Current Design-Build Practices for Transportation Projects
20. Legal Issues
This section addresses legal issues identified through a review of legal resources including statutes and case summaries, and also discusses information regarding various design-build projects based on "off-the-record" discussions with individuals involved in those projects.
20.1. Procurement Issues
Pre-qualification, Shortlisting and Exclusion of Firms: The case summaries reviewed included one case where an engineering firm was excluded from participating on a design-build team for changes to the electrical distribution system at an airbase in Biloxi, Mississippi. (SSR Engineers, Inc., Comp. Gen. No. B-282244 (June 18, 1999).). The Navy's decision to exclude SSR was based on its prior involvement in preparation of a master plan for a portion of the electrical system that was the subject of the procurement. The Comptroller General rejected SSR's arguments that it should be allowed to participate, concluding that the Navy's decision was reasonable.
In addition, at least two design-build transportation projects have faced protests relating to disqualification of a proposer for failure to meet financial requirements. For one project, the judge ordered the agency to add the team to the shortlist; for the other, the judge upheld the owner's decision not to pre-qualify the firm. The former decision was based on the judge's concerns regarding organizational conflicts of interest within the selection committee, and did not examine the financial data that was the basis for the decision.
Pre-Proposal Communications: The case summaries reviewed did not reflect any reported cases regarding pre-proposal communications. However, issues have arisen in at least two design-build transportation projects that are noteworthy.
In one case, questions asked by proposers were answered individually, and it was not clear whether the same information was in fact provided to all proposers. In order to avoid this situation, it is advisable for questions to be asked and answered in writing with the same document provided to all proposers. It is also beneficial to produce an updated and consolidated set of questions and answers, and distribute it to the proposers, before the proposal due date.
For another project, involving numerous one-on-one meetings, information regarding the degree of latitude permitted in the proposal in a particular area was provided to certain proposers in those meetings but not others. The proposer who was not advised of the owner's intention provided a proposal that was inconsistent with the owner's expectations. The proposal was determined to be non-responsive and the owner advised the proposer that it would not receive a stipend. The proposer protested this decision, and the owner ultimately decided to pay the stipend. In order to avoid this type of situation, it is advisable to limit the number of one-on-one meetings following issuance of the RFP and to take steps to ensure that information provided by the owner to one proposer is also given to the others. Owner representatives in one-on-one meetings conducted after issuance of the RFP should be made aware of the risks of protests based on allegations that the playing field is uneven.
Alternative Concepts: The case summaries reviewed did not reflect any reported cases regarding alternative concepts. However, at least one procurement involved a protest relating to pre-approved concepts. In that case, a proposer was advised that its concept would be acceptable only if approved by a third party. The proposer included the concept in its proposal, stating that it would seek approval, but did not provide any information regarding the steps that would be followed to obtain approval. The agency believed that the concept, as proposed, was not acceptable, and reviewed the proposal without considering the option associated with the concept. A protest was filed. The contracting officer reviewed the original conditional approval, determined that the option should have been considered, and directed the evaluators to re-evaluate the proposal. The re-evaluation did not affect the original selection decision, and no further protest was filed.
The risk of occurrence of this situation could be reduced by careful review of conditional approvals of technical concepts to ensure that the owner's intent is clearly stated.
Issues Relating to Proposals and Award: There are a number of reported cases concerning protests of award of design-build contracts. A number of awards have been overturned based on a determination that the agency was subject to a competitive bidding requirement and did not have the ability to use an alternative procurement process. However, as a general matter, where the agency has the authority to award contracts based on a best-value decision, the courts will defer to the agency's discretion. One exception to this rule concerns use of "past performance" history as an evaluation factor. Among other things, the courts will scrutinize the process followed by the agency in determining the proposer's past performance grade, and may overturn the procurement decision if the past performance grade affected the selection and cannot be justified.
Other proposal-related issues faced by transportation agencies using design-build include the need to deal with prices offered that exceed the maximum budgeted amount available, non-responsive proposals, and proposals that deviate from RFP requirements.
With regard to prices in excess of the budget, the available solutions vary depending on the agency's procurement authority and the terms and conditions of the RFP. Some solutions include:
- Discussions with proposers within the competitive range, followed by request for best and final offers
- Pre-award negotiations with the selected proposer
- Post-award negotiations with the contractor.
