1. Value-Based Contracting- It’s Not Just Price Anymore
American Bar Association
Forum on the Construction Industry
2003 Fall Meeting
Value-Based Contracting- It’s Not Just Price Anymore
The Mayflower Hotel Washington, DC
Oct 2-3, 2003

2. Documenting the Best Value Relationship
Forum on the Construction Industry Fall 2003 Meeting
Documenting the Best Value Relationship
William J. Ernstrom
Ernstrom & Dreste, LLP
Rochester, NY
Eileen M. Diepenbrock
The Diepenbrock Law Firm
Sacramento, CA
October 3, 2003

3. Introduction
Best value contracting is a form of procurement not a form of contract;
Statutory restrictions;
Various standard form contract documents
3 sets and AIA
Starting point

4. AGC Documents

5. Overview

6. The PIAC Private Industry Advisory Council
Corporate Owners drawn from diverse sectors
Automobile manufacturing
Banking
Entertainment
Health Care
Insurance
Power Generation & Distribution
Retailing
Technology

7. DBIA Documents

8. General DBIA Philosophy
Derived from DBIA Contracting Guide
Process Oriented Document
Reflects best design/build practices
User-friendly & balanced
Expectation that parties will partner
Minimize disputes
Appropriate for any selection process and any type of project 49

9. The DBIA Contract Family
No. 520: Preliminary Agreement
No. 525: Lump Sum
No. 530: Cost Plus Fee with Option for GMP
No. 535: General Conditions 50

10. EJCDC Documents

11. EJCDC DESIGN/BUILD DOCUMENTS
Guide to Preparation of
Request for Proposal, Use of Documents,
and Supplementary Conditions
OWNER’S
CONSULTANT
OWNER
D-520 (or) D-525
O-D/B Agreements and
D-700
O-D/B General Conditions
D-500
O-OC Agreement
DESIGN/BUILDER
D-521 (or) D-526
D/B-Sub Agreement and
D-750
D/B-Sub General Conditions
D-505
D/B-E Agreement
ENGINEER
SUBCONTRACTOR 6

12. Proper Allocation of Risk

13. Proper Allocation of Risk
Risk Allocation
Standard of Care
Design Development process
Changes
Price, Scope and Time Related Issues
Ownership of Documents
Insurance and Bonding
Performance Issues – guarantees & tests
Indemnity & Limitation of Liability
Inspection/Acceptance/Warranty
Termination.

14. Risk Allocation

15. Allocations Of Risk Who will bear what risks?
Risk of Design
Risk of Construction
Who is best to bear risk?
How is risk best allocated?

16. The Owner’s Dilemma Owner-Contractor Implied warranty of design
Responsibility
Owner Claims: Economic loss doctrine

17. Owner-Design Professional
The Owner’s Dilemma
Owner-Design Professional
No warranty of plans
Breach of contract
Professional negligence

18. Allocating Risk Through The Best Value Relationship
Best value procurement permits fair allocation of risk
Permits bargaining of key contract terms
Goal: Balance perspectives and apportion risks fairly

19. Price, Scope and Time Related Issues

20. Scope Concept Documents/RFP Design Phase Services Construction
Preliminary Services
Overview of program
Schematic design
Completion of design
Construction

21. Price Price set at earlier point than traditional Design/Bid/Build
Incomplete project scope
Incomplete design and construction documents

22. Price Lump sum; adjustments per CO Cost plus fee with GMP Combination
Contingencies
Right to audit

23. Time: Construction Phase
Liquidated damages
Early completion bonus
Final completion/milestones
Duty to accelerate
Time extensions
Entitlement
Time only/No damages for delay prohibition
Time and money

24. Time: Design Phase Overall contract time v. Milestone
Damages to Owner from delays
Liquidated damages
Risk v. Fee

25. Changes

26. Changes During design and construction Additional money and/or time
Define compensable changes
Traditional pricing

27. Unknown Conditions Adjustment for DSC Shift risk of Type I
TYPE II is compensable
Conditions differ from those reasonably anticipated

28. Standard of Care

29. Standard Of Care
Design/Builder possesses professional capacity for construction and design
Design services to be performed according to applicable standard of care

30. Standard Of Care D/B’R: Reasonable skill and judgment
A/E: Care and skill ordinarily used by A/E’S practicing under same conditions at same time and locality
O and D/B’R proceed on basis of trust, good faith and fair dealing

31. Indemnity & Limitation of Liability

32. Indemnification Bodily injury/Property damage only?
Defense v. Indemnity for fees?
No fault v. Negligence?
Reciprocal?

33. Limitation of Liability
No liability for consequential damages
Limited to available insurance
Limited to fee or portion thereof

34. Termination

35. Termination Termination by D/B’R for cause
Payment for work performed + damages
Termination by Owner for cause
No payment prior to completion
Owner’s damages

36. Termination Termination by Owner for convenience
Payment for work performed + damages
Payment for % of remaining contract balance or % of fee

37. Performance Issues: Guarantees & Tests

38. Performance Guarantee
Spearin upside down
Minimum performance warranties-reasonable?
Standard forms do not address (DBIA exception)
Too loose/too tight? = a tight rope for Owner
Conflict between performance requirements and limitations on design perimeters
What’s the real project goal?

39. Performance Test Criteria Cost - how to allocate or share cost?
Adequate definition
Who will decide
Procedures/practice/protocols
Use of independent third party
Cost - how to allocate or share cost?
Retesting – the right/not the duty.

40. Performance Test Mixed Results Penalties
stair step the penalties
Bonus provisions
Penalties
Impact of project performance
Use of time zone approach
Up front consensus as to testing procedures & requirements.

41. Inspection, Acceptance and Warranties

42. Inspection, Acceptance and Warranties
The type and extent of warranties
Correction period
Warranty period
Difference between construction and design – the risks
Distinguish vendor/supplier warranties.

43. Design Development

44. Design Development The Owner’s Program Material Changes and Deviations
Progressive Sign-Off 18

45. Ownership of Documents

46. Ownership of Documents
Owner receives ownership of property rights, except copyrights
Termination
Owner may use for subsequent renovation and remodeling of the Work, but not for other projects w/o authorization of D/B
O’s use on other projects is at O’s sole risk; O defends and indemnifies 26

47. Insurance and Bonding

48. Insurance Professional Liability Insurance General Office Coverage
Project Specific

49. Bonding Coverage for design liability vs. design costs? Choices
GMP (if there is no GMP, then the agreed estimated cost of the Project, including design and construction),
Agreed estimated construction cost of the Project
Such Performance Bond shall cover the cost to complete the Work, but shall not cover any damages of the type specified to be covered by the insurance pursuant to Paragraph 11.2 and Paragraph 11.3, whether or not such insurance is provided or is in an amount sufficient to cover such damages.

50. END

51. Value-Based Contracting- It’s Not Just Price Anymore
American Bar Association
Forum on the Construction Industry
2003 Fall Meeting
Value-Based Contracting- It’s Not Just Price Anymore
The Mayflower Hotel Washington, DC
Oct 2-3, 2003