December 2017

Inside this issue:

Design and Construction ManagementProfessional Reporter

David J. Hatem, PC, ChairGwen P. Weisberg, Esq., Managing Editor

www.donovanhatem.com

Design-Build & Public-Private Partnerships: Managing Cost Overrun Risk for Project Owners On Infrastructure MegaprojectsBy John Reilly P.E., C.P.Eng. John Reilly Associates International Ltd., Framingham, MA

David J. Hatem, PC, Esq. Donovan Hatem LLP, Boston, MA

Abstract

Cost overrun risk for owners has been a significant concern, prompting development of a number

of best practices to more realistically identify and quantify risks that impact cost and schedule on megaprojects and to prudently allocate those risks among project participants.

Design-build (DB) and public-private partnership (P3) projects present owners with the opportunity to transfer substantial design and construction risks to private sector participants. Examination of the contemporary practices of

owners in achieving that objective and whether they improve owner “cost overrun” exposure is necessary. Many owner procurements, contractual and other practices will likely result in retention or a subtle reversion of cost overrun risk to the megaproject owner.

The premise of this paper is that while many owners regard DB and P3s as opportunities to transfer to the private sector significant design and construction risks that could result in cost overruns, unbalanced risk allocation, and other imprudent procurement, contractual and implementation practices are likely to result in retention/reversion of substantial owner risk for cost overruns.

IntroductionThe chronic experience of cost overruns on infrastructure and other complex megaprojects is well-documented, (Reilly, 2001; Flyvbjerg, Holm & Buhl, 2002; Butts & Linton, 2003b; 2009) in which overruns, in a significant numbers of cases, are of the order of +100% over the initial budget. Myriad and diverse reasons account for such cost overruns on megaprojects, in many cases relating to the size, complexity and long time-frames of such projects involving, as a consequence, changes in political environments among other factors.

The focus of this paper is infrastructure megaprojects and two significant sources of cost overruns: (i) defective design and (ii) differing subsurface conditions. In the United States, a great deal of the cost overrun experience has occurred in the context of the use of the design-bid-build (DBB) method and, for the most part, the adverse impact of that experience has been borne by the owner since, in DBB, the risk of cost overruns for defective design (“design adequacy risk”)

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typically resides with the owner and, subject to particular risk allocation contractual regimes, cost increases due to materially different subsurface conditions are substantially borne by the owner as well (Hatem, 2010a; 2017).

In response to megaproject cost overruns, a number of proactive management practices have been implemented in recent decades, including management strategies such as partnering, strategic team alignment, risk management, improved contracting, risk-based cost validation methods and, better communications and public outreach methods (Egan, 1998; Reilly, 1999; 2000; 2003b; Flyvbjerg, Bruzelius & Rothengatter, 2003; Reilly & Brown 2004a). The extent to which those practices have mitigated cost overrun exposure for owners is still being evaluated – however owners’ heightened awareness of cost outcomes, which have substantially exceeded authorised budgets, has increased the use of such practices to help mitigate cost overruns, potential risks and, to improve clarity of contractual requirements and obligations.

In addition to such practices, owners, for a variety of reasons, are also utilizing alternative delivery and financing approaches, such as DB (Reilly, 2008) and P3s, as additional strategic planning and contractual mechanisms, designed to reduce their cost overrun exposure on infrastructure megaprojects (Hatem, 2017; Reilly, Hatem & Salvucci, 2017). These alternative approaches typically present significant opportunities for owners to allocate substantial risks for design adequacy and subsurface conditions to others; i.e., the design-builder in DB and the concessionaire in P3s (Hatem, 2014b; 2017). Since virtually all P3 projects utilise some form of the DB approach, the observations herein as to DB are equally applicable in the context of P3s.

To contain owner cost overrun exposure, DB and P3 procurement and contractual provisions typically disclaim the accuracy or completeness of, and negate any reliance rights on, any owner-furnished design or subsurface information; in many instances, limit (or preclude) equitable adjustments based on design deficiencies or differing subsurface conditions; and obligate the design-builder

to design and construct the defined scope of work for a guaranteed maximum price.

Viewed discreetly, these provisions may lead to the absolute conclusion that the owner has legally, and effectively, allocated to its contractees (i.e. design-builder in DB, and concessionaire in P3s) virtually all cost overrun exposure for design adequacy and differing subsurface conditions. A fair question, however, is to what extent those procurement and contractual practices realistically, legally and ultimately insulate the owner from cost overrun exposure in DB and P3 infrastructure megaprojects (Hatem, 2017).

