©Helmut K. Johannsen, P.Eng., C.Arb.Partner, Fasken Martineau DuMoulin LLP

P3/Design-Build

Project Management ConferenceYellowknife, N.T.November 17-19, 2009

OverviewIntroductionGeneral Comments on P3 vs Design-Bid-Build (“D-B-B”) vs Design-Build (“D-B”)Different Perspectives

OwnerDesign-Build ContractorConsultant

Primary focus will be on D-B by requestIdentification of some key issues and risk allocation

P3 and D-B Building ProjectsWarehouses, Schools, Hospitals, Correctional Facilities

Meet a public or private need for a buildingP3 buildings generally provide facilities for a public service, not to generate a profitPrivate buildings generally look to obtain return on investment

Owner’s risk tolerance related to budget (P3) or expected return on investment (private)Complexity and risks often (but not always) related to type and size of project

P3 and D-B Industrial ProjectsPrimary purpose can be a revenue producing project:

Meet a public/private need for product (e.g. IPP)Create a “profit centre” and obtain a return on investment

As a “profit centre”, owner wants to minimize/limit “inputs” and maximize “outputs”Owner’s risk tolerance related to expected return on investment Plants that produce products are typically more complex than buildings, roads and other “static” industrial projectsComplexity and risks often (but not always) related to type and size of project

Building & Industrial ProjectsP3 and Design-Build are alternatives to consider Even with traditional Design-Bid-Build some elements of a project are often procured on a Design-Build basisExamples

Water to wire equipment packageTurbine genset for cogeneration or wind powerPower boiler for thermal powerplantCertain building components

Powerplant Development ExampleTraditional Canadian “public utility” approach

Confirm capacity needRatification by regulatory authoritiesDesign project in-house (typically for D-B-B procurement)Order machinery/equipmentEngage construction firm(s) to constructAssume project risks (cost, schedule, performance)Finance (government guaranteed debt), own, operate.

Powerplant Development Example (cont’d)Canadian P3/IPP public utility approach

Utility confirms capacity needRatification by regulatory authoritiesCompetitive bids for power sales agreement from IPP generation projectsWinning IPP bidder assumes project risks and financing risks (risk premium)IPP finances, builds, owns, operatesMay use either conventional D-B-B or D-B procurementSome public utilities currently following this P3/IPP approach through “customer based” and “green power” RFPs

General Project Procurement StrategyDevelop scope of project

Determine stakeholder requirementsDetermine regulatory/environmental permittingand approval processes and requirementsDetermine First Nation/Aboriginal issuesProduce project definition report

Identify general procurement constraintsPublic invitation or private invitationPre-qualification/short-listingCompetitive tendering/proposals vs sole sourcing

Develop business case for P3 vs D-B-B vs D-B

General Procurement Strategy (cont’d)Select contracting strategy by model/name:

D-B-B: Design-Bid-Build or “Traditional”D-B: Design-Build or Design-ConstructEPC: Engineer-Procure-ConstructEPCM: Engineer-Procure-Construct-ManageBOT: Build-Operate-TransferP3 or PPP: Public Private Partnership

General Procurement Strategy (cont’d)Select pricing strategy:

Stipulated PriceUnit Price Cost PlusFixed FeeGMPOn completion/service payments (P3)Combination of pricing strategies

Note: pricing model/strategy largely independent of contracting model/strategy

General Procurement Strategy (cont’d)Consider risk of potential for a transition from P3 to Design-Build procurement

P3 procurement:Focus is typically more on commercial arrangementMany details of D-B contract left to sophistication/experience of concessionaire and lenders

D-B procurement:Focus is typically more design, construction, life-cycle, reliability and durability since warranties often of short duration with limited recourse

Can partly mitigate risk by addressing D-B procurement within P3 procurement

Design-Bid-Build or “Traditional”Method of project delivery in which an owner:

contracts directly with a consultant to prepare the detailed design, drawings and specifications for the project; andsubsequently contracts directly with a contractor to construct the project to the owner’s design, drawings and specifications.

The construction contract is typically (not always) administered by the owner’s consultant

EPCM vs. Design-Bid-Build ApproachMethod of project delivery in which an owner contracts with another party (typically an engineer) to:

provide design, drawings and specifications;procure equipment and construction by entering into contracts as agent for the owner with suppliers and contractors, or prepare contracts directly for owner’s signature; andadminister and manage the equipment and construction contracts on behalf of the owner.

Design–Bid–Build or “Traditional”

OWNER

Supplier

OWNER’’S CONSULTANT

$$ CONSTRUCTION OFOWNER’S DESIGN

PREPAREDESIGN

Trade ContractorTrade Contractor D/B Contractor

CONTRACTOR

ADMINISTERCONTRACT

Summary of Design-Bid-Build Some AdvantagesWell understoodSingle design contract and single construction contractOften fixed priceGC at risk for

PriceScheduleQualityOH&S

Single bondsPredictableStandard form contracts

Some DisadvantagesDifficult to fast trackQuality and completeness of documents critical

DesignSpecificationsDrawingsContract

Change Orders expensive (delays and extras)Market dependentIll-suited for renovations & expansions

Design-Build / Design & ConstructOwner contracts with design-build contractor to design and construct a projectDesign-build contractor is responsible for design, procurement and constructionOwner or owner’s consultant administers the design-build contractVariations

Owner’s requirements can be prepared by owner, owner’s consultant or design-build contractorMay be for entire project or only for specific parts of a project (e.g. “water to wire”, turbine genset for cogeneration or wind power, recovery boiler for a pulp mill, etc.)

