This post is about “designing” the web of contracts for design and construction projects. That web is called a “project delivery method,” and there are many ways to engineer that web of contracts.
The article is not about claims or disputes. Not overtly, at least. It does, however, have a decided “dispute resolution” overtone because good project delivery methods and contracts can minimize disputes.
Good Project Design Can Minimize Design and Construction Disputes
My suspicion? If you conducted a “post-mortem” on most protracted design and construction claims, I bet you could trace the problem which led to the claim back to a faulty project design. I am talking about litigation which wastes everyone’s time and money, and goes nowhere for years, destroying relationships along the way.
When I say faulty project design, I mean the wrong project delivery method. The wrong contract forms, and the wrong terms. The wrong insurance. And the wrong mentality among the project participants.
I can point to no empirical data. But that is my strong suspicion. I base it on nearly two decades of litigating, arbitrating, and mediating design and construction disputes, and negotiating design and construction contracts.
One of my mentors from my days as a partner in Schiff Hardin LLP’s Construction Law Group once said something that I will never forget. He said smart design and construction businesspeople are beginning to ask – why are we paying our lawyers so much to prepare for trials which seldom occur?
More and more, Real Estate Developers and Project Owners – and other participants in design and construction projects – are starting to ask that question. They are annoyed with litigation attorneys and high attorneys’ fees.
That is understandable. I agree. I am a big proponent of early cost, efficient dispute resolution on design and construction projects. But the problem has deeper roots. It is not just about lawyers who prolong litigation for no good reason. That is the second half of the problem. The first half is about the faulty project design which empowers these attorneys to “find the gray areas” which tend to prolong litigation.
My thesis? When you negotiate design and construction contracts with a litigator’s mentality, with the end in mind – anticipating what might go wrong, negotiating smart contracts which promote early, cost-efficient dispute resolution, and getting proactive about dispute avoidance – you can promote good outcomes. You can avoid or minimize disputes, shorten the pain and distraction that comes with litigation and arbitration, and complete projects successfully.
Real Estate Lawyers, Project Delivery Methods and Contracts
This post is modeled on my presentation entitled “Construction Contracts Primer: What Real Estate Attorneys Should Know” to The Chicago Bar Association’s Real Property Law Committee in December 2020. It focused on selecting the right project delivery method, the insurance and pricing ramifications of that decision, all before selecting the type of design or construction contract. If you are interested, use these links to download my Slide Deck or the Written Materials from that presentation. Or, you can watch the entire 75 minute presentation by clicking that link.
Why did I direct my Chicago Bar Association presentation toward real estate attorneys?
Because I am not a real estate attorney. I have never handled a lease. I have done no zoning or entitlement work. I do not arrange construction financing. I am no expert in real estate law.
I am a design and construction attorney. I represent the same kind of clients as real estate lawyers, who sometimes dabble in design and construction contracts. The problem is that many do a poor job.
Often, real estate lawyers just fill-in-the-blanks on standard form agreements, like AIA Contract Documents. They frequently overlook the “less obvious” issues they should consider when negotiating design and construction agreements for our common Real Estate Developer, Project Owner, Architect, Engineer, Design-Builder, and Contractor clients.
I hope the project delivery method diagrams and illustrations below will be fun and helpful. Not just to real estate attorneys, but to the common clients we serve: Real Estate Developers, Project Owners, Architects, Engineers, Design-Builders, Contractors, and other participants in the design and construction industry.
Pro Tip: Don’t Skip Steps #1 Through #3!
The slides below are from my Chicago Bar Association presentation linked above.
Often, when real estate attorneys and their clients prepare to engage in design and construction projects, they skip steps one through three, shown below, and jump immediately to step four:
There is an instinct to overlook project delivery methods and jump right to design and construction contracts.
My Real Estate Developer and Project Owner clients will sometimes come to me and say, “I have a new project. It is already half baked. Here is a contract form we will use. The other party has already put in its preferred contract terms. Now, you need to comment and make it better.”
Don’t get me wrong. I am always happy to help.
However, skipping thoughtful consideration of steps one through three – and jumping right to contract form selection, and negotiation of contract terms – is a missed opportunity. Often, once my clients have got to step four, they hesitate to go backward. This can keep me from contributing maximum value by helping to design the project.
Common Project Delivery Methods
Getting less abstract and somewhat closer to what real estate attorneys might recognize, here are some of the common design and construction project delivery methods:
Even though these terms may be familiar, few real estate lawyers are deeply versed in their advantages and disadvantages – and why a Real Estate Developer or Project Owner might prefer one project delivery method rather than another. That is what I address below.
Traditional Tripartite Project Delivery Method: Design-Bid-Build
This among the most common project delivery methods. Here, the Project Owner separately hires the lead design professional and the constructor using a separate Owner-Architect Agreement and Owner-Contractor Agreements:
By the way, I love diagrams. You will see a lot in this post. When you see a solid black line on a diagram, that line represents a contract between the parties identified in the boxes.
In this common arrangement, the Project Owner separately hires the Architect or lead design professional under one contract. Then, the Owner enters into a separate contract with the constructor or the General Contractor.
But we need to consider not just who is contracting with whom, but also what are they doing? What is the sequence of the design effort, pricing the construction cost of that design, and then the construction effort itself?
If you look to the upper right of the chart, you will see that the design is completed before pricing and construction. This is known as “Design-Bid-Build” or “Design-Negotiate-Build.”
There are advantages and there are disadvantages to this traditional tripartite project delivery method.
