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By Val S. McWhorter,
Ronald L. Shumway and Mark E. Hanson
I.
INTRODUCTION
Whether
or not the individual topics covered in this program are
each truly a “project delivery system” or not
is less important than the effort to explore and discuss
in depth project delivery systems and many of the tools,
techniques, legal relationships and roles of the various
participants within a particular project. Successful project
delivery, that is, the ultimate completion and launch into
useful operation of a facility, whether commercial or public,
on time and consistent with anticipated costs and margins,
is after all frequently dependent and heavily influenced
by the players in the increasingly varied options for project
delivery evolving in todayís markets for construction
and related services. As construction industry professionals
and those closely allied with that field, the acknowledged
goal of the work of the contributors to this program is
to enhance understanding of the nature of project delivery
and the interplay of a number of its constituent elements,
such as contractual relationships and allocations of risk,
the evolving and mutable roles of program and construction
managers, insurance and bonding challenges and the trend
toward greater private sector initiatives in conceiving,
developing, financing and “delivering” major
projects.
Principally,
a “project delivery system” can be defined through
the entity that assumes the risks of cost, quality and
timely performance and, potentially, the additional risks
associated with emerging public/private strategies combining
delivery methods, technologies and capital sources. This
is a suggested framework within which to initially approach
analysis of legal rights and obligations in a particular
project and is based on the proposition that the nature
of the risk assumed by the entity ultimately responsible
for physically bringing the project “out of the ground” to
completion is the only marginally useful distinguishing
characteristic between project delivery systems. Thus,
design-build, design-bid-build, multi-prime and the various
turnkey, build-operate-transfer, design-build-operate methods
often viewed as falling under the privatization umbrella,
appear to differ primarily in the manner in which the risk
of “delivery” is allocated, with some increasing
the risk to the deliverer (design-build and turnkey) while
others create more narrowly defined risks (design-bid-build
and multi-prime). While those participants not carrying
this responsibility are often essential to a project advancing
to the point where it can be “delivered,” it
is suggested that changes in the participant that performs
these related services (principally management of the process)
do not alter a delivery system itself, but introduce variations
within a particular system that, as previously noted, can
influence the outcome of a project.
II.
A BRIEF HISTORY OF PROJECT DELIVERY
The substantial
differences between public and private construction procurement,
processes and contracts tilts much of the discussion of
project delivery systems to developments in the ways major “public
works” projects have been and will in the future be
conceived and implemented. The progress of major public
infrastructure projects in this country is usually viewed
as government financed and executed through the traditional
or design-bid-build method. Industrialized societies have
generally built infrastructure projects, dams, bridges,
highways, locks, wastewater treatment facilities, air and
road transport facilities, on the conviction that these
projects were necessary to provide benefits to the societiesí populations.
Such perceived benefits have included increased mobility,
enhanced commercial opportunities, protection of property
and protection of the environment. For much of the last
50 to 75 years, these projects, large, complex and intended
to serve multiple generations, have been designed, constructed,
operated and maintained primarily by governmental and quasi-governmental
entities.
Historically
during this period, procurement of project delivery services,
construction, swung from negotiated and sole source to
traditional, statutorily-mandated competitive bid, design-bid-build
to the current trend involving increased use of design-build,
other “commercial practices” and public-private
partnerships, design-build-operate and the many variations
involving innovative financing techniques which all serve
the goal of trying to do more with less; less tax dollars,
less government regulation and bureaucracy. And, in the
case of the public-private strategies the program participants
will discuss, create revenue streams to amortize construction,
operation and maintenance costs, and in some cases create
profit. These changes and trends provide the focus for
several of the programís papers and presentations.
To a
great extent the focus, function and purpose of each evolution
in the public system of construction has been efficiency,
at least in attempting to create an efficient vehicle for
the construction process, setting aside political, environmental
and economic questions of the advisability and need for
certain projects; for example, the numerous water projects
that populate the western United States. Negotiated procurement,
while efficient during times the country needed certain
essential projects done, soon gave rise to perceptions
of favoritism, unhindered discretion and corruption. Not
unlike potential reaction to recent statutory changes (FASA
and FAR Part 15) to construction and other procurement
allowing contracting officers to restrict bidding to fewer
competitors and exercise greater discretion, statutory
developments eroded contracting by negotiation and resulted
in the current preference in most large-scale, public construction
projects for the competitive bid, design-bid-build project
delivery method. With its perceived leveling of the playing
field through unit prices, expected reliance on the accuracy
of government-furnished plans and specifications (including
geotechnical information) and risk allocation clauses,
the system is perceived as less prone to corruption and
subject to public scrutiny.
