LAW: The Contractor's Side

Beware of ‘innovative’ risks

Article December 28, 2000
Printer-friendly version

Design-builders and intelligent transportation systems (ITS) contractors beware. State DOTs and other public agencies may be asking you to sign negotiated contracts that put you at far greater risk than you may be aware. Do your contracts:

• Specifically exclude your proposal from the contract documents;

• Have no limitation on liability for damages;

• Require that you indemnify the DOT or public agency for its own negligence;

• Make you potentially responsible for consequential and indirect damages, including lost revenues;

• Exclude the differing site condition clause;

• Obligate you to long-term warranties;

• Make you responsible for costs incurred to remediate hazardous waste;

• Have substantial liquidated damages for late completion coupled with subjective criteria for “acceptance;”

• Make you responsible for obtaining environmental permits; or

• Make you responsible for complying with any changes made to applicable laws.

Over the last several years, I have been involved in negotiating and in some cases arguing over the terms and conditions of design-build and ITS contracts. The checklist above enumerates issues which have arisen.

Request for proposal

Design-build and ITS contracts are typically initiated by a DOT’s request for proposal (RFP). In the RFP, the DOT provides project information, proposal submittal procedures and proposal selection procedures. In addition, the DOT typically specifies a general scope of work, with any performance requirements, and the “formal contract” with terms and conditions in the RFP.

The contractor then submits its detailed proposal, including a fixed price or unit price for the work and services it intends to perform. After evaluation and award, the parties marry the RFP and proposal into a “conformed” contract document. Contractors need to be aware that if their proposal is either specifically excluded from the “conformed” contract document, low in the order of precedence, they may be required to perform a scope of work far in excess of what was included in their fixed-price proposal.

Design-build and ITS contracts are more risky than the standard design-bid-build contracts. Most contractors seek to limit their potential liability to the limits of their insurance. Most contractors also seek to specifically exclude the DOT’s right to recover “consequential” and indirect damages, including lost revenues. Contractors also seek to avoid indemnifying the DOT for its own negligence. On the other hand, some state DOTs have attempted to place these risks on the design-builder or ITS contractor.

Some DOTs seek to place the risk of differing site conditions on the design-build contractors, based on the theory that they should be able to ascertain the actual site conditions in their design. Contractors would be wise to either conduct a detailed geotechnical site investigation or include a contingency in their proposal.

Long-term warranties can create a substantial risk to the contractor; and, in some cases may make it more difficult to obtain a bond. The first issue contractors need to consider is the scope of the warranty. Is this a warranty on the design? If so, that is far more risky than the normal design contract. Is the contractor guaranteeing performance? For example, is an ITS contractor guaranteeing a stringent level of reliability for its state of the art technology? These and other issues can greatly increase the contractor’s risk.

Contingencies

Who is responsible to remedy hazardous waste found at the site? Contractors who accept that responsibility need to include some sort of contingencies in their proposal for both the potential cost of remediation and the time-related cost if the work is delayed.

One deadly combination for an ITS contractor is substantial liquidated damages provision, coupled with unclear or subjective acceptance criteria. The state-of-the art technology involved in ITS contracts has resulted in less objective acceptance criteria than on typical highway and bridge construction projects. In many cases there has been no “meeting of the minds” on how the acceptance criteria are to be measured.

Contractors need to determine whether the contract requires them to obtain necessary environmental permits. That responsibility historically has been the responsibility of the DOT. Obviously, there is a significant effort involved in obtaining a general permit from the Army Corps of Engineers and state environmental permits.

Finally, contractors need to determine whether they are responsible for complying with any changes in the law, without being able to seek an increase in the contract price.

Design-build and ITS contractors are being asked to shoulder more risks. It remains to be seen if the rewards from completing the projects outweighs the new risks.

About the author: 
Overlay Init