Advantages of the Traditional Tripartite Project Delivery Method
One of the big advantages – for Project Owners who are only occasional consumers of design and construction services – is the direct contract between the Owner and the Architect. There are good reasons why the Project Owner might want to have a direct contract with the Architect. As I discuss in this video, Architects can help protect owners from construction project problems. The Architect can play a big role in “keeping an eye on” the contractor. The Architect can do things like review the contractor’s payment applications and observing the construction as it proceeds.
When I say “keep an eye on” the Contractor, I do not mean that in a pejorative way. However, the reality is that this common tripartite project delivery method – intentionally – sets the Architect and Contractor up as adversaries, arguably to the benefit of the Project Owner. That is one of the delivery method’s main features.
Because the Owner has a direct contract with the Owner, the Architect owes its duty of loyalty to the Owner. It is the Architect’s job to “tattle on” the contractor. To advise the Owner when the construction work might have a problem. Or when the Contractor is asking to be paid more money than it is entitled on any given month.
Similarly, it is the contractor’s responsibility to identify design problems to the Owner. To suggest to the Owner value engineering options or design changes which might help improve the project, in terms of cost or schedule or constructability. The Contractor’s client is the Owner, to whom the Contractor owes its duty of loyalty.
Another advantage is that the traditional tripartite method of project is delivery is so common, the design and construction marketplace is comfortable with this kind of project. Compared to some of the more complex project delivery methods discussed below, this one is arguably the simplest to implement correctly without inviting claims or problems.
Yet another advantage? The Architect’s construction documents are typically complete before they are priced by contractors. This means the owner might enjoy more accurate pricing. When the plans and specifications are complete, the Contractor need not wonder about the Architect’s and Engineers’ design intent.
When contractors bid or negotiate construction pricing without a clear understanding of design intent, do you know what happens? They are forced to include financial contingencies to offset their risk. The Contractor says, effectively, “I don’t know what the Architect means here, so I better add another 1% to my bid pricing.” The more complete the drawings and specifications, the less the Contractor must guess at design intent, so its pricing can be more accurate.
Also, when the Architect’s and Engineers’ construction documents are well-detailed and complete before construction begins, the odds of design and construction defects decreases. Sometimes, on “fast tracked” projects, construction work begins at the project site before the designer has issued “for permit” or “for bid” or “for construction drawings and specifications. This is a feature of some of the project delivery methods discussed below.
All things being equal, when the design is complete before construction begins, the odds of a good design leading to a good construction effort increases. The less guesswork the better. The more the design effort proceeds sequentially, without undue rush or less-than-optimal sequencing, leading to a single package of construction documents, the less likely it is that design errors will lead to construction problems.
Disadvantages of the Traditional Tripartite Project Delivery Method
What are the disadvantages? One is a lack of Contractor input during the design phase.
In recent decades, a consensus as developed that it benefits both the Project Owner and the Architect to have the Contractor involved in the design phase. It benefits everyone when the Contractor can whisper in the ear of the Architect, and its engineering subconsultants, about issues like constructability and construction costs. Design professionals tend to be much less well versed in the logistics of construction and how design can affect construction costs.
Another disadvantage to the traditional “Design-Bid-Build” or “Design-Negotiate-Build” tripartite method of project delivery is slower project delivery time. Look at the diagram above; specifically, the upper right hand corner. You can see that the design effort, the pricing effort, and the construction effort are sequential. The occur back-to-back. Construction must wait until the pricing effort is complete, and pricing must wait until the design effort is complete.
So if you represented a Real Estate Developer that says, “I’ve got a tenant, I signed a lease, my project must be finished in a short timeframe,” or “my JV partner or lender needs me to have a shovel in the ground in one month,” the sequential Design-Bid-Build or Design-Negotiate-Build probably will not work for the Real Estate Developer. The Architect’s and Engineers’ design will not be 100% complete in that short timeframe. Under this “sequential” phase project delivery method, slower project delivery time must be balanced against the advantages listed above.
Pros and Cons of the Traditional Tripartite Project Delivery Method
To summarize, here are some advantages and disadvantages of the traditional tripartite method of project delivery, where the Owner separately hires the Architect and Contractor, and the design and construction effort occur one after the other, perhaps in service of the “price assurance” and “fewer defect” upside:
AIA Contract Documents: Traditional Design-Bid-Build Approach
The AIA Contract Documents are divided into nine “families” based on the project delivery method and the type of design and construction project. The “Conventional Family” or “A201 Family” of AIA Contract Documents, partially depicted below, can implement the traditional tripartite project delivery method:
Most real estate attorneys, and their Project Owner and Real Estate Developer clients, are familiar with only a handful of AIA Contract Documents. Most are familiar with the three most widely-used AIA Contract Documents:
- B101- 2017 Standard Form of Agreement Between Owner and Architect
- A101- 2017 Standard Form of Agreement Between Owner and Contractor where the basis of payment is a Stipulated Sum
- A201- 2017 General Conditions of the Contract for Construction
However, there are dozens more AIA Contract Documents in the “Conventional Family” or “A201 Family” in order to implement the traditional tripartite method of project delivery.
These AIA Contract Document numbers include: A101, A101SP, A102, A103, A107, A121, A201, A201SP, A221, A401, A401SP, A503, A521, A701, B101, B101SP, B102, B103, B103SP, B104, B106, B107, B108, B109, B121, B144ARCH-CM, B201, B202, B203, B204, B205, B206, B207, B209, B210, B211, B212, B214, B221, B252, B253, B503, B509, C101, C102, C103, C201, C202, C401, C401SP, C402, C421, C422, D503, and others.
For a more complete list of the AIA Contract Documents which comprise the Conventional A201 Family, check out that link. Even attorneys who may be disinterested in the more exotic project delivery methods discussed below can benefit from clicking that link and learning about the most basic AIA Contract Documents.