Engineer-Procure-Construct (EPC)Method of project delivery in which an owner contracts with another party (EPC contractor) to:

engineer;procure; andconstruct

project to meet owner’s statement of requirements.Some publications use Engineer-Procure-Construct-Install (“EPCI”)Most publications/authors define EPC as “similar to Design-Build”

TurnkeyThe “turnkey” arrangement, (also known as the “package deal”, “design and build”, “clé-en-main” or “design and construct”) places the duty to design and construct solely on the contractor. There is no accepted definition for each of these terms in the construction field. The term “turnkey” tends to mean the most extreme form of placing design and construction responsibility on the contractor, such that after completion the employer need only turn the key to commence operation of the constructed facility. Notwithstanding this, the term “turnkey” will be used here to describe the more general global arrangement of placing both design and construction responsibilities on one contractor” (emphasis added)

From Text “Understanding and Negotiating Turnkey Contracts”, by Joseph A. Huse (Freshfields), Sweet & Maxwell 1997

Design–Build Relationship (Theory)

OWNER

DESIGN-BUILDCONTRACTOR

SPECIALTYSUBCONTRACTORS

MATERIALS AND SUPPLIESLABOUR

OWNER’S CONSULTANT

$$

PERFORMANCE SPECIFICATIONS

ADMINISTERCONTRACT(?)

DESIGN TO PERFORMANCE SPECIFICATIONS,PROCURE AND CONSTRUCT

Note: Design-Build Contractor assumed to be a single integrated firm

Design–Build Relationship (Typical)

OWNER

DESIGN-BUILDCONTRACTOR

SUBCONTRACTORS EQUIPMENTSUPPLIERS

DESIGN CONSULTANTS

OWNER’S CONSULTANT

$$ DESIGN TO PERFORMANCE SPECIFICATIONS,PROCURE AND CONSTRUCT

PERFORMANCE SPECIFICATIONS

ADMINISTERCONTRACT(?)

Note: Design-Build Contractor is typically a joint venture, consortium, special-purpose vehicle, etc.

Public-Private-Partnerships

Narrow Definition:

“instead of the public sector procuring a capital asset by paying for it in full up front, the effect of a typical PPP structure is usually to create a single standalone business, financed and operated by the private sector. The purpose is to create the asset and then deliver a service to the public sector client, in return for payment commensurate with the service levels provided.”

“Public Private Partnerships: UK Expertise for International Markets”,June, 2001 by International Financial Services

Public-Private-Partnerships (cont’d)“The term "public-private partnership" carries a specific meaning in the Canadian context. First, it relates to the provision of public services or public infrastructure. Second, it necessitates the transfer of risk between partners. Arrangements that do not include these two concepts are not technically "public-private partnerships" and do not fall within the scope of the work being done by CCPPP. The definition embraced by The Canadian Council for Public-Private Partnerships is as follows:

A cooperative venture between the public and private sectors, built on the expertise of each partner, that best meets clearly defined public needs through the appropriate allocation of resources, risks and rewards.”

Canadian Council for Public Partnerships, www.pppcouncil.ca

Public-Private-Partnerships (cont’d)Important to note no universal definition of P3P3s cover a wide range of projects, depending on asset ownership, risk sharing, financing and operationP3 agreements:

Primarily a commercial (concession) agreement rather than a construction agreementDo not always involve new capital asset

E.g. sell/lease back or IT out-sourcing

Players in construction industry need to know where they fit within the P3 structure

Public-Private-Partnerships (cont’d)CCPPP includes following as P3 examples:

Design-BuildO&M ContractDesign-Build-Finance-OperateBuild-Own-OperateBuild-Own-Operate-TransferBuy-Build-Operate (where private sector buys public asset,upgrades/builds and operates)Operation Licence (e.g. IT projects)Finance Only (e.g. bond issue for project)

Build-Operate-Transfer

Method of project delivery in which a private company is given a concession to finance, design, build and operate a facility (powerplant, airport, toll road, etc.) normally built and operated by the government. At the end of the concession period, ownership and/or operation of the facility is transferred to the government. Variants include BOO (no transfer back), BOOT, DBFO, FDBOM, etc.

