LAW: The Contractor's Side

Innovative contracting here to stay

Article December 28, 2000
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Recently, I read that a state legislative audit of highway construction projects in Washington found that approximately one-third of project changes were caused by inadequate field investigations, unclear specifications, plan errors, design changes or mistakes by a construction engineer. In other words, one-third of the project changes could have been avoided. I believe a review in most states would find similar results.

Shortly after reading about the audit, I made a presentation at the 1998 Symposium on Innovative Contracting sponsored by the Federal Highway Administration (FHWA). With the exception of a presentation on constructability reviews, I perceived that most of the innovative techniques discussed at the FHWA symposium did not address inadequate field investigation, unclear specifications, plan errors, design changes or mistakes by a construction engineer. Instead, there were presentations on the design-build method, cost-plus time bidding, warranties, and time and quality incentive/disincentives. Some states have emphasized warranties, yet most studies I have reviewed indicate the ability to control quality diminishes greatly once construction begins.

More on investigations and preparation

At a time when projects are increasingly more complex, state DOTs should strongly consider spending more on field investigations, preparation of constructable and clear plans and specifications. However, I sense many are spending less, while at the same time placing extraordinary risks on contractors by long-term warranties and contract special provisions that include big dollar disincentives (penalties) for late completion with no provision for time extensions.

Many contractors believe that the innovative techniques described at the symposium deprive them of the opportunity to fairly compete; or, place unreasonable risks on them. Those contractors believe that only mega-large contractors can afford to team with a designer and put together a proposal. They further believe that only mega-large contractors have the equipment and crews to propose a tight schedule for A+B bidding or meet a tight schedule for incentive/disincentive contract.

I believe state DOTs’ use of innovative techniques in highway construction is inevitable. The FHWA has published a pamphlet on innovative contracting listing states that have tried each of the techniques. I sense that if a given state has not tried anything innovative, it is akin to being ranked 50th in quality of public education. Innovation done simply to be innovative is hardly the right answer. Instead, innovative techniques should be implemented in a way that considers and addresses the needs of all of the “stakeholders” including the pubic, the government and the contracting industry.

Some states are utilizing design-build because of DOT resource constraints and because of the perception of cost and time savings. I believe there will be a growing trend to use the design-build approach for appropriate projects. For example, in the 1980s, time and money could have been saved if several of the cable-stayed and prestressed concrete segmental bridges had been built using design-build. Yet, I think it makes little sense to construct a simple $3 million to $5 million box girder bridge using the design-build approach.

Unreasonable risks

In some states the design-build team is being asked to take on unreasonable risks, including indemnification of the state DOT based on absolute liability even if the state DOT is negligent. Additionally, some state DOTs have chosen to eliminate the differing site condition clause and the relocation of utilities clause from the design-build contract. In some states, the design-builder is being asked to assume risks of environmental hazards, and is being put at financial risk if the permits and rights-of-way had not been timely obtained.

Innovation in time-related provisions have created significant disputes because the stakes are usually very high. In some, the time established by the state DOT is unrealistic. In other cases, state DOTs have made changes or delayed the contractor, but have refused to extend either the incentive date; or, in some cases the contract completion date. As a result, contractor’s have been forced to accelerate their work at great additional cost to avoid assessment of $15,000 to $20,000 per day in disincentive penalties. Contractors will seek to recover both the cost of acceleration and the loss of the incentive.

Readers interested in attending a one day workshop on the legal aspects of innovative contracting or interested in obtaining a copy of the written material I prepared for the symposium may send me an e-mail or write to me in care of the editor.

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