The Gray Area of Design/Build

 OP INSTITUTIONALBy Sarah Biser

Are design/build construction contracts legal in New York for both public and private projects? Surprisingly, the answer is not a simple yes or no.  
Traditionally, construction projects have not been design/build, but rather design/bid/build. In that system, the owner contracts first with a design professional and then separately bids out the project to and contract separately with a contractor. The designer is responsible only for its failure to meet the "standard of care." This means the owner is responsible for the design to the extent that there are non-negligent errors or omissions. The owner also bears the risk of the designer and contractor blaming each other for errors or delays. To the extent that there is a gap between the fault of the contractor and the fault of the design professional, the owner is on the hook.

In a design/build project, builders and independent licensed design professionals bid together and enter into a single contract with the owner – a process that many experts believe reduces the time and cost of projects, minimizes disagreements, reduces change orders and reduces construction issues often related to lack of coordination. The contractor/designer team with the winning bid is responsible for delays, cost overruns and all other construction related damages. Finger pointing between the design professional and the contractor, which often leaves the owner in the lurch, is eliminated.

Design/build seems to be a home run. So what's the problem? The answer differs for public and private projects. Public Projects

New York Governor Andrew Cuomo has proposed legislation that would expand the use of design/build among state agencies (but not in New York City agencies), just in time for President Trump's proposed $1 trillion infrastructure program. Currently, New York has authorized the use of design/build process for only a few state agencies and authorities since 2011, when New York passed a law authorizing five agencies and authorities – including the Department of Transportation – to use design build.

Some notable design/build projects in New York are the $3.9 billion replacement of the Tappan Zee Bridge, which is estimated to save at least $1.5 billion because of the design/build process. There are about 17,378 highway bridges in New York State and the State Department of Transportation inspects them once every two years in accordance with state and federal mandates. 

Still, there is resistance to design/build for public projects.  Its proponents argue that while design/build may not be the right choice for every project, its potential for savings in time and money is critical at a time when the state's infrastructure is aging and not keeping up with public demand. Others, including some state legislators, labor leaders and construction industry groups, believe that design/build could lead to fewer public sector jobs as more design and engineering work is contracted out by government agencies and not done in-house. Others argue that design/build can lead to a more subjective selection process because bids would be evaluated for "best value" and not the lowest bid, and could create incentives for more favoritism and corruption in an industry that is no stranger to such ills.  

As a result of this opposition, while most states have accepted that design/build is cheaper and faster, New York lags behind. Significantly, it is expected that state design/build legislation will not apply to the procurement process by New York City agencies, which are required to use the traditional design/bid/build project delivery method. Some argue that New York City is further encumbered to the tune of millions and millions of dollars by the Wicks law, which requires that all public construction projects (with limited exceptions) be separately specified and bid out to certain trades rather than allowing the public entity to hire a contractor who can then hire the various trade subcontractors itself. 

The law applies to any public entity that is entering into a contract for the erection, construction, reconstruction or alteration of buildings in New York City where the cost of such project exceeds $3 million. The Wicks Law applies to projects outside of New York if the cost of the project exceeds $1.5 million in Nassau, Suffolk or Westchester counties or $500,000 in any other county in New York.

The public entity must bid and enter into separate contracts with and oversee the work of the following three groups of trades: (1) plumbing and gas fitting; (2) steam hearing, hot water heating, ventilating and air condition apparatus; and (3) electric wiring and standard illuminating fixtures.

Private Projects

Although courts have approved design/build in private construction, state regulators are another matter. The New York Court of Appeals, the state's highest court, has held that a design/build contract does not involve the unauthorized practice of engineering as long as the design work is performed under a separate contract between the contractor and the licensed engineer who is performing the engineering services. 

The New York State Education Department (NYED), however, does not agree. NYED has issued regulations that prohibit a general contractor from subcontracting with a design professional to provide design services to a third-party client. Although the courts would permit design/build for private projects, applicable regulations do not.

Does the conflict between the courts and the NYED stop the use of design/build in private construction in New York? At the very least, it has had a dampening effect and certainly leads to confusion. New rules that would authorize the use of design/build would be a welcome change for New York and could help make construction there more efficient. Its seems, however, that the wheels of change move slowly when it comes to design/build in the private sector, and no such change in legislation appears on the horizon.

Sarah Biser is a partner with Fox Rothschild LLP in the New York City. She represents owners, contractors, developers, architects and engineers, both in the United States and abroad, in all stages of the construction process. Biser can be reached at 646-601-7636 and sbiser@foxrothschild.com.

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