Liability of Design-Builders for Design, Construction, and Acquisition Claims (2015)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

46 federally funded early acquisition.”205 AASHTO believes that these factors, when considered in con- junction with the existing factors to be considered during the certification process, as set forth in 23 C.F.R. § 710.501(e)(1)-(4), “could discourage States from even seeking authorization for a federally funded early acquisition,”206 as opposed to facilitat- ing more early acquisition efforts. As of the publication of this digest, it remains to be seen whether the proposed regulations will be approved and, if so, whether the concerns raised by Caltrans, AASHTO, and others will be taken into account in adopting the final regulations. VI. DESIGN–BUILD CASE LAW ADDRESSING DESIGN AND CONSTRUCTION LIABILITY Section II provided an overview of liability issues arising from the design and construction process and a discussion of the Spearin doctrine. This sec- tion reviews court decisions resulting from design– build projects that address problems associated with the design and construction process. Before discuss- ing these cases, it is important to note that design– build legal precedent remains very much a “work-in- process.” This is partly because: • There has been a strong tendency over the past 20 years for construction disputes to be set- tled in mediation or through other nonbinding pro- cesses (e.g., dispute review boards). • Disputes that are not settled are often for- mally resolved in binding arbitration proceedings, which are confidential and result in orders that are not generally available to the public. Although settling disputes and using arbitration are positive developments for the construction industry, the downside is that they deprive the industry of a broad body of published opinions that explain how courts view liability. The downside is compounded in the case of newer delivery systems such as design–build, as well as for such concepts as lean construction, Building Informa- tion Modeling, and green design and construction. Conflicts in these areas can be complex and often leave the parties in “uncharted waters” as to which party has the better legal position. This creates even more incentive for the parties to settle their disputes. As a result of these factors, many design–build dis- putes are decided with little or no precedent. To the requirements, this proposed change allows agencies, under certain circumstances, to use federal funds to acquire property prior to receiving NEPA clearance. To use this new option, the state must certify, and FHWA must concur, that all applicable conditions have been met. One key requirement is that the acquisition not affect the environmental review and, in particular, that it will not “limit the choice of reasonable alterna- tives for a proposed transportation project or other- wise influence the decision of FHWA on any approval required for a proposed transportation project,”201 or “prevent the lead agency from making an impartial decision as to whether to accept an alternative that is being considered in the environmental review pro- cess for a proposed transportation project.”202 Another key is that the acquisition must be vol- untary. In other words, to use federally funded early acquisition, the property may not be acquired through use of eminent domain.203 This limitation does not exist if the agency seeks to use state funds for the early acquisition, regardless of whether the agency intends to have the state funds be eligible for future credit (i.e., subject to later federal reimburse- ment or as credit for part of the required state funds for the project). The limitation on the use of eminent domain only applies when the agency seeks to use federal funds in the first instance. The proposed regulations are not without contro- versy. With respect to the proposed rule that allows agencies other than the state to formulate a right-of- way manual and allows agencies to craft RAMPs on a project-by-project basis, the California Depart- ment of Transportation (Caltrans), at least, believes that, rather than streamlining the process, the new regulations will cause project delays. In particular, Caltrans objects that this added flexibility would create a “devastating” change in its required over- sight, explaining that “[Caltrans] is not sufficiently staffed for such review and it would cause numerous delays to project delivery.”204 AASHTO also raises concerns. With respect to the procedures concerning early acquisition activi- ties, AASHTO notes that the Proposed Regulations contain “a list of factors that FHWA will consider, in its discretion, when deciding whether to approve a 201 See prop. 23 C.F.R. § 710.501(e)(2)(iv), 79 Fed. Reg. 69997, 70028 (Nov. 24, 2014). 202 See prop. 23 C.F.R. § 710.501(e)(2)(v), 79 Fed. Reg. 69997, 70028 (Nov. 24, 2014). 203 See prop. 23 C.F.R. § 710.501(e)(2)(viii), 79 Fed. Reg. 69997, 70028 (Nov. 24, 2014). 204 See Caltrans comments to Notice of Proposed Rulemaking, Jan. 23, 2015, at 2, ¶ 1, available at http://www.regulations.gov/#!documentDetail;D=FH WA-2014-0026-0019 (last visited June 29, 2015). 205 AAASHTO comments to Notice of Proposed Rulemak- ing, Jan. 23, 2015, available at http://www.regulations.gov/ #!documentDetail;D=FHWA-2014-0026-0016 (last visited June 29, 2015). 206 Id.

47 work, did a take-off of the structural concrete and rebar quantities indicated in the solicitation design documents. The final design was similar to the one shown in the solicitation and was approved by the owner. Mortenson ultimately submitted a request for equitable adjustment based on the increased quantities of concrete and rebar associated with building to the final design. The Corps rejected the claim, believing that, because of the fixed price nature of the design–build contract, Mortenson assumed the risk of any cost growth resulting from these quantities. The Armed Services Board of Contract Appeals agreed with Mortenson, finding that, although the solicitation did not require the proposers to use the information in the drawings, it did not indicate that the information was to be used at the proposer’s risk. The board held that Mortenson acted reason- ably in relying on the technical information provided by the Corps. It rejected the notion that Mortenson was obligated to place a contingency in its bid or have an engineer involved in the proposal process: The Government suggests that “some sort of review by a structural engineer would have been prudent.”…It also suggests that [Mortenson] should have included a contin- gency in its proposal to cover any increase in quantities. This interpretation is not reasonable. It was not established as a factual matter that an interpretation of the solicitation requiring preproposal engineering or a contingency for the quantities in question in this appeal would be reasonable and prudent from a contractor’s point of view. The contract required [Mortenson] to verify and validate the design as part of the design work, not the proposal effort.208 In so ruling, the board concluded that the govern- ment had warranted the adequacy of information in the solicitation design documents. Because the Mortenson solicitation documents specifically stated that the design could be used for pricing purposes, the precedential value of the case could have been quite narrow. However, later cases that examined allegedly defective design specifica- tions on design–build projects cited Mortenson and Spearin as authority for finding that the owner impliedly warrants these specifications. Consider White v. Edsall Construction Company, Inc.,209 which involved the construction of an avia- tion support facility for the Army. The issue in dis- pute was the design of the storage hanger tilt-up canopy doors. The drawings showed a three-point pick system to lift the doors. The design–builder eventually concluded that the three-point system was deficient and made a claim for its costs in modifying the lifting system. Arguing that the three- point pick system was a performance specification, extent that precedent exists, it is often from decisions by the federal boards of contract appeals and federal courts having jurisdiction over federal government contracts (e.g., the U.S. Court of Federal Claims). As for the handful of reported design–build cases within each state, readers should be aware that many of them range from very complex projects with sophisti- cated parties (e.g., power plants) to home builders, who are often charged with different legal responsi- bilities than commercial design–builders. This background is not intended to suggest that there is nothing to be gained by considering how design–build case precedent applies to state court transportation cases. To the contrary, the cases dis- cussed in this section offer some important lessons on how to evaluate potential liability and may be considered by arbitrators and state courts as they evaluate a particular case. A. Errors in Owner’s Preliminary Design As discussed in Section II, an owner’s liability under the Spearin doctrine is well-established when the owner’s design documents contain errors that the contractor could not reasonably determine during bidding. Owners have attempted to argue that Spearin is not applicable to design–build, as the owner is not providing a final design. They have also used disclaimer language like that discussed in Section III in an attempt to contractually shift to the design– builder the risk of errors in their RFP documents. To date, courts that have considered this issue have largely ruled against owners. They have found that the principles behind the Spearin doctrine apply to any situation where an owner provides a detailed specification that has been reasonably relied upon by a bidder to the bidder’s detriment. The fact that a design–builder will ultimately be the designer-of-record does not alter this principle. Appeal of M.A. Mortenson Co.207 is one of the leading cases that addresses this issue. It involved a design–build contract awarded by the U.S. Army Corps of Engineers to Mortenson for a medical clinic replacement facility at Kirkland Air Force Base in New Mexico. The solicitation contained design docu- ments that were approximately 35 percent complete and informed proposers that such documents expressed the minimum requirements for the proj- ect. The Corps’ design criteria stated that “[these] requirements may be used to prepare the propos- als.” The Corps-furnished design documents con- tained a number of options for structural systems, as well as calculations for them. Mortenson’s estimators, in originally pricing the 208 Id. at 17. 209 296 F.3d 1081 (Fed. Cir. 2002). 207 ASBCA No. 39978, 93-3 B.C.A. ¶ 26,189, 1993 ASBCA LEXIS 222 (June 30, 1993).

48 Specifications included in a design–build contract, however, to the extent specific requirements, quantities and sizes are set forth in those specifications, place the risk of design defi- ciencies on the owner. Thus, the VA reassumed the risk and warranted the accuracy of the specifications with regard to the 196LB/hr boiler output.212 Using logic similar to that seen in Edsall, the board acknowledged that the government could have transferred the risk of design defects to the contractor by drafting the boiler requirement as a pure performance specification rather than by including a prescriptive design requirement: The VA could simply have stated, “install the Steris 3400 GFP sterilizer and a boiler to operate it.” Such a specification would have made [the design–builder] responsible for choosing a boiler that would properly operate the sterilizer. When, as here, the VA specifies a 196LB/hr boiler, absent actual knowl- edge to the contrary a bidder may rely on that information.213 As of the date of this digest, no state court cases appear to have considered the enforceability of an owner’s disclaimer of liability for the preliminary designs that it furnishes during the proposal period. If state courts follow the rationale of the federal court cases previously discussed, then some of the clauses quoted in Section III may not be read as literally as the agencies would like. If they do not follow the rea- soning of the federal courts, then it is possible that the design–builder will bear the risks of wrong or inadequate owner-furnished information. As discussed in Section III, the protections afforded design–builders under the Spearin and Mortenson line of cases have extended to design–builders that discovered errors in the owner’s preliminary design during the design development process, corrected the errors, and then sought recovery for the consequences of the errors. The authors are not aware of any case law where the design–builder based its design on an owner’s defective design, constructed that defective design, and then later attempted to absolve itself from liability for that defect. Finally, it should be noted that, although the Mortenson line of cases gives a design–builder an opportunity to make a claim under Spearin, the abil- ity to succeed on that claim is premised upon the rea- sonableness of the design–builder’s interpretation of the agency-furnished information. In Appeal of Lovering-Johnson, Inc.,214 the design–builder on a Navy housing project in Illinois was not able to prove that its interpretation was reasonable. As a result, the Armed Services Board of Contract Appeals largely denied the design–builder’s claim for more than $6.8 million and 267 days of alleged delays. the government claimed that responsibility for the deficient system was to be borne by the design– builder. It pointed to a note on the canopy door draw- ings that required the design–builder to verify details and loading prior to bidding. The court found the three-pick design system to be a defective design specification because of the level of detail in the design: If the three-pick-point design had been merely a perfor- mance specification (i.e., it did not specify an actual method of performance), Edsall could have chosen any method of building a workable tilt-up canopy door, including a four- pick-point design. Because the Army made the three-pick- point door design, including the weight distribution to points on the truss, a design requirement, it warranted the adequacy of the design. The Army is thus responsible for the consequences of design defects absent an express and specific disclaimer shifting the design risk to Edsall.210 Citing Spearin, the court concluded that the design–builder was entitled to recover its costs in remedying this defect. Another well-recognized design–build case, Appeal of Donahue Electric, Inc.,211 relied upon both Mortenson and Spearin to find in the design–build- er’s favor with respect to defective owner design documents. The dispute revolved around the require- ments for a steam boiler to power a sterilizer on a Veterans Administration’s (VA) ambulatory care center. The 50 percent design documents furnished with the RFP specified that the design–builder was to install a government-furnished sterilizer unit manufactured by Steris. The contract’s HVAC equip- ment schedule listed a Parker B-3 steam boiler to power this sterilizer. The Parker B-3 is a 7HP boiler. During design development, the design–builder con- cluded that the 7HP boiler would not meet the instantaneous burst requirements of the Steris equipment. After it was agreed that a 25HP boiler would be supplied, the design–builder argued that it should be entitled to the additional costs associated with the change to the 25HP boiler. The government rejected the claim, believing that the design–builder had no right to rely on the VA’s 50 percent drawings because the “information only” note on the drawings effectively prevented bidders from using or relying on the drawings in any way. It con- cluded that the design–builder should have obtained the Steris sterilizer specifications, developed its own design, and purchased whatever was necessary for the installation of the VA-furnished sterilizer. The VA Board of Contract Appeals disagreed with the government, holding it liable for the addi- tional cost of upsizing the boiler, stating: 210 Id. at 1085-86. 211 VABCA No. 6618, 2003-1 B.C.A. ¶ 32129, 2002 VA BCA LEXIS 13 (Dec. 27, 2002). 212 Id. at 34–35. 213 Id. at 35. 214 ASBCA No. 53902, 2006-1 B.C.A. ¶ 33126, 2005 ASBCA LEXIS 98 (Nov. 17, 2005).

49 effort during the proposal stage to determine that the agency’s solicitation design is flawed.217 J.E. Dunn Construction Co. v. General Services Administration,218 which involved a curtain wall dis- pute on a new federal courthouse in Kansas City, Missouri, demonstrates this point. This project con- tained a number of creative architectural design ele- ments, including an innovative, complex curtain wall that rested on columns four stories high, extended another three stories to the penthouse, and was semi-circular in shape. The curtain wall specifications contained a mix- ture of design and performance requirements. For example, the solicitation stated that the drawings and specifications were “an outline of the criteria and performance requirements”219 of the work and “within these parameters the contractor is respon- sible for the design and engineering of the window system.”220 The specifications also stated that the curtain wall was to be designed to accommodate, among other things, “27mm maximum long term depiction (creep) at edge of structure at the midpoint between columns.”221 As it was developing shop drawings, the curtain wall subcontractor determined that the curtain wall would not accommodate the long-term creep limita- tion. It argued that the costs to overcome this prob- lem should be borne by the government, since the design, shapes, and profiles of the curtain wall’s alu- minum members were prescribed in the contract and one could reasonably assume that the govern- ment had evaluated concrete deflection in conjunc- tion with this design. The government countered by claiming that the contractor had the responsibility to determine the means and methods of accommo- dating deflection in its design of the curtain wall system. It cited contract language that the solicita- tion’s drawings were merely “diagrammatic,” and further claimed that “the drawings were only the starting point, to be modified at the discretion of the contractor to meet the deflection criteria.”222 The General Services Board of Contract Appeals rejected the government’s position on the basis that the Spearin doctrine governed, notwithstanding that a combination of design and performance specifications The claim was largely based on issues that arose during the design phase, which resulted in the design–builder, Lovering-Johnson, Inc. (LJI), submitting its final design drawings to the Navy 15 months later than planned. One of LJI’s primary arguments was that the Navy required it to per- form “unfunded preliminary design studies,” including on the project’s storm drainage system. The contract’s performance specifications required that the system be capable of handling a 10-year storm and runoff from adjacent properties. In pre- paring its design, LJI relied on certain solicitation drawings by the Navy, which depicted various-sized drainage pipes. LJI contended that, due to an alleged DSC of high flow rates and large culverts, it ultimately had to use wider pipes in its design than those shown on the initial drawings. The Board rejected LJI’s claim on several grounds, stating: “Fundamentally, [LJI] misconstrues the extent of its design responsibility.…[its] differing site condi- tions (DSC) allegations are premised on the view that the Navy had already done the storm drainage design work for it.”215 According to the board’s decision, an adequate site investigation would have revealed the pres- ence of the twin 60-in. culverts and potentially “huge flows” from off-site water sources. In addi- tion, the board believed LJI’s reliance on the draw- ings was misplaced given that the solicitation drawings were not detailed and the pipe systems identified were ambiguous. Importantly, the board concluded that the Navy’s RFP design was not “final” and that its RFP package expressly identi- fied that any concepts and information contained therein would have to be verified prior to LJI’s development of the “final” design. Stated differ- ently, it was LJI, not the Navy, which was respon- sible for designing the drainage system.216 B. Conflicts Between Owner’s Design and Performance Specifications Some owners have attempted to argue that Mortenson and Spearin should not apply when the design–builder’s claim is based on a performance specification’s prescriptive element that is in conflict with the overall performance specification. To date, this argument has failed when the conflict could not be readily determined during the bidding process. Importantly, these decisions conclude that a pro- poser does not have to go through an engineering 215 Id. at 58. 216 This case addressed two other topics that are addressed in this section—design review processes and the ability of LJI to make changes to the design included in its proposal. 217 See cases cited in michAel c. loulAkis, legAl AspecTs of performAnce-bAseD specificATions for highwAy con- sTrucTion AnD mAinTenAnce conTrAcTs (Nat’l Cooperative Highway Research Program, Legal Research Digest No. 61, Transportation Research Board, 2013). 218 GSBCA No. 14477, 2000-1 B.C.A. ¶ 30806, 2000 GSBCA LEXIS 41 (Mar. 2, 2000). 219 Id. at 8. 220 Id. 221 Id. at 10. 222 Id. at 39.