P3 Relationship

O & M SERVICEPROVIDER

DESIGN BUILDCONTRACTOR

SUBCONTRACTORS EQUIPMENTSUPPLIERS

DESIGN CONSULTANTS

EQUITY

BOND HOLDERS

SENIORDEBT

P3 CONTRACTOR(Private Partner SPV)

$$

PUBLICENTITY

(“”OWNER”)

GOVERNMENT

$ FUNDING

BANKS/BONDS/INVESTORSINTEREST &PRINCIPAL

DIVIDENDS

EQUITY$ FUNDING

Note: P3 Contractor is typically special-purpose vehicle (to be formed)

Design/Construct Issues vary by Project Roads through rural areas Freeways in congested urban areasBridgesTransitSchoolsRecreational FacilitiesWater/Wastewater Treatment FacilitiesHospitals

P3s for Major Capital ProjectsCommon Elements:

Two PartiesGovernment/Public Sector Entity (government party)Private Sector Entity (private sector party)

D-B Contractor not a direct party to P3 agreementService Provider not direct party to P3 agreementPrivate sector party arranges and obtains financing

Lender is not a direct party to P3 agreementPrivate sector entity often an SPV – e.g. Project CoPublic sector entity can be an SPV – e.g. Public Co.

P3s for Major Capital Projects (cont’d)Common Elements (cont’d)

Project Co (SPV) enters D-B (typically) or other contract(s) for design and constructionProject Co responsible for interface of D-B contractor and Service Providers (Life Cycle Costing)Project Co tries to push risk downTypically much more risk transfer if FM Services are included

E.g. government party often obtains benefit of longer “warranties” vs conventional contracts through requirement for long term Facility Operation and Management/Capital Refresh.

P3s for Major Capital Projects (cont’d)Common Elements (cont’d)

P3 lawyers tend to be commercial solicitorsOften not familiar with design and construction issuesOften not familiar with underlying business of Public CoOften no litigation experienceOften have never seen their documents litigatedOften structure transactions with emphasis on “commercial transaction” and assume Project Co and Lenders will deal with design, construction, quality, schedule and warranty issues

Very few P3 Agreements have been “tested”through litigation and/or arbitration so interpretation and enforceability may prove interesting (e.g. “deducts” vs. LDs)

Summary of Procurement ModelsNo universally accepted industry definitions for D-B-B, D-B, Design-Construct, EPC, EPCM, Turnkey, P3, etc. in terms of specific scope of work, risk allocation and responsibilitiesIn practice terms are often used loosely and it is prudent to always clarify terminology at the beginning of project to avoid misunderstandings

P3/ D-B / EPC / Turnkey Common ThemesPerformance obligations

Quality of overall product, performance of plant, modules and equipmentOutput - in terms of overall production/outputSchedule completion

Financing entities (banks, bond investors, etc.) often insist on underlying D-B contract for P3 and IPP projectsSignificant exposure of D-B contractor to damagesMany risks normally borne by owner assigned to D-B contractor

Selection of D-B or D-B-BAdvantages and disadvantages of Design-Bid-Build are generally well known.Design-Build is always an option, but in deciding whether to go with Design-Build have to consider:

Extent to which perceived advantages will outweigh perceived disadvantagesProfitability of projectRisk tolerance of OwnerResources of OwnerPool of available design-build teamsSource and type of financing

Some Advantages of Design-BuildSingle point responsibilityOpportunity for innovation and faster project deliveryEfficiency (design & construction expertise together)Fitness for purposeNo real alternative for proprietary technologyFewer changes and implementation simplifiedReduction of claims (or number of claims)Increased flexibility to address changed conditionsReduced administrative burden for ownerCost savings and more certainty of final priceImproved risk management for ownerGreater ability to evaluate contractors on factors other than cost

Some Disadvantages of Design-Build Loss of control and reduced owner involvement in designCost of tendering (to all parties)Difficulty/time comparing different designsCost of risks and contingenciesDanger of Design-Build becoming Build-DesignEnvironmental/regulatory processesLimited pool of qualified Design-BuildersQA/QC largely in contractor’s handsDisputes tend to be larger and more complex Management of long term risksSome lack of project definition prior to contract award

Some Owner Considerations D-B-B vs. D-B

Design-Bid-BuildMultiple projects to spread risksHigh risk toleranceHigh return on investmentOwner rate-based utilityInternal resources and expertiseComplex environmental/regulatory permittingOwner can select “best”engineer & contractor independently

Design-BuildSingle-point responsibility“One-off” projectLow risk toleranceMarginal projectOwner not a rate-based utilityNo internal resourcesOwner has limited expertiseNeed for overall Performance Guarantees

Some Contractor Considerations D-B-B vs. D-B

Design-Bid-BuildCivil contractor with no design-build expertiseNo design-build track recordNo historical relationships with engineers & suppliersLow risk toleranceLimited resources for pursuit costs

Design-BuildSpecialty supplier/contractorIntegrated design-build contractorDesign-build track record Proprietary designs/technologiesSubstantial resources for pursuit costsBetter control of destiny if it controls engineer

Survey* – Top 5 Views on Design-Build AdvantagesSingle point responsibilityEngineers get benefit of contractor’s experienceAbility to evaluate contractors on factors other than costLess change ordersOwner can control cost at early stage