Fast-Track Design and Construction Projects
Returning again to the “speed of project delivery” issue, what you have at the top of the next slide is the traditional method is what we just talked about: where you complete the design first, and then bid or negotiate, and finally build the project, all of which leads to a project of longer duration from start to finish:
There are ways to “fast-track” design and construction projects so the pricing exercise can happen simultaneously with the design phase, and some construction work can even begin. Of course, things like site work and perhaps even pouring foundations can begin before the design is 100% complete. It is unnecessary for the interior design and fixtures, furniture and equipment (FF&E) to be finalized before early construction tasks commence.
If you represent Real Estate Developer or Project Owner with a pressing need to commence and complete the project quickly, you need think about how to “arrange the chess pieces” so that you can fast-track the project. That might mean pursuing one of the project delivery methods discussed below.
One downside of fast tracking a design and construction project is a certain “loss of control” over the project. For example, if the construction cost pricing exercise will occur before the design is done, the pricing is unlikely to be as accurate – and financial contingency free – as it would if the design was complete before it was priced.
Worse, if you pour foundations and erect steel on a complicated project, and then realize “too late” that some of the initial design assumptions were inaccurate, the project can have many problems. The Project Owner can face additional project costs through change orders or requests for additional services fees, delay, and myriad other issues. When we talk about the loss of control that comes through fast tracking, that is its essence.
That is one reason I am a big fan of the next project delivery method, the Design-Build method of project delivery. One advantage of Design-Build is the ability to fast-track the project without that loss of control.
The Design-Build Method of Project Delivery
The hallmark of the Design-Build project delivery method is that the Real Estate Developer or Project Owner hires a single party to provide all of the project’s design and construction services:
In Design-Build, the “intentionally adversarial” relationship between the Architect and Contractor, found in the traditional tripartite method of project delivery, is not present. The lead design professional and the constructor are on the same team. The Contractor is not awaiting a completed set of construction documents to formulate its bid. Nothing stops the Architect and its engineering subconsultants from working closely, with the General Contractor and its trade contractors and vendors, during the design phase – both to improve the design, to get more accurate and quicker pricing, and to facilitate a “fast tracked” start to the construction work of the project.
As you can see from the upper right of this Design-Build diagram, the design and pricing and construction functions can overlap, reducing project time. That “fast tracking” without the “loss of control” is one of the principal advantages of the Design-Build method of project delivery. Exactly how the design and construction teams work together on Design-Build projects depends on how well they are managed, and how the “chess pieces” are arranged among the various parties who are involved in the Design-Build project. In other words, who contracts with whom.
Design-Build projects can vary considerably. The Design-Builder in the Design-Build diagram, above, which has a contract with the Project Owner, take many forms. A Design-Builder might be a developer with in-house design capabilities, i.e., licensed Architect and Engineer employees. The Design-Builder could be a joint venture between construction and design companies. There are many other potential Design-Build variations. What makes a Design-Build project is that the Project Owner hires one party to provide both the project’s design and construction services.
The Contractor-Led Design-Build Project Delivery Method
The most common form of Design-Build is “Contractor-Led Design-Build,” a project delivery method where the design team is hired as subconsultants to the general contractor Design-Builder:
That most Design-Build projects are “contractor-led” is kind of an historical accident.
Architects have a lot in common with lawyers. As professionals, what we are good at – or maybe not so good at – is pairing a scope of services with an estimated number of hours it will take to complete those services. This makes design professionals, like attorneys, perhaps somewhat risk averse.
Unlike contractors, Architects and Engineers are not used to guaranteeing things like the price and schedule of a design and construction project. Contractors tend to be much more entrepreneurial and risk-taking. They guarantee price and schedule all the time.
Also, many would say it is appropriate for the Contractor to lead the Design-Build team because – when it comes to worrying matters of dollars and sense, costs and constructability, and getting the project done on time and on budget – there may be some advantage to having the Contractor in the lead. I do not necessarily disagree.
However, when the Owner is weighing trade-offs between costs, constructability, design features, and the wisdom of value Engineering choices, there is a good argument that a design professional is best trained to advise the Owner. For example, if the Design-Builder general contractor says, “sure, I can still bring the project in on budget, despite all those unexpected change orders, we can simply value Engineer and cheapen the mechanical system.”
Now, the Architect and Engineers might think this is a terrible suggestion. But, since the design team works for the Design-Builder, the Architect and Engineers have something of a conflict of interest. In “Contractor-Led Design-Build,” they are somewhat muzzled. Somewhat unable to deliver that good advice to the Owner, over the objections of the Design-Builder – which may be much more interested in completing the project, than long term life cycle considerations.
Like everything, there are trade-offs associated with selecting the party who will serve as the Design-Builder. The party that will lead the Design-Build team. There are advantages to “Contractor-Led Design-Build.” However, for various reasons, I am a big proponent of the project delivery method set out in the next slide: “Designer-Led Design-Build.”
I have both Architect and Engineer clients who practice this “designer-led” project delivery method. It can take the form of “Architect-Led Design-Build” or “Engineer-Led Design-Build,” depending on the project:
When it comes to weighing building performance over decades verses costs and constructability and value Engineering changes, I would argue that an Architect or Engineer is better equipped to give the Project Owner good advice. I am a big proponent of Designer-Led Design-Build.
Most Architects and Engineers are scared to lead Design-Build teams, so “Designer-Led Design-Build” is not something you see often. I write about why design professionals should not be afraid to lead Design-Build teams here. For my video about why Architects and Engineers are – understandably – scared to lead the construction of their designs, click here. For a slide deck entitled “Architect-Led Design-Build: A Practical Business Plan,” which I prepared with the help of my former Schiff Hardin LLP partner and mentor, Mark C. Friedlander, click here.
