By Michael C. Loulakis and Lauren P. McLaughlin
The use of design-build in the transportation sector has certainly proliferated over the past 20 years, particularly on complicated, big-dollar projects. State departments of transportation find that design-build is a great way to deliver projects faster as well as being a way to shift to the private sector some of the project risks DOTs would typically assume.
While contractors and engineers certainly like many aspects of design-build, they are clearly unhappy with how DOT projects are forcing them to accept those risks that DOTs want to shed.
Over the past five or so years, industry’s challenges with the risks on fixed-price design-build transportation projects have been well chronicled. Major contractors have suffered substantial losses on one or more projects, and many have stated publicly that they will no longer pursue certain design-build projects.
Likewise, many engineering firms are involved in litigation/arbitration with design-build contractors over a variety of issues — particularly alleged mistakes in the proposal design documents upon which the contractors based their price proposals. These firms are questioning whether being involved on the “at-risk” side of design-build is worth it.
Some risks are inherent in how design-build is traditionally procured, where the design-build contractor commits to deliver the project for a fixed price based on preliminary design documents. The pressures that come from having to provide a competitive price lead contractors to squeeze their contingencies — including those for design development. Design development risk doesn’t happen in design-bid-build, as the contractor is able to base its bid on a complete set of design documents.
The other big risks that design-build teams face on transportation projects are associated with the right-of-way process, utility relocation, and governmental approvals. Under design-bid-build projects, the DOT bears virtually all the risk with these issues, as they generally must be resolved to develop a 100% complete design and obtain authorization to proceed with the project. In the fast-paced world of design-build, it is common for the design-build contract to be signed without ROW being finally obtained, utilities being relocated, or all governmental approvals being in hand. When contractors discuss the reasons for their losses on design-build projects, they often attribute it to one or more of these risks.
A recent decision
A decision published earlier this year, Hawaiian Dredging Construction Co. Inc. v. United States, provides a helpful explanation of some of the risks with ROW, utility relocation, and governmental approvals. Hawaiian Dredging and Construction Co. was the design-builder for a bypass project that made improvements on the Honoapiilani Highway in Lahaina on the Hawaiian island of Maui. HDCC entered into a fixed-price contract in the amount of approximately $38 million with the Central Federal Lands Highway Division of the Federal Highway Administration.
CFLHD conducted the procurement in conjunction with the Hawaii Department of Transportation. The request for qualifications stated that there were two ROW acquisitions required within the limits of the project — one with a private landowner and one with Maui County. It also stated that the ROW acquisition was expected to be completed prior to the issuance of the request for proposals.
The RFP included, among other things, an Alternative No. 3 Profile that had been prepared for and included as part of HDOT’s Final Environmental Assessment/Finding of No Impact for the project. The RFP required that each proposal include the plan and profile of the roadway alignment and the proposed alignment and maintenance limits as related to available ROW. It also required the design-builder to locate and identify all utilities within the project area and “cooperate with utility owners to expedite the relocation and adjustment of their utilities to minimize interruption of service, duplication of work, and delays if relocations or adjustments are needed” and “prepare utility agreements for (CFLHD]) to be executed by HDOT.”
The design-build contract incorporated the standard permits and responsibilities section of the Federal Acquisition Regulation, which states:
The Contractor shall, without additional expense to the Government, be responsible for obtaining any necessary licenses and permits, and for complying with any Federal, State, and municipal laws, codes, and regulations applicable to the performance of the work.
The contract contemplated that while CFLHD would execute the final ROWs, HDCC was to prepare to HDOT standards the ROW plans and other documents needed to facilitate the final acquisition of the design and permanent ROW.
The project was beset by delays almost immediately. HDCC’s proposal was based on Alternative No. 3 and its assumption that CFLHD had already secured the required ROW documents and permits or would do so prior to issuing the project’s notice to proceed. This did not happen, and HDCC blamed the late ROW acquisition for delays to its final road design, preparation and execution of appropriate rights of entry agreements, and the start of construction. It also claimed that it was impacted by changes CFLHD made to the ROWs from what was indicated in the proposal documents.
HDCC alleged that it encountered delays and increased costs in obtaining the Clean Water Act Section 404 permits because of CFLHD’s failure to timely secure final ROWs. It argued that it was not able to submit its Section 404 permit application in line with its preferred schedule because the permit application required details that could only be found in the final ROWs. Before HDCC was able to obtain the ROWs and submit its permit application, the local regulations governing the Section 404 permit requirements expired and new, more stringent regulations were put in place, which HDCC claims it would not have experienced had it been able to submit its permit application under the old regulations.