DisadvantagesRequires more owner skill level on front end work (RFP prep.)Lack of project definition prior to contract awardContractor’s decision based on capital cost, not life cycle costContractor meets criteria through cheapest material and minimum designDesigner’s financial burden in developing proposal in design

*Research for PhD. by Dr. Sami Fahmy, University of Calgary 2004

Standard Form Design-Build ContractsCCA 14 – Design-Build Stipulated Price ContractFIDIC Silver Book – EPC/Turnkey Contract

Fédération Internationale des Ingénieurs-Conseils

FIDIC Yellow Book - Plant and Design-Build“For Electrical and Mechanical Works and for Buildingand Engineering Works Designed by the Contractor”

Engineers Joint Contract Documents Committee (EJCDC) Design-Build Contract (U.S.)Associated General Contractors of America Form of Design-Build ContractTypically standard forms are “generic” for buildings/civil projects and developed by contractors and engineers with little direct owner representation

Some Key Issues to ConsiderEnvironmental/ Regulatory ProcessProcurement Process IssuesRole of Owner’s EngineerContractor’s ProposalDesign IssuesGeneral WarrantiesPerformance SpecificationsPerformance Guarantees

Progress PaymentsVariations and ChangesSubsurface ConditionsQualityScheduleSafetyCommissioning/ TurnoverInsuranceBondingConsequential DamagesForce MajeureContractor Default

Environmental/Regulatory ProcessMay dictate procurement modelExisting E/R processes generally contemplate D-B-B:

First: design concept, GA drawings, design reports completed Second: submission to regulatory agenciesThird: Permits, Licenses and Approvals (PLAs) issuedFourth: contract awardAbove steps not wholly compatible with Design-Build process

First Nations/Aboriginal consultationTwo approaches:

Owner develops “Base Concept” and obtains PLAsD-B contractor develops “Base Concept” and obtains PLAs

D-B contractors often not familiar with lengthy and complex environmental assessment processes required to obtain PLAs, and which can impact price and schedule

For D-B, generally only preliminary approvals can be obtained - based on design conceptConfirmation/Amendments to PLAs required

Submission & review of final concept & designPotential impact on RFP process and schedule“Owner” may have to apply and give commitments Potential for imposition of additional regulatory requirements

Habitat compensationFederal & provincial interests may vary

Procurement process and D-B contract must address transfer of obligations/responsibilities

Environmental/Regulatory Process (cont’d)

Environmental/Regulatory Process (cont’d)

Design-Bid-BuildEnvironmental/regulatory process is generally completed on the final design and the detailed technical/environmental specifications prior to contract award

Design-BuildGenerally only “preliminary” approvals can be obtained – usually based on a “Design Concept”Final permits, approvals and licences subject to submission and review of “Final Design”

Potential DelaysPotential Additional Requirements (Cost &/or Schedule Impact)

Procurement Process Issues

Design-Bid-BuildPublic tendering vs select tenderingMay have pre-qualification process (but not always)Contractor usually has proven track record

You know exactly with whom you will be contracting

Key personnel important

Design-BuildUsually select tendering based on pre-qualificationDesign-Build team vs Design-Build contractor (i.e. group coming together for first time)Often no proventrack record as teamHow to pre-qualify?Changes in team members/personnelKey personnel critical

Commitment to Project?

Procurement Process Issues (cont’d)

Design-Bid-BuildLow contractor bid cost“Objective” bid analysisCapital cost is major/only factor

Design-BuildHigh bid cost

Cost related to completion of design for bidContractor may have to pay designers

“Subjective” bid analysisCapital cost only one of many factors

Procurement Process Issues (cont’d)D-B team may come together for first time only at RFQ/REOI stagePrior to Proposal submission, D-B team’s internal contractual arrangements often “loose”Typically:

“Pre-bid” JV/Consortium Agreement only entered when RFP issuedActual JV/Consortium agreement for project not prepared or finalized until just before contract award (at the earliest)

Resolve legal capacity of JV/Consortium to contract in its own name as in many jurisdictions these are not recognized as separate legal entities

Procurement Process Issues (cont’d)What are ramifications on process of:

“Short-listing” entities that do not exist until contract awarded (often the case for major projects)?Changes in composition of proponent teams?Changes in internal contractual structure from that on which proponent was short-listed?

Are you evaluating the entities named, or really their parent companies through consolidated financial statements?Should Procurement process allow design-build teams flexibility to change members/arrangements?

Procurement Process Issues (cont’d)Enforceability of “bid security”Competition/Participation Agreements:

Contractual commitment by proponent to submit conforming proposal, backed by appropriate proposal security (e.g. L/C)Contractual commitment by owner to pay honorarium (if applicable)Addresses owner entitlement to use ideas/designs of unsuccessful proponents

Procurement Process Issues (cont’d)Competition/Participation Agreements (cont’d)

Proposal security paid to owner as liquidated damages if proponent fails to submit a “conforming” proposal

Must define what constitutes a “conforming” proposal in terms of conformance to RFP process documents, Form of Contract and Owner’s Performance Requirements/Specifications

Dispute resolution process for disputes over entitlement to liquidated damages or honorarium

Role of Owner’s EngineerIs/should there be a role?

