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.
Be careful what you ask for Idaho
In the last two decades, the Idaho State Legislature has authorized design-build contracting for many different types of public projects. It appears that the Legislature will continue this trend for highway projects. In February, a House committee voted to print a bill that would allow the Idaho Transportation Department (IDT) to award design-build contracts for highway projects. A similar measure nearly became law last year.
For the most part, the Legislature’s acceptance of the design-build process is good thing. Several years ago, I worked for a commercial contractor. In 2001, I visited our largest project at that time -- a $500 M design-build facility in California. When I asked the project lead whether he liked design-build projects, he was quick to praise the process. He believed that design-build projects equated to fast results, decreased change orders, and less litigation. To him, it was a no-brainer. Many of my colleagues agree.
Since then, I have been involved with several design-build and design-bid-build projects. Although some design-build projects have been successful, that’s not always the case. The moment an owner enters into a design-build contract, it loses something that can be very important to a successful construction project: control. This lack of control – which is caused in large part by undefined design requirements – can lead to significant cost overruns and delays.
To avoid such results, owners should focus on two important actions: careful planning and diligent execution. On the topic of planning, design-build owners should spend significant time defining the project requirements. The design-build contract documents must include, among other things, detailed project design criteria, program requirements, performance specifications, and deliverables. Absent such defined requirements, design-builders are free to run wild.
Professional execution of the plan is equally important. Owners must prudently monitor the design-builder’s work. Too often, owners in design-build projects overlook this task, believing that such role is limited in design-build projects. In fact, the opposite is true. Because the design-builder has more flexibility in design-build projects, owners must arduously monitor the budget and schedule.
Design-build projects present many benefits. IDT, however, should know that it will not be less work for them. The key is for IDT to clearly define the project programs and performance requirements before the contracts are signed, and to monitor the design-builder’s compliance with these requirements throughout the project.