HDCC ultimately submitted a claim seeking approximately $6.6 million and a time extension of 482 days based on extra work and delays. When CFLHD’s contracting officer denied the claim, HDCC appealed to the U.S. Court of Federal Claims. For the reasons discussed below, the court dismissed HDCC’s case, finding that “the setbacks HDCC alleges it encountered during contract performance — problems with the timing and content of finalized ROWs, obtaining necessary permits, relocating utilities … — were both HDCC’s sole responsibility under the firm fixed-price Contract and reasonably foreseeable.”
The court began its analysis by stating: “At its center, this case involves responsibilities and liabilities under a firm fixed-price design-build contract. … It is a ‘well-settled rule that in a fixed-price contract, the contractor bears the risk that its actual cost of performance might exceed the contract price.’” With this, the court stated that unless HDCC could indicate that CFLHD changed the contract requirements, HDCC could not obtain relief to recover its losses.
As to the timing of the ROW acquisitions, the court noted that while CFLHD had the duty to obtain title to ROWs, the contract did not specify a date by which CFLHD was required to do so. The court focused on the RFP language that made it clear that HDCC’s assistance was required to facilitate ROW design and acquisition. Consequently, the court concluded that it was “entirely foreseeable that the Government would not have finalized ROWs prior to awarding the Contract or issuing the notice to proceed.” Because the ROW design and facilitation services were part of HDCC’s scope of work, the court found that HDCC bore the risk of increased costs and delays related to “designing ROWs, securing ROWs, and adjusting construction designs based on preliminary ROW approximations in order to fit final ROWs.”
The court cited the standard FAR permits and responsibilities clause in finding that HDCC had the duty to obtain, at its expense, the Section 404 permit. To shift the delays in obtaining this permit to CFLHD, the court found that HDCC needed to plausibly allege that the late ROWs changed the contract or resulted in excusable delay, which it did not do. The court specifically found that HDCC had not credibly alleged that the contract requirements or site conditions were materially different from the ROW information in the RFP, stating: “The need to adjust the ROW design to fit within the final ROW was foreseeable under the RFP's and Contract's requirements for ROW design and facilitation services.”
Aside from the ROW delay, HDCC also argued that it was delayed in completing final roadway configurations because CFLHD failed to timely execute and enforce its agreements with public utility companies to relocate utilities. HDCC specifically complained about the failure of utilities to relocate telephone and electrical poles and overhead lines until many months after HDCC had notified them of the need for relocation. The court rejected this claim. It found no contract provision or authority obligating CFLHD to compel third-party utility companies to complete utility relocations within HDCC's preferred schedule. Because the contract specified that HDCC was responsible for cooperating with utility owners and relocating those utilities, the court concluded that HDCC assumed the risk of utility relocation delays.
The problems encountered by the design-builder in the Hawaiian Dredging case are not unique. Moreover, the decision is not surprising — even though one can question how a design-build contractor is supposed to plan its work if major ROW is not available on a specified date. Because this case was dismissed early, we don’t know what the design-builder’s explanation would have been when questioned about the scope of work, including ROW services. We also don’t know why CFLHD indicated in the RFP that it would have the ROW by contract execution and why that didn’t happen.
DOTs are well advised in advance of their design-build procurements to deal practically with the risks around ROW, utility relocation, and governmental approvals. Some DOTs include dates in design-build contracts to establish benchmarks for when these items are expected to be obtained and give design-builders contractual relief if the dates are not met through no fault of the design-builders.
Others are using progressive design-build instead of traditional design-build. Progressive design-build allows the issues with ROW, utility relocation, and governmental approvals to be worked out while the design-builder is under contract but before the design-builder establishes a fixed price. Progressive design-build also helps better address the problem of the design-builder providing that firm price at a very early stage of preliminary design.
Contractors and designers should recognize that the case law to date is not supportive of their ability to obtain relief when there is not clear contract language giving these rights. Even though one can have empathy for delays that are not caused by the design-build team, the question is who bears that risk under the contract. When the contract is, at best, unclear, then the “fixed price — your risk” finding in the Hawaiian Dredging case is the likely result.
This article is published by Civil Engineering Online.