“Design-Build may also encourage economies, not only in terms of price, but at the expense of quality. Therefore, it is considered essential that the Employer has (or procures) expert technical services, in order to ensure that his requirements are elaborated in the tender documents and are achieved in practice. If expertise is unavailable, problems may arise, particularly in respect of the need for variations.”

Guide to the Use of FIDIC Conditions for Design-Build and Turnkey Contracts

Role of Owner’s Engineer (cont’d)Can be in-house or consultant, Owner’s agent or independentRole and responsibilities may vary, depending on project

Role of Owner’s Engineer (cont’d)No Owner’s Engineer in some contracts

E.g. CCA-14 (but see role of D-B Contractor’s Engineer)FIDIC Silver Book

Owner’s Engineer in other contractsFIDIC Orange Book (role similar to Red Book)Many custom forms

If dispute over design, submittals, progress payments – who resolves in first instance?

Decision binding or non-binding?If design dispute, who dictates solution?

Who is responsible for the design if Owner’s Engineer has (final or interim) authority to resolve disputes over design?

Role of Owner’s Engineer (cont’d)Owner’s Engineer can help identify gaps or problems in design

This role is critical if D-B contractor provides limited warranties of short duration but completed facility has a long life

If role not clearly defined, if Owner’s Engineer administers contract is it an agent of Owner?Owner’s Engineer essential if D-B contractor’s engineer is on a fixed price with limited scope, does not provide field services, or doesn’t fully take into account future life-cycle issues).

Contractor’s ProposalShould contract include or exclude proposal?Should proposal be merged with Owner’s Performance Requirements/Specifications?Including proposal in contract:

Contractor’s perspective/hope: qualifies & defines/limits scope/responsibilityOwner’s perspective/hope: expands scope/responsibilityOften forms basis of disputes and claims, and raises issues of liability/responsibilityCan be successfully used to defeat claims under performance guarantees

Design IssuesControl over design

How much does owner want vs. need?How much “interference” can D-B contractor tolerate?

To what extent is design to be prescribed? Provides owner comfortLimits contractor flexibility & innovationImpacts submission costs & scheduleRaises issue of who is responsible for design meeting its purpose and potential future claims

Are both design and detailed specifications to be complete prior to contract?

Design Issues (cont’d)Who is the “Designer”

For some projects, critical there be single point responsibility for overall design (e.g. dams)Will a single design firm have overall responsibility for the entire design or will the design be parceled out to a number of firms?Gaps in design, and failure to fully integrate and coordinate design, between different design firms and major equipment manufacturers can lead to significant disputes

Remedial measures not always possible after project completion and Owner’s remedies may be inadequate

Deal with this fully in D-B contract by identifying role & responsibility of “Designer” that will be under the D-B contractor

Design Issues (cont’d)Standard of Care

What is “Standard industry practice”?Such terms must be defined in contract since often no real “standard” exists

Where design standards or codes exist, are they of general application or specific/applicable to industrial projects (e.g. hydroelectric dams)No specific Canadian design standards and codes for some projects (e.g. dams)Are the standards prescriptive or merely guidelines that leave considerable discretion to designer?

Design Issues (cont’d)Design criteria

Are specified criteria minimum or maximum?Prior to contract, owner and contractor agree they are “minimum” criteriaAfter contract, they may become “maximum” criteria

Interpretation of codes and standards variesMost codes leave room for interpretation

Under D-B-B, owner’s engineer may use conservative interpretationUnder D-B, contractor’s engineer may be pressured to use “aggressive” interpretationMinimize issues by specifying criteria for application –e.g. additional load factors or capacity reductions for codes and standards

Use of “reference projects”

Design Issues (cont’d)Design review process

Hands off or hands on approach?Consequences - interference vs input

“Approve” vs. “accept” – and when?Tensions between D-B contractor and design team where D-B contractor controls purse stringsReview by owner/owner’s engineer vs. independent technical panel (e.g. independent panel of geotechnical reviewers)Must balance D-B contractor’s interests (need for flexibility) and owner’s interests (prudent and safe design that will work and reduce life cycle costs)Disputes? “Work under protest” allowed?

Design Issues (cont’d)Fitness for purpose

Implied term under Canadian statutes only applies to contracts for the sale of goods (e.g. equipment and materials)Fit for purpose often excluded in D-B contracts

In construction contracts, courts at times add an implied term that materials supplied will be fit for purposeOften no implied term that completed facility will be fit for purposeCan sometimes address by limiting purpose to meeting performance requirements

Design Issues (cont’d)Modifying design to suit unanticipated site conditions

Need for mandatory design representative at site?To be representative of the “Designer” on site To promptly identify when unanticipated conditions occur that impact design (i.e. proactive)To coordinate field changes with design office

Final designDesign creep from preliminary designDesign “intent” vs variation/change orderFinal design or justification of preliminary design?

Or retroactive justification of what was done without final design?

