March 16, 2020 On In-House Counsel’s Desk

But It’s Design-Build: Analyzing and Overcoming This Conclusory Defense

Sean Dowsing

What should an advocate say when an owner asserts the “But, it’s design-build” defense in response to their client’s (a construction contractor) claim for changed conditions, i.e. when the actual site conditions differ from what was in the plans? Surprisingly, there is not a lot of case law to guide the advocate’s answer, even though this defense is becoming increasingly common. Rest assured: This defense will be asserted by the owner’s project managers before lawyers are involved and then again by the owner’s lawyers after they are retained. The advocate should ask themselves and their opposing counsel, “So what?” Answering “So what?” requires understanding the nuances of the contract and the nature of the changed conditions or changes affecting the project’s design.

The advocate must know they can apply the Spearin doctrine to differing site conditions and the doctrines of commercial impracticability/impossibility to design and performance specifications issues. When design and construction are separate contracts with separate parties, knowing which doctrine to apply is easy. Which doctrine applies in design-build, where the designer and contractor are the same entity, is grayer. The advocate must carefully analyze where in the design-build process the changed condition arises and consider applying both doctrines.

Before going further, some definitions and an example are needed. In construction, there are broadly two methods of contracting: design-bid-build and design-build. Design-bid-build is what most people consider normal. An architect or engineer designs a project and drafts a complete set of plans. A contractor takes those plans and builds them. Both the designer and contractor are liable to the owner.  In design-build, the designer and the contractor are the same entity, the design-builder, representing a single point of responsibility to the owner. The design-builder must bid on an incomplete set of plans and specifications. Typically, the design is 5% to 30% complete before the owner issues the request for proposal (RFP). The RFP will provide additional information like project goals, specifications, soils reports, site photos, and as-builts. The design-builder bids on the incomplete set of plans and specifications and agrees to finish the design and construction of the project.

Importantly, the RFP will contain prescriptive and performance specifications that alter how the legal theories affect the parties’ legal rights. A prescriptive specification is where the owner tells the design-builder exactly what to build (and sometimes how to build it). For example, in constructing an airport runway, an owner may prescribe that the concrete be 5” thick. If the runway actually needs 6” of concrete in some places, the owner owes the contractor for the extra one inch of concrete. The owner prescribed how to build it, so they are liable for defects in that design. A performance specification is where the owner tells the design-builder how they want the end product to perform. This affords both flexibility and liability to the design-builder. In this case, for example, the owner would tell the design-builder they want the runway to handle a Boeing 747. The design-builder must design and construct a runway sufficient to support a 747. If the runway cannot, the design-builder is liable—unless one of the legal doctrines below shields it.

Applying the Spearin Doctrine to Partially Completed Designs

Implicit in the “But, it’s design-build” defense is the incorrect assumption that Spearin does not apply to design-build contracts. The Spearin doctrine was created in 1918, when the Supreme Court held that (1) the contractor is not responsible for defects in the plans and specifications, and (2) the owner’s liability is not relieved by the general clauses requiring contractors to visit the site, check the plans, and inform themselves of the requirements of the work.    

The “But, it’s design-build” defense argues that because the plans and specifications are incomplete when the contractor bids on a design-build project, Spearin is inapplicable. This issue was recently addressed in California when the Southern District of California found that Spearin does apply to design-build. Balfour Beatty (Balfour), as the general contractor, issued a design-build subcontract to Bonita Pipeline (Bonita). The subcontract contained waiver language to the effect that Bonita assumed the risk of further refinement of the plans and waived its right for additional compensation due to such refinement. Bonita encountered multiple changes on the project. Balfour argued that Spearin did not apply because the plans were incomplete at bid time and the waiver language barred Bonita’s recovery for extra work. The court rejected Balfour’s arguments and found that Spearin can apply to design-build contracts because a contractor can be misled by plans or specifications. The court further reaffirmed that, even in design-build contracts, general waiver-type clauses do not overcome Spearin.

Going back to the airport runway example, if the partial plans and specifications show the proposed runway zone has no subsurface utilities, when in fact it has underground electrical lines crisscrossing it, then the design-builder has a valid changed conditions claim and should seek compensation for the extra work. Spearin warrants the accuracy of the plans and specifications, regardless of their completeness.         