Several design-build project owners have dealt with non-responsive proposals:
- For one project requiring pricing to be provided for a 15-year O&M term, one of the proposers only provided six years of pricing. When offered the opportunity to provide a revised pricing form, the proposer failed to do so. Its proposal was not considered.
- In two different cases, a project owner notified a proposer that it would not receive a stipend because its proposal was nonresponsive. In one case the proposer protested and a determination was made that the owner should pay the stipend (in part because the other proposers had asked whether they could take that approach and were told not to, but that information was not conveyed to the proposer in question). In the other case the proposer did not protest the decision.
- For one design-build project, the owner received a proposal that deviated from the contract requirements as interpreted by the owner. The owner issued a request for best and final offers including a clarification to the provision that had been misinterpreted.
20.2. Environmental Litigation
A number of design-build projects have been the subject of challenges regarding compliance with environmental laws, including the San Joaquin Hills Toll Road in California, the El Portal project in Yosemite, and the Legacy Parkway project in Salt Lake City. These cases do not preclude agencies from using design-build for projects that require environmental analysis. However, they highlight the need for agencies to analyze the risk of future environmental litigation in deciding whether and how to use design-build for a particular project and in structuring the procurement and contract documents for the project.
San Joaquin Hills Toll Road: The San Joaquin project was the subject of numerous environmental actions, including one that resulted in a 1993 injunction against a significant portion of the project. This action, which was brought by The Laguna Greenbelt, Inc., is described below. Because the north and south ends of the project had independent utility and were not enjoined, the design-build contractor was able to work around the injunction and in fact completed the project several months before the March 1997 completion deadline. The contract provided for a time extension and payment of damages due to delays in the critical path caused by environmental injunctions, and allowed the owner the option to pay for acceleration in lieu of giving a time extension. The contractor received a price increase for changes in the work and acceleration costs directly attributable to the injunction.
The Laguna Greenbelt, Inc., et al. v. U.S. Department of Transportation, et al. (U.S. Dist. Ct., C.D. Cal. No.SACV93‑0499 LHM (RWRx). On January 22, 1993, four environmental organizations filed a lawsuit in the U.S. District Court, Northern District of California, against the Federal Highway Administration ("FHWA"), other federal agencies and officers, and the TCA, alleging that the defendants did not comply with federal law in its approval of the Corridor. Upon motion by the TCA, the matter was transferred to the U.S. District Court for the Central District of California. The complaint sought a declaration that the FHWA violated applicable federal law, an order setting aside the approval of the Corridor by FHWA, and injunctive relief prohibiting any action altering the physical environment until defendants have complied with applicable federal laws. On September7, 1993 the Court issued a partial preliminary injunction pending the trial on the matter. The preliminary injunction authorized the TCA to initiate construction activities on the northern and southern portions of the Corridor, but prohibited construction activities on the central portion pending the trial in this matter. On June 14, 1994 the Court granted the TCA's motion for summary judgment in its entirety and lifted the preliminary injunction. The plaintiffs then appealed the matter to the Court of Appeals for the Ninth Circuit and requested an emergency injunction pending appeal. On June 22, 1994 the Ninth Circuit Court of Appeals granted plaintiffs' application for an injunction pending appeal in accordance with the terms of the District Court's prior preliminary injunction. In December 1995, the Ninth Circuit Court of Appeals affirmed the decision of the District Court and dissolved the injunction.
El Portal Roadway: An environmental action was brought against the Department of the Interior in 1999 to enjoin its El Portal highway reconstruction project. The complaint alleged violations of NEPA and the Wild and Scenic Rivers Act, and resulted in an injunction against a portion of the project pending further study, as described below. Work under the design-build contract was completed in October 2000. It appears that the agency responded to the injunction by removing the enjoined work from the contract.
Sierra Club v. Babbitt, 69 F. Supp. 2d 1202, 1999 U.S. Dist. LEXIS 16708, 50 Env't Rep. Cas. (BNA) 1263 (E.D. Cal. 1999). Flooding in January, 1997 severely damaged the El Portal road in Yosemite National Park, closing it for five months. The National Park Service determined that permanent reconstruction work was in order, and issued an environmental assessment for the project on August 22, 1997. FHWA's Central Federal Lands Highway Division awarded a design-build contract for the project on June 1, 1998, and construction work commenced in September, 1998. On February19, 1999 an action was filed by the Sierra Club and a local environmental group; plaintiffs filed a motion for summary judgment on May6, 1999; and on May 25, 1999 the defendants filed an opposition and counter motion for summary judgment. In his July 12, 1999 judgment, Judge Ishii ruled that numerous violations had occurred, but only enjoined a portion of the project--Segment D, the portion of the roadway extending from the 120/140 Highway split to the Pohono Bridge in the west end of Yosemite Valley. The decision prohibited any work within SegmentD (other than sewer repairs and necessary slope stabilization) until after completion of a Comprehensive Management Plan for the Merced River. With respect to the remaining 6.4 miles of the project, the judge prohibited the erection of any stream-side wall rising more than 27 inches above the surface of the road, but otherwise permitted work to proceed.