Concerns with DBB for Large, Complex Projects

There are several concerns with DBB for large, complex projects.

• DBB is time consuming because all planning and design work must be completed prior to beginning bidding and the subsequent construction work, meaning that there are significant risks related to long-term (future) uncertainties and issues which may arise for large or complex projects.

• DBB projects normally have a significant number of bidders. This sometimes means that innovative construction techniques (not accessible to all contractors), cannot be included in the design, potentially reducing value for the owner.

♦ In order not to convey “unfair” advantage to one contractor and because the contractor is not yet involved in the project at the design stage, design work is typically performed without any contractor input.

♦ This means that opportunity is lost for the contractor to contribute to the design with practical suggestions and construction means-and-methods that could add value.

♦ Methods exist to address this concern such as early contractor involvement (British Highway Owner, 2004) and construction manager/general contractor (CM/GC) (Reilly, 2008). These methods allow for an opportunity to use contractors’ input regarding generally available construction best practices and possible improvements that could be realized.

• When using DBB, design and construction must be performed sequentially which means that schedule savings, which might be achieved by concurrent scheduling of (at least) some early phases of design with phases of construction, is lost.

• The contractor’s non-involvement in the design contributes to the adversarial nature of the construction process. This often results in substantial cost and schedule increases during construction – changes that might otherwise be avoidable. Frequently, these increases occur in a non-productive, inefficient, adversarial work environment, leading to claims, disputes and costly litigation (Quick, 2002).

Concerns with DB

There are also concerns with DB regarding, for example,

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quality of materials, type of structure (relating to fitness for purpose) and specific equipment to be used, e.g. tunnel boring machines (Reilly, 1997), because the owner must relinquish control over these elements as part of the DB process. DB in a competitive environment normally prioritizes minimum cost (as opposed to best value contractual approaches), but the contractor’s choices in this regard may not be the ones that the owner would make in a DBB environment and such contractor choices may affect quality or fitness for purpose. This may reduce value for the owner. Also, in giving up control of the final design, the owner may not retain appropriate nor adequate accountability for the project.

Infrastructure Megaprojects: Cost Overruns and Improved Processes Implemented

There are substantial studies documenting cost overruns in infrastructure and other complicated megaprojects (Reilly, 2001; 2003a; Flyvbjerg, et al., 2002; Butts & Linton, 2009). The root causes are discussed in other papers and publications (Hatem, 2010a; Galloway, et. al., 2013; Reilly, 2013b).

There are many key factors driving such cost overruns including, for example, the ability of the owner to reasonably project the probable cost (outturn cost) of the project given the many uncertainties that are implicit in a megaproject whose timeframe may span, in some cases, decades. In this regard, and because of this concern, the Washington State Department of Transportation developed a risk-based probable cost estimating process, called the Cost Estimate Validation Process (CEVP®) (Reilly, et. al., 2004a) which, in 2003, reasonably projected the probable cost of several complex megaprojects in Washington State. More cogently, the CEVP® process raised awareness of the impact of risk and the need for proactive risk management by the owner and staff. CEVP® includes a rigorous cost-validation process including a “basis of estimate” statement, a process to assess the reliability of the base cost estimate and a risk-based probable cost process. CEVP® (or an equivalent

risk-based cost estimating process) has been adopted by several U.S. federal and state agencies and is recognised

internationally.

Discussion

DBB Infrastructure Megaprojects: Roles, Responsibilities and Risks

Design Adequacy Risk Allocation

Design inadequacies and subsurface conditions variability together represent the primary and more significant, design and construction risk factors in most infrastructure megaprojects, especially those involving major subsurface work. In DBB, the owner typically controls and prescribes the definition, details, mandatory criteria, and standards of the design development and finalization process relating to permanent project work. The rationale for allocating design adequacy risk to the owner in DBB derives from the principle that since the owner is in control of the design process, it should be legally responsible for, and impliedly warrant to the contractor, the accuracy, suitability, completeness and constructability of the final design furnished to the contractor (Sweet & Schneier, 2013). The contractor’s role in DBB relative to design development typically is passive; the contractor is bound to construct according to the design details furnished and prescribed by the owner. As such, most legal systems assign to the owner risk and responsibility for the adequacy, suitability and constructability (“design adequacy”) of the permanent works design that it furnishes to the contractor as part of the contract document requirements. These typical roles and responsibilities in DBB for design adequacy may be displaced, as in situations in which a contractor is delegated responsibility for design of a portion of permanent project work (Hatem, 2010b; 2016a; Sweet, 2010).