Therefore, when faced with changed conditions resulting from defects in the partially completed design or prescriptive specifications, an advocate can reliably apply Spearin. Before diving into the nuance of a case, an advocate should consider the following non-exhaustive list of threshold questions:

  1. Did the design-builder attend the job walk? Would the claimed changed condition have been apparent had they visited the site? If the answers to these questions are “no” and then “yes”, the condition is not a changed condition. The design-builder loses.
  2. Were the defects in the plans or specifications patently obvious, i.e. would a reasonable contractor have recognized the issue before bidding? If yes, the design-builder loses.
  3. Were requests for information (RFIs) asked about the unforeseen conditions? The advocate needs to carefully analyze the wording of each RFI and the owner’s answers (or non-answer in a lot of cases).
  4. Is the waiver language in the contract general or specific? General waiver language is less likely to be upheld than language pertaining to the claimed changed condition.

Applying Commercial Impracticability

Spearin does not apply in the design phase, where performance specifications are an issue. This shifts liability to the design-builder, but it is not the 100% shift that owners hope for. The owner still warrants that the specifications are possible and commercially practicable to meet.  Commercial impracticability arises when, because of unforeseen events, the contract can be performed only at an excessive or unreasonable cost.  In design-build, commercial impracticability mostly arises due to changes in design that render the construction portion impracticable. Whether something is commercially impracticable/impossible is a question of fact. This requires expert testimony, ideally from both designated experts and from the design-builder’s own staff who can serve as non-designated experts.

In the runway example, imagine a design-builder is to construct a runway capable of landing a Boeing 747 (performance specification) and, at bid time, Boeing’s safety specifications state the runway must be at least 7,500 feet long. Imagine also the runway is bounded by a freeway on one side and a beach on the other, so its max length is 7,500 feet. If Boeing later changes its safety guidance such that a 747 needs 8,000 feet of runway, then the design-builder should consider a commercial impracticability claim. Designing the extra 500 feet will cost more money but given the total size of the contract, and complexity of the changes, the extra design costs may still be practicable in a court’s eyes. However, the added cost of designing an extra 500 feet would pale in comparison to actually constructing those changes. The design-builder must either demolish and move a freeway into a tunnel underneath the runway or literally build new land past the beach into the ocean to accommodate the 500 feet. Neither is technically impossible, but if the RFP and design-builder never contemplated such construction, the change is likely impracticable unless the owner is willing to pay large sums of money to accommodate it. Even if the owner was willing to pay in this case, the design-builder should strongly consider if it has the experience, qualifications, and bonding capacity to undertake such changes—all of which may independently render the contract impossible for that design-builder.

Some considerations that the advocate should consider in impracticability/impossibility claims are:

  1. What was the nature of the unforeseen issue that caused the increased cost? Why was it not known?
  2. How much more will the new design cost relative to the old one? A larger relative change will help establish impracticability/impossibility.
  3. How much will the change in design increase future construction costs? Again, a larger relative change will help an impracticability/impossibility claim.
  4. Are the changes the kind that would normally require different contractors’ licensing or specialty licensing? While not directly related to cost, which is the central consideration in establishing impracticability/impossibility, the design-builder can argue the cost of securing such licensing themselves or through subcontractors is prohibitive. This can also help establish a cardinal change claim which is a separate doctrine not discussed in this article.
  5. Can the design-builder bond and insure the new work? If the cost of the changes are too high, or because of lack of experience in the new work (in the above example, an airport paving contractor may not be qualified to move a freeway underground), the design-builder may not be able to secure bonding or insurance for the new work at all—or may only do so at a prohibitive cost.

Conclusion

For all the benefits of design-build, and there are many, a major drawback is the existence of gray areas where they were once black-and-white. In theory, Spearin applies, but only when the contractor is misled by the provided plans and specifications, regardless of their completeness, and the doctrine of commercial impracticability/impossibility applies, but only when faced with performance specification defects. Practically speaking, because of the gray areas, the advocate will find that both doctrines apply in many situations. The advocate needs to be aware of them so they can answer the inevitable defense of “But, it’s design-build” intelligently which, by the time the advocate has been retained, the owner will have already asserted.

 

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Sean Dowsing

Orion Construction Corporation, Orange County, CA, Division 11 (In-House Counsel) and Division 13 (Government Construction)