Legacy Parkway: In January, 2001, shortly following the Utah Department of Transportation's award of a design-build contract for the Legacy Parkway project, an environmental action was brought to enjoin the project. The Tenth Circuit issued an injunction in November 2001, after construction was already under way, and in September 2002 issued a decision invalidating the environmental impact statement and 404 permit in certain respects. As of October 2002, the design-build contractor is continuing to perform certain work not affected by the injunction, pursuant to a standby agreement. The Department has stated that it remains committed to finding solutions to the transportation challenges that the Legacy project is intended to solve, but it is still evaluating the situation and has not yet determined how it will proceed or what action will be taken with regard to the design-build contract.
Utahns for Better Transportation v. U.S. Department of Transportation (U.S. Dist. Ct., D. Utah No. 01-0007). On January 17, 2001, a coalition of environmental groups filed an action alleging violations of NEPA, the Clean Water Act and Section 4(f). On January 31, 2001, the Sierra Club filed suit claiming violations of air quality conformity requirements and that mobile source air emissions from the project will hinder attainment of ozone standards. On August 11, 2001 the judge dismissed the consolidated actions. The plaintiffs appealed to the Tenth Circuit, which granted a preliminary injunction in November 2001. On September 16, 2002, the Court remanded the case to the District Court judge, holding that the EIS was inadequate and that the Corps of Engineers had acted arbitrarily and capriciously in issuing a 404(b) permit. The decision was based on the following facts:
- elimination of an alternative alignment based upon inadequate cost estimates
- failure to consider alternative sequencing of the Shared Solution (i.e. expanding I-15, developing Legacy and expanding transit)
- failure to consider integration of the Legacy Parkway and transit
- failure to consider wildlife impacts (analysis of wildlife impact was inadequate because it was limited to the area within 1,000 feet of the right-of-way).
The court also held that the Corps of Engineers acted arbitrarily and capriciously in issuing a 404(b) permit, based on the following grounds:
- issuing a permit with insufficient information to determine whether an alternative alignment was practicable
- failure to consider whether a narrower median was a practicable alternative
- failure to consider alternatives that would reduce right-of-way requirements
- failure to consider the impacts to wildlife.
Discussion: The above cases show the necessity of considering the risk of environmental litigation in the design-build planning process. Projects that involve sensitive environmental issues are likely to be challenged, regardless of the delivery methodology chosen. Agencies should consider steps to reduce the likelihood that an action will be brought, to increase the probability of success if an action is brought, and to mitigate damages to the agency and the contractor if an injunction is issued.
Most agencies elect to complete the NEPA process prior to award of a design-build contract. Although a few agencies have chosen to award design-build contracts prior to completion of the NEPA analysis (in at least one case integrating the design-builder into the NEPA planning process), FHWA discourages such an approach. Regardless of the approach taken, one of the first decisions that must be made in planning a design-build procurement concerns the level of preliminary engineering required to ensure compliance with NEPA and similar environmental laws. This may vary from project to project and levels of preliminary engineering (and NEPA needs) may vary within components or sections of a project. In some critical NEPA areas, it may be necessary to take a piece of a project to 100% design.
As indicated by the below excerpts from the El Portal case, the judge in that case was concerned about the interrelationship between NEPA compliance and the agency's decision to use design-build:
[Concerns Regarding Lack of Opportunity for Public Comment and Description of the Project Used as Basis for FONSI]
"In their Reply, Plaintiffs reiterate at length their claim that the design/build nature of the Project did not provide an adequate project description. In response to Defendants' claim that the Phase I design plans were incorporated by reference into the Revised or Final EA, Plaintiffs correctly argue that both the Phase I design plans and the Request for Proposal ("RFP") were developed after the close of public comment, so that the public did not have an opportunity to review and comment upon them. Plaintiffs also correctly point out that the Final EA, into which Defendants incorporated by reference the Phase I design plans, was not subject to public comment. . . .