50 drawings, the contractor was certifying that its design complied with building code requirements and other performance criteria. The contractor’s scope of work included a perfor- mance specification for the fabrication and installa- tion of fiberglass panels that replicated the build- ing’s wood roof cornices. Engineered shop drawings were to include any necessary design changes to the support structures and the attachment points for the cornices. In addition to the performance specifi- cation, the contract also contained various design specifications associated with this cornice work, including specific directions for design of the stain- less steel support structure and location of the attachment points. Before the contractor started the cornice work, it discovered that this work could not be performed as specified in the contract documents. Its struc- tural engineer determined that several parts of the structure needed modification to carry the required loads, particularly the weight of the fiber- glass. The engineer also concluded that the num- ber of attachment points shown on the contract drawings was inadequate to prevent the fiberglass from sagging. Because this engineer would not approve the design without making necessary changes, the shop drawings submitted to the gov- ernment were different in many material respects from the original contract requirements. Although the government eventually approved these shop drawings, it denied the contractor’s claim for the additional money associated with the revisions to the contract requirements, relying on the contrac- tor’s contractual obligation to meet the perfor- mance specification. The General Services Board of Contract Appeals rejected the government’s performance specification defense. The board was favorably impressed by the fact that the contract documents gave the contractor specifics on what was expected in key areas: The drawings told Trataros to construct the support structure using stainless steel angles of a certain size, configured a particular way, connected in a particular way, and running in specified directions. The drawings said that the structure was to be attached to the building using stainless steel bolts of a specified diameter, and showed the configuration of that attachment. The draw- ings showed Trataros where to use clip angles and where to install bolts to hold the support structure’s angles and clip angles together.226 These and other detailed specifications led the board to conclude that the contract documents and specifications, read together, did not leave the design and location of the fiberglass system to the contrac- tor’s discretion: was involved. It noted that the contractor’s discretion was confined by the requirements shown on the draw- ing details, and that any modifications to the curtain wall design had to conform to these details: We thus cannot agree with the Government’s argument that the drawing details were merely schematic, or that the written specifications subordinated the drawing details to the performance requirements. The argument may be an example of the wish being father to the thought, but it was simply not the way the contract was written. … The mullions for the north and south curtain walls were dimensioned and considerably detailed in the drawings, leaving little discretion to the contractor as to how to fab- ricate the mullions.223 The board ultimately concluded that the curtain wall contractor could not produce curtain wall mul- lions that met the design specifications while at the same time meeting the deflection criteria’s perfor- mance specification. The board also rejected the government’s argu- ment that this defect had to be discovered during the bidding process and that the contractor had a duty to seek clarification before submitting a bid. It noted that none of the six curtain wall subcontrac- tors that submitted bids noticed the defect. It fur- ther observed that even the government’s architect did not discover the defect during its initial review of the curtain wall’s sketches before shop drawing submission. The decision stated that it took the cur- tain wall subcontractor’s engineering expert 20 hours of engineering study to discover the defect, and it then took additional structural engineering to determine the design and shape of mullion that would accommodate the deflection criteria: “A rea- sonably prudent construction contractor is not expected to become an amateur structural engineer and hunt down defects in Government design draw- ings upon which the contractor has been told to rely, especially given the relatively short—one month— time to prepare bids.”224 Based on this, the board concluded that the design defect was “latent” (hid- den) and that the government bore the liability for overcoming this defect. A similar result was reached in Trataros Con- struction, Inc.,225 which involved conflicts between design and performance specifications on the reno- vation of the U.S. Post Office and Courthouse in Old San Juan, Puerto Rico. The performance speci- fication was established through the shop drawing requirements, which directed the contractor to develop shop drawings that were sealed by a pro- fessional engineer. By submitting sealed shop 223 Id. at 45. 224 Id. at 53. 225 GSBCA No. 14875, 2001-1 B.C.A. ¶ 31,306, 2001 GSBCA LEXIS 40 (Feb. 21, 2001). 226 Id. at 27.

51 cases in decades.230 Although the trial court agreed with the Navy, the Court of Appeals for the Federal Circuit reversed the trial court’s decision and pro- vided an informative opinion as to how DSC claims are to be treated on design–build projects. Metcalf involved a Navy procurement for a $48-million housing facility at a Marine Corps base. The RFP included a soils report that identified the soils as having “slight expansion potential” and noted that this was relevant to certain features of the project, such as concrete foundations. It also stated that the soils report was for “preliminary information only,” with the contract obligating the design–builder to conduct its own soils investigation after contract award. After award, Metcalf ’s geotechnical engineer dis- covered that the soil’s swelling potential was “mod- erate to high” (i.e., not “slight”), and recommended some design changes to deal with those conditions. Metcalf promptly notified the Navy, and the parties then had protracted discussions over what to do. Almost a year after the issue arose, the Navy rejected the DSC claim, and Metcalf used post-tension con- crete slabs to mitigate the time and cost of over- excavating and importing select fill. Another soils issue involved the presence of chlor- dane, a chemical contaminant. The RFP stated that chlordane was present at the site but remediation actions would not be required because the levels were deemed “acceptable.” Metcalf later discovered soils with higher levels of chlordane than expected and incurred costs to remediate. The Navy refused to reimburse Metcalf for substantial remediation costs. Metcalf ’s total claim, inclusive of other alleged breaches by the Navy of its duty of good faith and fair dealing, was approximately $25 million. In ruling in favor of the Navy, the trial court con- cluded that, because Metcalf had to investigate the soil conditions during performance, Metcalf could not rely on the RFP’s representations about the soil characteristics. The Court of Appeals for the Federal Circuit flatly rejected this, finding that the lower court misinterpreted the contract: Nothing in the contract’s general requirements that Metcalf check the site as part of designing and building the housing units, after the contract was entered into, expressly or implicitly warned Metcalf that it could not rely on, and that instead it bore the risk of error in, the government’s affir- mative representations about the soil conditions.231 The appellate court differentiated between Metcalf ’s post-award obligation to conduct additional investigations and Metcalf ’s pre-award right to Although the contract required Trataros to supply shop drawings, this did not provide Trataros with any flexibility concerning either the design of the support structure or the location of the attachment points for the fiberglass panels. …Trataros’s obligation was to provide a support structure and to attach the fiberglass panels as shown on the draw- ings. Trataros was not obligated by the contract, however, to correct any design problems contained in the drawings.227 Similar to the conclusion reached in Dunn, the board rejected the government’s argument that the contractor should have assessed the risks associated with this cornice work before committing to a price. There was no evidence that the contractor or its team knew the extent of the engineering problems before pricing the work. The board stated: “Trataros…did not have any contractual obligation to provide engi- neering services in order to determine the adequacy of the design shown in the drawings before it pro- posed a price for performing the cornice work.”228 Given these factors, the board awarded the contrac- tor an equitable adjustment for the consequences of dealing with the defective design specifications. C. Geotechnical Design Scope and DSCs A variety of cases have considered geotechnical design claims on design–build projects. Many arose in the context of a DSC claim asserted by the design– builder, and some specifically addressed the enforce- ability of the agency’s disclaimer of liability for the RFP’s geotechnical information. Others addressed conflicts that occurred between the owner and design–builder during the design development pro- cess for foundations and other geotechnical matters. 1. Geotechnical Disclaimers As noted in Section III, many design–build con- tracts require that the design–builder conduct, as part of its design process, a comprehensive geotechnical assessment of the site. Many design–build contracts also include broad disclaimers of liability for the geo- technical information furnished by the owner during the procurement process. As a consequence, when a design–builder claims that it encountered a DSC based on the owner’s geotechnical information, the owner argues that the claim should be denied because: 1) the geotechnical information it provided was pre- liminary and incomplete and, based on contractual disclaimers, could not be relied upon by the design– builder; and 2) the design–builder had the contractual duty to perform the full geotechnical assessment. This argument was essentially what the Navy used in Metcalf Construction Co. v. United States,229 one of the most well-publicized U.S. construction law 227 Id. at 30. 228 Id. at 34. 229 742 F.3d 984 (Fed. Cir. 2014). 230 In addition to the issue of disclaimers, the Metcalf deci- sion also addressed the government’s implied duties of good faith and fair dealing. 231 Metcalf, 742 F.3d at 996.

52 wanted to use spread footings. It was behind schedule because of installation problems with drilled piers on other areas of the project and was looking to save time and money. The Corps refused to allow this, believing that it was entitled to strict compliance with the con- tract, which had disallowed spread footings and required deep foundations. PBS&J argued that the contract was ambiguous, because, among other things: 1) it allowed the use of spread footings for small structures, which, it con- tended, included a balcony; and 2) the RFP’s founda- tion specifications were not prescriptive, as they used the terms “recommended” and “recommenda- tions,” which the design–builder argued were not “requirements.” The board rejected PBS&J’s ambi- guity argument. It was influenced by the fact that, for much of the contract performance period, PBS&J had interpreted the contract as not allowing spread footings for the balconies, as its early designs had shown the use of concrete piers. The board additionally noted that, if the contract contained ambiguities, they were so obvious that PBS&J should have asked about them prior to bid- ding. The board found that the Corps had acted rea- sonably in rejecting the change to spread footings, as the building was on expansive soils, and there was a possibility that balconies supported by spread footings would move more than the rest of the struc- ture, which was supported by the drilled piers. Contrast the result in the PBS&J case to that in Record Steel and Construction v. United States,237 wherein the dispute also involved whether geotech- nical design specifications were a requirement or simply a recommendation. The design–build project involved a dormitory at Offutt Air Force Base in Bellevue, Nebraska. Part of the RFP contained a foundation analysis report, with a section entitled “Subsurface Recommendations.” Included in the rec- ommendations was the following language, “Due to the anticipated column loads for a multi-story build- ing, it is believed that improving the site is more viable than reducing the bearing pressure to a very low value….The recommended improvement pro- gram is outlined below.”238 The recommended program contained statements that materials be undercut and “should be excavated” from below the bottom elevation of all building footings. In response to the RFP, the design–builder sub- mitted a price proposal that informed the Corps of Engineers that it did not believe over-excavation for the foundations would be required, but, if site condi- tions ultimately required over-excavation, it com- mitted to perform this work at no additional cost. reasonably rely on the Navy’s geotechnical informa- tion as it bid the project. Citing decades-old precedent, the appellate court stated that the DSC clause was incorporated into the contract to “take at least some of the gamble on subsurface conditions out of bidding.”232 It also highlighted that the phrase “for preliminary information only” was not an effective disclaimer.233 The phrase, the court held, “merely signals that the information might change (it is ‘preliminary’). It does not say that Metcalf bears the risk if the ‘preliminary’ information turns out to be inaccurate.”234 The appellate court’s opinion in Metcalf is consis- tent with substantial precedent that supports the DSC remedy for contractors in spite of disclaimers. In fact, these cases reach as far back as Spearin, wherein the U.S. Supreme Court refused to allow a disclaimer to affect its view on who should bear the risk of defective specifications.235 As a consequence, even though Metcalf is not binding on state courts, it is highly likely that a state court would find it to be valuable precedent for dealing with a design–build contract’s broad contractual disclaimer for the own- er’s geotechnical information. 2. Geotechnical Design Requirements Several relatively recent cases discussed conflicts between owners and design–builders over founda- tion designs. In Appeal of PBS&J Constructors, Inc.,236 the design–builder filed an appeal to the Armed Services Board of Contract Appeals when the U.S. Corps of Engineers refused to allow it to use spread footings to support balconies on a barracks project. The RFP documents identified drilled piers as a “recommended foundation system.” They stated that spread footings were not considered a viable alternative and, therefore, not allowed. The contract required the design–builder’s geotechnical engineer to provide design calculations to support its ulti- mate recommendation. The design–builder’s pro- posal specified that it would use a drilled pier sys- tem, but it did not specifically state what would be used for the balconies. During design development, the design–builder’s initial geotechnical report showed that the balconies were supported by concrete piers. The final founda- tion design, however, contained a revised geotechnical report and showed for the first time the possibility of using spread footing foundations. Based on the record before the board, it appeared the design–builder 232 Id. at 996. 233 Id. 234 Id. 235 G248 U.S. at 137. 236 ASBCA No. 57814, 2014-1 B.C.A. ¶ 35,680, 2014 ASBCA LEXIS 225 (July 25, 2014). 237 62 Fed. Cl. 508 (2004). 238 Id. at 511.

53 The court ruled, however, that the Corps’ contract interpretation fell “within the zone of reasonable- ness.”239 It looked to the fact that the RFP used the verb “shall” in connection with incorporating the foun- dation report’s recommendations into the contract, and that, by referring to the terms “overexcavation and compaction requirements,” there was an argu- ment that the RFP expressly converted the founda- tion report’s recommendations into requirements.240 Faced with two reasonable contract interpreta- tions, the court then looked to the rule of contra pro- ferentem for guidance on who should bear the risk of these ambiguities. The four-part test associated with this rule places the risk of the ambiguities on the government when: 1) the contract specifications were drawn by the government; 2) the language used therein was susceptible to more than one inter- pretation; 3) the intention of the parties does not otherwise appear; and 4) the contractor actually and reasonably construed the specifications in accor- dance with one of the meanings to which the lan- guage was susceptible. The court found that all of these conditions were satisfied. The court also refused to apply the exception to the general rule of contra proferentem (i.e., the pat- ent ambiguity doctrine), which resolves ambiguities against the contractor when the ambiguities are “so ‘patent and glaring’ that it is unreasonable for a con- tractor not to discover and inquire about them.”241 The court did not find this ambiguity obvious, par- ticularly since the Corps had not indicated its view on the mandatory nature of these so-called “require- ments” until many predesign meetings between the parties had taken place. Another case that addresses foundation disputes during design development is Fluor Intercontinen- tal, Inc. v. Department of State,242 which involved a Department of State (DOS) design–build contract with Fluor for an embassy in Haiti. Fluor’s $38-mil- lion claim included, among other things, a request for relief from DSCs. The RFP documents incorpo- rated a preliminary geotechnical report that indi- cated that spread footers could be used to support the structure without having to fully undercut the site. This was confirmed by Fluor’s geotechnical engineer and was the basis for Fluor’s proposal. After award, and as required by the contract, Fluor’s geotechnical engineer investigated the site, con- ducted field testing, and concluded that there were indications that the soil was collapsible, not suitable The need for over-excavation was discussed during several design meetings both prior to and after con- tract award. The parties agreed that the design– builder’s geotechnical firm was to conduct field investigations and tests and provide such informa- tion to both the design–builder and the Corps. If the resulting data were satisfactory, then the design– builder could proceed with its design without con- ducting over-excavation. The geotechnical firm concluded that the native soils were adequate to support the building’s foot- ings without over-excavation. However, the Corps apparently reevaluated its position and refused to issue a notice to proceed for the footings unless the design–builder agreed to conform to “requirements” of the subsurface recommendations of the Founda- tion Analysis Report and over-excavate the site. The design–builder complied with this order and sub- mitted a claim for the costs associated with the over- excavation effort. The design–builder argued that the contract unambiguously made over-excavation a design rec- ommendation—not a design requirement. In the alternative, it argued that if the contract was ambig- uous, then the ambiguity was latent and should be construed against the government. The government argued that the contract expressly and unambigu- ously required the design–builder to over-excavate the foundation. After carefully examining the rele- vant contract provisions, the U.S. Court of Federal Claims found the contract to be latently ambiguous, and saddled the government with the financial responsibility of the over-excavation. The court first looked at the reasonableness of each party’s contract interpretations. In finding that the design–builder’s interpretation was reasonable, it first noted that the design–builder, as the designer-of- record, was expected to exercise its professional judg- ment in designing the dormitory and had to defer only to specific requirements contained in the RFP, not to recommendations. The court then examined how the “requirements” in the RFP were expressed in terms of words like “shall,” “may,” and “should.” It found that the most critical aspects of the foun- dation report used the word “should” instead of “shall”—and that this expressed a desire for action, but not a binding requirement. It looked to the fact that the foundation report stated that the Corps “believed” that over-excavation was “more viable” to improve the site, and couched its report in terms of a “recommendation” rather than as a requirement. The court also found the design–builder’s interpre- tation to be reasonable based on the fact that the Corps’ initial borings were not conducted within the actual footprint of the dormitory’s location. 239 Id. at 515. 240 Id. at 516. 241 Id. at 517. 242 CBCA 1559, 13 B.C.A. ¶ 35,334, 2013 CIVBCA LEXIS 99 (May 24, 2013).

54 engineer based his finding on faulty test results, and that, had he conducted proper testing, he might have drawn a different conclusion. Another recent case found that the design– builder failed to demonstrate that it had a differing geotechnical site condition. In Liquidating Trustee Ester du Val of KI Liquidation, Inc. v. United States,244 Kullman Industries, Inc. (KI), contracted with DOS for the design and construction of the Tajikistan embassy. KI was ultimately terminated for default and went bankrupt as a result of the proj- ect, in large measure because of the geotechnical costs it incurred. The parties had a fundamental disagreement over how geotechnical costs were to be treated within the fixed-price contract. KI put very little money in its contract price for foundation and geo- technical work, on the assumption that this work would be treated as an allowance and that the con- tract price would be increased to reflect the actual costs of this work. DOS did not construe the con- tracting approach as being open-ended and assumed that KI’s fixed price included all geotechnical condi- tions, subject to any proven DSCs.245 Although DOS furnished a geotechnical report that warned of poor and collapsible soil conditions, KI did not conduct any meaningful site investiga- tion prior to award. After visiting the site and con- ducting some tests post-award, KI’s geotechnical expert agreed with the conclusions in the DOS report. It used the same soil preparation approach contained in the report, which involved compressing the foundation soils using an extensive flooding and de-watering system. This approach was costly and time-consuming. In considering KI’s claim, the court disagreed with KI’s contract interpretation and held that its fixed price included all of the geotechnical work. The fact that it had little time to conduct a pre-award site investigation was its own problem. If KI had been con- cerned that it was “being pressed into making a pre- mature decision, it had the option of simply not agree- ing to the government’s terms, unpalatable as that might have appeared at the time.”246 It also concluded that no DSC existed, as there was no indication of any- thing being materially different from what was shown in the contract documents. In drawing this conclusion, the board was critical of KI’s foundation design: for supporting foundations, and should be removed. Fluor notified DOS that the findings constituted a DSC, as the RFP documents gave no indication as to the need to remove all of the soil. When DOS indicated that it would likely reject the claim, Fluor asked for direction as to how to pro- ceed. DOS refused to do so, stating that, “…this is a design problem….You need to provide an engineer- ing solution that meets the requirements of the con- tract taking into consideration the questionable bearing capacity of the soil that was clearly noted in the RFP.” Fluor ultimately followed the recommen- dations set forth in its geotechnical engineer’s report, removed the upper silt layer of the site, and formally claimed a DSC. As the dispute proceeded, DOS’s soil experts opined that Fluor’s engineer’s test results were unreliable, not performed in accordance with accepted standards, and did not necessarily indicate collapsible soil. The Civilian Board of Contract Appeals agreed with these experts and held that the soil was not collapsible, “or collapsible to a degree significant to the design of the foundations.” Because Fluor did not establish the collapsibility of the soil, the board concluded that Fluor failed to meet its burden of proving that there was a DSC. Fluor argued that DOS should not have been allowed, “several years after-the-fact,” to complain about the adequacy of its testing plan and methodol- ogy. The board disagreed, finding that, because DOS had notified Fluor that it did not believe there was a valid DSC, Fluor knew that its claim would be con- tested. In response to Fluor’s argument that DOS was obligated to investigate the site and provide direction once Fluor raised notice of the DSC, the board stated: The agency did provide direction, rejecting the conclusion that a differing site condition existed and permitting the contractor to proceed as it deemed appropriate under the design–build contract. The agency is not contending that the ultimate foundation design was improper; rather, the agency contends that it is not obligated to provide addi- tional time and/or money under the contract because the contractor has not established the existence of collapsible soils (that is, no differing site condition has been demon- strated to have existed).243 One of the interesting features of the Fluor deci- sion is that it showed how experts can see engi- neered solutions differently. Fluor’s geotechnical engineer appeared to take a more conservative posi- tion on potential soil collapses than the govern- ment’s testifying experts. This was certainly the pre- rogative of Fluor’s engineer, given that he was ultimately responsible for the design. The board’s decision, however, appeared to conclude that Fluor’s 243 Id. at 56. 244 116 Fed. Cl. 338 (2014). 245 Part of the reason for this confusion was that DOS was, as the court noted, “eager, indeed desperate, to close the deal on a fixed price contract [as of the close of the fiscal year.] And they may have welcomed KI’s naiveté in agreeing to take on the risk that it could perform at a profit.” Id. at 376. 246 Id. at 377.

