DB and P3 Subsurface Projects - Contractual Risk Allocation Principles: New Terrain, Old Ground, or Both

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1 DB and P3 Subsurface Projects - Contractual Risk Allocation Principles: New Terrain, Old Ground, or Both Risk Management for Underground Construction Seminar November 29, 2017 David J. Hatem, PC Donovan Hatem LLP Boston New York DRAFT

2 Focus Risk Allocation Principles: Subsurface Projects Risk Allocation Principles: Project Delivery Methods Design-Bid-Build ( DBB ) Design-Build ( DB ) Public-Private Partnerships ( P3s ) Transformed Projects Path Forward: Developing Guidelines for Risk Allocation in DB and P3 Subsurface Projects 2

3 Risk Allocation Principles: Subsurface Projects Specialized Focus Subsurface conditions Design adequacy Subsurface Risk Interrelationships and Interdependencies Scope of subsurface investigation Character of subsurface conditions Availability and reporting of subsurface data and interpretations Design of permanent project work Compatibility and suitability of permanent work design with anticipated subsurface conditions Lessons Learned Improved Contracting Practices Adequate subsurface investigation Information disclosure Fair and appropriate risk sharing Geotechnical baseline reports 3

4 Risk Allocation Principles: Subsurface Projects Relationship between (a) The scope and quality of subsurface investigation; (b) The assessment and evaluation of available subsurface data relative to the final design approach; (c) The compatibility, suitability and constructability of that approach based upon available subsurface data and related evaluations 4

5 Risk Allocation Principles: Project Delivery Methods DBB: Typical Roles and Responsibilities Owner: Subsurface investigation and reporting Preparation and furnishing of permanent works design implied warranty obligation Risk sharing differing site condition provision Geotechnical baseline report preparation Contractor: Selection, design and implementation of construction means/methods, and equipment (unless prescribed or mandated by Owner) Construction based on Owner-furnished design Responsible for delegated (or performance-based) design or proposed/accepted design variations 5

6 Risk Allocation Principles: Project Delivery Methods DB: Roles and Responsibilities Owner: - Subsurface investigation: To what degree? Provided in DB RFP? Disclaimers/reliance rights? Geotechnical baseline report preparation? - Design development: Pre-Award Factors To what level? Prescriptive criteria or standards? Disclaimers/reliance rights? Prototypcial Design v. Project-Specific Design Scope of review and authority regarding acceptance/rejection of Design- Builder s design submittals 6

7 Risk Allocation Principles: Project Delivery Methods Design-Builder: Subsurface investigation: To what degree? Complete or supplemental? Preparation of geotechnical reports Relationship/relevance to final design approach? Design development: Responsible for final design Alternative technical concepts Suitability/compatibility/constructability relative to anticipated subsurface conditions Negation of Owner-implied warranty obligation 7

8 Risk Allocation Principles: Project Delivery Methods Variability in Subsurface Conditions Risk Allocation in DB: For example: Owners may furnish more or less subsurface information Owners may or may not disclaim (in whole or in part) the design-builder s right to rely upon owner-furnished subsurface information The contract documents may or may not include geotechnical reports, including a geotechnical baseline report, prepared by the owner s consulting engineer. The contract documents may or may not include provisions that allow for sharing of risk due to materially differing subsurface conditions by providing for time or cost equitable adjustment opportunities These varied approaches will have a significant potential impact on subsurface conditions risk allocation as between the owner and designbuilder in DB (and the concessionaire in P3s). 8

9 Risk Allocation Principles: Project Delivery Methods Scope Validation Approach Progressive DB 9

10 Risk Allocation Principles: Project Delivery Methods Risk allocation for design adequacy and subsurface conditions in DB and P3 projects should derive from how certain underlying questions are addressed, including: Who is responsible for defining the scope of and performing the subsurface investigation? Who is responsible for the assessment and evaluation of subsurface conditions/properties relative to geotechnical design considerations? Whether the owner provides site-specific subsurface information in the procurement documents Whether the design-builder has any right to rely upon subsurface information furnished by the owner Whether there are disclaimers as to the accuracy or suitability of subsurface information, and the specificity of any such disclaimers. Whether a differing site condition provision allows for an equitable adjustment if materially different subsurface conditions are encountered in the design and construction processes from those indicated in subsurface information furnished in the procurement and contract documents These answers to these questions will have profound influence, if not determinative effect, upon design adequacy and subsurface conditions risk allocation in DB and P3s. 10

11 Risk Allocation Principles: Project Delivery Methods P3s P3s = DB ++ Relational risk allocation 11

12 Displacement of Typical Risk Allocation Principles in D-B and P3s Displacement of General Principle - The Owner may retain or assume design adequacy risk and responsibility in the following circumstances: Overly prescriptive design criteria or standards Relatively high degree of design development Imposed limitations on scope of subsurface investigation Mandated or directed characterization of subsurface conditions for design or construction purposes Broad scope of review/rejection over DB Team s design submittals Unwarranted intrusion or interference with DB Team s design discretion, judgment or prerogatives Mandated or prescriptive construction means/methods and equipment 12

