Adding an "O" and "F" to the DB process
The design-build (DB) process is no longer a novelty. In the past ten years, contractors and engineers have fine-tuned the DB project delivery approach, utilizing it to build bigger and better structures at reduced costs.
As the demand for public infrastructure continues to increase and the funds to pay for public infrastructure continues to decrease, a “new” process is gaining momentum in the construction industry in the states (it’s been around for awhile outside of the US). We are starting to see more projects that add an “O” and “F” to the DB acronym.
The DBOF process involves a public-private partnership whereby the private entity designs, builds, operates, and finances a facility. In return, the public entity pays fees throughout the life of the project, often extending 30 years.
When done correctly, the DBOF process can be a win-win for all parties. However, public and private entities should be aware of the issues that can arise with these agreements. Among other things, these issues include the following:
1. Legal challenges related to the public entities ability to pursue such a project delivery approach under the law.
2. Potential opposition from unions.
3. Lack of competition in the bidding arena because only a few entities perform such work.
4. Risks related to the financial demise of the private company.
5. High transaction costs related to the complex nature of these arrangements.
Bond. Performance Bond.
Performance bonds—insurance-like arrangements in which a surety (the bonding company) contractually agrees to pay for the performance of a principal (the contractor) to an obligee (the owner) in case the principal fails to perform the obligations of its contract—should be used more often in construction agreements to provide owners with a source of funds to cover defective work in a project.
Currently, owners typically require contractors to obtain insurance policies with the hope that such policies cover defects in the work they perform for the owner. Though owners are willing to spend a lot of money, time, and effort in obtaining these policies, insurers continue to make revisions to their policies to limit, and sometimes prevent, coverage for these defects.
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Performance bonds may provide better protection to an owner. Typically, the bond provides funds to pay for repair of defective work that may not be covered by insurance as part of the bond’s guarantee of the faithful performance of the contract by the contractor.
Unlike insurance policies, performance bonds provide coverage only for the owner’s project—if an owner discovers a defect in the contractor’s work, the owner will not have to worry whether another owner’s claim against the contractor for another defective project will reduce the coverage available under the contractor’s bond. The performance bond’s recovery pool belongs to the owner for the specific project it is drafted to cover.
A Rose by any Other Name.... But Are You Really Insured?
Do you think you have adequate insurance protection for your project under an “additional insured endorsement” to another entity’s policy? Or through a “wrap” policy, known as either an Owner’s Controlled Insurance Policy (OCIP) or Contractor’s Controlled Insurance Policy (CCIP), because you are listed as “an insured”? Perhaps not under more recent policies. Check the latest policy language carefully, and you may not like what you find. Many recent insurance policies now include limiting language that restricts the self-insured retention (SIR) provision to payments made only by “The Named Insured,” e.g., “Payments by others, including but not limited to additional insureds or insurers, do not serve to satisfy the self-insured retention. Satisfaction of the self-insured retention as a condition precedent to our liability applies regardless of insolvency or bankruptcy by you.” This past year we have noted a few published decisions that have supported such limiting policy language, allowing an insurer to restrict and ultimately refuse to accept SIR payments from any other insured but “the Named Insured.” What is the result of that interpretation if “The Named Insured” is M.I.A.? The policy is never triggered, thereby precluding coverage and the benefits of the policy to all other insureds. The potential effect on risk management and business protection for your project make those policies worthy of a second look.
CPSC Recommends Removal and Replacement of Chinese Drywall
Today the Consumer Product Safety Commission recommended removal of all sulfur-containing drywall from homes built with the problem drywall. The CPSC’s recommendation is contained in its Interim Remediation Guidance for Homes with Corrosion from Problem Drywall. In addition to the problem drywall, the CPSC recommends removal and replacement of all fire safety alarm systems, electrical components and wiring, gas service piping and fire suppression sprinkler systems, all of which the CPSC states have a direct connection to safety. The CPSC recommendation also noted that, while its scientific investigations are ongoing, information revealed to date justified issuing the interim recommendation.