55 DOI ultimately entered into a design–build con- tract with Drennon Construction and Consulting, Inc. (Drennon) to excavate the hillside and design– build a gabion wall along the two-lane road. Dren- non conducted a survey demonstrating that the road could not be built as shown on USKH’s drawings. As a result, the road needed to be shifted in the oppo- site direction, into the hillside, requiring additional excavation and construction of a much higher wall to restrain the contents of the hill from falling onto the road. Drennon also encountered soil problems during excavation, as the hillside slopes collapsed due to the soils being “at or near [its] angle of repose.” In essence, every “scoopful” excavated from the slopes caused a mini-landslide from above. Drennon con- cluded that the hill could not be stabilized and stopped work. Ultimately, the project was scaled back to eliminate the widening of the road and included only the construction of the gabion wall. Drennon filed a claim with the Civilian Board of Contract Appeals, seeking its costs incurred during the suspension and for the additional gabions not used because of the project redesign. Drennon claimed that the project’s design was defective and that the geotechnical information provided by the government in the solicitation, on which Drennon relied in pricing the job, significantly differed from the site conditions actually encountered. The board agreed, finding that the bidding documents con- tained both design defects and representations about the site that materially differed from actual site conditions. Citing to the Spearin doctrine, the board found that DOI bore responsibility for the defective design. The decision noted that both DOI and USKH knew the design was flawed prior to bid. It called for the road to be widened over the guard rail separating the road from a river, but that was impermissible given the National Wild and Scenic River designation of the river. The correction involved moving the road into the hill on the opposite side from the river, an act the board concluded a reasonable bidder could not have anticipated, particularly given that the area was covered with snow during the bidding period. It also rejected the notion that “weasel words” (USKH’s phrase used to describe the disclaimer) in the solici- tation would shift this responsibility. The board further noted that the solicitation called for the gabion wall to be “approximately nine feet high at most,” and that about 420 cubic yd of gabions would be needed to build it. Because the road was moved into the hill, Drennon had to exca- vate much more of the hillside than anticipated. In fact, the wall needed to be 15-ft high and consumed It is ironic, and indeed tragic, that the [RFP geotechnical] report prompted [KI] to invest millions in what probably was over-engineering with respect to the foundation work. But KI’s own experts came to the same conclusion and the result was investment in an elaborate watering/compac- tion/de-watering scheme, which appears to have been unnecessary.247 Note that the opinion contains no succinct expla- nation for why the court drew this conclusion about over-engineering. There is only the inference that the court believed KI did not conduct a more refined engineering effort because it thought DOS would be paying for the ultimate cost. One of the most common geotechnical dilemmas on design–build projects is the extent of geotechni- cal information obtained by the agency prior to starting procurement. As noted in Section III, AASHTO’s Guide to Design-Build Procurement sug- gests that “agencies conduct initial investigations necessary to prepare an appropriate scope, schedule and price estimate for the work.”248 Unfortunately, some transportation agencies are more interested in expediting procurement (for polit- ical or funding reasons) than undertaking a reason- ably adequate site investigation. These agencies vir- tually require the design–build proposers to accept the site “as is” and assume the associated risks. The “as is” approach is challenging, given the longstand- ing legal precedent found in the Spearin doctrine and the DSC clause that favors contractors. Drennon Construction & Consulting, Inc. v. Department of the Interior249 considered these issues on a federal road project in central Alaska. The Department of the Interior (DOI) wanted to widen a campground road from one lane to two and to elimi- nate a blind curve. It obtained funding under the American Recovery and Reinvestment Act of 2009 as a “shovel-ready” project and engaged an engi- neering firm, USKH, to prepare 100 percent design drawings and a geotechnical report. DOI provided USKH with a digital terrain model based on earlier photogrammetric mapping. When USKH realized the model contained inaccurate control points, it requested $25,000 to perform a more reliable and accurate survey. Concerned about the limited proj- ect funding, DOI denied the request. Instead, DOI decided to deal with this issue by warning potential bidders of possible inaccuracies in the model, requir- ing the contractor to perform a survey before com- mencing work, and using disclaimer language to shift the risk to the contractor. 247 Id. at 376. 248 AASHTO, guiDe for Design-builD procuremenT 33 (2008). 249 CBCA 2391, 2013-1 B.C.A. ¶ 35213, 2013 CIVBCA LEXIS 22 (Jan. 24, 2013).

56 thought to these requirements, which causes con- flicts between and among them. Sometimes, these conflicts can be resolved by an order of precedence clause; other times, a provision requires the design– builder to meet the “most stringent governs” stan- dard. Predictably, disputes arise when the design– builder bids a project expecting to meet a different standard from what the agency anticipates.252 Such a conflict is seen in Appeal of Speegle Con- struction, Inc.,253 wherein the Armed Services Board of Contract Appeals considered a dispute over a fire protection system in a design–build dor- mitory at Eglin Air Force Base in Florida. The Design Requirements section of the specifications specifically addressed conflicting requirements by stating that “Various codes or code requirements are cited throughout this RFP…When codes are in conflict, the most stringent shall apply.”254 The orig- inal specifications required that the dormitory room facilities and the attic have a wet pipe sprin- kler system designed in accordance with a stan- dard from the National Fire Protection Association (NFPA). An amendment explicitly changed this by requiring the attic to have a dry pipe system designed in accordance with a specific military standard. A later amendment stated that “all new standpipes shall also extend into the attic” and ref- erenced NFPA standards. Given these amendments, the design–builder’s fire protection subcontractor interpreted the con- tract as requiring a single (i.e., wet) sprinkler sys- tem for both the facilities and attic. It supported its position by claiming that this was consistent with industry standards, as sprinkler systems were not 778 cubic yd of gabions. Although DOI acknowledged that these differences required Drennon to change its construction means and methods, it argued that the use of the word “approximate” and the design– build nature of the relationship shifted these risks to Drennon. The board disagreed, stating: The disclaimer that the design might have to be adjusted per a contractor-financed survey alerted bidders to the pos- sibility that the design might have required a bit of tweak- ing, but cannot reasonably be read to impose on the contrac- tor an obligation to construct the project in a manner significantly different from that envisioned in the contract. With regard to the anticipated height of the wall, “[t]he use of the word ‘approximately’…obviously does not mean that the relevant quantity is absolute …[but it] implies a reason- able accurate representation. …Nine feet is not a reason- ably accurate representation of what turned out to be fif- teen feet.250 The board also concluded that Drennon encoun- tered a DSC. The soil borings allegedly contained between 5.1 percent and 10.7 percent fines, described as “slightly silty,” and advised that the hillside would be “composed of similar soils.”251 The actual soils on the hillside, however, contained virtually no fines, and the slopes were in a state of incipient failure. As a result, the board found that it was impossible to keep the wall of the excavation open for any period of time, contrary to the conclusions in the geotechni- cal report. D. Disputes Arising Out of the Design Process Section III provided some examples of contract provisions that define the design–builder’s design responsibilities and the standards by which the design–builder is to perform its design services. Courts have considered a variety of disputes in this area, including: 1) what happens when there are conflicting views over the contract’s design require- ments; 2) how much discretion the design–builder has to deviate from contractual standards; 3) whether the design–builder is obligated to meet the prescriptive elements of a performance specifica- tion; 4) whether the owner’s actions during the design review and approval process can create lia- bility; and 5) what happens if the design–builder does not follow its own specifications. This section will address each of these areas. 1. Conflicts over Contract’s Design Requirements and Scope of Work A typical government design–build contract requires the design–builder to comply with a laun- dry list of specifications, codes, and standards. Unfor- tunately, the agency typically does not give much 250 Id. at 25. 251 Id. at 7. 252 There are several design–bid–build cases that discuss this topic in the context of a design professional’s duty to the owner. An interesting example is Gee & Jenson Engineers, Architects, and Planners v. United States, No. 05-457C, 2008 U.S. Claims LEXIS 504 (Fed. Cl. 2008), which involved water infiltration on a Navy facility. The Navy concluded that a contributing cause for the leaks was the absence of flashings under a concrete sill at the building’s storefront, and that flashings were required by the various Navy guide specifications that were incorporated into the architect’s con- tract by reference. The architect argued, among other things, that it met the standard of care because the building code did not require the use of flashing, but made its use discre- tionary with the designer. The U.S. Court of Federal Claims disagreed with the architect, finding that building “sets forth only the minimum requirements acceptable within the industry and a contractor is required to comply with the con- tract, and guide specifications incorporated in the contract. In that regard, the government is allowed to enter contracts that mandate more stringent requirements than that gener- ally accepted in the industry.” Id. at 53. 253 ASBCA No. 54236, 2005-1 B.C.A. ¶ 32866, 2005 ASBCA LEXIS 12 (Jan. 26, 2005). 254 Id. at 1.

57 2. Extent of Design–Builder’s Discretion in Choosing Design Standards Several cases have considered disputes between the owner and design–builder over what, if any, dis- cretion the design–builder has to make changes to design standards. Consider Appeal of United Excel Corporation,257 which involved the construction of a federal government healthcare facility for the VA. The RFP contained detailed specifications, includ- ing requirements for components of the HVAC sys- tem. During the 90 percent design review, a dispute arose between the design–builder and the VA over whether the registers, grilles, and diffusers in the operating rooms were required to be aluminum or stainless steel. The numerous specification sections that addressed these requirements were in conflict. Some required that the components be stainless steel, oth- ers that they be extruded aluminum, and still others gave a choice of stainless steel or aluminum. The design–builder’s mechanical subcontractor identi- fied these conflicting provisions prior to submitting its bid and priced aluminum diffusers to provide “best value.” When the design was developed, how- ever, VA insisted that stainless steel be used in the operating rooms. VA conceded that the specifications for the oper- ating room HVAC materials were ambiguous, but contended that the conflicts were so “obvious” and “glaring” that they should have been considered “patent ambiguities,” and that the design–builder was obligated, pre-award, to inquire about which materials were required. The design–builder argued that the ambiguity was not patent, since the specifi- cations reasonably led one to believe that aluminum was an acceptable material. The design–builder also argued that, because this was a design–build con- tract and the RFP drawings and specifications only established “design parameters,” it was entitled to choose aluminum diffusers as the most economical way to achieve the design intent. The VA Board of Contract Appeals concluded that the design–builder had the obligation to meet the design requirements of the specifications, not- withstanding that this was a design–build project: The Contract is clear that, in executing the final Con- struction documents, [the design–builder] was con- strained to follow the requirements of the RFP specifica- tions and drawings and this constraint required [the design–builder] to design a diffuser configuration, using stainless steel diffusers, which would meet the sterile air curtain requirements.258 designed to require a higher level of protection (i.e., dry sprinklers) in an area above a primary space (i.e., attic). The government rejected this interpreta- tion, in part on the basis that the contract required the design–builder to meet the more stringent provi- sion (i.e., the dry sprinkler system in the attic) if there was a conflict in the specifications. The board ruled against the design–builder on several grounds. Primarily, it found that the refer- ence to standpipes and the NFPA standards in the later amendment did not explicitly change the prior amendment’s requirement for a dry sprinkler sys- tem in the attic. To the extent there was an ambigu- ity in the contract’s requirements, the board con- cluded that it was obvious and that the design–builder should have inquired about it during the procure- ment process. Finally, the board found no merit in the design–builder’s argument that its interpreta- tion was consistent with industry standards. “The government has the right to insist on adherence to the contract specifications.”255 A case in which the design–builder was able to prevail on its interpretation of a design require- ment is Appeal of Jaynes Corporation.256 It involved a dispute over paint finishes on a pre-engineered building for the Air Force. The design–builder modified the government’s guide specifications to use a Level 4 finish for certain wall areas, specifi- cally deleting the specification’s reference to a Level 5 finish. The design–builder did this to con- form to another provision of the specifications, which specified a finish that was consistent with a Level 4 finish. The government required the design–builder to use a Level 5 finish, arguing that the guide specification was to be the “minimum basis for quality.” The board rejected this position and found for the design–builder. It concluded that: 1) the order of precedence clause supported the design–builder’s interpretation; 2) the contract specifically contemplated that the design– builder was to edit the guide specification to conform to the varying design requirements in the contract; and 3) the government’s reading of the contract would lead to certain provisions being inoperable. Many other cases involve similar arguments over the scope of the design–builder’s design responsibili- ties. As suggested by the Jaynes decision, an agen- cy’s reliance on broad provisions (e.g., “comply with the most stringent requirement”) will not overcome specific language to the contrary, particularly from an order of precedence clause. 255 Id. at 10. 256 ASBCA No. 58288, 2013 B.C.A. ¶ 35,240, 2013 ASBCA LEXIS 10 (Feb. 15, 2013). 257 VABCA No. 6937, 2004-1 B.C.A. ¶ 32,485, 2003 VABCA LEXIS 13 (Dec. 11, 2003). 258 Id. at 16.

58 Appeal of Lovering-Johnson, Inc.,263 which was previously discussed in Section A, had a similar result. The design–builder argued that because this was a design–build project, it should have been per- mitted to change the design submitted in its techni- cal proposal if it met the performance standards. The board rejected this, finding that “[as] a general proposition, the structures, details and finishes that appellant offered to provide in its proposal became part of the contract. It could not offer features and later provide lesser quality alternatives without identifying the variations and generally offering them at a reduced cost to the Navy.”264 3. The Duty of Design–Builder to Meet the Prescrip- tive Elements of a Performance Specification265 Consistent with the arguments raised in the United Excel, ECC, and Lovering-Johnson decisions discussed above, some design–builders have argued that, because of the nature of design–build, they are free to ignore prescriptive elements of a specifica- tion, as long as they are ultimately successful in achieving the performance specification. These arguments have not been successful. One of the early design–build cases addressing this was Dillingham Construction, N.A. v. United States.266 Dillingham, the design–builder, sued the [Veterans Admin- istration] on behalf of its electrical subcontractor for costs arising from the VA’s enforcement of more stringent electri- cal specifications than the electrical subcontractor con- tended were required by the contract. The electrical specifi- cations in the solicitation required the use of raceways to run conduit through the facility. They also described the conduit size and characteristics, and supports for the race- ways. The subcontractor proposed to use metal clad cable (“MC cable”) in lieu of the raceways.267 The VA rejected this proposal. It also rejected the conduit supports installed by the subcontractor, claiming they were non-conforming to the specifications. The total cost of complying with these VA requirements, which was over $600,000, was the subject of the claim. The subcontractor argued that the electrical specifications were performance specifications and, as a result, were merely “general guidelines” that gave the subcontractor “wide latitude” in interpreting them. Its primary argument was based upon the cover page of the solicitation, which The board found it unnecessary to decide whether the conflicts in the specifications were patent or hid- den. In holding against the design–builder, the board concluded that, because the mechanical subcontrac- tor had actual knowledge of the ambiguity, its failure to raise this ambiguity prior to bid was fatal to the claim. It specifically rejected the notion that, because the contract was “design–build,” these duties to inquire before bid were no longer relevant: We also see nothing in the case law, and [the design–builder] has provided none, for the proposition that the well-settled law relating to the contract interpretation is suspended or abrogated in a design–build contract. To the contrary, the case law indicates that a design–build contract shifts risk to a contractor that a final design will be more costly than the bid price to build and that the traditional rules of fixed- price contract interpretation still obtain. [The design– builder] was not relieved of its obligation to inquire about the aluminum stainless steel diffuser discrepancy because the Contract was design–build.259 A similar result was reached in Appeal of ECC, Interna- tional,260 which involved disputes over design and other standards for a prefabricated warehouse in Iraq. The con- tract’s standard of care provision stated: The standard of care for all design services performed under this agreement shall be the care and skill ordinarily used by members of the architectural or engineering profes- sions practicing under similar conditions at the same time and locality. Notwithstanding the above, in the event that the contract specifies that portions of the Work be per- formed in accordance with a specific performance standard, the design services shall be performed so as to achieve such standards.261 As with the contractor in United Excel, the design–builder argued that the clause contractually required the government to afford it “some type of flexibility,” particularly as it related to war-time con- ditions and local building techniques. The board rejected this position, citing the fact that the contract contained specific standards that the design–builder was to achieve, including design- ing the project to meet the International Building, Electrical, Mechanical, and Fire Codes. It also required the design–builder to meet the U.S. Corps of Engineers Guide Specifications. The board stated, “Thus, [the design–builder] did not merely commit itself to perform under some adjustable standard that varied depending upon local conditions or building techniques.”262 Because the design–builder could not show that the government had required it to do something beyond what was specified in these standards, its claim failed. 259 Id. at 17. 260 ASBCA No. 55781, 2013 B.C.A. ¶ 35,207, 2012 WL ASBCA LEXIS 106 (Dec. 28, 2012). 261 Id. at 4. (This clause is identical to the DBIA’s standard of care clause, as previously set forth in § III.) 262 Id. at 64. 263 ASBCA No. 53902, 2006-1 B.C.A. ¶ 33,126, 2005 ASBCA LEXIS 98 (Nov. 17, 2003). 264 Id. at 72. 265 Much of this section is extracted from michAel c. loulAkis, legAl AspecTs of performAnce-bAseD specificA- Tions for highwAy AnD mAinTenAnce conTrAcTs 50 (Nat’l Cooperative Highway Research Program, Legal Research Digest No. 61, Transportation Research Board, 2013). 266 33 Fed. Cl. 495 (1995). 267 MC cable is a factory assembly of conductors, each individually insulated and enclosed in a metallic sheath of interlocking tape or tubes.