Construction
and program management also developed over the last several
decades in response to shrinking corporate resources and
to better manage the processes involved in bringing to
fruition construction of major capital assets. The course
of construction management, and increasingly program management,
has been the pursuit of better informed, more efficient
decisions by project owners through professional estimating,
project scheduling, constructability reviews, program evaluation
and development, site acquisition assistance and financing
advice.
Multi-prime
contracting, as one of the programís contributors
has described, is a project delivery method with a history
coincident with public construction in many states since
the early 1900s. Again, the impetus for its development
appears to have been the desire for greater public awareness
of contract procurement processes. While it is a system
that has been infrequently used on a broad scale in the
last decade, in places where it continues to be used in
many cases competition is greater, prices to the owner
are lower and the opportunities for non-traditional and
disadvantaged businesses to enter the market are greater.
III.
NEED FOR THE KNOWLEDGE
Should
we concern ourselves with the common ground, different
functions, higher or lower risk or uncertainty of the several
project delivery systems currently in use? Is it not sufficient
to read the contract or contracts to advise our clients,
whether they be contractors, designers, financial institutions,
public entities or potential investors? Like the experience
gained through years of analyzing, advising, consulting
and sometimes litigating, it is likely that only through
experience with the transactions, operations and execution
of the kinds of projects with which the program contributors
are familiar will anyone become more skilled and of greater
benefit to the project participants to whom we provide
our services. The presentations and papers for this program
provide significant insight into legal precedent; emerging
services, potential liabilities and practical solutions;
political, legal, social and economic forces that have
prevented and now foster private sector involvement; and
many of the internal factors and elements that must be
considered in evaluating project risks and opportunities.
All the information provided is the result of substantial
experience in the respective fields of each contributor.
Many of us pride ourselves on learning by immersion or
being quick studies in our fields. It is the hope of the
organizers, presenters and contributors that the information
provided will advance your knowledge.
IV.
INTRODUCTORY COMMENTS
A.
Program Management
Program
Managers provide services that in many cases were traditionally
performed either by the architect, or with the architectís
assistance, or by the owner with a steady demand for analysis,
review and implementation of changes to its facilities
and real estate programmatic requirements. Such requirements
supported corporate real estate and construction departments
staffed with the kinds of industry professionals who now
perform site evaluation, selection, acquisition and assistance,
and management and oversight of design and construction
processes in consulting roles.
Not only
corporate downsizing, but the fragmentation of responsibilities
as architects and engineers sought to avoid potential liabilities,
caused many of these functions to no longer be performed
by owners or their architect advisors. Many architects
and engineers attempted to attract engagements that involved “pure” design
work, with the result that many of the programmatic services
and functions, often the very earliest portions of a major
project, are performed by professional managers bearing
no significant financial risk for delivery of the project. “Program
managers have now joined interior designers, construction
managers, and other competitors in capturing work and fees
that were formerly controlled by architects and engineers.”1
Some
architects and engineers have begun to compete again for
these services, recognizing the early opportunities for
involvement as the terrific marketing opportunity it is.
However, the rise of the professional program (and construction)
manager and the fragmentation of design and construction-related
responsibilities yields the anomalous result that those
traditionally most concerned with the end product, the
owner, builder and architect, have become excluded at various
stages of a project in favor of a manager with no financial
risk for the successful outcome of the project, operating
according to professional standards of care as yet largely
undefined.
B. Design-Build
The movement
to increased use of design-build, in both the public and
private realms, responds to concerns that the design-bid-build
system too frequently resulted in adversarial confrontations
between participants that unnecessarily increased project
costs and frequently delayed project delivery. Some commentators
disagree, however, the general thinking is that the system
avoid overruns and thereby minimizes disputes through single
point responsibility for both design and construction.
Problems with design are the problem of the builder since
they are one and the same. The system can be attractive
to owners for these reasons and because of the potential
to lower the overall margin paid on costs-fewer parties,
fewer profit shares to pay as part of the cost to deliver
the project.
One of
the potential problems is an owner with an ill-defined
project scope or a strong penchant to meddle and tinker
with the design. In other words, if the owner issues a
scope document that provides the design-builder a collection
of performance specifications upon which to price the project,
whether cost plus fee or lump sum, but then changes the
design criteria, the same kinds of disputes that have occurred
on many fixed-price construction projects can arise. While
some counsel that the changes clause be agreed not to operate
until a certain point in time,2 for
example, upon owner approval of 100% construction drawings,
it is extremely difficult to evaluate this proposal outside
the specific facts of a particular contract.
C.