Design Issues (cont’d)Integration with existing facilities

Expanding existing facilities can be problematicDefining battery limits and scope of work often difficultBalancing standardization of new with existing facilities vs. D-B contractor’s innovation and freedom to select

In absence of contractual provisions, D-B contractor generally free to select equipment, layouts, control panel schematics and logic for new facility

Must give due consideration to training and safety

General WarrantiesMechanical/equipment warranties

Commencement and duration?Evergreen?

Civil work warrantiesCommencement and duration?Relationship to design?

Design warrantiesDuration?

General designMajor equipment

Limits on liability

Performance SpecificationsPerformance based contractsPerformance requirements and consequences of failure to meet those requirements are critical to success

Performance characteristics of completed facilityAlso performance characteristics of key civil, mechanical and electrical parts of the facilityNeed to address and clarify:

Number, type and scheduling of routine performance testsStandards, testing protocols, testing conditions, method of samplingRe-testing procedures if tests fail or are interrupted

Performance Specifications (cont’d)Often not well draftedMust focus on “Big Picture”Must include systems and sub-systems

For each component part of project, identify overall performance requirement separately from detailed requirements Use consistent numbering format throughout!

Specify details only where critical to OwnerE.g. grade of stainless piping and/or minimum I.D. of piping if critical to owner rather than leave to dispute after contract awardE.g. type, location and minimum sizes for access

Performance Specifications (cont’d)Use of general reference “standards”

“Standard Industry Practice”, “Prudent Utility Practice” and other “Motherhood Provisions”.

Often such standards vary from one company to another“Current Practice” – can be issue if D-B contractor or its designers are not localUse definitions to define what is intended

References to Codes and StandardsSome codes contain discretionary items or require contract to specify certain requirements

What is application of those codes or standards where contract fails to specify those requirements?

Performance Specifications (cont’d)Level of detail in Performance Specifications

Balancing ActMinimal amount to protect owner vs. flexibility to D-B contractor and innovation

Beware of including specifications that are too detailed and specific

E.g. Specify overhead crane by function rather than by minimum and maximum hook elevations if floor and roof elevations not specifiedSpecifications must not conflict with Performance Requirements and Performance Guarantees or they prevent D-B contractor from meeting them

Contract should address who is responsible in such case

Performance GuaranteesEnforceability is dependent on quality and completeness of drafting of Performance GuaranteesToo often, Performance Guarantees not well draftedMust focus on inputs and outputs

If inputs not to spec, are outputs really guaranteed?Two levels of Performance Guarantees

Performance guarantees for facility as a wholePerformance guarantees for individual components, equipment, subsystems and systemsKeep the distinction clear throughout the documents!

Performance testsWhen are they established and who establishes them?How & when will they be performed – who performs them?

Progress PaymentsMust balance payment measurement and ease of contract administration

Progress payments vs. fixed monthly payments vs. milestone payments

Must define measurements and payments for progress, but what is true value of:

a partially completed design?a manufacturing process that is in progress?testing and commissioning that identifies problems which may take months to resolve?Incomplete design documents, manuals, QA/QC documentation, submittals, as-builts, etc.?

Variations and ChangesRisk of changes is related to quality of Owner’s Requirements and/or state of completion of design as of contract awardSubstitutions vs. Changes by Contractor

To what extent can D-B contractor substitute?Timing – before or after design review?Who receives benefit of cost savings?

Owner Change Orders and Change DirectivesCan have significant impact on performance guarantees – must address at time CO/CD issuedValuation where design/construction overlaps?Valuation of risk assumed or perceived?

Subsurface ConditionsHazardous Substances

ExistingNewly discovered

Changes in Geotechnical ConditionsOpportunity for investigationRisk allocation/management

Inclusion of baseline geotechnical report?Requirement for mandatory proponent field investigations, perhaps funded by owner during RFP process

QualityQA/QC is often a concern for D-B contractsSchedule delays can pressure QA/QCMere reliance on ISO and other broad standards is often not sufficientClarify requirements for inspection & test plans, shipping releases, QC release forms, NCRs, QC compliance certificates, etc..Pressure on QA/QC where it may hold up production – in supply or installationField modifications to suit typically occur on fast track D-B contracts

To what extent can Owner live with this?

Quality (cont’d)Manufacture & Supply

Design, procurement, manufacture and installation often overlap, creating QA/QC challengesLong lead times for procurement may require modifications to detailed design and specifications of other components

Including field changes to design/equipmentStandardization vs. over-designIndependent testing at manufacturer’s premises

Best D-B contractors fully support comprehensive QA/QC

ScheduleMust have realistic, achievable schedule

Sufficient time for design review / re-submittalsSufficient time for detailed design & commissioning“Political schedules” can have a significant price

Schedule/coordination risk – e.g. for equipment delivery, inter-connection, etc.

