Benefits and issues of design-build model

By ALEXIS GUEST
THE construction industry has seen a traditional method of procurement come to prominence, with many projects now being developed on a ‘design-build’ model as opposed to procuring separate design and build packages.

When issuing separate packages, a developer will engage a consultant to prepare the concept and detailed design, then move to a competitive procurement process, which often (but not always) results in an award to a contractor with the lowest price. Whilst this model has been successful in the UAE and the rest of the GCC region, there has recently been renewed interest in the design-and-build method of contracting.

In the design-and-build model, the contractor performs both the design and construction elements of the project, under one contract. Such contracts are also referred to as EPC (engineering, procurement and construction) or ‘design and construction’ contracts. Regardless of what the contract is called, it is important to consider the detail in the contract.

For example, a ‘construct only’ contract may actually contain an obligation for the contractor to carry out an element of design.

Why use this contract?

Depending on the nature of the project, there are several reasons as to why a design-and-build model is attractive. It eliminates any potential gap and interface issues between the designer and contractor as well as mitigating any possible delay that would result. Perhaps the biggest advantage of a design-and-build contract is that there is a single point of contact and responsibility for the employer.

If a proposed development is going to be project financed, a financier will find the wrapping of the risk into one package a more attractive option than having risk shared between two parties and the resulting interface issues. The contractor is able to focus on the scope and needs of the employer and schedule accordingly rather than the possible delays that may arise from the need to coordinate between the designer and the contractor.

The single point of responsibility can be considered a motivation for quality and proper performance of the contract. Generally, the design-and-build contractor will warrant that the design documents it completes are free from error, thus avoiding the common tension between the designer, construction contractor and employer in relation to delivery of drawings. In addition, the risk allocated to the contractor can limit its liability for design errors. An example of this is with regards to ground conditions and change in law where the contractor can design the solution to the problem.

Typically, design-and-build models are often completed sooner than traditional ones. The contractor is able to start construction prior to the detailed design being completed and activities can be coordinated in parallel. If the project brief is given adequate time, the contractor is able to begin early scheduling, order items that require long lead times and there is less opportunity for the employer to interfere with last minute variations.

Issues to consider

In considering whether to use the design-and-build model of construction, the following precautions should be considered, as such contracts can have some pitfalls particularly in terms of employer’s requirements, professional indemnity insurance and licensing issues.

Employer’s requirements

The employer’s requirements document and brief is critical. This document essentially sets out what the employer expects from the project. It must specifically define limits of the scope, set the standards and prescribe the particular requirements of the employer. It must also strike a balance between performance outputs and prescribing materials.

The employer’s requirements must be prepared specifically for the project. This means that a standard form will not suffice as each project will require a bespoke scope.

Drafting of the employer’s requirements must be started early in the procurement process and be clear as this document forms a crucial party of the tender. This will be advantageous to both the employer and the contractor. The employer will receive tender responses of better quality and detail if these requirements are clear and specific. Similarly, a contractor will be able to price for the works more easily and realistically and offer improved value engineering solutions.

If there is a lack of scope in the employer’s requirements, this can lead to a large variance in prices, which makes the evaluation process difficult. It is also important to give the bidders time to assess the risks of the project and price these accordingly.

Issues can arise if the employer’s requirements are not completed with sufficient information. Much criticism based around the design-and-build model is that the employer can end up with an inferior final result. So in order to avoid this, the employer’s requirements should be as complete and accurate as possible.

Professional indemnity insurance

The employer should check the contractor’s professional indemnity insurance. Many policies do not cover design and construction. Due to the obvious design element under a design-and-build contract, it is imperative to ensure that the employer has recourse in the event of a design flaw and/or defect.

Licensing issues

Licensing in the UAE is generally different for designers and contractors. Currently, in Dubai and Abu Dhabi, a contractor cannot hold a licence for both design and construction.

A possible option for addressing this limitation could be through the employer ‘engaging’ a licensed designer to undertake the design element of the project and then novating the design agreement to the contractor. Whilst this may address the licensing issues, a contractor may be averse to accepting responsibility for a design that was not prepared by him.

It may be possible for the contractor to subcontract the design to a third party. If this is the case, it is imperative that collateral warranties are provided and other protections are included in the subcontract to ensure that the employer has a right of contractual recourse against the subcontractor.

Drafting guidelines

Whilst a design-and-build contract can take many forms, there are certain elements that it must contain in order to avoid ambiguities and potential claims.

The contract should contain a clear promise by the contractor to the employer that the former will meet the employer’s requirements, and warrant that the finished product will be fit for the purpose for which it is intended. There should be a clear mechanism for commissioning and/or testing the works to ensure that the works are fit for purpose.

The contract price should be fixed. This means the contractor is given flexibility to source the most cost-efficient methods of construction and materials but will not be entitled to claim additional costs due to an increase in materials and resources required for the project or in the prices of those materials and resources. There should be a mechanism for variations and changes, which is clear and sets out a robust procedure for approving and carrying out variations.

In addition, there must be a clear completion date, by which all work must be finished, as well as an extension of time regime for limited circumstances in which the contractor has been caused delay. The allocation of risk should be clear. Risks that have been allocated to the contractor should be defined and clearly set out. There should also be a clear mechanism for commissioning and/or testing the works to ensure that the works are fit for purpose.

Based on some recent projects in the region, it appears that the market appetite for design-and-build contracts may be increasing. This being the case, it is important for the employer to allow adequate time for the employer’s brief to be prepared and have a clear vision of what is required from the end product.

The employer must be willing to cede control of the design to the contractor and allow it to utilise its market knowledge to value engineer the project. There is also the added benefit that the design-and-build contract is attractive to financiers and so, if external finance is required, a design-and-build model may assist in obtaining this.

There are clear advantages of a design-and-build contract, however precautions must be taken and drafting of the contract should be approached on a project-by-project basis.

Gulf Construction