The long and short of it? Insurance brokers and attorneys, like me, have scared design professionals into thinking that “Designer-Led Design-Build” is too risky. Traditionally, we are guilty of advising Architects and Engineers make no warranties or guaranties, and to take other precautions, by contract and otherwise, to not invite claims that their professional liability insurance would not cover. That is not bad advice, in the right context.
I wish more Architects and Engineers knew they can structure their relationships, both contractually and within their corporate structures, to take the risk out of “Designer-Led Design-Build.”
This is counterintuitive, I know – but “Designer-Led Design-Build” done correctly can actually be a lot less risky for design firms than their traditional “design only” scopes of services.
This is not theoretical. I have given speeches about “Designer-Led Design-Build” everywhere from coast-to-coast. I am helping both Architect and Engineer clients implement “Designer-Led Design-Build” right now.
If you want to know more about “Designer-Led Design-Build,” shoot over an email: firstname.lastname@example.org. Suffice to say this project delivery method has substantial upside not just for Project Owners and design professionals, but also for their General Contractor teammates who love when designers hand them projects on a silver platter.
Using Criteria Professionals Control the Design on Design-Build Projects
Getting more control over the architectural and engineering design – and a better overall understanding of what kind of project the Project Owner or Real Estate Developer is getting for its money – is a substantial reason for Project Owners and Real Estate Developers prefer “designer-led” to “contractor-led” Design-Build.
Think about it. When an Owner hires a Contractor to lead the Design-Build team, as a matter of necessity, the architectural and engineering design cannot be complete. If the design were complete, that would imply another project delivery method. Namely, a delivery method where the Owner has separately hired the Architect or Engineer.
So how does a Project Owner or Real Estate Developer know what it is buying through a “Contractor-Led Design-Build” project? One strategy is for the Owner or Developer to cross its fingers and hope. A better strategy might see the Owner hire a “criteria professional” to help set out the Owner’s design requirements in a contractually meaningful way:
The diagram above shows the common “Contractor-Led Design-Build” project delivery method, with a twist. Here, the Project Owner has hired a consultant – the criteria professional – under a direct contract.
A criteria professional is typically an Architect or an Engineer. He or she should have a strong understanding of building performance and construction. The criteria professional should work with the Project Owner or Real Estate Developer to
develop an exhaustive list of criteria for the finished project. Often, that well-developed criteria are stated as a “performance specification” to guide the Design-Builder’s design effort. Performance specifications, when incorporated into the Design-Builder’s contract, can help define the requirements of the successful Design-Build project.
So what does that look like in practical terms?
Rather than the Project Owner having to take the Design-Builder’s word that its mechanical design will be appropriate – say, a correctly sized chiller – the Project Owner can incorporate a requirement into the Owner/Design-Builder Agreement that the chiller be “capable of continuously maintaining an interior temperature of 76 degrees Fahrenheit while the outside temperature is 100 degrees Fahrenheit.” That is a simple example of a performance specification.
Sometimes well-advised Real Estate Developers and Project Owners incorporate detailed performance specifications into their contracts with Design-Builders to ensure that it designs the project within certain parameters. Otherwise, the Project Owner may have little contractual means of exercising control over the Design-Builder’s design.
In fact, on larger projects, it would not be uncommon for a criteria professional (which might be called something else on larger projects) execute the first 30% of the project’s design, before handing that preliminary design and its performance specifications over to the Design-Builder to complete the design. One might refer to the criteria professionals 30% design as “bridging documents.” I have always assumed that is because these documents “bridge the gap” between the Project Owner’s project-specific needs and the design of the Design-Builder, placing constraints on the Design-Builder to ensure that the Project Owner gets the project it needs.
Here is more detail on how Project Owners can use criteria professionals to protect them on Design-Build projects:
If you are a Project Owner about to engage in a Design-Build project, you might first wish to consider what you might lose by not having a direct contract with the lead design professional, the lead Architect or Engineer.
Hiring criteria professional, under direct contract, is one of several ways for Project Owners to enjoy the advantages of a “Contractor-Led Design-Build” project – while still exercising some contractual control over the Design-Builder’s design and construction efforts.
Pros and Cons of the Design-Build Method of Project Delivery
Design-Build, like all project delivery methods, has its advantages and disadvantages.
The Project Owner will enjoy “single point responsibility” in the event of problems – in other words, the Architect and General Contractor will not point fingers at one another if a project problem occurs. The Design-Builder is responsible to the Project Owner for both design and construction problems. That is good for the Project Owner.
The Project Owner might not enjoy the same unbiased advice from the Architect than had the Project Owner signed an Owner-Architect Agreement, hiring the Architect directly. If the Design-Builder wants to suggest a value engineering design change to the Project Owner, the Architect may not warn the Project Owner if it disagrees with the proposed change. That is because the Architect’s client is the Design-Builder, to whom the Architect owes its duty of loyalty.
That might not be a problem – if the Project Owner is a sophisticated Real Estate Developer who is a frequent consumer of design and construction services. In that case, the Project Owner might have the in-house ability to manage the project and assess the recommendations of the Design-Builder.
If the Project Owner is an institution which infrequently designs and constructs, it might be better off to directly hire the Architect and benefit from its unvarnished advice. Alternately, the Project Owner could retain a criteria professional to help it exercise control over the design of the project.
What Makes the Design-Build Project Delivery Method Different?
This slide summarizes some advantages and disadvantages of the Design-Build project delivery method.
The Project Owner or Real Estate Developer can benefit from the “fast tracking” without the loss of control. It gets “single point responsibility,” meaning that it can sue the Design-Builder for both design and construction problems. It also means that the Project Owner will not face Contractor change orders for design problems.