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Subsurface Conditions Risk Allocation

In DBB infrastructure projects, efforts generally are made to share risk of cost and time impacts due to the encountering of subsurface conditions materially different from those reasonably indicated in the contract documents (Hatem, 2017). In many instances, subsurface conditions risk sharing on public projects is mandated by statutory or other legal requirements (Hatem, 2017). In major subsurface infrastructure projects, risk allocation for subsurface conditions variations is complicated by the interdependencies and interrelationships among the compatibility and suitability of between: (a) the scope and quality of pre-construction subsurface investigation; (b) the assessment and evaluation of available subsurface data relative to the final design approach; (c) the details of the final design approach for permanent work; (d) the selection of the final design approach relative to anticipated subsurface conditions; and (e) the contractor’s means and methods, and equipment utilized in the execution of the work. Considered discreetly, (a), (b), (c) and (d) typically fall within the exclusive control and responsibility of the owner in DBB, while (e) typically falls within the exclusive control of the contractor (Hatem, 2010b; 2017). However, the interrelationships and interdependencies among (a), (b), (c), (d) and (e), in DBB infrastructure projects involving major subsurface work, present challenges and complexities in evaluating and precisely determining ultimate risk and responsibility as between the owner and contractor in the context of allegations of defective design and/or differing subsurface conditions (Hatem, 2017).

DB and P3 Infrastructure Megaprojects: Roles, Responsibilities and Risks

Many megaproject owners are attracted to DB and P3s as approaches to significantly contain (if not, ideally, eliminate) their exposure for cost overruns, especially risk pertaining to design adequacy and subsurface conditions (Hatem, 2014b; 2017).

Based on current trends and forecasts, more infrastructure megaprojects in the foreseeable future will be delivered utilizing DB and P3s. To the extent that containment of cost overrun risk is a principal objective of many owners in selecting DB and P3s, a fair question is whether and how that objective may be effectively and realistically accomplished. An equally important question focuses on what owner procurement, contractual and performance practices in DB and P3s ultimately may result in a reversion or re-allocation to the owner of cost overrun exposure due to design adequacy and subsurface conditions risks. Further, what guidelines should be developed to inform prudent and effective design adequacy and subsurface conditions risk allocation in DB and P3?

Design Adequacy and Subsurface Conditions Risk Allocation in DB and P3s

As previously noted, in major subsurface projects there are interdependencies and interrelationships between: (a)

the scope and quality of subsurface investigation; (b) the assessment and evaluation of available subsurface data relative to the final design approach and (c) the suitability, compatibility and constructability of that approach based upon available subsurface data and related evaluations. Given the expanded and dominant roles and responsibilities of the design-builder in (a), (b) and (c) in DB and P3s, it should reasonably be expected that the owner will and should have the opportunity and ability to allocate substantial design adequacy and subsurface conditions risk to the design-builder (Hatem, 2014b; 2017).

Design Adequacy Risk Allocation

DB and P3s are intended to effect a fundamental transfer of design adequacy risk from the owner to the design-builder because, in DB, the design-builder is contractually responsible for design adequacy. The assignment of design adequacy risk to the design-builder is rationalized on the latter’s presumed ability to meaningfully control the development and finalization of the design, and to exercise substantial and independent professional judgment, discretion and innovation in the design development process.

In general, procurement and contractual risk allocation approaches in DB and P3s are implemented in the following manner:

• the owner prepares conceptual or preliminary design criteria or standards that define certain minimum and mandatory requirements for the final design (“owner design requirements”);

• the owner disclaims the design-builder’s right to rely upon design or other information that it furnishes in the procurement;

• the owner’s authority to review (and/or not accept) the design-builder’s design submittals is limited to evaluation for conformance with the owner’s design requirements; and the design-builder is responsible for the adequacy, suitability, constructability and performance of the

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final design (to be stamped or sealed by its consulting engineer), consistent with the owner design requirements and compliance with professional and contractual standards (including fitness for purpose requirements) (Hatem, 2017).