Privatization
“In
the US, where the governmentís ownership of manufacturing
and service industries is virtually nonexistent ëprivatizationí has
been commonly associated with the promotion of private
investment in developing, financing and constructing large
infrastructure facilities where the local or state government
cannot do so alone.”3 The
transition from a system in which purely public financing,
implementation, operation, oversight and control of conception,
development and delivery of large, complex infrastructure
projects to a broader, more flexible mix of methods, has
eroded a number of legal principles that have defined and
determined whether a historically governmental function
served through a particular infrastructure facility may
legally be spun off to a private or quasi-public entity.4 It
is the thesis of several contributors and previous commentators
that such principles as the reserved powers and unlawful
delegation doctrines are no more and the relevant questions
are: What public supervisory controls should be in place
to ensure public safety and accountability? How should
a contract or the projectís contracts be coordinated
and how should they allocate the risks of the project?
Will courts uphold contractual risk allocation? Does the
delegation of formerly public power run afoul of statutory
restrictions such as public bidding statutes? If so, can
the statutory scheme be altered to provide the necessary
flexibility without removing all guidance to public employees
and without creating to much discretion so we revive corruption?
What education, training and experience ought we to expect
public employees involved in this milieu to possess?
With
regard to liability issues, other questions dominate. Will
a contractor be able to offer the common law government
contractor defense, or is it potentially liable to the “public”?
On the other hand, could a claimant proceed against the
public or quasi-public entity which might then attempt
to defend on the ground that the action was the contractorís?5
The trend
away from public development, creation and operation of
infrastructure has spurred a shift in financing capacity
from the public to the private sector as public sector
resources have been depleted through decades of financing
defense, social security, health care, and the majority
of transportation and physical infrastructure, not to mention
economic and political cycles.6 As
one commentator has put it:
No more
taxes, no more money losers. The private sector canít
have it both ways. If the private sector limits government
income, then it must also share the infrastructure burden
and accept more risk.” **** “Ultimately, the
private sector wants the public sector to protect it from
disaster and still offer a reasonable opportunity for profit.
After all, if push comes to shove, government can probably
still raise taxes. But a private enterprise is forced out
of business.7
Financing
and equity positions are a key in the trend toward greater
private sector participation. Legislatures across the country,
recognizing that private development of public works permits
the development and construction of projects that might
otherwise go unfunded and unbuilt, have developed statutory
schemes to promote such projects. Construction and engineering
firms are willing and eager participants.
[L]arge
construction firms now commonly ëbuyí sole
source business by providing financing to the project.
Just as architectural firms used to ëbuyí design
jobs by taking equity positions or agreeing to lease space
in the office towers they designed, so cash rich construction
companies are now financing their own construction budgets.
This increases their risk but also their return.8
V.
CONCLUSION
The twin,
sometimes conflicting strains of open competition and efficiency
that run through most institutions in America are most
evident today as efficiency and commercial practices become
ascendant in public procurement. While full, fair and open
competition has been the watchword for the latter part
of the twentieth century, a number of the contributors
to this program discuss the ways in which we may be witness
to a paradigm shift in public procurement of construction
and in innovative strategies to allow private sector involvement
in developing major infrastructure projects.
Other
matters of importance addressed by the contributors include
the challenges inherent in providing counsel in the face
of other rapid changes. These are: the rise of public and
private project labor agreements, increased joint venturing
by entities in different businesses and the insurance and
bonding difficulties of such arrangements.
1 C.
Noble, "Program Management: The Design Professionalís
Perspective," THE CONSTRUCTION LAWYER, October 1996 at
8.
2 M.
Loulakis, Single Point Responsibility in Design-Build Contracting,
in DESIGN-BUILD CONTRACTING HANDBOOK ß 1.14 (R. Cushman & K.S.
Taub 1992).
3 F.
Moavenzadeh & J. Miller, Public Projects That Attract Private
Investment and Parallel Private Development, in THE NEW
LEVERAGED PRIVATIZATION: MAKING PUBLIC/PRIVATE PARTNERSHIPS
WORK IN THE NINETIES 10 (ABA Section of Public Contract
Law, February 5, 1993).
4 See
generally J. Griffith, Finding the Right Road: Conventional
Process or Privatization of the Public Works Process, in
AVOIDING DETOURS IN PUBLIC WORKS CONSTRUCTION (ABA Sections
of Urban State & Local Government Law and Public Contract
Law, April 5-6, 1990).
5 Id.,
at 16.
6 M.
Utter, A Financial Perspective of the Ideal Characteristics
of Privately Financed Infrastructure Projects, in THE NEW
LEVERAGED PRIVATIZATION: MAKING PUBLIC/PRIVATE PARTNERSHIPS
WORK IN THE NINETIES (ABA Section of Public Contract Law,
February 5, 1993).
7 Id.
8 Id.
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