The flipside is that the Architect owes its duty of loyalty to the Design-Builder, not the owner. Unlike in the traditional tripartite method of project delivery, the Architect does not “police” the Contractor for the owner’s benefit.
The owner has the advantage of greater and earlier cost certainty, even if the project is fast tracked. However, the Design-Build Agreement between the Project Owner and the Design-Builder must be signed, and the constructor must be chosen before the design is complete – so the price of the Design-Build Agreement must be “negotiated” rather than “competitively bid.” This is not necessarily a bad thing, but negotiated pricing tends to be somewhat “richer” for the builder than when it is forced to compete, in terms of pricing, with other bidders.
The Architect and its engineering subconsultants can work closely with the General Contractor, and its trade contractors and vendors. Theoretically, this can help the project team make the best use of Building Information Modeling (BIM). BIM is a three dimensional and collaborative means of design where various parties can make their respective contributions to the “BIM Model Elements” which comprise the “BIM Model.” How effective the design and construction teams are able to work together depends, heavily, on whether they can cast off their typical roles as adversaries.
AIA Contract Documents: Design-Build Method of Project Delivery
The “Design-Build Family” of AIA Contract Documents, depicted below, is appropriate when the Project Owner will enter into a single contract with the Design-Builder to furnish both design and construction services:
The AIA Contract Document numbers within the “Design-Build Family” include: A141, A142, A145, A441, B142, B143, C141, C441, G704DB, G741, G742, G742C, G742S, G743, G743C, G743S, G744, G745, and others. For a more complete list of the AIA Contract Documents which comprise the Design-Build Family, check out that link.
I should make a few points about those AIA Contract Documents in the Design-Build Family.
A wide variety of project participants can, theoretically, serve as the Design-Builder in the orange box depicted above. It could be a Design-Builder who contracts for all design and construction services. It could be an integrated Design-Build company with in-house design and construction capabilities. It could be a joint venture between separate design and construction companies. I could envision even more variations on that theme.
For example, the Design-Build Family of the AIA Contract Documents works with either “Contractor-Led Design-Build” and “Designer-Led Design-Build,” where the Contractor or designer, respectively, leads the Design-Build team.
The AIA Contract Documents in the Design-Build Family are best suited for a Project Owner or Real Estate Developer who knows – from the outset of the project – that they wish to use the Design-Build project delivery method and are content to “price the construction work” based on negotiated pricing rather than competitive bidding.
Let me (try to) dumb that down.
If the Project Owner might want to use competitive bidding (at the prime constructor level), the AIA Contract Documents for Design-Build are an ill-fit for that specific project. Sure, competitive bidding at the subcontractor and trade Contractor level is possible – and even common – on Design-Build projects.
However, by definition, on a Design-Build project, the owner hires the Design-Builder before the architectural and engineering design is sufficiently developed for competitive bidding. This means that the owner of a Design-Build project is forced to negotiate for, rather than solicit bids for, construction pricing.
I do not mean to suggest that is a bad thing. It is just part of the trade-offs that a Project Owner must consider when it weighs whether to use the design-build method of project delivery or to hire the lead designer directly.
Why can’t the Project Owner hire the Design-Builder after the Architectural and Engineering design is sufficiently developed for competitive bidding, you ask?
In that case, the Project Owner would have, by definition, at some point earlier already hired the lead design professional to develop the design under a direct contract. That means it is not a Design-Build project.
Now, I suppose there could be exceptions to that rule. The owner could hire the Architect to partially develop the design, use that design as the basis to select a Contractor Design-Builder, and then force the Architect to complete the design under a subcontract with the Design-Builder. But that would not present the hallmarks of a “good” or “sensible” Design-Build project, where the design and construction teams work together from the outset in the spirit of cooperation.
For more on the Design-Build Family of AIA Contract Documents, click that link.
Multiple Prime Contractors Method of Project Delivery
The next project delivery method is known as “Multiple Prime Contractors.” As you can see from the diagram below, the owner acts as its own General Contractor (sometimes through a Single-Purpose Entity, perhaps an LLC, like the Project Owner’s “general contractor” entity depicted below). There is no role for traditional General Contractor.
This means that the owner need not pay the General Contractors fee and markup for overhead. The downside, of course, is that the Project Owner is ultimately liable for management and coordination problems which may occur on the project.
Losing out on the General Contractor’s managerial expertise is not something Project Owner should do lightly to avoid paying its markup. Few General Contractors execute projects using their own employees, their own forces. Most all of the work is subcontracted out to trade contractors and suppliers. They report to the General Contractor, which is something of a professional manager for the delivery of construction services.
So what could go wrong for owners who act as their own General Contractors?
Let’s say the project is in downtown Chicago. Assume space around the project site for storage of materials and equipment is limited. Under the schedule, assume that various contractors have the right to use certain “lay down areas” to store their materials and equipment at various points. Now, assume that the schedule has slipped a few days, and one contractor has failed to vacate the lay down area on time.
Had the owner hired a General Contractor, odds are that problem would have been timely noted and addressed. However, if the Project Owner has itself hired Multiple Prime Contractors, the conflict might not be noted until a dozen trucks roll up with steel beams – and nowhere to unload them!
This could – and likely would – cause a substantial problem for the Project Owner, besides substantial claims and change orders for reimbursement of the contractors’ extra costs.
Now, there are good reasons for Project Owners to select the Multiple Prime Contractors method of project delivery. I do not imply otherwise. But Project Owner who select this delivery method may be wise to consider getting some managerial assistance from a Construction Manager. Someone who can replace the General Contractor – and manage the Multiple Prime Contractors so they do not get in each other’s way.
