Subcontractor terminations on design-build projects
Source: http://www.lexology.com, April 17, 2013
By: Joseph C. Staak, Smith Currie & Hancock
Owners like design-build construction because it places more risk on the design-builder, which accepts the responsibility for both design and construction. Design-builders have success when they understand these risks, assemble a knowledgeable team, and stick to projects in their comfort zone. Contractors run into trouble in design-build when they chase unfamiliar work, team up with unfamiliar designers, or use unproven subcontractors.
While design-build may reduce the number of owner disputes, disputes between design-builders and its team members can be as common as subcontractor disputes on a traditional design-bid-build project. However, disputes among design-build team members can be more difficult to manage and resolve because risks and expectations may not be properly evaluated on the front end, and responsibilities and relationships are not correctly defined and allocated in the contract documents.
Terminating a Design-Build Subcontract
The decision in BMAR Associates, Inc. v. Midwest Mechanical Group, 2010 U.S. Dist. Lexis 40183 (D. Md., April 23, 2010), illustrates that problems that may seem straightforward on a traditional project can be extremely complex in design-build. For example, if a subcontractor defaults on a design-bid-build project, the general contractor generally has the right to terminate the subcontractor and hire a replacement. The new subcontractor takes over where the defaulted sub left off, and the subcontract termination clause provides the basis for determining the liability of the defaulting subcontractor. However, a subcontractor default in design-build can be far more complicated when the terminated subcontractor had design responsibilities. Terminating a member of the design team creates far different problems than terminating a worksite subcontractor.
In BMAR, a design-builder doing medical renovations subcontracted out the design and construction of the boiler work to a mechanical subcontractor. The subcontract divided the boiler package into two design phases and a separate construction phase. The subcontract required the subcontractor to provide payment and performance bonds covering its construction responsibilities.
Because the subcontractor anticipated self-performing the installation work, it did not prepare the construction documents to the same level of detail that an independent designer might have provided. The subcontractor intended that any design issues arising during construction would be addressed and resolved by its field forces. The design-builder left the technical details of the boiler design to the subcontractor.
When field work was ready to commence, the subcontractor could not provide surety bonds. In response to this bonding problem, the design-builder sought out a substitute subcontractor to do the field work. The design-builder was aware of the added complexity created by the first subcontractor’s design responsibilities and understood it could not simply terminate this sub. Rather, the design-builder began negotiating a transition of the full boiler package to a second subcontractor. In addition, the design-builder instructed the original subcontractor to complete the boiler design.
Substituted Subcontractor for Field Work
The design-builder held extensive discussions with a proposed substitute subcontractor about the transition but no overall agreement was ever reached. During this same time the original subcontractor was trying to convince the design-builder to allow it to perform the field work without the required bonds, or be excused from all further project involvement.
The time required for these negotiations increased scheduling pressures to get the field work started. These scheduling pressures ultimately caused the design-builder’s project manager to issue the replacement subcontractor a lump sum subcontract for the field work. The new subcontract incorporated the boiler design developed by the first subcontractor but failed to place any specific design responsibilities on the new subcontractor. The replacement subcontractor immediately went to work.
The design-builder wanted a single source of responsibility for the boiler work and intended to continue negotiations that would result in the replacement subcontractor accepting the transition of all boiler design obligations. However, once the installation subcontract was issued, the new subcontractor stopped all discussions about design. The design-builder argued that the new subcontractor knew that an essential term of the arrangement was for the new subcontractor to take over all responsibilities (including the design). According to the design-builder, the new subcontract was intended only to allow field work to commence as the parties continued to work out the details of their relationship.
Responsibility for Design Issues
The second subcontractor not only refused to accept design responsibilities, it raised numerous complaints about the poor design. A major dispute arose when that subcontractor asserted construction claims for design errors and omissions. The design problems led the replacement subcontractor to stop work, and litigation ensued.
The design-builder argued that both parties understood that the design responsibility would transition to the new subcontractor. E-mails between the parties certainly showed that the design-builder was seeking a transition of both aspects of the boiler work. However, no agreement on design was reached before a subcontract was executed on the field work. This new subcontract contained an integration clause providing that all prior negotiations were merged into the written agreement. Once the subcontractor signed that new subcontract, the document controlled over all prior discussions. Contractually, the only agreement was for the field work based on the design documents developed by the first subcontractor.
Once this subcontract was issued, the new subcontractor had no reason or desire to accept any design responsibilities. The problem the design-builder ran into could not be blamed on the new subcontractor taking advantage of a misstep at the time the new subcontract was issued. The negotiations over design had never produced an agreement because the replacement sub did not want to accept design responsibilities. The design-builder failed to appreciate the new subcontractor’s position and assumed that everything could be worked out. Most importantly, the design-builder failed to understand that properly addressing the design issue was crucial to any resolution.
Were There Alternatives?
The design-builder failed to fully evaluate the issues when it considered replacing the first subcontractor due to its bonding problem. Questions that should have been raised by the design-builder were never properly considered. Why didn’t the design-builder require the original subcontractor to post the surety bonds at the beginning of performance? Was a better alternative waiving the bonding requirement and allowing the original subcontractor to do the field installation? Should the design-builder have demanded the first subcontractor remain as the designer of record and take responsibility for any design problems that may arise? Was there any contract vehicle available to the design-builder that would have allowed field work to commence yet keeping pressure on the new subcontractor to accept a transition of design responsibilities?
On a design-build project, changing any member of the design team raises challenges that need to be carefully evaluated. Plowing ahead due to scheduling concerns can backfire as it did for the design-builder on this Maryland case when it failed to understand the different risks and responsibilities created by the design-build elements of the project. Without fully understanding these differences a design-builder can make significant errors when any change in team members must be made.