This procurement and contractual framework is predicated on the principle that the owner will exercise limited control over, and have minimal involvement in, design development and prescription relative to (a) the design-builder’s more substantial and comprehensive role in design development and (b) the design-builder’s ability to exercise independent professional judgment, discretion and innovation in achieving the owner design requirements. In short, the allocation to the design-builder of design adequacy risk is rationalized on the degree of control expected of, and contractually assigned to, the design-builder in the design development process.

Subsurface Conditions Risk Allocation

In DB and P3 megaprojects involving major subsurface work, the procurement and contract documents will include not only owner design requirements but also, in some instances, some subsurface data and reports (“subsurface information”) may be furnished. Beyond the preceding statement, it is challenging to generalize on the framework for subsurface conditions risk allocation in the context of DB and P3 infrastructure megaprojects, as there is much variability and optionality in approaches. For example:

• Owners may furnish more or less subsurface information.

• Owners may or may not disclaim (in whole or in part) the design-builder’s right to rely upon owner-furnished subsurface information.

• The contract documents may or may not include geotechnical reports, including a geotechnical baseline report, prepared by the owner’s consulting engineer.

• The contract documents may or may not include provisions that allow for sharing of risk due to materially differing subsurface conditions by providing for time or cost equitable adjustment opportunities (Gransberg & Loulakis, 2012; 2016; Hatem & Corkum, 2014; Loulakis, et al., 2015; Hatem, 2014b; 2016b; 2017; Essex, 2016).

These varied approaches will have a significant potential impact on subsurface conditions risk allocation as between the owner and design-builder in DB (and the concessionaire in P3s).

Some owners allow for equitable adjustments as the result of a time-limited “scope validation” process during which the design-builder has the opportunity to evaluate the suitability of the owner-furnished subsurface information in the context of the planned design development approach. (Briglia & Loulakis, 2017; pp. 118-119; Hatem & Gary, 2017).

On other subsurface projects, an owner may commence the project in a more conventional mode in which it leads the processes of subsurface investigation and evaluation, and preliminary design development, and invites a putative design-builder to participate in those processes, with the

intention of subsequently entering into a DB contract with that design-builder. This approach has been characterized as “progressive” DB. (Briglia & Loulakis, 2017). The “progressive” DB approach allows the owner and the design-builder to collaborate in (a) defining the scope of subsurface investigation; (b) evaluating the products of that investigation; (c) developing a design considered suitable and compatible with the investigation and evaluation; and (d) developing contractual risk allocation approaches for design adequacy and subsurface conditions that are particular to the project-specific alignment of anticipated subsurface conditions and design approaches.

Both the “scope validation” and the “progressive” DB approaches are intended to improve the process and point in time at which final contractual decisions as to design adequacy and subsurface conditions risk allocation may be informed and determined. The improvement is accomplished by providing for a meaningful and dynamic approach in which more “real time” opportunity for synchronized interaction and collaboration between the roles and responsibilities of the owner and the design-builder is contractually allowed regarding the interrelationships and interdependencies relating to design and subsurface conditions, so as to inform a more refined, sensitive, and particularized approach to fair and balanced contractual risk allocation.

In the context of the “scope validation” and “progressive DB approaches, the particularization, clarity and documentation of contractual risk allocation decisions may be enhanced through the owner and design-builder’s collaboration in the preparation of a Geotechnical Baseline Report.

Risk allocation for design adequacy and subsurface conditions in DB and P3 projects should derive from how certain underlying questions are addressed, including:

• Who is responsible for defining the scope of and performing the subsurface investigation?

• Who is responsible for the assessment and evaluation of subsurface conditions/properties relative to geotechnical design considerations?

• Whether the owner provides site-specific subsurface information in the procurement documents.

• Whether the design-builder has any right to rely upon subsurface information furnished by the owner.

• Whether there are disclaimers as to the accuracy or suitability of subsurface information, and the specificity of any such disclaimers.

• Whether a differing site condition provision allows for an equitable adjustment if materially different subsurface conditions are encountered in the design and construction processes from those indicated in subsurface information furnished in the procurement and contract documents.

The answers to these questions will have profound influence, if not determinative effect, upon design adequacy and subsurface conditions risk allocation in DB and P3s.