13 Path Forward: Developing Guidelines for Risk Allocation in DB and P3 Subsurface Projects DB and P3s do not require total design and subsurface conditions risk transfer from Owner to Design-Builder Risks should be allocated to the party having: An ability to manage the risk A meaningful and realistic opportunity to exercise discretion and judgment in the subject areas relevant to the risk Appropriate project-specific risk sharing should be contractually-defined and stipulated Actual performance of parties should conform to contractual risk allocation terms and underlying principles Appropriate balancing of the interdependencies and interrelationship factors 13

14 Transformed Projects The sequential combination of two different delivery methods for the same project-specific scope For example, the first delivery method may be design-bid-build (or CM-At-Risk) and subsequently transform to design-build (or a publicprivate partnership) Transformation may be either planned or unplanned Design and Construction Interface Risk Risk issues for Design Professionals Design Responsibility Professional Responsibility Degree of Design Development Prescriptive and Mandated Design Interface and Coordination of Design Components Third-party Reliance/Third-Party Beneficiary 14

15 Transformed Projects What accounts for Transformed Projects? Owner dissatisfaction with original delivery method Owner need or desire to compress the design and construction schedule Budget overruns and/or concerns about cost overruns Owner desire to transfer more risk to design professionals and/or others Loss or reduction in available public funding Increased opportunity recognized for private financing What are relevant risk factors for design professionals in transformed projects? Different from risk factors centric and specific to any singular project delivery approach Risk identification and evaluation is essential 15

16 Transformed Projects Design-Bid-Build (CM-At-Risk) Design-Build (Public-Private Partnership) Roles, Responsibilities and Risks Design Characteristics Level of Development Conceptual 30+% 100% Complete (for all or only a portion of the project design) Stamped or Sealed? Prescriptive Mandated Critical or Ancillary Project Component? Integration, Interface, Interdependency, and Coordination Considerations Project-Specific v. Standard, Prototypical Design/Details 16

17 Transformed Projects Design-Bid-Build (CM-At-Risk) Design-Build (Public-Private Partnership) Roles, Responsibilities and Risks Contractual and Legal Issues Professional Responsibility Contractual Responsibility Ownership/Use Rights Risk Allocation* Permits and Approvals Stakeholder Requirements and Expectations Disclaimers, Reliance Rights Implied Warranty * Hatem, D., Diverse and Bifurcated Design Roles: Distinguishing Design Responsibility and Design Risk Allocation, Design and Construction Management Professional Reporter, Donovan Hatem LLP (Dec. 2016) 17

18 Transformed Projects Design-Bid-Build (CM-At-Risk) Design-Build (Public-Private Partnership) Roles, Responsibilities and Risks Design Professional Teams Same or Different Conflict of Interest Novation Assignments Third-Party Beneficiaries Indemnification Design Revision and Modification Submittal Review, RFIs, etc. Owner s Design Professional Team Design Professional Subconsultants of Design-Builder 18

19 Transformed Projects Design-Bid-Build (CM-At-Risk) Design-Build (Public-Private Partnership) Roles, Responsibilities and Risks Professional Liability Insurance Project-Specific 19

20 Path Forward: Developing Guidelines for Risk Allocation in DB and P3 Subsurface Projects Improved contracting practices provide an excellent and solid foundation for development of risk allocation guidelines for DB and P3 subsurface projects Same general principles apply, albeit in a modified manner in DB and P3 subsurface projects Modifications derive primarily from the differing roles and responsibilities of project participants in DB and P3s from roles and responsibilities in D-B-B The underground industry should collaboratively focus on developing, adapting and conscientiously applying risk allocation principles to DB and P3 subsurface projects 20

21 Path Forward: Developing Guidelines for Risk Allocation in DB and P3 Subsurface Projects Guidelines should be developed that account for the risk allocation considerations and provide guidance for project-specific application in DB and P3 projects Guidelines should address both contractual and performance practices Guidelines: Not prescription or standards, and not a substitute for prudent and sensible risk allocation judgments and decisions on a project-specific basis Reference: Hatem, David J., PC. "Risk Allocation and Professional Liability Issues for Consulting Engineers on P3 and Design-Build Projects." Public-Private Partnerships and Design-Build: Opportunities and Risks for Consulting Engineers. Eds. David J. Hatem and Patricia Gary. 2nd ed. Washington: ACEC,

22 Path Forward: Developing Guidelines for Risk Allocation in DB and P3 Subsurface Projects Industry Initiatives Improving risk allocation in alternative delivery methods (ADMs) Transportation Research Board, Guidelines for Managing Geotechnical Risks in Design-Build Projects, NCHRP (Dec. 1, 2017) 22

23 Subsurface Conditions Risk Allocation/ Project-Specific Professional Liability Insurance: Correlation Subsurface Conditions Risk Allocation Project-Specific in Approach Various Options in P3s and DB Project-Specific Professional Liability Insurance ( P-S PLI ) Project-Specific Underwriting Evaluation of Project Specific Subsurface Conditions Risk Allocation Approach Not Standardized Process or Product Prudent (Fair and Balanced) Risk Allocation Promotes Availability, Terms and Premium Cost for P-S PLI P-S PLI Not a Solution for Imprudent Risk Allocation 23

24 24 Questions

25 Contact Information David J. Hatem, PC Donovan Hatem LLP Exchange Place 53 State Street Boston, MA