"In addition to arguing that the public did not have an opportunity to review the document relied upon by Defendants to demonstrate that they adequately defined the Project, Plaintiffs argue that NPS did not have adequate description of the Project before it reached its final finding of no significant impact. Plaintiffs argue that only the documents the agency had before it at the time it issued the FONSI can be relied upon to support Defendants' position. Specifically, Plaintiffs claim that Defendants could not have considered the Phase I design plans or the Biological Assessment, because they were published only a few days before the publication of the Revised EA." (69 F. Supp. 2d at 1216.)[The judge granted summary judgment on two causes of action regarding violation of NEPA.]
[Concerns Regarding Specificity of Revegetation Plans That Were the Basis for the Environmental Assessment]
"The court concludes that in essence, Plaintiffs contend that the revegetation plans provides by Defendants are not sufficiently specific, while Defendants argue that because of the nature of the Project as a design/build project, they are unable to provide site-specific revegetation plans until the Project is completed. After reviewing all of the parties' arguments, the court concludes that Defendants' reliance upon a revegetation plan that was not yet developed in issuing the EA adds weight to Plaintiffs' argument that substantial questions exist as to whether the Project will have a significant effect on the environment." (Id. at 1224.)
"Defendants assert that to date, ten orders for revegetation work have been issued, and that every one has been completed on time and in accordance with contractual requirements. Plaintiffs do not dispute this, or cite any defects in this work. Further, Defendants assert that the revegetation [**163] cannot be accomplished until after completion of the heavy earthwork, but that the revegetation plan for the Project is now being developed and will be implemented. The court finds that Defendants' failure to develop a revegetation plan before this time is clearly attributable to the "design/build" method of construction, and has resulted in an impairment of Plaintiffs' ability to assess the impacts of the Project. However, the court finds that Plaintiffs have not demonstrated irreparable injury in connection with the tardy completion of the revegetation plan sufficient to support injunctive relief. See Weinberger, 456 U.S. at 313 (holding that a federal judge considering a request for equitable relief is not obligated to grant an injunction for every violation of law)." (Id. at 1259.)
For the most part the judge's concerns appear to stem from an underlying belief that the agency should have proceeded with an environmental impact statement instead of an environmental assessment and FONSI. Nevertheless, the judge also indicated concern regarding the level of design and planning was used as the basis for the environmental assessment and FONSI and the fact that the public was not allowed the opportunity to comment on the design that was used as the basis for the environmental assessment. Consequently, even though the El Portal case was resolved at the district court level, and thus does not constitute binding precedent for unrelated cases, each agency that plans a design-build project would be well-advised to consider the concerns raised by the judge and take appropriate action to avoid similar arguments with regard to its project.
20.3. Contract Disputes
Disputes Regarding Contract Interpretation: There are relatively few published cases regarding design-build contract issues (which is consistent with the premise that use of design-build reduces the opportunity for disputes). Most of the reported cases appear to involve disagreements regarding the scope of the contractor's work. Design-build contract disputes generally fit into one of the following categories:
Contract documents include prescriptive specifications or a preliminary design that fails to conform to performance or other contract requirements.
Contract documents contain ambiguities such as failure to specifically describe work that the owner believed was included in the scope but that the contractor failed to include in its price.
Contract does not specifically deal with liability/responsibility for changes in project requirements affected by design-builder design choices (including matters such as right-of-way acquisition, utility relocations, construction of walls, replacement of impacted wetlands or habitat, remediation of contaminated materials or groundwater, and future operations and maintenance).
Reported cases in the first category are reflective of the general rule that contract interpretation is dependent on the specific contract terms, conditions and circumstances. In some cases the design-builder was required to provide an end product that complied with the contract requirements, and advised that it should have asked for a scope clarification during the procurement process. In others the owner was considered to have provided an implied warranty that the contract requirements will be met if the design and construction complies with the prescriptive specifications, regardless of exculpatory language in the RFP requiring proposers to examine the RFP documents for conflicting language and ambiguities and to ask the owner for clarification before the proposal due date.
In order to avoid disputes regarding the intent of the contract documents, it is critical for the owner to conduct a thorough review of the documents, prior to the proposal due date, to determine whether the project is accurately and completely described. In addition, where the documents give the contractor wide latitude in designing the project, the owner may want to include contract provisions to ensure that decisions by the design-builder will be in the best interests of the project.