59 owner is taking on design liability if the proposed design contains errors in spite of contract language to the contrary. In addition, questions can arise as to whether the owner’s actions during the submittal process make it liable for delaying the project. Most design–build contracts specify the level of design submittals expected from the design–builder and the response (i.e., turnaround) time required by the owner. Although this type of clause can be used with a designer under a design–bid–build process, it has little practical ramification, as construction is not directly impacted by whether the owner takes more time to respond to the design submittals than the contract allowed. This is not the case in a design– build contract, as the design–builder has committed to complete the project in a specific period of time, and its price is based upon moving efficiently from the design to construction process. Several federal cases discuss design–builders’ claims that they were delayed by the government’s actions during the design review and approval pro- cess. Among the complaints raised by design–build- ers are that the agency: 1) took too long to complete its design reviews, 2) added to the scope of work, and 3) improperly “nitpicked” the submittal—resulting in the design–builder either being delayed in starting the next phase of design or in starting construction. Courts in considering these claims generally base their analysis on the same questions associated with proving excusable delays on any project, including whether: 1) the government breached its contrac- tual obligations (e.g., excessive response times or added scope of work); 2) the design–builder contrib- uted to the government’s breach; 3) the design– builder notified the government that it was being negatively impacted by the breach; and 4) the gov- ernment’s breach actually affected the project’s com- pletion date. The results to date have generally not been favorable to the design–builder. Consider, for example, K-Con Building Systems, Inc. v. United States.272 It involved a $580,000 design–build contract for the construction of a pre- fabricated building for the Coast Guard in Port Huron, Michigan. Because K-Con (the design– builder) was late in completing construction, the Coast Guard withheld approximately $110,000 in liquidated damages. K-Con filed suit to recover the liquidated damages and its own affirmative delay- related claims, basing much of its case on the Coast Guard’s actions during the design review process. Shortly after contract award, the Coast Guard inquired about the feasibility of making some changes in the proposed design. The parties engaged in some back-and-forth about the scope and impact of the stated that: “Contractor shall provide complete construction drawings and specifications for the [Project] based on the preliminary drawings and performance specifications included with this solicitation.”268 The court rejected this argument out-of-hand, stating that the cover page did not say that the contractor was excused from complying with design specifications in the contract. In fact, the court noted that the contract specifically required that the design comply with the design–build criteria and the electrical specifications contained in the contract. Citing to the general rule and the Blake decision discussed above, the court stated that “design specifications” and “perfor- mance specifications” are just labels that “do not indepen- dently create, limit or remove a contractor’s obligations.”269 The electrical specifications specifically required the use of raceways and gave the design–builder no flexibility to instead use MC cable. With respect to the support clips, the court concluded that the types of allowable supports were also specifically identified in the specifications, and con- sisted of ceiling trapezes, strap hangers, and wall brackets. The fact that the support clips offered by the electrical sub- contractor performed the same function as those identified in the specifications was irrelevant, as the specifications did not state that “an equivalent” could be used. A similar result was reached in Appeal of FSEC, Inc.,270 which involved a dispute over the installation of a ventila- tion system during construction of a new naval abrasive blast and spray facility. The plans and specifications speci- fied, among other things, two exhaust fans and two dust collectors for each room and a cross-draft ventilation rate of air flow. The design–builder assumed that it had the flexi- bility to design a ventilation system that would meet the performance specifications; therefore, it concluded that each room needed only one exhaust fan and dust collector to meet the air handling requirements. When the Navy rejected the design–builder’s proposed design and required it to supply all four exhaust fans and dust collectors, the design–builder filed a claim for the additional costs. The board rejected the notion that the design–builder could change the specified design as long as it met the perfor- mance requirements. It noted that the contract very clearly contained both design and performance specifications, and that the design–builder had to comply with both. The board was also persuaded by testimony from the Navy that it wanted the ventilation system design to be prescriptive to “insure that the end result would meet applicable air pollu- tion standards…and not leave it to chance for the design– build contractors to design it.”271 4. Owner’s Actions in Reviewing and Approving Design Submittals The owner’s involvement in the review and approval of design submittals on a design–build project creates a much different liability exposure than under other delivery systems. As noted in Sec- tion III, there can be questions as to whether the 268 Dillingham, 33 Fed. Cl. at 497. 269 Id. at 516. 270 ASBCA No. 49509, 1999-2 B.C.A. ¶ 30,512, 1999 ASBCA LEXIS 112 (July 28, 1999). 271 Id. at 9. 272 100 Fed. Cl. 8 (2011).

60 the Coast Guard’s requests as though they were con- sistent with the terms of the contract…responding to Coast Guard’s review comments with brief, affir- mative statements, such as ‘[w]ill comply,’ ‘[c]orrec- tion will be made,’ and ‘[d]etail will be revised.’”275 Although the appellate court’s decision noted that a contractor could try to explain why the notice requirements should not be enforced, K-Con’s argu- ment that compliance would have been “futile” was not an adequate basis. Finding no evidence that com- pliance would have been futile, the court cited to the “Design Coordination Review Comments” form, which left a space for the contractor to respond with an action code, including that it did not concur with the Coast Guard’s comments. The court further stated: [It] is unknown what would have happened had K-Con broached the issue of changes around the time the Coast Guard made the work requests at issue. …[T]imely objec- tions would have presented a very different choice between at least four options–refraining from making requests regarding K-Con’s work, altering the nature of the requests, keeping the requests the same but making equitable adjustments to the contract, or rejecting the allegations of changes altogether and thereby risking litigation or a halt to the project. K-Con failed to comply with the changes clause, and its after-the-fact speculations about what would have happened had it complied do not create a genu- ine dispute of material fact regarding whether it should be excused for its failure.276 K-Con was consequently unable to obtain remis- sion of the liquidated damages as a result of its failure to follow the contract’s claim notification process.277 As suggested by the K-Con decision, one of the common challenges in the design review process relates to the reasonableness of the agency’s rejec- tion of a submittal—particularly when it affects the start of construction.278 Guidance on this topic, how- ever, comes from Appeal of Imperial Construction potential changes, particularly the effect that they would have on the overall building design. During this process, the Coast Guard changed its mind, first stating that it was inclined to enlarge the building and add certain work and then later advising that it would not make any changes. K-Con argued it could not start the design until these issues were resolved. Another set of issues involved the design review comments and whether they added scope. K-Con alleged that it made the changes “required” by the Coast Guard during the review process, as it would have been futile to convince the government that the comments were ill-founded. The trial court examined 10 discrete comments and concluded that all of them required an evidentiary hearing to deter- mine if they constituted additional work. Consider the following review comments: • “Overall building dimensions shall include provisions for minimum 1” air space between the inside face of the veneer brick and sheathing.” • “Please provide small vision panels in the exterior doors.” • “Need to provide return from the multi-purpose room.” • “Please provide a hose bib connection.” • “Recommend isolation pads between furnaces and the framing.” • “Recommend utilizing storm excluding louvers in case of snow or rain penetration.”273 The Coast Guard argued that the first four items on this list were not directives for additional work but “reminders” to K-Con that it needed to comply with all relevant building standards. It argued that the two “recommendations” were just that: they were intended to ensure compliance with standard building practices. K-Con argued that all of these items were not required by applicable building stan- dards. It further argued that it was delayed because it accommodated the Coast Guard’s comments by making the changes in its 35 percent and 50 percent design documents. The trial court never ultimately ruled on whether these comments were changes. It granted the Coast Guard’s summary judgment motion that K-Con failed to provide written notice that it objected to the Coast Guard’s design comments. This decision was affirmed by the U.S. Court of Appeals for the Federal Circuit.274 Both courts relied upon the fact that, throughout the period that the Coast Guard was allegedly making changes, K-Con never objected to the Coast Guard’s actions or suggested that it was entitled to an adjustment of contract terms. “Instead, K-Con repeatedly expressed its intent to incorporate 273 Id. at 16, 31–33. 274 K-Con Bldg. Sys., Inc. v. United States, 778 F.3d 1000 (2015). 275 Id. at 1009. 276 Id. at 1011. 277 A major issue in the litigation was whether the liqui- dated damages amount was a penalty, and therefore unen- forceable. Both the trial and appellate courts concluded that the liquidated damages were reasonable and enforceable. 278 K-Con initiated lawsuits against the Coast Guard on two other design–build projects for prefabricated buildings. The Elizabeth City, North Carolina, project (K-Con Bldg. Sys., Inc. v. United States, 114 Fed. Cl. 722 (2014)) involves delays to the project that resulted in the assessment of liq- uidated damages and the Coast Guard’s default termination of K-Con. The St. Petersburg, Florida, project (K-Con Bldg. Sys., Inc. v. United States, 115 Fed. Cl. 558 (2014)) also in- volved the Coast Guard’s assessment of liquidated damages and the question of whether K-Con’s delays were caused by the Coast Guard. In each case, there are allegations that the Coast Guard delayed K-Con by precluding it from starting construction work until the design was 100 percent approved. The decisions reported to date have not addressed the merits of this argument.

61 completeness of the civil drawings are, to an extent, subjective and, in some instances, based on require- ments that are not in the contract (e.g., demolition plan).”280 The board concluded, however, that the design–builder had not proven the cause-and-effect of the alleged delays: It is clear that both parties may have had some part in the extended 50% design performance period. [Design–builder] has provided no proof showing that its incomplete 50% design submittal had no role in that extended performance period. We have not been shown any causal connection between this apparent delay and the date for overall com- pletion of construction.281 The board specifically noted that the design– builder failed to conduct an as-built scheduling analysis to demonstrate the impact that design had on its construction activities. Note that the project manager in Imperial had no prior experience with design–build. The court’s decision suggests that, although the manager was technically correct in finding flaws in the design submittals, she appeared to be asking for more information than required and based her rejections on technicalities. If the design–builder had been bet- ter able to demonstrate the impact of those decisions on its critical path, the decision might have been dif- ferent. A similar problem occurred for the design– builder in Appeal of The Davis Group, Inc.,282 where it was unable to show that the design modifications required by the U.S. Army Corps of Engineers were the ultimate cause of the construction delays.283 An example where the design–builder prevailed on its position that the government delayed the project is Appeal of ADT Construction Group, Inc.284 Two cen- tral issues fueled the dispute on this Air Force muni- tions maintenance facility: 1) whether the design– builder was able to fast-track the design process and start construction before design was completed, and 2) whether the government delayed the design–builder in the review of its design submissions. The fast-track issue arose from conflicting lan- guage in the RFP. Although the RFP initially allowed fast-tracking, the government changed its mind and attempted to modify the RFP to require the design–builder to submit a 100 percent design of the entire project before it would review the plans. and Electric, Inc.,279 which involved the design and construction of a New Jersey water park for a gov- ernment agency. The design–builder claimed that it was delayed and then accelerated by the govern- ment and incurred delay-related and productivity- related expenses. One of the design–builder’s pri- mary complaints was that the government caused delays during the design phase of the project that later caused construction delays, and that the gov- ernment would not allow time extensions for those delays. The board of contract appeals considered and ultimately rejected each of the design–builder’s bases for design-related delays. The first delay cited related to the design kick-off meeting, which the contract provided would be con- ducted as soon as practicable after award. The board found that it should have taken place 14 days after the design notice to proceed. For reasons attributable to the government, it took place after 29 days. The design–builder, however, provided no written con- temporaneous indication that this delay of the kick- off meeting was affecting its design work. It provided no evidence that, but for this delay, its 50 percent design submittal could have been made earlier. As a result, the design–builder failed to show that this specific delay caused an overall project delay. The design–builder fared no better with its alle- gations that the government’s responses to the 50 percent design delayed its performance. Approval of this design was a condition precedent to the govern- ment’s issuance of a limited notice to proceed to start clearing and grubbing activities. The design– builder appeared to argue that comments were being received piecemeal, and that it could not final- ize the 50 percent design until all design comments were received. It also argued that the drawings were technically sufficient to allow clearing and grubbing, and that the government’s comments should not have held up authorization. The board agreed that the drawings were techni- cally sufficient for clearing and grubbing, but con- cluded that it was reasonable for the government to withhold issuance of the limited notice to proceed. Among the government’s cited reasons for its rejec- tion of the 50 percent drawings were: 1) the site drawing was not signed by the architect of record; 2) the drawings lacked evidence of an internal design quality assurance review; and 3) according to a gen- eral observation by the government’s project man- ager, the submittal included insufficient construc- tion specifications for site work. The board recognized that “the observations as to the sufficiency of the specifications and the 280 Id. at 30. 281 Id. at 33–34. 282 ASBCA No. 57523, 2011-2 B.C.A. ¶ 34,824, 2011 ASBCA LEXIS 59 (Aug. 12, 2011). 283 The design issues involved the direction by the Corps for the design–builder to modify its stormwater design to incorporate certain requirements of a state stormwater management manual. 284 ASBCA No. 55307, 2009-2 B.C.A. ¶ 34200, 2009 ASBCA LEXIS 38 (July 9, 2009). 279 ASBCA No. 54175, 2006-1 B.C.A. ¶ 33,276, 2006 ASBCA LEXIS 38 (May 3, 2006).

62 technical grounds. The reasons included: 1) the con- tractor had not executed the signature block on a transmittal letter; 2) a transmittal page was num- bered incorrectly; and 3) signature blocks were photo- copied. These rejections, among others, were used to stop the preconstruction meeting from taking place and contributed to almost 6 months of project delays. The design–builder’s claim for additional costs of delay and remission of liquidated damages was rejected by the Armed Services Board of Contract Appeals. The board concluded that each rejection was justified based on a strict reading of the contract. It also concluded that the government’s representative had it within his discretion to demand the corrections before allowing construction activities to start. The issue of the government’s untimely process- ing of design submittals was also raised in the Appeal of Lovering-Johnson, Inc. (LJI),287 as previ- ously discussed. The design–builder asserted that the Navy took too long to review its design docu- ments, arguing that, in a design–build setting, the government’s review of the 40 percent and 80 per- cent design should have been a cursory, “over-the- shoulder” analysis of its design. Instead, the design– builder claimed, the Navy approached the design review period as if the contract was based on a design–bid–build delivery system. In denying the design–builder’s claims, the board issued a rather scathing rebuke of the design– builder. It found the design–builder’s design docu- mentation over the course of the project to be “incom- plete, submitted piecemeal, error-filled, replete with variations from contractual requirements and oth- erwise inadequate.”288 The decision noted that: • Because of the extensive deficiencies in the design documentation, an “over-the-shoulder” review could only have been a first step in resolving them. • The design problems necessitated frequent resubmissions and extensive discussions. The design–builder offered no proof that the govern- ment actions were either in error or dilatory.289 The board ultimately concluded that the design– builder offered no evidence to show the Navy’s com- ments, disapprovals, or itemization of problems dur- ing the design review process were unwarranted, lacked merit, or otherwise caused LJI to perform extra work. Design–builders often voice the concern that owners abuse the submittal process to obtain, for free, a design preference that would otherwise be The board found that the government “failed misera- bly at that task” and several references to fast track remained in the RFP. The design–builder’s proposal stated that it would use the fast-track method for design and construction. As a consequence, the con- tract contained both the proposal and the clause requiring approval of 100 percent of the design. In finding for the design–builder, the board was per- suaded by the fact that: 1) the government did not question the design–builder’s intentions to use fast track as stated in its proposal; 2) during the design period, the design–builder repeatedly reminded the government that it was fast-tracking the project; and 3) the government never said fast track was not appropriate or not allowed. As to this list point, the board stated, “[The] government’s utter silence when [design–builder] repeatedly raised the issue of fast track squarely put the burden on the government to respond during the design phase—and it did not.”285 As for discrete design review and approval delays, the board found the government to be responsible for a number of problems. For example, approval of the site/civil drawings was delayed because of a con- flict between a slope requirement and the actual topography, which ultimately resulted in a waiver being given by the government. The board concluded that the government bore responsibility for not act- ing upon the waiver sooner. The board also found several instances where the government “raised questions late in the game, which had no merit but held up approvals,” and made late changes to the design that reversed prior decisions. The board ulti- mately concluded that the government was respon- sible for 218 days of project delay, as supported by the design–builder’s scheduling analysis. One of the great fears that design–builders have about the design review process is that agencies will “nit-pick” submittals and impact their ability to prog- ress the work. Although “nit-picking” can be in the eyes of the beholder, it appears to be what happened in Appeal of Ellis Environmental Group, LC.286 In general, the dispute was over unreasonable delays in processing submittals on an exhaust ventilation sys- tem for a fire station at a Florida Naval Air Station. The design–builder’s ability to start any construction activities, including a preconstruction meeting, was tied to the government’s approval of the 100 percent final design submission. This submission included an environmental protection plan, a QC plan, and a health and safety plan, among others. On numerous occasions, the government rejected the design–builder’s submissions on a number of 285 Id. at 84. 286 ASBCA No. 55375, 2008-2 B.C.A.¶ 33,918, 2008 ASBCA LEXIS 48 (July 22, 2008). 287 ASBCA No. 53902, 2005-2 B.C.A. ¶ 33126, 2005 ASBCA LEXIS 98 (Nov. 17, 2005). 288 Id. at 70. 289 Id. at 71.

63 One other point about the owner’s submittal review process must be noted. It is clear that con- tract language and case law have been protective of the owner’s right to obtain what is required by con- tract regardless of its review and approval of sub- mittals.292 However, a design–builder can use the owner’s approvals, or failure to reject or comment, to support a claim that the owner knew the design– builder’s contractual interpretation and, therefore, should be bound by it. Reliable Contracting Group, LLC v. U.S. Depart- ment of Veterans Affairs293 illustrates this point. The project involved a design–build contract for a new utility plant and electrical distribution system for the VA. A dispute arose over whether the design– builder’s electrical subcontractor was obligated to provide two or three emergency generators capable of running simultaneously. The subcontractor sub- mitted an initial short circuit study analysis that was based on two generators running simultane- ously, with the third generator serving as a back-up. VA approved this approach, with some notes. The subcontractor then procured and installed equip- ment that was consistent with the study. As the plant neared completion, VA asked about the sequence of operation of the three generators. At that point, VA advised the design–builder that it expected all three generators to simultaneously pro- vide power. This resulted in another short circuit study, which showed that several large pieces of equipment were not adequately protected if the three generators were running simultaneously. VA directed the design–builder to change the equipment, prompt- ing a claim of approximately $1.7 million. considered a compensable change. As a consequence, to avoid delays, the design–builder will give in to the owner’s preferences and then seek recovery of the differences in cost. Several cases suggest that the owner did precisely that, but the design–builder was unable to prove that it was not acting as a volunteer in giving the owner what it really wanted. In Appeal of Win Ballance, Inc.,290 the design– builder alleged that the U.S. Army Corps of Engi- neers required it to provide a more costly roof sys- tem than required by the contract. The design–builder claimed that this situation was created because the Corps stated at an early partnering meeting that it wanted the roof system to match that used on an adjacent building. The design–builder initially chose a different roof system manufacturer than the one used on the other building, but was unable to con- vince the Corps that the colors on both would match. After having its submittals repeatedly rejected, the design–builder eventually agreed to use the same manufacturer as on the adjacent building. The Corps argued that its rejection of the submittals was because the design–builder had failed to comply with contract requirements. The Armed Services Board of Contract Appeals denied the claim. It found that the Corps was con- tractually justified in rejecting the submittals, and that the design–builder made a unilateral decision to change manufacturers rather than try to obtain an acceptable submittal with its original manufac- turer. Interestingly, its decision noted that “we are not prepared to suggest that the user would not have preferred that both contractors use the same roof system.”291 Because allegations of owner-caused delays dur- ing the design process have been a common theme in design–build disputes, other cases in this section will address their disposition as appropriate. As pre- viously demonstrated, courts and boards of contract appeals have generally been less than sympathetic to design–builders’ complaints. Many of the results appear to be based on the design–builder’s inability to prove that the alleged owner interference actually caused delays to the project. If the design–builder’s project controls and management approach demon- strated the cause-and-effect of the alleged owner action on its operations, a different result might be seen. The Ellis Environmental decision is more chal- lenging for design–builders, as the board did not seem troubled by the agency’s “form over substance” viewpoint of the submittal process. 290 ASBCA No. 53710, 2005-2 B.C.A. ¶ 33,081, 2005 ASBCA LEXIS 83 (Sept. 28, 2005). 291 Id. at 7. 292 Gee & Jenson Engineers, Architects, and Planners v. United States, No. 05-457C, 2008 U.S. Claims LEXIS 504 (Fed. Cl. 2008), cited in note 227, is a design–bid–build case that discusses this as well. In that case, the archi- tect claimed that it was absolved from liability because the Navy approved the design with no flashing. The U.S. Court of Federal Claims rejected this argument, citing FAR 52.236-23(b), which stated: (b) Neither the Government’s review, approval, or acceptance of, nor payment for, the services required under this contract shall be construed to operate as a waiver of any rights under this contract or any other cause of action arising out of the performance of this contract, and the Contractor shall be and remain liable to the Government in accordance with applicable law for all damages to the Government caused by the Con- tractor’s negligent performance of any of the services furnished under this contract. The court also relied on contract provisions that re- quired the architect to actually request permission from the Navy to cancel the flashing requirement and obtain specific approval from the Navy to do so. 293 CBCA 1539, 2011-2 B.C.A. ¶ 34,882, 2011 CIVBCA LEXIS 295 (Nov. 16, 2011).