Why such a significant degree of variation in subsurface conditions risk allocation approaches in DB and P3s? In part, the answer lies in the fact that in DB and P3s typically the

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owner has significantly more legal latitude and discretion to decide how to allocate subsurface conditions risk; and legal requirements applicable to DBB procurement mandating specific subsurface conditions risk allocation approaches may not automatically or necessarily govern in DB and P3 procurements (Loulakis, et al., 2015; Hatem, 2017). This results in significantly more opportunity for owner discretion in selecting optional approaches for subsurface conditions risk allocation in DB and P3s.

The answer also derives from the recognition that in major subsurface projects subsurface conditions risk allocation is and should be correlated with the assignment and allocation of roles, risks and responsibilities for design adequacy. More specifically, there are critical interdependencies, and interrelationships and interactions among the scope and character of subsurface investigation; how subsurface information or data is characterized, assessed, evaluated and reported; the evaluation of subsurface data or information relative to the final design approach; and the compatibility, suitability and constructability of the final design in anticipated subsurface conditions (Loulakis, 2013; Hatem, 2017). In DB and P3s, contractual decisions about subsurface conditions risk allocation reasonably should be influenced by the design-builder’s dominant role and responsibility in: (a) defining and conducting subsurface investigations and related evaluations; and (b) developing and finalizing the design and its contractually allocated risk and responsibility for design adequacy, including the suitability, compatibility and constructability of that design in the context of reasonably anticipated subsurface conditions.

For these reasons, contractual decisions in DB and P3s concerning subsurface conditions risk allocation, appropriately, and understandably, are made in recognition of the design-builder’s substantial roles, responsibilities and risks as to subsurface investigation and related evaluations, and in design development. These decisions are (and should be) made on a project-specific basis.

As such, subsurface conditions risk allocation in DB and P3s appropriately is achieved through a variety of project-specific approaches that prudently should take into account the particular and respective roles, responsibilities and risks of the owner and design-builder, all considered in the context of other project-specific factors and considerations (Hatem, 2017). This degree of variability in approaches for subsurface conditions risk allocation is not inherently problematic; the key is in the quality and conscientiousness of the process by which decisions are made concerning the approach selected, especially as to the correlation and balancing of roles, responsibilities and risks in a manner that results in fairness in risk allocation.

Owner Procurement, Contracting and Performance Practices: Impact on Cost Overrun Exposure in DB and P3 Infrastructure Megaprojects

This discussion demonstrates the substantial opportunity in DB and P3s for the owner to allocate significant risk for design adequacy and subsurface conditions to the design-

builder on infrastructure megaprojects, thereby significantly containing the owner’s correlative cost overrun exposure (Fluor Intercontinental, Inc. v. Dept. of State, 2013). That said, in some important respects, contractual provisions pertaining to design adequacy and subsurface conditions risk allocation in DB and P3s may, ultimately, provide less legal protection to the owner for cost overrun exposures. The latter situation may occur when owners engage in certain procurement, contractual and performance practices that result in a “re-allocation” of risk to the owner.

The project-specific application and initial articulation in procurement and contract documents of risk allocation approaches for design adequacy and subsurface conditions often is not ultimately as decisive and definitive as one may think. In some DB and P3 subsurface projects, disputes arise as to risk allocation in the subject areas when procurement and contract documents do not clearly state: (a) whether design criteria or standards are furnished merely as guidance or recommendations, as distinct from requirements or other mandatory and prescriptive terms; (b) the extent to which, if at all, the design-builder is entitled to rely upon or is required to utilize owner-furnished conceptual or preliminary design and subsurface information (or characterizations or assessments regarding subsurface conditions or properties) in the design development process; and/or (c) whether the design-builder may be entitled to an equitable adjustment in the event that encountered subsurface conditions materially differ from those indicated in owner-furnished conceptual or preliminary design and subsurface information (Record Steel and Construction v. U.S., 2004; Fluor Intercontinental, Inc. v. Dept. of State, 2013; Appeal of PBS&J Constructors, Inc., 2014; Metcalf Construction Co. v. U.S., 2014; Loulakis, et al., 2015; 2016).

The lack of clarity in procurement and contract documents as to these and other factors relevant to risk allocation, and the resultant disputes, lead to uncertainty in risk allocation, especially as relates to responsibility for cost overruns due to design inadequacies and subsurface conditions.

The principle underlying the opportunity for substantial risk allocation to the design-builder for design adequacy and subsurface conditions derives from the significant roles and responsibilities of the design-builder in the control of the design development process – as compared to the relatively minimal roles and responsibilities of the owner in those spheres. That principle may be undermined and subverted by owner practices in one or more of the following respects:

• The owner design requirements are based on a relatively high (say, 30% or more) degree of design development and/or are overly-prescriptive and detailed.