The Multiple Prime Contractors method of project delivery looks like where the owner hires a Construction Manager as Adviser to assist with the project:
The Multiple Prime Contractors delivery method is compatible with this construction manager as adviser delivery method. The chart above depicts the Construction Manager in a direct contract with the Project Owner. It will have the benefit of the Construction Manager’s expertise in managing the multiple prime contracts.
Construction Management Project Delivery Method: A Spectrum of Options
The Construction Management method of project delivery is not a single delivery method. It is a spectrum of options. A sliding scale which can take many forms, depending on the specifics of the project:
To the left of the spectrum you will find the Construction Manager as Adviser (CMa). All they provide Project Owners is a layer of consulting, coordination and management for fee. The CMa is not in contract with the project’s various constructors and the subcontractors.
If you go all the way to the other side of the spectrum, you will find the Construction Manager as Constructor (CMc). The CMc delivery method is quite similar to the traditional tripartite method of project delivery, where the Project Owner hires a General Contractor to hold the trade contracts and subcontracts.
So what is the difference between an owner hiring a General Contractor versus hiring a CMc? The answer is that the CMc is typically involved in the design phase, whereas Project Owners tend to hire General Contractors later. The CMc provides various preconstruction services – like cost estimating services, and advise about constructability – during the project’s design, and then switches over to serve as the prime constructor when the design is complete.
The key question to determine where we fall on the spectrum: is will hold the contracts with the various trade contractors and subcontractors? If it is the Project Owner, you have CMa. If the CMc will hold those contracts you have, well, a CMc method of project delivery.
There are other options too. For example, if the Construction Manager will sign the subcontracts, but do so in the Project Owner’s name as its disclosed agent, you have “agency” Construction Management.
The next two slides graphically make the differences between CMa and CMc quite clear:
Watch what happens when we switch from a CMa to a CMc project:
As you can see, the CMc replaced the General Contractor. Since it is atypical for an Owner to use both CMa and CMc on the same project, in the CMc slide above, the CMa is no longer part of the project team.
AIA Contract Documents: CM as Adviser and CM as Constructor
What are the AIA Contract Documents for the Construction Management method of project delivery? Funny you should ask…
Just as COVID-19 hit, I was set to give a presentation on AIA Contract Documents’ new Construction Manager as Adviser contract documents, with several other esteemed construction attorneys, at the American Bar Association’s (ABA) Forum on Construction Law Annual Meeting, between April 22-24, 2020, in Seattle, Washington. At the time, when Seattle was the COVID-19 epicenter, it was a no-brainer to cancel the Annual Meeting. We had no idea how widespread the pandemic would become; so there were lots of jokes about “not going to Seattle!” I was honored that my friends at the AIA asked me to give that presentation, and hope to give it at the ABA Forum on Construction Law’s Annual Meeting in 2021. Meanwhile, I turned the presentation into a CMa and CMc article, click here.
Since the Construction Management method of project delivery is a spectrum of options, not a single delivery method, many AIA Contract Documents could be used. In fact, I believe the Construction Management Family of AIA Contract Documents includes nearly 80 individual documents.
This is one way to implement the CMa project delivery method with AIA Contract Documents:
This CMa diagram is actually not as complicated as it looks.
The design consultants are hired by the Architect using AIA Document C401-2017. The subcontractors are hired by the Contractor using AIA Document A401-2017. That is just like any other project; the C401 and A401 are not specific to Construction Management projects. There is nothing complex about the Project Owner hiring the Architect using AIA Document B132-2019, although that is an Owner-Architect Agreement specific to CMa projects. There is also nothing complex about the Project Owner hiring the CMa using AIA Document A132-2019, although that is also a CMa project delivery method-specific contract.
What makes this CMa slide look confusing is that the owner is using a CMa with the Multiple Prime Contractor delivery method. That explains why there are three gray boxes marked “contractor.” As you can see, the Project Owner directly contracted with Multiple Prime Contractors using AIA Document A132-2019, a contract document also specific to the CMa delivery method. The dotted line between the CMa and the prime contractors represents the communication, coordination, and management that the CMa provides among the prime contractors, for the Project Owner’s benefit.
For more on the AIA Contract Documents Construction Manager as Adviser Family of Documents, click the link.
One way to implement the CMc project delivery method with AIA Contract Documents is depicted here:
The CMc contract documents appear to be even more straightforward than the CMa documents.
The Project Owner will hire the CMc using AIA Document A133-2019 when it is protected by a Guaranteed Maximum Price (GMP); if there is no GMP, the CMc is hired using AIA Document A134-2019. Both the A133 and A134 use AIA Document A201-2017 as their General Conditions. In the CMc approach, just like the traditional tripartite approach, the Architect performs the typical A201 General Conditions-inspired construction administration functions in the construction phase. That both the tripartite and CMc delivery methods utilize the A201 General Conditions demonstrates the similarities between those approaches.
For more on the AIA Contract Documents Construction Manager as Constructor Family, click the link.
Last but not least, I will transition to more “exotic” methods of project delivery.
Integrated Project Delivery – Design and Construction’s Savior?
Integrated Project Delivery (IPD) is exotic and infrequently used, but has the potential to become much more relevant to the design and construction industry in decades to come.
I think of IPD as a laboratory for the future of design and construction. IPD is the focus of the most forward-thinking people in the industry. Thought leaders trying to improve the future of design and construction by completely rethinking how projects are delivered, and how they might be better delivered.
The IPD variants discussed below are… well… a little unorthodox. They might, for example, have three parties contract with each other by signing a single contract as the contracting parties. Alternately, IPD might entail multiple parties forming an IPD Joint Venture, perhaps an LLC, which will then individually hire the IPD project participants.