64 Consider Appeal of Strand Hunt Construction, Inc.,295 which involved the installation of windows at a U.S. Army Corps of Engineers complex in Alaska. The RFP’s specifications called for windows that met certain thermal and blast-resistance perfor- mance requirements. The design–builder had trou- ble procuring and installing contract-compliant win- dows. It sought extra costs for the delays, claiming that the specification was defective because the win- dows that met the specified criteria were not avail- able off-the-shelf from manufacturers at the time of contract award. It is important to note that the design–builder’s architect created design specifications directly from the RFP. These documents were submitted, reviewed, and approved by the government. It was only after these specifications were sent to subcontractors for bidding purposes that it was allegedly discovered that they could not be met by an “off-the-shelf” product. The board rejected the design–builder’s claim, finding that, although the windows had to meet sev- eral specific design characteristics, the overall win- dow specification was a performance specification. It gave the contractor discretion over the window loca- tions, size, manufacturer, and installation. The fact that windows meeting these specifications were not available off-the-shelf and had to be custom-made did not shift this risk to the owner: SHC apparently assumed, even though the RFP made no such representation, that a ready-made window existed or that a compliant custom made window could be acquired within its budget that met the RFP requirements. It (as well as its designer and its window subcontractor) did lit- tle investigation prior to submitting its proposal or even before substantially completing its design during the per- formance period. …The RFP does not require nor promise the availability of ready-made windows. There is evidence that windows meeting all RFP performance requirements could be manufactured given enough time. The evidence shows only that SHC could not find an off-the-shelf ready- made window meeting the requirement of CRF 67 and which was within its proposed budget. Had SHC, its archi- tect of record and its window subcontractor investigated window availability in the proposal phase they would have discovered that it was unlikely they would find windows meeting all the RFP requirements without having them custom manufactured with attendant cost and long lead times. However, SHC and its subcontractors did not fully investigate window availability until late in the design process. SHC must now bear the burden of its failure to investigate the availability of the required windows. (Cita- tions to findings omitted.)296 The design–builder attempted to argue that it had no choice but to make sure its proposal and VA argued that the design–builder bore the cost consequences of installing and removing underrated electrical equipment prior to its submission of the final short circuit study and analysis. It believed that the design–builder, prior to selecting the elec- trical equipment, should have performed a final short circuit study analysis to determine the proper type and size of equipment for the contract. Had this been done, the fact that only two generators would be running simultaneously would have been discov- ered. This would have obviated the costs incurred for purchasing, installing, and removing the under- rated equipment. The Civilian Board of Contract Appeals flatly rejected this position. First, it found no evidence that VA warned the design–builder that it was installing large amounts of unapproved equipment. The record made it clear that the design–builder was proceeding with the work based on the approval of the initial short circuit submittal. Next, it found no compelling evidence that the design–builder should have discovered that VA wanted the three generators to be capable of running simultaneously. In addition, VA presented no evidence to rebut the design–builder’s testimony that it is common prac- tice for hospitals to have a spare generator for their backup electrical system. In finding that the design–builder should be com- pensated for all of its costs in dealing with this situ- ation, the board had this comment about VA’s actions: It is clear from the evidence that the VA failed to adequately review the submittals and is attempting to foist its own fail- ures onto Reliable (i.e., the design–builder). Reliable’s inter- pretation, that only two generators were required to run simultaneously, was reasonable. It is difficult for the Board to find sympathy for the Government when it operates in such a careless fashion and later attempts to obtain relief from such behavior. Based on the evidence before us, we see no reason to penalize the contractor for not earlier realizing the parties’ differing interpretations regarding the backup generators, or the resultant need for a change to the con- tract. Clearly, the VA’s sloppy handling of some of the elec- trical equipment submittals contributed to Reliable’s esca- lated costs for the change.294 5. Failure of Design–Builder to Abide by Its Own Design Design–builders will ultimately create the proj- ect’s design documents based on the agency’s established contractual requirements. What hap- pens if the design–builder puts forth a design that is approved by the agency, and later either fails to follow it or believes that it is too restrictive? Pre- dictably, the design–builder has not fared well in these situations. 294 Id. at 9. 295 ASBCA No. 55671, 08-2 B.C.A. ¶ 33,868, 2008 ASBCA LEXIS 57 (May 22, 2008). 296 Id. at 33–34.

65 Because the design–builder failed to follow its own specifications, and its rebar placement was inaccu- rate, it had breached its obligations to perform all work “in accordance with the Contract.” E. Failure of Design–Builder to Meet Expected Performance As discussed in Section II, one of the primary challenges for owners using design–bid–build is that they have to prove whether design or construc- tion is the root cause of a problem. Design–build’s single-point-of-responsibility feature generally elimi- nates this challenge, enabling the owner to point to the failure of the system to function and make a claim against the design–builder. The cases in this section highlight the practical application of these principles. 1. Improper Design or Construction When a design–build project does not function as required, the owner has multiple legal theories it can use to pursue the design–builder for defective design or construction. Breach of express contract is the most common legal theory used by owners who have claims against design–builders. Consider, for example, Rivnor Properties v. Herbert O’Donnell, Inc.,299 wherein the owner of the project contracted for the design and construction of an office building in the greater New Orleans area. The design–builder subcontracted the design to an archi- tect who had no contractual supervisory obligations incident to construction. Shortly before completion of the project, the owner complained that water was leaking into the building. Over a period of about 3 years, the design–builder attempted to remedy the leaks. Its subcontractor performed patch work on the cap flashing, installed caulking around the building, and drilled holes in the exterior curtain wall system. Despite these efforts, the leaks contin- ued, resulting in, among other things, glass break- age and discoloration. Eventually, the owner hired its own experts to determine the causes of the various problems. The owner performed the work recommended by its experts and then filed suit against the design– builder for breach of contract and express and implied warranties. Various third-party claims and cross-claims were filed by the design–builder and its subcontractors, including the architect. The trial court found the design–builder fully liable to the owner. The Louisiana Court of Appeals affirmed this decision. The court held that the design–builder “was charged by contract with the sole responsibil- ity for all construction means, methods, techniques, design specifications mirrored the RFP require- ments. The board dismissed this, stating: [If] SHC indicated in its proposal and design specification submissions that it would meet the RFP performance require- ments without adequate investigation, it did so at its own risk. SHC was obligated to not just say that it would meet requirements, but also to be sure it could actually do so.297 Underlying the board’s decision was evidence presented during the hearing that the contract-com- pliant windows could be designed and manufactured given enough time and appropriate planning. A similar result was reached in a private sector case, Younglove Construction, LLC v. PSD Develop- ment, LLC.298 This project involved the construction of an animal feed manufacturing plant in Ohio. The owner withheld a substantial portion of the design– builder’s retainage based on allegations of defective work, including: 1) concrete that did not meet the con- tract’s requirement of 4,000 psi at 28 days, and 2) rebar that did not meet the specification’s vertical spacing requirements. The design–builder argued that these deficiencies were immaterial and provided engineer- ing proof that the as-placed concrete was structurally adequate for its intended purposes. The court dis- agreed with the design–builder. For each alleged breach, the court noted that the design–builder cre- ated the specifications that it failed to follow. As for the concrete, the court held that the design– builder’s failure to meet the concrete strength test: 1) met the contract’s definition of “defective con- struction,” in that the work did not conform to the Contract Documents, as required by the contract; and 2) constituted a breach of the design–builder’s contractual guarantee that “all Construction will be complete in accordance with the Contract Docu- ments.” The fact that the design–builder might be able to prove that the building was structurally ade- quate did not negate that there was a breach, but simply would go to the materiality of the breach and the appropriate damages. The court reached a similar conclusion relative to the placement of the rebar. The design–builder’s design specified the location of the rebar, vertical spacing, and amount of concrete cover. Because it decided to “float” the rebar, these precise require- ments were not met. The design–builder argued that the Ohio Building Code allowed rebar placement to vary from the engineer’s structural drawings if, “after review and analysis, engineering judgment warrants such variance.” The court concluded, how- ever, that this could only be done as part of the design process, not after the fact during construction. 297 Id. at 32. 298 Case No. 3:08-cv-1447, 2010 U.S. Dist. LEXIS 117124 (N.D. Ohio 2010). 299 633 So. 2d 735 (La. Ct. App. 1994).

66 District,302 which involved the failure of a tie-back anchor block system on a South Dakota emergency slope repair project. The road had a history of slope failures over a year-long period, which appeared to be caused by above-average precipitation. The design–builder’s anchor block system was one of several failed attempts to stabilize the area. When the owner failed to pay the last portion of the design–builder’s payment requisition, the design–builder sued. This prompted the owner’s counterclaim for breach of contract and negligence against the design–builder, alleging that the design- builder: 1) provided an improper design solution, and 2) failed to construct the system in accordance with the design specifications. Its damages sought, among other things, the cost of fixing the slope, as well as reimbursement for the funding it could have received from the Federal Emergency Management Agency under the Public Works Assistance Program if the project was completed and the road in operation. The court denied the design–builder’s motion for summary judgment on the negligence count, hold- ing that: Here, HBI undertook the obligation to provide professional services to Shirttail Gulch. The failure to exercise reasonable care had the potential of increasing the risk of harm. Addi- tionally, Shirttail Gulch and others relied upon HBI to exer- cise reasonable care in designing and constructing the earth retention system. While the obligation to provide an appropri- ate design and proper construction arose out of the contract, a duty existed to provide such services using “such skill and care ordinarily exercised by others in the same profession.…” Accordingly, the court finds HBI owed a duty to Shirttail Gulch, the violation of which gives rise to tort liability.303 The design–builder also attempted to have the court dismiss the breach of contract action. It claimed that, because the owner had not fully paid the design–builder under its contract, the owner did not suffer any damages. This motion was also rejected by the court. Noting that the damages avail- able for breach of contract are intended to “put the owner in the same position had no breach occurred,”304 the court found that there were several ways a jury could fashion a remedy. The design– builder suggested that the court could award dam- ages that were limited to the amount left to be paid under the design–build contract. Another option was that it could award damages for: 1) the costs to remedy further damage to the road and surround- ing slope, or 2) the reasonable cost of effecting a repair, which could potentially be an entirely new solution (e.g., a soldier pile wall). Each of these sequences and procedures and for coordinating all portions of the work under the contract,” as well as QC inspections. The court also found that several members of the design–build team, i.e., the architect and several trade subcontractors, contributed to the leakage problem and were liable to the design– builder for a share of the damages. Performance problems were also the focus of Glacier Tennis Club at the Summit, LLC v. Treweek Construction Company, Inc.,300 a case discussed in detail in the following Sections E.3 and F.2. This involved litigation that arose out of defects in a Montana tennis facility. As it was investigating other problems with the facility, the owner discov- ered that the building had elevated levels of radon. It attributed this to the design–builder’s failure to install a subsurface vapor barrier and sued the design–builder for the costs of remediat- ing the radon. The design–builder argued that radon remedia- tion was neither contemplated by the parties at the time of contracting nor required by the standard of care at the time of the project. The owner asserted that the design–builder’s failure to install the vapor barrier violated the Uniform Building Code, and that radon remediation was the foreseeable consequence of the design–builder’s failure to sat- isfy this duty. The lower court allowed this issue to go to the jury, which found in favor of the owner. The design–builder’s appeal to the Montana Supreme Court was unsuccessful, as that court concluded that there was adequate evidence to sup- port the relationship between the need for radon remediation and the failure of the design–builder to install the vapor barrier. Although breach of contract is an expedient legal theory for an owner to raise against a design– builder, the damages awarded under this legal the- ory are more limited than those available for negli- gence.301 As a consequence, depending on state law, some owners will sue the design–builder for both breach of contract and negligence. This was the case in Hayward Baker, Inc. v. Shirttail Gulch Road 300 2004 MT 70, 320 Mont. 351, 87 P.3d 431 (2004). 301 An owner’s ability to sue its design–builder for neg- ligence is dependent on whether the applicable law enforces the “economic loss doctrine.” This doctrine, which is recognized in about half of the states, does not allow one contracting party to sue a counterparty for negligence when its claim is based on economic (as opposed to personal injury or property) damages. It also will not allow a party to sue someone with whom it does not have a contract for economic damages (e.g., an owner suing a design–builder’s subcontractor). See generally Allensworth, Altman, Overcash & Patterson, supra note 16, at 615–66. 302 Civ. No. 10-5012-JLV, U.S. Dist. LEXIS 128107 (D.S.D. Sept. 10, 2012), 2012 WL 3929211 (D. S.D. 2012). 303 Id. at 14. 304 Id. at 17.

67 soil, causing that soil to swell and the basement slabs to heave. Once the slabs heaved, the upward pressure was transferred from the slab to the walls and all levels of the structure, causing all elements of the structure to move differentially. This resulted in major interior damages. The board was heavily influenced by the fact that the design–builder failed to comply with the specifi- cation’s QC plan and testing requirements. The design–builder conducted, on average, only 2 back- fill tests around each building versus the 21 tests required. It did not take any tests in the backfill around 26.7 percent of the buildings. The board found that the design–builder hid these test results from the government by not submitting them in a timely or complete manner. The design–builder argued that the problems were caused by the improper selection of an SOG design, pointing to pre-bid government foundation studies that advised against using SOG because of the potential for heave. The design–builder’s expert corroborated this, finding that the government’s SOG design was a “fatal flaw” and pointing to a number of other deficiencies in the specifications that exacerbated it. Based on this, the design– builder argued that, under the Spearin doctrine, it should be absolved from liability. The board acknowledged that Spearin was theo- retically applicable, as the government had specified the use of an SOG foundation. It found, however, that the design–builder failed to prove that the SOG design was unsuitable for its intended service. The fact that the government did not select the “best” or most expensive design, or a design that would ensure the maximum number of years of service, or a design that would require minimal repairs does not render it defective.307 The board believed the government’s expert, who testified that, although there was some level of risk with the SOG, the flaws should not have appeared for 10 to 15 years if the work had been constructed per the specifications. Importantly, the board also noted that to prove the government breached its implied warranty under Spearin, the design–builder had to first show that it substantially complied with the specifications, which the design–builder in this case failed to do. 2. Failure to Meet Performance Requirements and Guarantees When an owner uses objective performance specifications and has testing and guarantees built around those specifications, it is fairly easy to dem- onstrate liability on the part of the design–builder remedies exposed the design–builder to substantial potential losses stemming from its failed anchor block system.305 Occasionally, a design–builder’s defective work cannot be determined at the time of substantial completion. Appeal of American Renovation and Construction Company,306 which involved the con- struction of 194 units of military family housing at a base in Montana, provides an excellent example of an owner’s remedies in this situation. The govern- ment furnished a design that had 100 percent com- pleted specifications and 35 percent completed drawings. The government’s design required that the units be built using slab-on-grade (SOG) con- struction with full basements. Shortly after the work was completed, the slabs heaved and the struc- tures on the foundation backfill settled, causing widespread damage to the units. Based on its belief that the design–builder’s shoddy construction practices caused the damage, the government revoked its acceptance of the units and terminated the contract based on, among other things, latent defects and gross mistakes that amounted to fraud. The design–builder argued that the revocations and terminations were improper because the root cause of the problem was the gov- ernment’s specification of SOG construction on a site that was predominantly fat clay, which would heave if exposed to moisture. It also argued that the government’s actual knowledge of its noncompliant construction methods precluded revocation and default termination. The Armed Services Board of Contract Appeals agreed with the government. Its decision identified a plethora of workmanship problems by the design– builder, all of which violated the contract’s detailed specifications. These deficiencies included: 1) using icy material 2 ft in diameter against the basement walls, which created gaps and voids that caused set- tlement; 2) leaving substantial amounts of debris in the backfill (e.g., a wooden fence post and steel stakes), making it difficult to achieve the specified level of compaction and creating a pathway for water to reach the expansive soils in the subgrade; 3) plac- ing fill lifts substantially greater than the 8-in. spec- ified (e.g., 6 ft to 8 ft in some instances); and 4) fail- ing to dewater the excavations. The board found that these and other flaws combined to allow mois- ture to infiltrate the expansive foundation subgrade 305 Because there is no later reported decision on this case, it is likely that the summary judgment ruling prompted the parties to settle. 306 ASBCA No. 53723, 2009-2 B.C.A. ¶ 34,199, 2009 ASBCA LEXIS 37 (June 30, 2009); affirmed by Am. Reno- vation and Constr. Co., ASBCA No. 53723, 2010-2 B.C.A. ¶ 34487, ASBCA LEXIS 42 (June 16, 2010). 307 2010 ASBCA LEXIS 42, at 15.