• The design-builder’s ability to exercise meaningful, independent judgment, discretion and innovation in the design development and finalization process is unreasonably restricted or constrained.

• The owner mandates that subsurface data, reports or information that it furnishes be utilized by the design-builder as the exclusive or primary basis for the design-builder’s final design.

• The owner affords the design-builder limited site access or opportunities to conduct its own subsurface

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investigations.

• The owner exercises an overly-broad review and right of rejection over the design-builder’s design submittals

• The owner (or its consulting engineer) imposes judgments upon the design-builder relating to the assessment, evaluation or characterization of subsurface conditions or properties and/or the suitability or appropriateness of the design in the specific context of anticipated subsurface conditions.

The cumulative effect of these practices potentially is – notwithstanding contractual provisions to the contrary – to place the owner in DB and P3s in a position of substantial control relative to the design development process and other important variables that impact design adequacy and subsurface conditions risk in infrastructure megaprojects (Gransberg & Loulakis, 2012; Loulakis, 2013; Hatem, 2016a; Lien & Rose 2017; Briglia & Loulakis, 2017)). These practices produce a misalignment of the control and risk equilibrium reasonably expected in DB and P3s that, in turn, produce unfairness and imbalance in risk allocation. In the context of such practices, it is likely that courts and other dispute-resolvers (such as arbitration panels or dispute review boards) will determine that allocation of contractually-defined risk on the design-builder – in the absence of considering the pragmatic impact of such owner practices – would produce fundamental unfairness due to imbalance as between control and risk. In such circumstances, the cost overrun exposure – contractually allocated to the design-builder – for design adequacy and subsurface conditions risk – may ultimately be re-allocated (in whole or in part) to the owner (Hatem, 2014a; Loulakis, et al., 2015). Thus, contractual provisions ultimately may provide illusory protection for the owner in containing cost overrun exposure due to design inadequacies and/or subsurface conditions variability.

Transformed Projects

As demonstrated by the preceding discussion, complex and challenging issues are presented in the evaluation of risk allocation among project participants in DB and P3s in which the relevant roles, responsibilities and risks of project participants are less established (particularly in terms of legal precedent) than in the DBB.

That said, risk allocation becomes even more complex and challenging in circumstances in which a specific project commences utilizing one delivery method (such as DBB or CM-At-Risk) and subsequently transforms into DB or P3; so-called, “transformed projects”.

Although this type of transformation may be planned, it often results or evolves from a number of initially unanticipated reasons, such as:

• Owner dissatisfaction with original delivery method

• Owner need or desire to compress the design and construction schedule

• Budget overruns and/or concerns about cost overruns

• Owner desire to transfer more risk to a DB Team and/or others

• Loss or reduction in available public funding

• Increased opportunity recognized for private financing

For a number of reasons, derived from the preceding factors, it reasonably should be anticipated that there will be more transformed projects encountered in the foreseeable future.

The factors that influence risk allocation in transformed projects are qualitatively different from the factors presented in the specific and discrete context of any singular or particular project delivery approach. These factors pertain to the roles, responsibilities and risks of the respective project participants in each phase or stage of the transformation that will influence risk allocation decisions and determinations such as:

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Design Characteristics

• Level of Design Development

♦ Conceptual

♦ Project-Specific v. Standard, Prototypical Design Details

♦ 30+%

♦ “100% Complete” (for all or only a portion of the project design)

Comment: The extent to which design was developed during the initial project delivery approach may evidence a degree of control and dominance in the design development process that may impact risk allocation for design adequacy as between the owner and the DB (or P3) Team.

• Stamped or Sealed Design

Comment: The stamping or sealing of owner-furnished design prepared during the initial project delivery approach may impact risk allocation for design adequacy as between the owner and the DB (or P3) Team.

• Prescriptive/Mandatory Design Criteria or Standards

Comment: The extent to which owner-furnished design prepared in the initial project delivery approach is prescriptive or mandated for adherence by the DB (or P3) Team will also influence risk allocation.

• Integration, Interface, Interdependency, and Coordination Considerations

Comment: The compatibility of owner-furnished design, with design to be prepared and stamped by the DB Team, may impact risk allocation for design adequacy and should be addressed in transformed projects.