Largely borne by contractor under Design-BuildLargely borne by owner under Design-Bid-Build

Consider wisdom of owner supply of any itemAny delay can result in huge damages to Owner

Must ensure that “Fast Track” does not become “Build-Design”

Schedule (cont’d)“Aggressive” schedules often used for revenue-producing projects and this often results in less than perfect contract documents

Source of stress for lawyers and consultantsBUT: acceptable where Owner is knowledgeable and experienced and consciously balances risk of increased cost for changes and acceleration against substantial revenues earned by coming on earlier than if project waited until documents are “perfect”

Schedule (cont’d)Delay Liquidated Damages & Bonus for Early Completion

Project finance may require significant Delay LDsRevenue generating projects may have significant bonus for early completionAdvantages and disadvantages

Incentive to accelerate to avoid Delay LDs and earn bonus may lead to “Build-Design”Compliance with notice provisions in D-B contract and focus on delay claims may result in deteriorating working relationships on site.

SafetyPublic safety

Difficult to address contractually by reference only to codes and standardsConcern over safety generally increases as size and complexity of project / consequence of failure increases

E.g. for hydroelectric facility involving a high head dam immediately upstream of communities

Extended warranties for public safety issues?Worker safety

Designating D-B contractor as “prime contractor”responsible for all site safety often not sufficientOwner safety audits still required

Safety (cont’d)

Design-Bid-BuildDesign-Bid-Build may result in Owner assuming safety obligations as the“Prime Contractor” or ”Prime Constructor

Design-BuildDesign-Build increases ability to designate Design-Build Contractor as “Prime Contractor” or “Constructor” under applicable WCBor Occupational Health & Safety legislation

Commissioning and TurnoverOften inadequately dealt with in (all) contractsOwner’s typically fail to recognize “Final O&M Manuals” never available until months after start-up

Must distinguish draft vs. final O&M manualsAddress & clarify overlap of maintenance vs. warranty vs. deficiency workAddress D-B contractor use and replenishment of owner spares

Impact on availability of long-lead time spares

Commissioning and Turnover (cont’d)Role of owner’s O&M personnel and training programs for O&M personnel often unclear

When are they to be available?Equipment operation prior to facility turnover?

Pre and post commissioningDirection and control of commissioning personnel and union jurisdiction issuesResponsibility for damage

Scheduling of testingResponsibility for costs of consumables and O&M personnel prior to facility turnover

InsuranceNeed to consider insurance program prior to issuing RFP!Availability over contract term? P3 contracts? Insurance can assist parties to manage risk

E.g. Delayed Opening Insurance for owner where owner procures marine cargo/inland transit insurance

Consider how to integrate/coordinate self-insured programsMust consider extent to which future operating policies for completed facility may resolve contentious risk allocation issues under D-B contract

Insurance (cont’d)Beware of reliance on certificates of insurance but there may be no alternative at time of contract awardPolicies for major projects are typically “manuscript” policies and not “standard form”

Consequence is that policy wording often not finalized until months after contract awardWhat happens if loss occurs after award but prior to policy wording being finalized?

Especially if policy wording still under review relates to an exclusion clause that may or may not apply to the loss.

BondingBid Bonds vs alternate security

May be difficult or impossible to enforce if parties negotiate changes to Proposal as submitted

Labour & Material Payment BondsPerformance Bonds

Application to design errors, damages for delay, liquidated damagesObligee must first fulfill its obligations under bond

Letters of Credit, Bank Guarantees and other alternates to bonds may be required if owner looking to foreign contractor participation

In what amounts and on what terms?

Consequential DamagesDifficult to find definitive legal definition of “consequential damages” for different jurisdictionsDefinition of “consequential damages”:

“losses that do not flow directly and immediately from an injurious act, but that result indirectly from the act.”

Black’s Law Dictionary, 7th edition.

Definition of “direct damages”:“damages that the law presumes follow from the type of wrong complained of.”

Black’s Law Dictionary, 7th edition.

Consequential Damages (cont’d)If project’s sole purpose is to be a revenue-generating facility, if it fails to work/produce product is the loss “consequential damages”or direct damages?

Any difference if, for example, you characterize project as a “profit centre” whose sole purpose is to produce a product/revenue to provide a return on investment?

Consider extent to which loss is insurable if caused by property damage

Force MajeureOften considered “boilerplate” in contractsExperienced D-B contractors much more sophisticated and recognize need to carefully address actual wording on a contract by contract basisAny Events of Force Majeure compensable in terms of both money and schedule reliefConsequences of contract termination may not be acceptable to the Owner if facility is not functional

Consider Owner option to pay all delay and increased costs if Event of Force Majeure continues beyond threshold limit

Contractor DefaultRemedies for default often inadequateTermination not always practicable or realistic

Consequences of termination of incomplete design-build project can be horrific to owner unless owner has ability to take over all subcontracts with designers and suppliers

Termination for default of D-B contractorRights of surety under performance bondRights of financing entities under financing documentsAssignment of subcontracts vs. subcontractor cooperation

Some (Obvious) Drafting PointsThese apply to P3 contracts and D-B contractsFollowing are some obvious but often overlooked drafting points, primarily when working with consultants drafting Owner’s Requirements/Output Specifications and other technical schedulesThese drafting points should:

Improve initial quality of documentsMinimize conflicts and duplicationFacilitate referencing specific provisions for discussion, negotiation, amendment, etc.Make my life easier when acting for a D-B contractor or lender’s counsel!