68 these, the owner terminated the contract and suc- cessfully pursued a claim against the surety. The surety argued that the only recourse for its princi- pal’s failure to meet the requirements was that it would not receive its 10 percent retainage. The Fourth Circuit Court of Appeals found that the design–builder’s agreement to meet the stated pro- duction objectives constituted warranties, not sim- ply conditions to receive retainage, and held the surety liable for the owner’s operating losses result- ing from the deficient performance output. 3. Owner Involvement as Impacting Design- Builder’s Responsibilities Some design–builders have attempted to argue that the owner’s knowledge, active involvement, or delayed actions absolve the design–builder from some or all of the liability associated with a problem. These arguments are generally unsuccessful, in large part because of contract language that requires the design–builder to meet its contract obligations, notwithstanding the owner’s inspections or design reviews and approvals. Samples of these clauses in the design context were previously discussed in Sec- tion III. Consider Fluor Intercontinental, Inc. v. Depart- ment of State,312 which arose from the design and construction of a United States embassy complex in Astana, the capital of Kazakhstan. Fluor’s 35 per- cent design submittal for the embassy’s perimeter wall depicted a shallow continuous footing 1 m below grade and above the frost line, consistent with the recommendations of its geotechnical engineer. This differed from the design approach included in the RFP’s design documents, which apparently showed a deep foundation. After Fluor started construction on the perimeter wall, and 9 months after it had received the 35 per- cent submittal, DOS questioned whether the foun- dation design complied with the International Building Code (IBC), which was a contract require- ment. Fluor ultimately confirmed that the IBC required that footings for structures must be below the frost line. Fluor subsequently modified its design and used a deep foundation system. Fluor com- plained, among other things, that DOS’s failure to object to this earlier created delays and additional costs. In denying this element of Fluor’s claim, the Civilian Board of Contract Appeals stated: [Fluor] seeks to distance itself from the responsibilities that it took on as the design/build contractor. The contract did not prescribe the design of the perimeter wall’s foundations. when the performance guarantees are not met. The Strand Hunt case308 discussed in Section VI.D.5 pro- vides an excellent example of the design–builder’s obligations to meet a performance specification. A number of cases arising from the power, petrochemi- cal, and process industries discuss the design–build- er’s obligations to meet performance requirements. The disputes in these cases are frequently over which party has responsibility for delays and whether liquidated damages are appropriate. In Fort Howard Paper Co. v. Standard Havens, Inc.,309 a paper company brought suit against a firm that designed, built, and installed a pollution control device in the company’s plant. The device was designed to remove fly ash from the plant’s flue gases prior to their emission into the atmosphere. Fly ash build-up on the filters of such devices can lead to higher operating costs, due to the greater power required to move the flue gases through the filter system. As a consequence, the filter manufac- turer warranted the device against filter cloggage, as measured by the pressure drop of the flue gases across the surface of the device. Under this war- ranty, the maximum allowable pressure drop was not to exceed 6 in. of water. The paper company suc- cessfully sued when the pressure drop consistently exceeded this level. Aiken County v. BSP Division of Envirotech Corp.310 involved the design and supply of a thermal sludge conditioning system for a wastewater treat- ment plant that failed to meet its performance guar- antees. The guarantees required that the system operate continuously on a 24-hour basis with not more than 15 percent of total time required for maintenance. The maintenance times for the first 3 months after start-up were 42 percent, 36 percent, and 42 percent of total time. Upon learning that the supplier had, despite its representations to the con- trary, provided a new process that had never been successfully used or tested in a wastewater applica- tion, the owner sued for breach of warranty and fraud. The owner prevailed on both theories. Gurney Industries, Inc. v. St. Paul Fire & Marine Insurance Co.311 involved a design–build contract for a yarn manufacturing plant that had specific pro- duction requirements for output and quality stan- dards. When the design–builder did not achieve 308 ASBCA No. 55671, 2008 B.C.A. ¶ 33,868, 2008 ASBCA LEXIS 57 (May 22, 2008). 309 901 F.2d 1373 (7th Cir. 1990). This discussion is tak- en directly from Michael C. Loulakis, The Current State of the Design-Build Industry, in Design-builD conTrAcT- ing hAnDbook (Robert F. Cushman & Michael C. Loulakis eds., 2d ed. 2001). 310 657 F. Supp. 1339 (D.S.C. 1986). 311 467 F.2d 588 (4th Cir. 1972). 312 CBCA 490, CBCA 491, CBCA 492, CBCA 716, CBCA 1763, CBCA 1555, 2012-1 B.C.A. ¶ 34,989, 2012 CIVBA LEXIS 89 (Mar. 28, 2012).

69 that the inspector was not responsible for discerning unseen problems developing below the surface. Cit- ing to contract language, the board found that the fact that an inspector may have observed the design–builder performing defective work does not excuse the design–builder from its obligation to meet the contract requirements. As discussed in Sections E.1 and F.2, Glacier Ten- nis Club at the Summit, LLC v. Treweek Construction Company, Inc.,317 involved litigation arising out of the construction of a tennis facility. One of the key issues in the case was whether the owner’s architect (Thompson) owed a duty of care to the design–builder and breached that duty by, among other things, fail- ing to find the flaws in its design during the submit- tal review process. As discussed in detail in the fol- lowing Section F.2, the court found against the design–builder, in large measure because there was no evidence that Thompson communicated profes- sional information to the design–builder with the intention or knowledge that such information would be relied upon by the design–builder. Consider, how- ever, how the Montana court may have evaluated this if it was the owner that directly communicated input about the design to the design–builder on an aspect of the design that was eventually faulty. It may have decided that the owner’s involvement should be con- sidered by the jury, notwithstanding contract lan- guage distancing the owner from liability. The fact that an active owner can potentially impact its rights against a design–builder is demon- strated by Allen Steel Co. v. Crossroads Plaza Associ- ates.318 This case involved a commercial facility in Salt Lake City, Utah. In response to an owner’s solic- itation for design–build proposals for structural steel work, a contractor submitted a proposal con- taining three structural design alternatives. The proposal specifically stated: This proposal is offered for the design, fabrication, and erec- tion of the Structural Elements only for the tower and mall. …Owner’s engineer is to check this design and make changes if necessary to enable him to accept overall respon- sibility for the design. Changes that effect [sic] quantity, weight, or complexity of structural members will require an adjustment in price.319 The proposal was accepted, and the contractor was directed to prepare detailed plans for steel fab- rication based on its proposal. During the course of Instead, the contract required Fluor to design the wall and its foundations. The contract did place certain conditions on Fluor with regards to its design. Fluor had to comply with the 2003 IBC, for example. This code required Fluor to take frost protection into account when it designed the wall’s foundation. In this circumstance, to do so, Fluor had to extend the foundation below the frost line. …The fact that DOS did not discover the flaw in Fluor’s approach until later in the project does not change Fluor’s obligations. Even if DOS’s action had some impact upon Fluor’s choices, causing it additional costs or delay, Fluor failed to give DOS adequate and timely notice that a problem existed and that Fluor believed that the contract required DOS to solve it.313 Unfortunately, the decision does not explain why Fluor believed it had the right to use a shallow foun- dation system in light of the IBC’s requirements.314 In Appeal of American Renovation and Construc- tion Company,315 which was previously discussed at length, the board rejected the notion that the design–builder’s poor performance should be excused because 1) the government’s inspector observed the defective work as it was being installed; and 2) QC reports recorded instances of defects in the work. “Merely keeping the reports in its job site trailer and making them available upon request does not…impute knowledge of the contents of those reports to the government.”316 The board also noted 313 Id. at 157–58. 314 Readers should note that other elements of the Fluor decision are instructive on the right of a design–builder to rely upon the RFP’s geotechnical information. The Civil- ian Board of Contract Appeals looked to the role of Fluor, as the design–builder, and concluded that it could not rely upon such documents: This contract placed all of the responsibility for design and construction (and, as a consequence, all of the risk) on Fluor. While the Government provided Fluor with standard design documents and basic technical specifi- cations developed for use for all embassy construction, the contract made plain that Fluor would be respon- sible for adapting the design to the specific location in producing the project construction documents. Bidders were expressly told in many different sections of the RFP not to rely on the drawings, as illustrated by the following: “drawings are for the sole purpose of illus- trating the design intent of the owner”; “the Contractor remains solely responsible and liable for design suffi- ciency and should not depend on the reports provided by the [Government] as part of the contract documents”; and noting that the contractor would be responsible for adapting the design “according to the unique conditions of the site and other local and regional factors.” Because this case predates the Metcalf appellate deci- sion, the precedential value of the decision relative to its findings on the reliability of the RFP documents is unclear. 315 ASBCA No. 53723, 2009-2 B.C.A. ¶ 34,199, 2009 ASBCA LEXIS 37 (June 30, 2009); affirmed by Am. Reno- vation and Construction Co., ASBCA No. 53723, 2010-2 B.C.A. ¶ 34,487, 2010 ASBCA LEXIS 42 (June 16, 2010). 316 ASBCA LEXIS 42, at 24. 317 2004 Mt. 70, 320 Mont. 351, 87 P.3d 431 (2004). 318 119 Utah Adv. Rep. 6, 1989 Utah LEXIS 124 (1989), (withdrawn, 1991 Utah LEXIS 30 (1991)). Although this case was withdrawn and has no precedential value from a litigation perspective, it does provide an interesting example of how an owner’s involvement can be perceived by a trier of fact. 319 1989 Utah LEXIS 124, at 5.

70 4. Insurance Coverage for Defective Work Many of the cases involving defects on design– build projects arise in the context of insurance cover- age disputes. The typical case will involve one of the parties seeking to have the expenses incurred in repairing the defect covered by a commercial general liability (CGL) policy. Although there are some excep- tions, most of these cases find that the CGL policy will not reimburse the design–builder for these expenses, based on common exclusions in the policy. Consider Penn National Security Insurance v. Design–Build Corporation,322 which involved con- crete slab movement on an industrial building that resulted in $2.6 million in damages. The design– builder self-performed the design and much of the construction of the facility. The slab movement was noticed shortly after the owner started operating its equipment in the building. The owner sued the design–builder on the basis that it failed to design and construct the facility properly, which prompted the design–builder to sue its CGL carrier for both defense obligations and coverage. The court granted summary judgment in favor of the insurance company, finding that the policy did not provide coverage for damage to the build- ing, loss of use of the owner’s machines, or loss of the owner’s profits. It largely based its findings on the following exclusions: • “Your Work”—This exclusion states that cov- erage is not available for property damage to the work of the insured. • “Professional liability”—This exclusion pre- cludes any damages caused by design or engineering mistakes, as distinguished from construction errors. Each of these exclusions is found in all typical CGL policies. The “Your Work” exclusion essentially means that the design–builder is obligated to bear the commercial risk of correcting its own defects. The “professional liability” exclusion is to ensure that the CGL policy is not to be used to cover errors and omis- sions, which are the subject of a different type of insurance (i.e., professional liability insurance). National Union Fire Insurance Company v. Turner Construction Company323 involved the failure of a design–build curtain wall, where 20 percent of the pipe rail connections did not conform to the build- ing plans. The failure resulted in damage to the build- ing’s facade, among other things. The owner sued the general contractor and design–build subcontractor for defects in design, fabrication, and installation. The contractors claimed that the CGL policy should performance, however, inspectors from Salt Lake City stopped construction because of what they per- ceived as structural defects. The owner retained its own engineer to correct the defects. Steel had to be torn down to remedy the problem, resulting in delays to the project and substantial cost overruns. The owner backcharged the contractor for such costs, prompting litigation between the parties. The sole issue in the case was whether the con- tractor effectively disclaimed responsibility for design defects by using its proposal to make the owner responsible for the design. The court found that although the owner had only provided general design parameters for the structural steel, the con- tractor had effectively disclaimed its responsibility, since it had provided a design for purposes of the bid and transferred the risk of verifying adequacy of the design to the owner. Another case finding that an active owner may impact its ability to recover from a design–builder is Weyerhaeuser Corporation v. D. C. Taylor,320 which involved a defective roof on a paper production com- plex in Iowa. The design–builder and a paper com- pany formed a company to develop the project. A roof- ing subcontractor was obligated to build the project per the design it was provided. The paper company eventually bought the design–builder out of the deal. When the roof started to fail during the 10-year war- ranty period, the paper company sued the subcontrac- tor. It did so by claiming that a warranty contained in the subcontract extended to the paper company. The court ultimately dismissed the case against the subcontractor on two grounds. First, it concluded that the subcontractor had constructed the work as required by the design documents, which the paper company had been heavily involved in creating (potentially because of the corporate structure between the design–builder and the paper com- pany). This design was defective and one of the major causes of the roof failure. Second, the court noted that there were construction defects because the layers of the roof had not been properly adhered. It found, however, that this was caused by the own- er’s insistence that asphalt be applied in cold tem- peratures. The subcontractor did its best to keep the materials warm, but could not keep them hot enough to create the proper adhesion.321 320 No. C02-141-LRR, 2005 U.S. Dist. LEXIS 17283 (N.D. Iowa July 29, 2005). 321 The decision does not explain why the paper com- pany did not sue the design–builder. It appears likely that the corporate buy-out, or the agreement between the design–builder and paper company, either had a waiver of liability or shifted the warranty obligations from the design–builder to the subcontractors providing the war- ranty after a period of time. 322 No. 2:11-cv-02043-PMD, 2012 U.S. Dist. LEXIS 94012 (D.S.C. July 9, 2012). 323 119 A.D. 3d 103, 986 N.Y.S.2d 74 (2014).

71 On the basis of Benham’s work product, Maddox submitted a formal proposal to complete the design and construct the work. It signed a contract with the owner in September 1990 for approximately $10 million. This led Maddox and Benham to enter into a subcontract for design services for approximately $600,000. The subcontract was signed in September 1990, but predated to June 1, 1990, which is when Benham was authorized to perform its proposal- related services. The subcontract contained a stan- dard integration clause, which said that the written contract “represents the entire agreement between [the parties] and supersedes….prior negotiations, representations or agreements.”326 The relationship between Maddox and Benham was problematic from the start of the project. Maddox claimed problems with Benham’s perfor- mance, including the fact that the drawings were often late and insufficient, that Benham had under- estimated the amount of work needed to complete the final design, and that because prints for the elec- trical components of the project were not available, Maddox ended up having to install part of the wir- ing without plans. Maddox eventually sued Benham and success- fully convinced the jury to award over $5 million in damages, including over $2.7 million for bidding errors, engineering errors, and delays caused by Benham. During the trial, Maddox introduced testi- mony that it relied heavily on the material quantity estimates provided by Benham, since Benham pos- sessed all of the design information. Benham appealed to the 8th Circuit Court of Appeals and cited two primary grounds for over- turning the jury’s award. First, it argued that the existence of the oral contract should not have been disclosed to the jury, since the contract had an inte- gration clause where the written subcontract was to represent the entire agreement between the parties and superseded any prior oral agreements. The rea- son that Benham wanted to rely on the written sub- contract was that it contained a provision stating that Maddox, not Benham, was to furnish all cost estimating services required for the project. The Eighth Circuit disagreed, finding that the oral contract was a separate, stand-alone agreement between the parties and had been entered into, exe- cuted, and paid for by the time the written contract was signed. It pointed to the title of the subcontract (“Agreement—Final Design”) and found that it was reasonable to assume that the parties might adopt a different arrangement on cost estimating responsi- bilities for preliminary engineering services, such as preparing an initial bid for the project. cover the defense costs and claims. The court granted summary judgment in favor of the insurance com- pany on the grounds that CGL policies do not afford coverage for faulty workmanship that results in dam- age to the insured’s work (i.e., the “your work” exclu- sion”), or for breach of contract or warranty. F. Designers’ Liability for Design Defects Only a handful of cases discuss the liability of a designer for design problems arising on design– build projects. This section will discuss the most common liability scenarios facing a designer work- ing on a design–build project, when the designer is not the prime design–builder. 1. Design Deficiencies Made During the Proposal Process Because most design–build procurements require the proposer to submit a technical proposal, the design–builder’s designer has a substantial (albeit indirect) role in helping the design–builder develop its pricing assumptions. These preliminary designs serve as the basis for quantity take-offs, equipment selec- tion, layout assumptions, and a variety of other facets of the estimate. If these proposal-based assumptions change as the design advances after contract, there is likely no opportunity to seek recovery from the owner, unless the owner has changed the design. As a conse- quence, the design–builder may look to the designer for compensation for the increased costs. As noted in Section VIII, professional liability carriers have experienced a number of claims aris- ing out of allegedly defective designs furnished dur- ing the proposal process. Most of these are settled or arbitrated and not subject to written decisions. There are two important cases, however, that explain designers’ duties and obligations in this situation. One of the most well-recognized cases is C.L. Maddox, Inc. v. The Benham Group, Inc.,324 which involved the remodeling of a coal processing system at an electric power plant in Illinois. Maddox, a gen- eral contractor, agreed to provide a design–build proposal to the owner for the work. As part of devel- oping this proposal, Maddox entered an oral agree- ment with Benham, whereby Benham was to pre- pare drawings, specifications, and equipment lists and quantity information for the proposal. The owner authorized payment of approximately $60,000 to Maddox to pay for Benham’s services.325 324 88 F.3d 592 (8th Cir. 1996). 325 The memo describing the oral contract stated: “[Own- er] approves $58,200 for [Benham] to begin in-depth study of equipment layouts, equipment sizing and to supply neces- sary information and assistance for [Maddox] to prepare a final construction cost (lump sum) for the project. [Benham] is to develop a final lump sum engineering cost.” Id. at 596. 326 Id. at 600.