QA/QC Issues: The case summaries reviewed did not reflect any reported cases regarding project quality. Nevertheless, a number of transportation agencies have had to deal with a failure of the design-build work product to meet the contract specifications which might have been avoided had proper QA/QC procedures been followed. Solutions include requiring the work to be corrected so as to comply with the requirements, requiring additional work to be performed to resolve the problem, requiring the contractor to pay for the reduction in quality (either through a reduction in the contract price or a payment to the owner), or a combination of the foregoing.
Disputes Regarding Change Order Pricing: The case summaries reviewed did not reflect any reported cases regarding change order pricing. This is an ongoing administrative concern for design-build as well as non-design-build projects, and disputes regarding pricing will undoubtedly ultimately reach the courts in the future. Issues that have arisen on various design-build projects include:
- Disputes regarding what should be considered a direct cost and what is included in the markup for overhead expense (such as CAD computer expense; bond premiums; costs of QC personnel; and overtime expense).
- Disputes regarding the amount of credit allowable for deleted work.
- Negotiations regarding the markup allowable for time and materials work.
Schedule-Related Claims: Although design-build may reduce opportunities for delay claims due to the transfer of control to the design-builder, it does not entirely avoid such claims. Whenever the project owner retains responsibility for aspects of the project (such as design reviews or provision of right-of-way), the possibility exists that the owner will cause a critical path delay. In addition, force majeure events may result in project delays. If a delay occurs, the potential liability can be significant.
Owner liability for such delays may be reduced by taking affirmative steps to avoid delay situations. It is also possible to provide contractually for the design-builder to assume a certain degree of responsibility for delays beyond the control of both parties. Notification requirements can also have the effect of reducing owner liability.
Disputes Involving Restrictive Specifications or Approval Requirements: Many owners are concerned regarding liability associated with "approvals" of design and construction, believing that the act of approval may, in and of itself, be deemed to result in a transfer of liability. Design-builders have been known to argue that approval of a design which deviates from the specifications constitutes a waiver of the right to later require the design to be corrected. There are very few cases in this area.
In Fru-Con Construction v. United States, 42 Fed.Cl. 94, 97 (1998), the court specifically held that the government's approval of design specifications furnished by a contractor did not relieve the contractor from responsibility for defects. The court held that the government's approval of specifications submitted by the contractor did "not relieve the Contractor of the responsibility for any error which may exist, as the Contractor . . . is responsible for the dimensions and design of adequate connections, details, and satisfactory construction of all work." (42 Fed.Cl. at 97, fn 1.) The court rejected the contractor's arguments that the government's approval constituted an implied warranty and that it relieved the contractor from responsibility for the design under the contract.
The case of Brunson Assocs, Inc., ASBCA No. 41201, 94-2 BCA ¶ 26,936 (1994) involved an Army Corps design-build contract for two fabric structures. The design-builder argued that the government should share in the liability for defective design on the theory of "comparative fault", since the government participated in the design review and approval process. The Board rejected the design-builder's arguments, holding that the government had not been negligent because its personnel were not actively involved in the design efforts and had no experience with these types of structures. Moreover, the defect that caused the structures to collapse hadn't been a subject of any design review comments by the government; nor was it discussed in design meetings. The Board also relied on a provision in the Federal Acquisition Regulation stating that review, approval and acceptance of the design by the government did not relieve the contractor from liability.
Based on a line of recent cases, it appears that requirements for owner approval of the design, when combined with a relatively high level of design provided by the owner, may result in retention of design liability by the owner. Three cases handed down in 2001 considered defective specifications and whether disclaimer language in the contract was effective to transfer liability for the defects to the design-builder. All of these cases resulted in rulings in favor of the design-builder, concluding that under the specific circumstances of each case the owner had retained liability for the errors. These conclusions were based in part on the relatively high level of design provided by the owner and the limited time allowed to the proposers to review the owner's design, combined with the degree of control over the post-award design retained by the owner in each case.
20.4. Summary of Legal Issues
There have been relatively few legal challenges to the use of design-build techniques. Where such challenges occurred, it was generally in the application of a particular design-build technique by an unsuccessful proposer, often due to a procedural error by the owner.
With regard to environmental challenges, the courts have found no conflict with the use of design-build techniques as long as there was compliance with NEPA requirements. Practically, this meant defining the project or portions of the project thoroughly enough to identify environmental impacts in the NEPA process.