To a non-lawyer this might not sound ground breaking. However, most law students and lawyers would tell you that multilateral contracts, like IPD contracts with multiple contracting parties, makes their heads hurt.
Integrated Project Delivery: A Spectrum, Not A Single Project Delivery Method
The first thing to understand about IPD is that it is not a single method project delivery. Like Construction Management, IPD is a spectrum of various project delivery methods.
Low risk IPD projects are similar to Design-Build projects. For Project Owners and Real Estate Developer, an IPD project to the “low risk” end of the spectrum arguably provides some of the IPD upside without the IPD risk.
The more an IPD project moves toward the full “contractual integration” end of the spectrum, both the risk of IPD and the benefits of IPD can be realized. A full integration IPD project sees one contract with multiple contracting parties.
At the highest level, the theory behind IPD is fairly simple. The more that IPD Project Owners and Real Estate Developers tie themselves contractually to their IPD design professionals and IPD constructors, the more likely it is these project IPD participants will share the same fate. In a great IPD project, they all win – they all make money, avoid claims, and deliver a great end product. In a bad IPD project, they all lose and face disastrous outcomes.
Integrated Project Delivery tries to intertwine the fates of the parties. More than other project delivery methods, on an IPD project, at least in theory, the IPD owner and the IPD Architect and the IPD Contractor all have incentives – financial and otherwise – to look out for the interests of the other IPD project participants.
The blinding flash of the obvious, right? Force all participants on an IPD project to abandon their typical “me first” viewpoint for an “IPD team first” perspective. When everyone wins and loses together, at least in theory, all of the IPD project participants stand to gain from the self-interest of the other IPD project participants.
Lower Risk IPD: Transitional Contract Documents
The contractual arrangements for a “lower risk” IPD project might look like this:
This “lower risk” form of IPD is similar to the traditional tripartite method of project delivery. The most common project delivery method discussed first in this post, above. Here, the Project Owner separately hires the lead design professional and the constructor using a separate Owner-Architect Agreement and Owner-Contractor Agreements.
The content of the IPD contract documents differ slightly, however, to promote an IDP mentality.
Rather than use the traditional AIA Document B101-2017 Owner-Architect Agreement, this “IPD lite” project uses AIA Document B195–2008, a standard form of agreement between Owner and Architect for a an IPD project. The IPD project also uses AIA Document A195–2008, a standard form of agreement between Owner and Contractor for an IPD project. Also, rather than use AIA Document A201-2017 for the General Conditions, the IPD project depicted above uses AIA Document A295–2008, General Conditions of the Contract for Integrated Project Delivery.
The AIA Contract Document IPD forms are not new. The B195–2008 and A195–2008 were, as their names imply, issued by AIA Contract Documents more than a decade ago. At least in my experience, the AIA’s standard form agreements for IPD projects appear to be little used. I have never used the AIA’s standard form IPD project agreements.
Note the AIA Contract Documents do not include IPD-specific forms for lower tier IPD project participants. The IPD project above shows the IPD Contractor using the traditional AIA Document A401–2017 to hire subcontractors, and the IPD Architect using the traditional AIA Document C401–2017 to hire design subconsultants. AIA Contract Documents warns that “[i]f A401 or C401 is to be used on a project with the Transitional Forms, appropriate modifications should be made with the assistance of insurance and legal counsel,” for this very reason.
Multi-Party Agreement for Integrated Project Delivery
This “multi-party agreement” form of IPD lead to my favorite diagram in this post, because here the IPD owner and the IPD Architect and the IPD Contractor all sign a single contract:
For non-lawyers, this may not seem like a big deal. But it is a huge deal!!!
Yes, we have all seen contracts with signatures of more than two parties. Usually however, there are only two real contracting parties. Usually the “extra” signatures are merely an acknowledgment by third parties of the terms of the contract.
That is not what you see above. This IPD project involves one contract with three contracting parties.
Again, this might not seem like a big deal. But ask any litigation attorney whether they have handled a lawsuit where a single contract has three true contracting parties, and I almost guarantee that his or her answer will be “no way.” Most judges and lawyers have never dealt with a true multi-party contract with over two contracting parties.
AIA Contract Documents’ description is best:
“AIA Document C191–2009 is a standard form multi-party agreement through which the owner, Architect, contractor, and perhaps other key project participants execute a single agreement for the design, construction and commissioning of a Project. AIA Document C191–2009 provides the framework for a collaborative environment in which the parties operate in furtherance of cost and performance goals that the parties jointly establish. The non-owner parties are compensated on a cost-of-the-work basis. The compensation model is also goal-oriented, and provides incentives for collaboration in design and construction of the project. Primary management of the project is the responsibility of the Project Management Team, comprised of one representative from each of the parties. The Project Executive Team, also comprised of one representative from each of the parties, provides a second level of project oversight and issue resolution. The conflict resolution process is intended to foster quick and effective resolution of problems as they arise. This collaborative process has the potential to result in a high quality project for the owner, and substantial monetary and intangible rewards for the other parties.”
For more about AIA Document C191–2009, check out that link.
Single-Purpose Entity Agreements for Integrated Project Delivery
Equally interesting, this slide depicts the Single-Purpose Entity (SPE) form of Integrated Project Delivery – where the major participants in the IPD project form a project-specific entity, which in turn hires them:
This is just one possible example of the SPE form of IPD. Here, the major players in the IPD project – the Project Owner, the Architect, and the Construction Manager – each become “members” of the SPE entity. That entity might be a limited liability company (an “LLC”), for example. In turn, the SPE LLC for IPD contracts with them and others.