Contractual and Legal Issues

• Professional Responsibility for Design

• Contractual Responsibility for Design

• Ownership/Use Rights Regarding Design Deliverables and Work Product

• Risk Allocation for Design Adequacy

• Permits and Approvals Relating to Design

• Stakeholder Requirements and Expectations

• Disclaimers, Reliance Rights

• Implied Warranty Obligations

Comment: There are a host of contractual and legal issues that impact risk allocation in the context of transformed projects.

Design Professional Teams

• Novation

• Assignments

• Third-Party Beneficiaries

• Indemnification

• Design Revision and Modification

• Submittal Review, RFIs, etc.

Comment: The design professionals involved in the initial delivery approach are likely to be different from those who are part of the DB Team. In some situations, there may be some commonality in the two design professional groups. The differences or commonalities in design professionals involved in the initial delivery approach and those involved in the successor delivery approach will raise specific contractual (e.g., novations, assignments) and legal issues relating to design risk and responsibility and risk allocation, to both clients and third-parties. In addition, issues such as roles and responsibilities among the various design professionals for design revisions and submittals need to be addressed.

Transformed projects present the opportunity for ambiguity as to roles, responsibilities and risk allocation relating to design adequacy and subsurface conditions. The failure

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to identify that concern and to anticipate and adequately address it, both contractually and in professional practice standards, will result in substantial risk and likely disputes involving all project participants. Clarity in design responsibility and risk, and subsurface conditions risk, in the context of transformed projects is essential.

In many circumstances, project-specific professional liability insurance may facilitate reasonable risk allocation in the context of transformed projects and, for that reason, should be seriously considered.

Conclusions: Path Forward

DB and P3s have achieved a prominent and sustaining position in delivery of infrastructure megaprojects. Owners, appropriately, and validly, choose DB and P3 to contain their risk for cost overruns. That said, fundamental principles of risk allocation fairness apply in DB and P3s, as they do, and have proven valuable, in DBB (Hatem, 2014b; 2016b; 2017). The balance – contractually and in reality – between control in the respective roles, responsibilities and risks of owner and design-builder is essential to achieving fairness in design adequacy and subsurface conditions risk allocation in DB and P3 infrastructure megaprojects.

As a general matter, the greater the degree of control and prescription exercised in DB and P3s exercised by the owner in the design development and subsurface investigation and evaluation processes, the greater the likelihood that unqualified contractual allocation to the design-builder of design adequacy and subsurface conditions risk will not be legally enforced or effectively achieved (Hatem, 2016a).

Another important factor – more subjective than contractual risk allocation terms – involves the extent to which an owner “culturally” embraces DB and P3s, in the sense of adaptively and commensurately relinquishing its more conventional (DBB) control over the design development and subsurface investigation and evaluation processes, required in DB and P3s to rationalize and justify the greater

levels of risk allocation to the design-builder for design adequacy and subsurface conditions. More specifically, and irreconcilably, some owners are neither sufficiently trained, nor acculturated, nor willing to accept their diminished role in DB and P3s, but still expect substantial risk transfer to the design-builder.

Unbalanced contractual and performance practices of the owner in DB and P3s that significantly impact design adequacy and subsurface conditions risk allocation will likely produce a re-allocation or reversion of cost overrun exposure to the megaproject owner, and result in owner cost containment objectives failing to be realized.

DB and P3s are at an important developmental point in megaproject delivery. Now is the time to assess procurement, contractual and performance practices as related to design adequacy and subsurface risk allocation in those approaches. Acknowledging that risk allocation in these spheres, especially in infrastructure megaprojects, is appropriately and significantly influenced by project-specific considerations, it is neither realistic, nor desirable to contemplate that “best practices” may be generically prescribed or developed in a standardized manner that is universally applicable in all subsurface megaproject contexts (Hatem, 2017; Hatem, 2017a)

That said, guidelines should be designed to achieve fairness and balance in design adequacy and subsurface conditions risk allocation in DB and P3s generally, and especially in infrastructure megaprojects (Hatem, 2014a; Gransberg, 2018 pending). Those guidelines should focus not merely on contractual provisions, but also on providing recommendations as to performance practices in DB and P3s that are consonant with the respective contractual roles and responsibilities of project participants and principles of fairness and balance in risk allocation.