Standardize Drafting and StylesCreate or adopt a style manual at the outset

Ensure it is then used consistently throughout D-B contract and all of its schedules, including by legal team and all consultants

Create standard template(s) for use by everyone, with standard sets of: paragraph styles; numbering schemes; auto-generated table of contents; etc.Consider basic word processing training seminar to avoid corruption of documents by users with limited word processing knowledge/skills

Divisions within DocumentsUse table of contents at the beginning of each part of the Owner’s Requirements/Output Specification to check for logic and completenessEvery paragraph and title should be numbered whenever possible to facilitate:

Ease of cross-referencingReferencing in correspondenceAmendments by Addenda

Eases references and amendmentsE.g. Avoids potential errors if you need to “amend 3rd sentence of 4th para under 8th bullet of Sub-clause 5.7 of Article A7”

Divisions within Documents (cont’d)Settle on units of division as part of style manual to avoid confusion and errors

Article, Section, Clause, Sub-Clause, Paragraph?Or: Article, Clause, Paragraph?

Alternatively, use one terminology throughoutE.g. Section 1, Section 1.2, Section 1.2.3, etc.

“Technical” numbering preferable to “legal”Technical: Section 1.3.1.2Legal: Article A, Section 3, Clause (a), Sub-clause (ii), Paragraph 1

Ideally should be able to refer to any paragraph anywhere by simple reference to document and single number

Divisions within Documents (cont’d)Numbering Scheme for ORs/Output Specs

Standardized for building contractsNo standard system for D-B contracts

Use of multiple consultants from multiple disciplines can mean substantially different numbering systems will be used throughout if not standardized at outset

Use only one system throughout ORs/Output Specs to avoid the following (actual example):

Section 1: 4.1, with bullets for next levelsSection 2: 2.1 and A1(c).2.4.3 and B2.2.1.1, with

bullets for next levelSection 3: D1.2.4.2, with bullets for next levelSection 5: 5.1.2.1, with no bullets

DefinitionsSettle definitions and terminology earlyDefine terms only once.

Use cross-referenced definitions when necessary to avoid repetition

Consolidate all definitions and acronyms into a single definition section or schedule

Eliminates “hide and seek” and multiple/conflicting definitions of same terms

Legal parts of agreements often conform to the above, but the ORs/Output Specifications and technical schedules often do not

Another reason to have technical drafting coordination workshops

Performance vs. Detailed Specs ORs/Output Specifications in P3 agreements and D-B contracts are typically performance based specifications rather than detailed design or technical specificationsConsultants may be experienced in preparing detailed design or technical specifications, but many have little experience with drafting performance based specificationsAn initial “drafting workshop” facilitated by someone experienced in drafting performance specifications can be very helpful

Performance vs. Detailed Specs (cont’d)ORs/Output Specifications must focus on “Big Picture” and not lose sight of the ball.

Easier to do this if each section of the ORs/Output Specifications:

Starts with a statement of purpose/objective to be metIncludes performance measures and/or tests and/or other requirements to show or demonstrate performanceIncludes detailed specs only where specific details are critical to owner

Clarity and consistency in ORs/Output Specifications later facilitates timely review of design submittals from contractor during design review/submittal procedure.

Coordination of DraftingDrafting of Output Specifications requires joint effort from several technical consultants/teams

Establish regular coordination meetings regarding adherence to style manual, consistency of concepts, wording and terminology, and conformance of Output Specifications to the content and format of P3 agreement

Coordination of Drafting (cont’d)Key to success: One person must take “ownership” and be responsible for constantly reviewing the whole of the ORs/Output Specifications to:

Ensure uniformity and compatibility of the different sections of the ORs/Output Specifications with each otherEnsure the ORs/Output Specifications read as one document harmonized with the commercial/legal parts of the contractIdentify conflicts and duplication

Summary of D-B contractsOwner

Some advantages: lower up-front cost, reduced risk of claims, single-point responsibility, some room for innovation, forces early decisions on requirementsSome disadvantages: loss of control (e.g. design, QC, etc.), potentially higher cost of changes

ContractorSome advantages: more control, ability to manage conflicts and problems more effectively, and possibly increased opportunity to win contract by innovationSome disadvantages: much higher up-front bidding costs and substantially more risk

Summary of D-B contracts (cont’d)Successful D-B contracts require knowledgeable and experienced adviceD-B doesn’t guarantee best project or that there will be no claims, but well suited when:

Project provides marginal returns so performance guarantees of completed facility are requiredOwner is “low overhead owner” without resources or expertise for traditional project deliveryTechnology is proprietary or driven by OEMOwner and its consultants prepared to relinquish some control to D-B contractorRisks and rewards understood and accepted

Questions?

Helmut K. Johannsen, P.Eng., C.Arb.604 631 4819hjohannsen@van.fasken.comDM_VAN#7231067v1