instances, contain cost-effective design solutions, which, without substantial changes, meet the Contract requirements. In such cases, it is expected that the Contractor would only have to perform minimal design work, thereby resulting in design cost savings reflected in a lower Total Proposal Price. Similarly, the Reference Documents may contain design solutions that require only moderate revision to meet Contract requirements, thereby resulting in similar cost savings and a lower Total Proposal Price. Nonetheless, regardless of the level of completion or suitability of any portion of the Reference Documents, the Contractor shall be solely responsible for Project design and [the owner] shall have no liability or obligation as a result of the design work contained in the Reference Documents. The Reference Documents are provided solely for Contractor’s reference and are without representation or warranty by [the owner], unless specifically stated otherwise in the Contract.
Record Steel and Construction v. United States: The Difference between Recommendations and Requirements
Another recent case further emphasizes the importance of making the owner’s intent clear in procurement documents, this time involving a situation where the owner wanted to require the design-builder to conform to recommendations in a document that the court determined was provided for reference purposes only. In Record Steel and Construction v. United States, 62 Fed. Cl. 508 (2004), the U.S. Court of Federal Claims Board of Contract Appeals held the U.S. Army Corps of Engineers liable to a design-builder for the cost of implementing a site improvement program as recommended by the foundation analysis report included in the RFP. The design-builder determined that the over-excavation recommended by the report was not necessary, but the Corps required compliance as a condition to issuing the notice to proceed with construction. The court focused on a number of factors in reaching the conclusion that the recommendations were not contract requirements, including use of the word “should” in the report, as well as the facts that the owner had drafted the contract documents and the contractor had raised the issue with the government prior to award of the contract. Please refer to the May 2005 edition of Design-Build DATELINE for a more extensive discussion of this case.
This case demonstrates the balancing act that must be followed by a project owner in drafting procurement and contract documents, in order to make sure that the line is accurately drawn between information provided for reference purposes and requirements that will be binding on the design-builder. It is incumbent on the owner to thoroughly review the documents prior to issuance of the RFP to make sure that they clearly reflect its intent. In preparing the RFP package, the owner should keep in mind that documents such as geotechnical reports are not typically set up as contract documents. If such a document is intended to represent a contract requirement, it should be rewritten to use appropriate contractual terminology. An alternative, but less preferable approach, would be to add a preface to the document explaining how it should be interpreted.
Steps Project Owners Can Take to Increase the Probability of Enforcement of Owner’s Intent
Unless the owner’s intent regarding design requirements is clearly communicated in the procurement and contract documents, the owner risks retaining liability for costs of “upgrading” the project to meet those requirements. In each case discussed above, the deciding body interpreted the procurement and contract documents against the owner, although a different outcome might have been possible if the documents had clearly communicated the owner’s intent. The owner’s actions during the contract term may also result in transfer of risk back to the owner. The following rules will help to ensure that the owner’s intent will be enforced:
- Decide in advance whether a document is intended to be mandatory. If so, it should use words such as “shall” and “must” rather than “should” or “may.”
- To the extent possible, use performance specifications rather than establishing contract requirements through a preliminary design.
- If it is necessary to provide a conceptual or preliminary design to adequately define the scope of the project, do not progress the preliminary design work any farther than necessary and designate the preliminary design as reference material. If the owner wishes to retain approval rights with respect to proposed deviations from elements of the preliminary design, include these elements as “baseline” requirements in the contract.
- Include statements in the procurement documents making it clear that the owner has not evaluated whether the preliminary design will meet the contract requirements, and obligating the proposer to perform its own investigations before submitting a proposal.
- Allow the proposer to submit alternative technical concepts for approval during the procurement period and to incorporate them into its proposal. (An invitation to review the preliminary design and to propose alternatives indicates that the proposer is expected to conduct a thorough analysis of the preliminary design prior to the proposal date. Also, if the proposer in fact proposes alternative concepts that are selected, those concepts are clearly “owned” by the proposer.)
- Allow sufficient time for the proposer to perform investigations prior to the proposal due date. If the documents require significant effort by the proposers, consider paying a stipend.
- During the design phase, respond promptly to design submittals, avoid imposing design preferences on the design-builder, and provide reasons for any disapproval of proposed deviations.
- Include provisions in the contract documents making it clear that the design-builder is liable for the final design.
- Review the procurement and contract documents carefully prior to issuance.
Nancy Smith and Brian Papernik are partners in the Los Angeles office of Nossaman, Guthner, Knox & Elliott, LLP, a national law and consulting firm specializing in the use of innovative delivery methodologies for development of infrastructure. They have represented public owners in connection with complex procurements and contracts for projects throughout the nation, including the Alameda Corridor, the T-REX project and the Trans Texas Corridor, among others. Both are active in DBIA, and Ms. Smith is the incoming chair of DBIA’s Legislative Committee. They can be reached at nsmith@nossaman.com and bpapernik@nossaman.com.