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Megaprojects: Lessons Learned, Improved Planning and Risk Management Practices

A retrospective on over 50 years of megaprojects involvement and management (Reilly, 2016b) outlined key characteristics of such projects and general lessons-learned. A short summary from that paper, of actions that need to be addressed by owners, includes:

Management

• Megaprojects are different and require focused management, project-specific procedures and executive commitment.

• Megaprojects require vision, dedication and leadership by management and resolution of complex political issues, including political transitions.

• Early and proactive communication of the owner’s plans, goals and objectives and projected costs, with buy-in from the public and political stakeholders, is necessary.

• Alignment of the project team to key goals and objectives, performance measures, critical activities, shared values and issue resolution (elements of partnering).

• Team alignment is essential for megaprojects with multiple political entities.

• Linkage and coordination between megaproject staff and long-term owner staff is difficult – both cultures need to be respectful of one another and must address their specific goals and objectives.

• Procedures for “normal” projects may be inadequate for megaprojects.

• Conventional wisdom may not lead to the best solution for advanced underground structures. “We’ve always done it that way” is not a valid reason to use existing procedures – often, new methods need to be developed and vetted.

• A strategic technical advisory team will add expertise to owner’s capabilities.

Cost and Risk

• Commitment to, and focus on, approved budgets is critical, requiring integrated processes that support management to budget (e.g., VE, CEVP®).

• It is essential to perform continuous risk management in design – for input to probabilistic cost estimating, for risk mitigation and for risk input to bidders.

• Risk management needs to be open in the construction phase so that owner’s, contractor’s and interface risks can be managed.

• Considering low-probability/high-consequence risks is necessary and important. How such risks should be

managed and addressed is not yet clear.

• Working in partnership, owner and contractor can efficiently resolve difficult construction and contractual issues, address risks proactively and minimize cost overruns.

• Use of best risk management practices, e.g. including compliance with the ITIG Code of Practice for tunnels, leads to better visibility of potential risks, improved risk mitigation and consideration of linked/dependent risk scenarios.

Contracting Methods

• The spectrum of contracting methods (e.g., DBB, DB, P3s, GCCM, or alliancing (relationship contracting)) should be considered and matched to project needs.

• Input from potential bidders is necessary to refine contract provisions, address contingencies and allowances and to foster a fair competitive bidding environment.

• Determination of the contracting method should follow a logical procedure such as the U.S. FTA TCRP131 process. A compressed schedule should not override this determination.

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About Donovan HatemDonovan Hatem LLP is a multi-practice law firm with offices in Boston, New York, New Jersey and Rhode Island. We serve a diverse clientele of private companies, nonprofit organizations, government entities and individuals. Our clients rely on our experience and expertise for focused advice and counsel that can minimize risk exposure.

The Professional Practices Group at Donovan Hatem includes over 30 attorneys who provide highly specialized counsel to architects, engineers, and construction managers. Our experienced trial lawyers represent design professionals in jury and non-jury cases in the northeast and nationwide, and at mediations, arbitrations, and other dispute resolution forums. In addition to professional liability claims defense, Donovan Hatem’s scope of construction law expertise encompasses risk management, contract review, and general business matters.

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The Design and Construction Management Professional Reporter is prepared and edited by Donovan Hatem LLP. The opinions of the authors, while subject to the Board of Editors’ review, are solely those of the authors. The Reporter is published by Donovan Hatem LLP and is distributed with the understanding that neither the publisher nor the Board of Editors is responsible for inaccurate information. The information contained in the Report-er should not be relied upon as legal advice for specific facts and circumstances and is not intended to be a substitute for consultation with counsel. Any inquiries should be directed to David J. Hatem, PC, Donovan Hatem LLP, 53 State Street, 8th Floor, Boston, MA 02109; telephone 617.406.4800 / facsimile 617.406.4501. Inquiries and information for publication are welcome. The Reporter may constitute as advertising.

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Reilly, J. (2001). Managing the Costs of Complex, Underground and Infrastructure Projects. In: American Underground Construction Conference, Regional Conference. Seattle.

Reilly, J. (2003a). Estimating and Managing the Costs of Complex Infrastructure Projects. In: Transportation Research Board Conference, Special Panel on Cost of Mega-Projects, Washington D.C.

Reilly, J. (2003b). The Relationship of Risk Mitigation to Management and Probable Cost. In: International Tunneling Association, World Tunnelling Congress, Geldermalsen, Netherlands.