72 suit against the designer, alleging that its breaches caused more than $12.5 million of the loss. It claimed that a substantial portion of its damages resulted from increased material quantities over the estimates provided by the designer during the bid process. The trial court found that the designer breached its contractual and fiduciary duties to: 1) provide sufficient accurate information to the contractor upon which to base its bid; 2) make reasonable efforts to design the project; 3) track quantities in its design; and 4) notify the contractor that quantities would be exceeded. It apportioned fault between the parties and concluded that the designer’s breaches caused damages to the contractor of approximately $5.5 million. The designer appealed, relying primarily on a clause in the joint venture agreement that read, in part: “Notwithstanding any of the forgoing (sic), [designer] shall have no risk, liability, or accumula- tion will occur of error and omission charges for con- struction material quantity variations if the actual quantities are different from those in the bid to the Navy.”331 The designer argued that this sentence unambiguously released it from any responsibility for damages resulting from increases in construc- tion material quantities. The appellate court disagreed, finding this sen- tence to be ambiguous in light of other provisions of the joint venture agreement that imposed responsi- bility on the designer for its errors and omissions. For example, the agreement contained a clause requiring each party to accept full responsibility for its scope of work and indemnifying the other for damages resulting from untimely, defective, or non- conforming work. Another provision stated that the designer was not liable for the first $750,000 in damages resulting from engineering errors and omissions. The court viewed this as a “deductible” on damage claims against the designer for errors in its design and engineering work. A New York Superior Court decision, Metropoli- tan Steel Industries, Inc. v. Perini Corp.,332 provides an interesting twist on the Maddox decision. This case involved a three-way dispute among a design– builder, a steel erection trade subcontractor, and the design–builder’s engineer on a New York City Transit Authority (NYCTA) bus depot. Perini Cor- poration (Perini), a general contractor, teamed with STV, Incorporated (STV), an engineering firm, to develop a bid. Perini was the successful bidder and entered into an $88-million design–build contract with NYCTA. Benham’s next argument was that even if the oral contract governed, it never warranted the accu- racy of the bidding information it supplied to Maddox and therefore could not be liable for breach- of-contract damages. Again, the Eighth Circuit dis- agreed, stating that under Missouri law, “when a company represents itself as being able to do work of a particular character, a warranty is implied that the work will be performed properly.”327 The court held that Benham repeatedly assured both Maddox and the owner that it was well-qualified to do the work and had the necessary manpower and exper- tise. This, coupled with Maddox’s testimony that it relied on Benham’s bidding information “because only Benham knew precisely what was going to be designed,”328 was sufficient to create an implied war- ranty and liability for the bidding errors.329 Another major case in this area is CRS Sirrine, Inc. v. Dravo Corp.,330 where a contractor and designer agreed to pursue, as a joint venture, a fixed-price design–build contract for the construction of a naval power plant. The parties entered into a letter agree- ment whereby the designer would assume the lead in preparing a technical proposal to the Navy. If the Navy accepted the technical proposal, the contractor was to assume the primary responsibility for prepar- ing the bid. The letter agreement further provided that, although the designer was responsible for sup- plying the technical information needed to prepare the bid, it would not guarantee the accuracy of the contractor’s estimates used in preparing the bid. The joint venture’s bid was successful, and the Navy awarded it a $100-million-plus design–build contract. When the contractor experienced more than $30 million in losses in constructing the plant, it brought 327 Id. 328 Id. 329 There is one other important element to the Maddox case that is unrelated to the errors in the bidding informa- tion. Maddox cited to the fact that the Benham subcontract required Benham to keep Maddox “informed of the progress and quality of the Work” and endeavor “to guard [Maddox] against defects and deficiencies in the Work of [Maddox].” Based on this clause, Maddox claimed and was awarded by the jury $1.2 million for damages due to errors by Maddox or the owner. The Eighth Circuit overturned this part of the verdict, finding that this clause could not be construed to impose upon Benham the duty to guarantee that Maddox would not make any errors. In reaching this conclusion, the court looked to the language of another clause, which stated that: “[Benham] shall not have control or charge of and shall not be responsible for construction means, methods, tech- niques, sequences or procedures...for the acts or omissions of [Maddox], [Maddox’s] subcontractors or any other persons performing any of the Work, or for the failure of any of them to carry out the Work in accordance with the Construction Documents.” (Emphasis added by the court.) Id. at 602. 330 213 Ga. App. 710, 445 S.E.2d 782 (Ga. App. 1994). 331 Id. at 715, 445 S.E. at 788. 332 6 Misc. 3d 1002(A), 800 N.Y.S.2d 350, 2004 N.Y. Misc. LEXIS 2835, 2004 N.Y. slip op. 51698 (U) (2004).

73 that the STV subcontract “unambiguously” limited STV’s indemnity to instances where claims were asserted for property damage or personal injury directly attributable to STV’s negligence. Since the indemnity clause said nothing about economic losses (such as Steelco’s claims), the court concluded that nothing in Steelco’s pleadings triggered STV’s con- tractual duty to indemnify Perini. The court then examined whether STV had an “implied” obligation to indemnify Perini. In assess- ing this, it considered established New York prece- dent holding that there “is no right to recovery under a theory of implied indemnification, unless the party seeking indemnity has delegated exclusive responsi- bility for the duties giving rise to the loss, to the party from whom indemnification is sought.”333 The court found the terms of the subcontract clearly showed that Perini had not exclusively dele- gated all responsibility for design to STV. The sub- contract demonstrated that Perini had not only “retained the unfettered right to approve or reject or issue directions regarding STV’s design,” but it also had “exclusive control over the construction of the Project, and the means and method of construc- tion.”334 The applicable clauses stated: [STV] will revise drawings as necessary to comply with Perini requirements. [STV] will consult with, and follow the direction of Perini when choosing design alternatives and options permitted within the project constraints and in accordance with accepted professional standards, the Contract Documents, and all applicable codes and rules.…. [STV] shall not have control or charge of construction activi- ties and shall not be responsible for construction means, methods, techniques or procedures, or for safety precautions, or programs or the acts or omissions of Perini and/or their subcontractors, or for the failure of any of them to carry out the work in accordance with the Contract Documents.335 The court also looked at evidence proffered by STV that Perini followed these clauses and, in fact, maintained control over each subcontractor’s perfor- mance throughout the project. STV alleged that it was required to, and did, participate in regularly- held design review meetings at which Perini and various subcontractors examined and commented on STV’s design drawings at each stage of the design process. At the end of these meetings, STV was required to incorporate Perini’s design suggestions into the project design, even if STV objected to these suggestions. Perini also initiated various design changes over the life of the project, and STV was compelled to integrate them into the design. As a result of these and other factors, the court rejected STV was designated in the contract as the proj- ect’s “Design Professional.” Perini and STV entered into a $3.2-million subcontract that placed design responsibility on STV. The subcontract provided, among other things, that: 1) STV was to review, check, and advance the NYCTA’s preliminary draw- ings to completion; 2) STV’s design was subject to Perini’s revisions and directions; and 3) STV had to meet certain target dates for critical design draw- ings for bidding and construction. Perini also entered into a number of trade subcontracts, including one for $9.6 million with Metropolitan Steel Industries, Inc., doing business as (d/b/a) Steelco (Steelco), wherein Steelco was to fabricate and erect struc- tural steel and a metal deck for the project. The project was almost immediately plagued by problems and design changes. Some problems were apparently attributable to design changes directed by NYCTA after Perini and STV alerted NYCTA that the project’s RFP was not compliant with New York law. Other design modifications were attributable to the fast-track schedule of the project. Steelco started sending letters to Perini within weeks of starting its work, complaining that STV was not providing accu- rate structural steel designs and that Steelco was being delayed as a result. Steelco also complained that it was being delayed by the late work from other trade subcontractors. Although Steelco did start structural steel erection, Perini ultimately termi- nated Steelco and completed its remaining work. Steelco’s termination prompted lawsuits and for- mal claims among the project participants. Steelco sued Perini and its sureties for $4.5 million in dam- ages arising from unpaid change orders and delays. Perini then brought a third-party action against STV, seeking more than $11 million in damages and alleging that STV was obligated to hold Perini harm- less from Steelco’s claims. Perini also alleged that STV provided erroneous information and design drawings during the proposal period, partly because STV had not alerted Perini to the possibility of poten- tial code violations or the necessity of increasing the emergency generator capacity. Perini further claimed that STV’s final drawings contained errors in the design of fans, ductwork, masonry, curtain wall fire- proofing, and other construction areas. STV filed a $3.9 million counterclaim against Perini alleging, among other things, that Perini misrepresented the scope of work that STV would have to perform. STV filed a motion for summary judgment on Perini’s hold harmless claims, arguing that the Steelco complaint focused on Perini’s wrongdoing, not STV’s alleged wrongdoing. The court agreed with STV on a variety of reasons and dismissed these causes of action as a matter of law. It observed 333 Id. slip op. at 12. 334 Id. slip op. at 13. 335 Id.

74 “integration” clause in the subcontract could not bar its claims for breach of the oral contract. The court rejected this argument. First, it noted that Perini’s third-party complaint said nothing about an oral contract, and the complaint specifi- cally alleged that all of Perini’s $11 million in con- tract damages arose from breaches of the written subcontract. The court also found that the evidence offered by Perini to demonstrate the existence of an oral contract—such as meeting minutes authored by Perini and never signed by STV—was insufficient to establish that an oral contract existed. These three cases provide stark reminders about the potential liability designers face for their proposal- related work, particularly for quantity errors.339 They also explain the importance of clear contract terms that reflect the parties’ intentions when something goes wrong. The absence of a written teaming agree- ment for Benham’s proposal-related services affected how the Maddox court analyzed Benham’s liability. A teaming agreement would likely have provided clarity on what would have happened if Benham’s quantities were wrong. Although Sirrine was based on a written joint venture agreement, the language was ambigu- ous regarding liability for errors and omissions and led to the major verdict against it. The design–builder in Perini obviously attempted to craft its position on pre-proposal damages based on the Maddox case, but was unable to convince the court that there was an oral agreement for these services that was separate and distinct from the written subcontract. the notion that STV could be liable to Perini on an “implied” indemnity theory. The final avenue Perini pursued to obtain indem- nity from STV on the Steelco claims was through an argument that STV had breached its contractual warranty to “perform its duties in a manner consis- tent with the degree and skill ordinarily exercised by members of the same profession.”336 The subcon- tract language stated: In the event that as a result of [STV’s] work having failed to comply with the [applicable standard of care] and that fail- ure is determined to have been the cause of a failure to achieve compliance with Perini’s warranty obligations [to the NYCTA], the Engineer shall be fully responsible for redesign necessary to achieve compliance and for the cost of any replacement and/or retrofit and/or corrective work, all sub- ject to approval by Perini and NYCTA. The Engineer’s obliga- tion shall be limited to costs incurred in excess of the stated limits of the Owner’s Controlled Insurance Program.337 The court found this clause to be a limited rem- edy and did not construe it as requiring STV to com- pensate Perini for a breach of warranty unless there was a failure to achieve compliance with Perini’s warranty obligations to NYCTA. Since there was no such allegation in the Steelco lawsuit, and since NYCTA had asserted no such claim, then the breach of warranty theory could not be used to recover money Perini spent relative to Steelco. The court next turned to whether STV could be lia- ble for the pre-proposal damages allegedly sustained by Perini. The court first noted that the subcontract only addressed post-proposal services and said noth- ing whatsoever about STV’s obligations prior to con- tract award. It also looked to the express terms of the subcontract, which stated that the subcontract repre- sented the “entire agreement between Perini and [STV] and supersedes all prior negotiations, represen- tations or agreements.”338 The court viewed this “inte- gration” clause as barring Perini from introducing any evidence as to an inconsistent, oral agreement. In an attempt to overcome this defense, Perini argued that there was an “independent and wholly separate” teaming agreement between the parties. Perini claimed that this oral agreement was entered into during the proposal phase of the project, and as a result, Perini relied on STV to: 1) undertake a com- plete review of the RFP to determine that it was code-compliant and technically accurate; 2) note all potential engineering or design problems related to the preliminary design; and 3) provide pricing infor- mation for Perini’s cost proposal. It argued that because the oral teaming agreement was separate and independent from the written subcontract, the 336 Id. slip op. at 16. 337 Id. 338 Id. slip op. at 17. 339 The risk of quantity growth is a particularly significant issue on design–build projects, given that the design–build contract price is committed to prior to the completion of the design documents. While Maddox and Sirrine discussed these issues in claims against the designer, at least one pub- lished decision has discussed this in a suit by a steel sub- contractor against the design–builder. Carolina Steel Corp. v. Palmetto Bridge Constructors, 444 F. Supp. 2d 577 (D.S.C. 2006) arose out of the Cooper River Bridge project in South Carolina, which is the subject of a case study in Section XIII. This published decision is the outcome, to some extent, of the design problems discussed in that case study. The origi- nal purchase order included a clause providing that a “[s] ubstantial deviation in design may necessitate a change in cost which will be determined on a case by case basis per the Terms and Conditions of the Purchase Order.” The pur- chase order set forth the following examples of a substantial deviation in design: “changing fillet welds to full penetration welds, changing straight girders to curved, changing struc- ture designed as an I-girder structure to boxes, and changes in lengths of individual girders that exceed 160 lineal feet.” The Released for Construction Drawings ultimately reflect- ed that the bridges had increased weight and complexity because of, among other things, earthquake, hurricane, and ship collision criteria. The issue in the case was whether the subcontractor could prove that $1.5 million in claimed costs were the result of “substantial deviations.” The court award- ed the subcontractor over $1 million on its claim.

75 and Pitt had provided a warranty that Pitt’s design would achieve the performance criteria and that they should be liable for the consequences of failing to do so.342 Significantly, the court never looked at Pitt’s liability from a standard of care perspective. Finding that the plant’s owner was a third-party beneficiary of the Alchemy–Pitt contract, the court only focused on Pitt’s contractual obligation (i.e., warranty) to deliver a design that met the perfor- mance criteria. A similar problem occurred in the construction of a plant to make blocked iron through a new and recently patented process. In Day and Zimmerman, Inc. v. Blocked Iron Corporation of America,343 Day and Zimmerman (D&Z) signed what appeared to be a standard engineering, procurement construction (EPC) contract that committed to make the blocked iron with specific performance requirements, includ- ing a specific capacity. For more than a year after start-up, the plant failed to operate profitably. The parties argued about whether D&Z had guaranteed the production rates and the maximum cost of the project. The court ultimately concluded that D&Z had not warranted the plant’s performance and held it to a “professional negligence” standard. The court did nevertheless conclude that D&Z was negligent, as it purchased equipment that was “wholly inca- pable of furnishing the necessary heat required by the duty specification.”344 Although the designers in Arkansas Rice Growers and Day and Zimmerman each had liability for ulti- mately failing to meet performance guarantees, the different ways the courts reached these results are significant and demonstrate the importance of a contract’s wording. The court in Arkansas Rice Growers used a “black and white” liability assess- ment, finding the designer liable simply because the plant did not meet the guarantees. The court in Day and Zimmerman looked at this from the lens of what a “reasonable engineer” would have done to meet the standard of care. 2. Failure of Design to Achieve Performance Guarantees As previously discussed in Section E.2, a design– builder may face a breach of contract claim from an owner if the design–builder fails to meet a perfor- mance guarantee. Because the design might be the cause of the failure, designers can also face claims. Although the most common claim would be for pro- fessional negligence, one case, Arkansas Rice Grow- ers Cooperative Ass’n v. Alchemy Industries, Inc.,340 found that the designer had impliedly warranted that its design would achieve the specific perfor- mance guarantees. This case involved the construction of a pollution- free rice hull combustion plant capable of generat- ing steam and marketable ash from the rice hull fuel, with the rice hulls being the only fuel for the plant’s furnace. The plant’s owner executed a con- tract with the process technology owner (Alchemy), whereby Alchemy agreed to hire the engineering firm that had developed the process technology (Pitt). Each committed to provide: [The] necessary engineering plant layout and equipment design and the onsite engineering supervision and start-up engineering services necessary for the construction of a hull by-product facility capable of reducing a minimum of 7½ tons of rice hulls per hour to an ash and producing a minimum of 48 million BTU’s per hour of steam at 200 pounds pressure.341 The plant’s owner acted as its own general con- tractor to build the plant to Pitt’s design, including procuring and installing pollution control equip- ment. The completed plant was to be operated in accordance with the instructions and procedures provided by Alchemy. Alchemy was to receive all of the ash produced from the plant. The plant, which was designed to operate daily on a 24-hour basis, never performed as anticipated. It was repeatedly shut down because of a build-up of hulls in the furnace and an inability to comply with state air pollution control standards. The primary reason for this was that the furnace system designed by Pitt could not support combustion at a tempera- ture low enough to produce quality ash without the aid of fuel oil when the outside temperature fell below a certain level. For 3 years, Alchemy and Pitt tried unsuccessfully to get the plant to operate per the specifications. The plant was eventually closed. The plant’s owner successfully sued Alchemy and Pitt for breach of contract and negligence on the basis that these parties failed to design a plant capable of meeting the performance requirements. Citing to Spearin, the Eighth Circuit Court of Appeals upheld this verdict. It found that Alchemy 340 797 F.2d 565 (8th Cir. 1986). 341 Id. at 566. 342 Alchemy and Pitt never contested that Pitt’s design did not meet the performance criteria and that fuel oil was needed. They argued, however, that the air pollution control equipment selected by the plant’s owner contributed to the problems. Both the district court and the appellate court found that the problems attributable to the faulty air pollu- tion control system, as well as some other problems caused by owner-furnished equipment, did not manifest themselves until several years after it was evident that the plant was incapable of achieving the performance criteria on a sus- tained basis. More importantly, these courts found that even if this other equipment had worked properly, the entire plant would not have been able to perform in accordance with the terms of the contract because of deficiencies in Pitt’s design. 343 200 F. Supp. 117 (E.D. Pa. 1960). 344 Id. at 122.

76 between the design–builder and the defendant designers, they could not be held liable for profes- sional negligence to the design–builder. Readers should note that many other design– build cases address the applicability of the economic loss doctrine.348 Because the applicability is state law-specific, it is important for those working on design–build projects to have a strong understand- ing of this before starting work in a particular state. Readers should also note that there are a variety of cases around the country that generally address a designer’s liability to third parties that are injured as the consequence of a design defect. These cases, which arise out of design–bid–build relationships, follow the principles discussed in Section II relative to negligence claims.349 4. Liability of the Owner’s Design Professional As design–build has become more popular, designers often find themselves providing owners with preliminary designs and then helping the owner during the execution of the project by, among other things, reviewing the design–builder’s design submittals. While the designer is not serving as the “designer-of-record,” it could have potential liability if something goes wrong, as evident by the two fol- lowing cases. Glacier Tennis Club at the Summit, LLC v. Treweek Construction Company, Inc.,350 was previ- ously discussed in Sections E.1 and E.3. It involved litigation arising out of the construction of a Mon- tana tennis facility. The owner hired an architect (Thompson) to provide preliminary design documents 3. Liability to Third Parties Other than Arkansas Rice Growers, the cases pre- viously discussed arise out of the designer’s contract- ing relationship. There are, however, several design– build cases that examine the potential liability of the designer to third parties. These cases are often dis- cussed in the context of the economic loss doctrine, which was examined in detail in Section II.F. A recent case, Westfield, LLC v. IPC, Inc.,345 consid- ered the question of whether a contractor could sue its design–build subcontractor’s designer on a pre- cast parking structure. The litigation arose because of concrete cracking, movement, and water intrusion in the structure that was noticed approximately 5 years after completion of the structure. The owner’s investigation found what it considered to be multiple design and construction defects in the structure. The designer asked for summary judgment on several bases, including the fact that the economic loss doctrine prohibited the contractor from suing it because they lacked a contractual relationship. The court looked to Missouri law, concluded that claims for professional negligence are not barred by the economic loss doctrine, and denied the motion to dis- miss the designer from the case. A different result was reached in Hawkins Con- struction Co. v. Peterson Contractors, Inc.346 This case applied Nebraska law relative to an economic loss doctrine defense on a road project for the Nebraska Department of Roads (NDOR). The design–build contract involved an intermediate foundation improvement to increase the allowable global stabil- ity beneath an MSE wall. The design–builder entered into a subcontract with a design–build sub- contractor for the foundation. The subcontractor had two designers working for it. NDOR found the work defective and demanded that it be removed and replaced. The prime design– builder did so, and then sued its subcontractor and the two designers for breach of standard of care and for failing to properly design and perform their work. The design–builder attempted to argue that the designers breached an implied warranty that the work would be “erected in a reasonably good and workmanlike manner and reasonably fit for the intended purpose.”347 It cited to construction cases as authority. The court rejected this, finding that cases involving “workmanlike manner issues” do not apply to design professionals, as they do not con- struct anything. The court also stated that Nebraska law allowed no exceptions to the economic loss doc- trine. Because there was no privity of contract 345 816 F. Supp. 2d 745 (E.D. Mo. 2011). 346 970 F. Supp. 2d 945 (D. Neb. 2013). 347 Id. at 950 (citations omitted). 348 For example, Kalahari Development, LLC v. Iconica, Inc., 340 Wis. 2d 454, 811 N.W.2d 825 (2012), considered the economic loss doctrine in Wisconsin relative to whether a negligence action could be brought against the design– builder. The project involved moisture damage in the walls of a water park resort and conference center, allegedly caused by a defectively designed and installed vapor bar- rier. Similar to the result in Hawkins, the court concluded that Wisconsin law did not permit the economic loss doc- trine to apply against design professionals. 349 One interesting exception to design liability to third parties is seen in Florida, under the so-called Slavin doctrine. This doctrine prevents an injured plaintiff from holding a contractor liable for injuries caused by a patent, or obvious, defect in construction after control of the property has been turned over to the owner after completion and acceptance of construction. See Slavin v. Kay, 108 So. 2d 462 (Fla. 1958). It was recently held applicable, however, to an engineer that was sued by the estate of a deceased motorist because of an allegedly defective guard rail. The court held the Depart- ment of Transportation had accepted a defective guard rail that ultimately may have led to the death, and because the department was apparently aware of the defect during the design phase, the engineer could not be liable. Transp. Eng’g, Inc. v. Cruz, 152 So. 3d 37 (Fla. Dist. Ct. App. 2014). 350 320 Mont. 351, 87 P.3d 431 (2004).