Wow, that is a lot of acronyms: the SPE LLC for IPD. That might be my record. But Single-Purpose Entity (SPE) Limited Liability Company (LLC) for Integrated Project Delivery (IPD) is a real mouthful.
AIA Contract Documents’ description is apt:
“AIA Document C195–2008 is a standard form Single-Purpose Entity (SPE) agreement through which the owner, Architect, Construction Manager, and perhaps other key project participants, each become members of a limited liability company. The sole purpose of the company is to design and construct a project utilizing the principles of Integrated Project Delivery (IPD) established in Integrated Project Delivery: A Guide. AIA Document C195–2008 provides the framework for a collaborative environment in which the company operates in furtherance of cost and performance goals that the members jointly establish. To obtain project funding, the company enters into a separate agreement with the owner. To design and construct the project, the company enters into separate agreements with the Architect, Construction Manager, other non-owner members, and with non-member consultants and contractor’s. The compensation model in the non-owner member agreements is goal-oriented and provides incentives for collaboration in design and construction of the project, and for the quick and effective resolution of problems as they arise. This highly collaborative process has the potential to result in a high quality project for the owner, and substantial monetary and intangible rewards for the other members.”
For more about AIA Document C195–2008, check out that link.
Is Integrated Project Delivery the Solution?
Design and construction causes too many claims, too much strife, and too much expensive litigation and arbitration. That is widely accepted. IPD could be part of the solution to the problems the design and construction industry faces.
Part of the problem is driven by Project Owners and Real Estate Developers who “control” design and construction projects. They invest too little attention and money selecting the right project delivery method and negotiating good contracts. They set themselves up for disappointed expectations, unless luck saves their design and construction project. By definition, IPD requires considerable attention to project delivery methods and contracts.
The problem is partially driven by attorneys who know too little about design and construction. They know too little to properly align the project participants incentives to enhance cooperation and good outcomes.
Often, these are real estate lawyers who are masquerading as construction lawyers. Their Project Owner and Real Estate Developer clients usually cannot distinguish between real estate and construction lawyers.
Real estate attorneys and construction attorneys have very different skill sets. Real estate attorneys often select the wrong standard form design and construction contracts. Real estate lawyers fail to identify ‘what is missing’ from standard form design and construction agreements. Often, real estate attorneys edit them improperly, just “filling in the blanks” of agreements like AIA Contract Documents. This is what differentiates real estate attorneys from design and construction attorneys. Almost Real estate attorneys know too little to delve deeply into IPD.
Part of the reason claims are prevalent in design and construction are “litigation attorneys” who lack the creativity to help their clients achieve early, cost-efficient dispute resolution. These “trial attorney” types mislead their clients to believe that their design and construction claims can be resolved only through scorched earth litigation. They do not understand how to properly use mediation to resolve design and construction disputes. They dismiss mediation as a “waste of time” simply because these trial attorneys do not understand mediation.
Sadly, IPD will not save the design and construction industry from trial attorneys who champion their own interests, not their clients. However, one can hope that when IPD is ready for the “prime time” – when IPD methods can be widely-used in the construction industry – the unique aspects of IPD will prevent claims before they arise.
Of course, part of the reason design and construction is fraught with claims and disputes is the nature of the industry and the kind of work. Design and construction is a team sport. It requires considerable coordination and planning. There are myriad reasons design and construction projects go awry. IPD will not necessarily change that fact.
Integrated Project Delivery does, however, hold the potential to create IDP project delivery variants which – probably decades from now – may be seen as a better way to design and construct new projects. The thought leaders on the forefront of IPD are, indeed, trying to use IPD as a future-thinking solution to many problems which plague the design and construction industry. This includes not just preventing or minimizing the impact of claims, but also rooting out avoidable waste and inefficiencies though the design of IPD projects.
For a great Integrated Project Delivery resource, check out Integrated Project Delivery: A Guide. The Guide, while somewhat dated, is a collaboration between the American Institute of Architects (AIA) National and AIA California Counsel, describes IPD as a “project delivery approach that integrates people, systems, business structures and practices into a process that collaboratively harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste, and maximize efficiency through all phases of design, fabrication, and construction.”
Conclusion: Project Delivery Methods Are Complicated
If you have read this entire post, congratulations! I thought only my mom will read the whole article.
Contracts and project delivery methods are intertwined – but their relationship is often misunderstood. Thoughtful selection of the best delivery method for the project should come BEFORE contract negotiations. Each project structure has its pros and cons. Only AFTER the ideal delivery method is chosen should contract preparations begin.
Often Real Estate Developers and Project Owners pick their project team, and leap right to the selection of contract forms. They default into one of several possible project delivery methods. Often, they do this with the advice of a real estate attorney who only dabbles in project delivery methods and contracts for design and construction projects.
This is a missed opportunity. Design and construction attorneys can help you consider the best delivery method for your projects, and then negotiate a suite of interrelated contracts to help implement the delivery method you choose.
When you “design” the project delivery method with a litigator’s mentality, with the end in mind – anticipating what might go wrong, negotiating smart contracts which tend to promote early, cost-efficient dispute resolution, and getting proactive about dispute avoidance – you can promote good outcomes. You can avoid or minimize disputes, shorten the pain and distraction that comes with litigation and arbitration, and complete projects successfully.
I better stop writing before I hit ten thousand words…
This publication is prepared for the general information of friends of Baker Law Group LLC in Illinois. It is not legal advice for you, or legal advice regarding any specific matter. Jeremy S. Baker is licensed to practice law only in Illinois. Under rules applicable to the professional conduct of attorneys in various jurisdictions, it may be considered attorney advertising material. Prior results do not guarantee a similar outcome.