77 is Evergreen Engineering, Inc. v. Green Energy Team, LLC.352 This case involved a biomass-to-energy plant on Kauai, Hawaii, with the plant using locally pro- duced wood waste products as its feedstock. The plant’s owner hired an engineering firm to do front- end engineering and conceptual design of the plant. Based on the engineer’s recommendations, the owner contracted with an equipment vendor for the gasification and boiler system that guaranteed that the plant would not have to use more than 201 tons per day of wood feedstock. This system ultimately proved faulty, as it was learned that 240 tons of fuel per day were needed to operate the gasifier system at the required efficiency level. The owner claimed that this affected the pro forma financials and eco- nomic viability of the project, not only because of the added cost of the feedstock, but also because compli- ance with its air permit would require the plant to operate fewer hours or at a lower output than intended under its power purchase agreement. As a result of the miscalculation in tonnage, the parties became involved in litigation over a number of issues. Central to the case was the interpretation of the following clause in the owner–engineer con- tract, which came from the engineer’s proposal and was incorporated into the contract: Overall plant performance guarantee will be achieved via guarantees by suppliers of individual equipment and the undertakings of the Contractor and certain project inves- tors as well as by the undertaking of Evergreen in this Agreement. Equipment performance guarantees will be written into the specifications for each piece of major equip- ment with financial penalties for performance shortfalls. Factory performance tests combined with onsite perfor- mance testing will verify that equipment is achieving desired performance. A highly qualified design team is being proposed for this project with the necessary experi- ence to design and support your project during construc- tion. The design will be performed in our Eugene, OR office. Evergreen will work together with your Construction Man- ager, Contractor and Owner’s Representative to ensure that your project is designed and built to the high standards you require in order to achieve your continual goals.353 The owner claimed this created a guarantee of the plant’s performance and made the engineer lia- ble for the performance of the equipment vendor. The engineer argued that this was not a design– build or engineer–procure–construct (EPC) contract, in which the risk of performance was shifted to the designer, but was simply a modified design–bid– build delivery system, where no guarantees of per- formance were provided. The engineer moved for summary judgment on the owner’s breach of war- ranty count, alleging that its only duty was to pro- vide its services in a non-negligent manner. for the procurement and also to review the design submissions of the design–builder (a general con- tractor) during project execution. After the project was completed, the building began to leak from below-ground exterior walls, and a bulge was found in the surface playing area of one of the tennis courts. The owner also found, during its investigation of the problems, that a vapor barrier had not been installed underneath the facility, and that this resulted in the facility experiencing excessive radon levels. The owner sued the design–builder for negli- gence and breach of contract. This prompted the design–builder to sue its design subconsultants, ten- nis court subcontractor, and Thompson. With the exception of the design–builder, the trial court dis- missed all of the above parties on summary judg- ment. The jury found against the design–builder. The design–builder appealed on several grounds, including that Thompson should not have been dis- missed from the lawsuit. It argued that Thompson was negligent in his preparation of plans for construction of the facility and his review and approval of plans and designs submitted for his review. The design–builder believed that Thompson’s continuing involvement in the project made it reasonable for the design–builder to believe that Thompson was reviewing and approv- ing its design and would notify Treweek of any poten- tial defects. Thompson denied that he owed any duty of care to the design–builder, contractually or otherwise, and maintained that the design–builder was unjusti- fied in relying on him as the project architect. The Montana Supreme Court determined that Thompson could, in theory, owe a duty of care to the design–builder even though they did not have a con- tract. This would be so only if Thompson “communi- cated professional information to [the design– builder] with the intention or knowledge that such information would be relied upon by [the design– builder].”351 The court did not find, however, that the design–builder met this standard and upheld the trial court’s decision to dismiss Thompson on summary judgment. There was no evidence that Thompson offered any guidance to the design– builder. Any construction administration services done by Thompson relative to the review of the design–builder’s progress were for the benefit of the owner, not the design–builder. There was also no evi- dence that Thompson communicated any profes- sional information to the design–builder during its review of the design–builder’s design, or that Thompson’s design reviews were to be relied upon by the design–builder as validating its design. A case that considered an engineer’s liability to an owner under a performance specification/guarantee 351 Id. at 360, 87 P.3d at 438. 352 Id. at 360, 87 P.3d at 438. 353 884 F. Supp. 2d 1049 (D. Haw. 2012).

78 for the ATC.355 There are no reported cases as of yet that answer the above question regarding liability for ATCs. There is a private-sector design–build case that addressed a design–builder’s potential liability for having made a VE recommendation that the owner later regretted. Baker County Medical Services, Inc. v. Summit Smith L.L.C.356 involved an owner hiring a design–builder for a new hospital facility. The con- tract was based on a two-phase approach, with the first phase for planning, design, and preconstruction services. During that phase, the design–builder developed and submitted a commercial proposal to complete the design and construct the facility based on the design documents it created in the first phase. The second phase involved the actual final design and construction. The design–builder’s initial HVAC design called for the use of a chiller for the hospital’s HVAC sys- tem. Because the owner was highly concerned about overall cost, the parties engaged in extensive VE discussions. The owner’s engineer and design– builder collaborated on options relative to the HVAC system, one of which was a direct expansion system (DX system) powered by multiple rooftop units. The owner ultimately chose the DX system based on sig- nificant cost savings. Unfortunately, immediately following completion of construction, the hospital’s cooling system mal- functioned. Multiple corrections were made by the design–builder, but the owner was never satisfied with the results. The owner ultimately sued the design–builder for negligently designing and install- ing the DX system, alleging it was undersized and had installation defects. It also argued that the design–builder should never have recommended the DX system for a hospital, because it had much higher energy and maintenance costs compared to the chiller system. The court concluded that the design–builder had properly designed and installed the DX system, and found that the owner’s performance issues were likely caused by the owner’s poor maintenance of the system. It also rejected the notion that the DX system recommendation was improper. Although all of the testifying experts concluded that a chiller sys- tem would be the better option for a hospital, par- ticularly if “first cost” was not a concern, none of them concluded that a DX system was per se improper for a hospital. The court’s decision focused on the “first cost” issue. By choosing the less-expensive, DX system, The court ultimately declined to grant sum- mary judgment, concluding that the provision was ambiguous and that what was intended by its terms would have to be decided in a trial. The court did note, however, that by including the term “over- all plant performance guarantee,” the agreement memorialized the engineer’s “assurance” regarding overall plant performance. What was unclear to the court was the scope of the guarantee and the assur- ance of the specific contours of “overall plant per- formance.” The court’s opinion expressed a concern about using the above-quoted language to create the same obligation as would arise under a turnkey contract, and distinguished the result in Arkansas Rice Growers, where the guarantee was much more clearly stated. G. Liability for VE and ATCs VE is frequently used in public-sector design– build projects to obtain the design–builder’s cost- cutting ideas. If the agency is using a procurement process that does not allow for pre-award discus- sions to take place with the design–build proposers (e.g., single phase low bid), any VE will be done after contract award. This process has limitations, as it does not allow the agency to learn of cost-cutting ideas from the proposers that were not selected as the design–builder. It also does not allow the agency to reward those who develop VE ideas during the procurement process. As design–build has become more common, own- ers have allowed VE ideas to be introduced during the procurement process through the use of ATCs. From a design–build perspective, the major liability issue for VEs and ATCs involves answering the fol- lowing question—who has the risk if the VE or ATC does not work as expected? Given that the designer- of-record is part of the design–build team, it would appear that the design–builder, rather than the owner, would face the ultimate liability. It is not clear what happens in a design–build scenario, how- ever, if both parties have presumed that an ATC will work, but, when the actual engineering is performed, it turns out to be impractical or impossible. Contract language will typically shift this risk to the design–builder. There are theories of “mutual mistake,” however, that may result in this risk being shared by both parties or, potentially, resulting in the contract being considered unenforceable.354 This remedy is not one that is used indiscriminately by courts. It is likely that it would be implicated only in the event that the ATC was so significant as to make it unfair to require the design–builder to perform the original design based on its commercial terms 354 NCHRP Synthesis 455, at 11. 355 Id. 356 Case No. 3:05-cv-541-J-33HTS, 2008 U.S. Dist. LEXIS 44154 (M.D. Fla. 2008).

79 enforceability of these type of LoL clauses. The question generally starts with a determination of whether applicable state law permits the use of such a clause as a matter of public policy. Those states which find such clauses unenforceable on public pol- icy grounds base their decisions on so-called “anti- indemnity” statutes, which prevent parties from being indemnified for damages arising out of their own negligence. A well-recognized example is City of Dillingham v. CH2M Hill Northwest, Inc.,361 where a city sued its engineer for damages arising from a DSC claim raised by the general contractor. The engineer’s con- tract contained an LoL that limited liability “for the engineer’s sole negligent acts, errors, or omissions” to $50,000. The city asserted that this provision was nullified by an Alaska statute that provided that construction contracts seeking to indemnify a party for liability resulting from the party’s sole negligence or willful misconduct are void and unenforceable. The court agreed, finding that enforcement of the LoL clause would be contrary to the legislature’s intent in crafting the anti-indemnity statute. A different result was reached in 1800 Ocotillo v. WLB Group, Inc.,362 where a real estate developer sued an engineer for preparing a survey that failed to identify an existing right-of-way that had a major impact on the developer’s project. The con- tract’s LoL clause limited the liability of the engi- neer’s negligence to its total fee, which in this case amounted to approximately $14,000. The developer argued that the provision was contrary to Arizona’s anti-indemnification statute, which prohibited par- ties from shielding themselves from liability for their sole negligence. Unlike the Alaska court in City of Dillingham, the Arizona appellate court found this argument unpersuasive. It concluded that provisions where a party sought to be “indemnified” for its sole negli- gence were different from those where a party sought to “limit” its total liability to the amount of its fees. The court found that LoL provisions do not exonerate the offending party from liability—they merely cap the amount of liability. It examined the legislative history of the Arizona indemnity statute and found no evidence that the legislature intended to prohibit LoL provisions in professional services contracts. The court also found it significant that LoL provisions had been accepted by parties and courts in commercial contracts outside of the con- struction industry. As such, the court observed that absent an ascertainable public policy to the contrary, parties in Arizona are free to contract as they wish. the court noted that the owner received the benefits of significant upfront savings, which allowed it to expand the size of the medical office building. The court found that the owner, when presented with the option of a lower-cost HVAC system, “made the deliberate choice to save on initial costs and expand the medical office building.”357 It also noted that although, in retrospect, the chiller system would have been a far better option than the DX system, the design–builder satisfied its contractual and pro- fessional obligations to the owner in presenting the DX system as an option: The Court finds that [the design–builder] did recommend the chiller system as the best option for a hospital by includ- ing the chiller system in the original construction plans and contract. The DX system was only presented as an option after [the owner] made the determination to try and lower the initial costs and expand the medical office building.358 Several other cases have addressed VE liability on projects using other types of delivery systems. Consider for example, Rodman Construction Co., Inc. v. BPG Residential Partners, LLC,359 which involved the extensive use of VE on what appears to be a multiple prime contracting project. In this case, the details were never agreed on and a fight ensued, particularly over the consequences of using a differ- ent exterior wall system than originally planned. The court characterized it this way: Further, as is frequently done in the industry, the owner and construction manager attempted to “fast track” the project through a “design–build” process by starting work on its early portions while design details and their associ- ated contractual arrangements were still being planned for later phases. And they conducted “value engineering,” modi- fying designs to save costs when initial cost estimates exceeded project budgets. Haste can, and did, make waste, however; and when the risks inherent in such an approach materialized, the parties came into conflict about their respective rights and duties, generating plaintiffs’ eight claims and defendants’ three counterclaims at issue here.360 Consistent with the Rodman decision, it is not unusual for parties on public projects to be less than clear on documenting VE changes. The risks can be significant if there is ultimately a dispute over what was agreed on. H. Limitations of Liability and Consequential Damages As previously noted in Section III, large-dollar design–build contracts will often have an LoL clause that creates a ceiling on the design–builder’s poten- tial liability. Several reported decisions address the 357 Id. at 50. 358 Id. 359 C.A. No. 076-08-084 JOH, 2013 Del. Super. LEXIS 34 (2013). 360 Id. at 5. 361 873 P.2d 1271 (Alaska 1994). 362 217 Ariz. 465, 176 P.3d 33 (2008).

80 When project completion was delayed by 8 months, the owner claimed $8 million against the design–builder, arguing that the delay was caused by its failures. In an effort to resolve the dispute, the design– builder offered the owner $332,000 (80 percent of its fee), which it asserted was the maximum amount for which it could be found liable. The owner refused the offer, filed suit, and raised a number of arguments to overcome the effect of the clause. All were unsuc- cessful, and the design–builder prevailed on its interpretation of the LoL clause. The court gave brief attention to the owner’s argument that the LoL clause was unconscionable. It found nothing to indi- cate that the owner did not voluntarily acquiesce to the clause, noted that the owner was “a giant and sophisticated company,” and found no evidence that it had been at a bargaining disadvantage with the design–builder.368 As noted in Section III, many design–build con- tracts contain a clause that waives consequential damages between the parties. However, if there is no such clause, design–build’s single point of responsi- bility feature can be used to impose liability on the design–builder for consequential damages. Numer- ous cases have considered the enforceability of clauses waiving the rights of parties to seek conse- quential damages, often in the context of how such clauses integrate with other contract provisions. Consider Action Industries, Inc. v. United States Fidelity & Guaranty Co.369 Action Industries, Inc. (Action), and Engineered Handling Systems, Inc. (EHS), entered into a contract whereby EHS was to design, build, and install a conveyor system for Action’s furniture manufacturing and distribution facility in Mississippi. The contract specified that the conveyor would accommodate a production rate of 11 units per minute. The finished conveyor ulti- mately only achieved 47 percent of this specified rate, causing Action to incur substantial labor and maintenance costs. Action filed an arbitration demand alleging that EHS was liable for negligent design and for breaches of express and implied warranties. When the arbi- tration panel awarded Action more than $1 million, Action quickly filed a lawsuit in Mississippi state court to confirm the arbitration award. A few days later, EHS sued Action in a Tennessee state court to vacate the arbitration award. Both lawsuits were eventually removed to federal court. The Mississippi federal court confirmed the arbitration award, and If the LoL clause passes the public policy test, courts will generally examine the clause and deter- mine whether it is reasonable, specific, and the result of an arms-length negotiation. W. William Graham, Inc. v. The City of Cave City363 illustrates the strict interpretation that most courts exercise in analyzing LoL clauses. It was based on a breach-of-contract action brought against the designer of a federally funded wastewater treatment plant. The engineer design professional failed to meet the contractually established deadline for submitting plans and specifi- cations to the government, resulting in a project fund- ing reduction of approximately $339,000. The engi- neer’s contract contained the following LoL clause: [t]he OWNER agrees to limit the ENGINEER’s liability to the OWNER and to all Construction Contractors and Sub- contractors on the Project, due to the ENGINEER’S profes- sional negligent acts, errors or omissions, such that the total aggregate liability of the ENGINEER to those named shall not exceed $50,000 or the ENGINEER’S total fee for services rendered on the project, whichever is greater.364 Relying on this clause, the engineer argued that its fee, approximately $99,000, was the limit of its liabil- ity. While the court did not dispute the validity of the LoL clause, it refused to apply the clause to limit the damages for breach of contract. The court pointed out that the clause cited only damages arising out of “pro- fessional negligent acts, errors, or omissions,”365 with no mention being made of liability for breach of con- tract. The court reasoned that because the parties had the opportunity to negotiate a clause that would limit damages for breach of contract, but did not clearly do so, the LoL was not applicable. A handful of cases have addressed LoL enforce- ability under design–build projects, with most of them being in the process or power sector. One exam- ple is Union Oil Company of California v. John Brown E & C,366 which involved a dispute on an Illinois poly- mer plant that was developed on a cost-reimbursable basis. The contract limited the design–builder’s total fee to $415,000, and further provided that: [JBI’s] maximum aggregate liability to Unocal…shall not exceed the proceeds of the applicable insurance coverages plus eighty percent (80%) of the aggregate fee paid to [JBI]…The limitations on [JBI’s] liability as specified above, shall apply whether such liability arises at con- tract, tort (including negligence or strict liability), or oth- erwise. The above notwithstanding, said limitations on liability shall not apply to all or any portion of such liabil- ity which arises out of the gross negligence, fraud, or will- ful misconduct of [JBI].367 363 289 Ark. 105, 709 S.W.2d 94 (1986). 364 Id. at 106, 709 S.W.2d at 95. 365 Id. 366 Case No. 94 C 4424, 1995 U.S. Dist. Lexis 13173 (N.D. Ill. 1995). 367 Id. at 1. 368 This result is consistent with other cases. See, e.g., Valero Energy Corp. v. M.W. Kellogg Const. Co., 866 S.W.2d 252 (Tex. Court of Appeals 1993). 369 358 F.3d 337 (5th Cir. 2004).