Evaluation of Project Delivery Methods (2009)

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TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs APPENDIX C – LEGALITY OF ALTERNATIVE DELIVERY METHODS This appendix includes the results of a research on the state codes to study the legality of alternative delivery methods in transportation projects in various states in the United States. Northeastern University The Research Report 198

TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs Alternative Project delivery methods: Applications and Legal Limits in Transportation Projects Introduction At the present time several types of project delivery methods are available to the owners of publicly funded transportation projects in the United States. An important decision, especially in the case of large complicated transportation projects is to select the best project delivery method for a specific project. In general, a construction project starts with a need and/or idea in the owner’s organization. The owner needs to hire professionals for design, management and construction of the project if there is not enough expertise in-house. Contractual relations, contemporary laws and regulations, owner’s perception of risks, awarding mechanism and the method of payment all contribute to project delivery method selection. Based on Public Law 92-582 (Brooks Act) passed in 1972 and similar laws passed by individual states (Little Brooks Acts), public projects in the United States should be designed by the quality-based selected designers. On the other hand the construction of the project should be awarded to the lowest responsible, responsive bidder. Combination of these two has led the public agencies towards the adoption of Design-Bid-Build (DBB) delivery method. This method was overwhelmingly dominant in transportation projects until 1996 when the Federal Acquisition Reform Act authorizing the use of Design-Build (DB) for federal projects was passed. After that the Transportation Equity Act for the 21st Century (TEA-21) allowed the states Department of Transportation (DOTs) to award a DB contract if the state code lets them do so (Molenaar et al 1999). Subsequent to the successful experience of using DB in several projects a number of states passed legislations and codes to allow alternative project delivery methods (Design- Build and Construction Management at Risk). The laws and regulations of the state where the transportation project is being considered play an important role in the choice of project delivery method. In many states, simply there is no choice other than the traditional design-bid-build approach. The trend however, is the rapid change of laws to allow more flexibility for choosing the contractor. This appendix is based on a review of United States codes in all the 50 states and shows which states have approved using alternative project delivery methods, namely Design-Build and/or Construction Management at Risk in the transportation sector. The states are categorized in four groups based on the level of authorization as follows: 1) fully authorized 2) authorized but needs extra approvals 3) authorized for a pilot program and/or with some limitations 4) not authorized Design-Bid-Build (DBB) is the traditional delivery method that is used in public and private projects in the United States and all the state codes authorize public agencies to use it in their projects. Design-Build (DB) and Construction Management at Risk (CMR) are considered as two alternatives to this traditional method. Some states have passed the authorization law for public agencies who want to use either of these two. Although legal authority is a yes/no criterion in decision making, only limited research is done on this issue. All of these research efforts have chosen either DB or Northeastern University The Research Report 199

TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs CMR and have shown in which states that method can be applied. As an example, a survey of states Department of Transportations authorized to do DB was done by Nossaman et al. (2006). The current report is based on a search in all the 50 state codes using LexisNexis search engine and has found the legal status of each of these two methods in each state. One important issue in this type of research is the realization that state codes in this area are constantly changing. States have made significant changes to their laws in the past 10 years with regards to alternative project delivery methods. This appendix is based on a research done at the end of December 2006 and does not reflect any updates in state codes afterwards. Wording of statutes are different in state codes; so in order to make sure that nothing is missed, several key words were used which are listed below: (1) Design-Build, (2) Design Build, (3) D/B, (4) design builder, (5) Construction Management at Risk, (6) Construction Management, (7) CM/GC, (8) Construction Manager at Risk, (9) construction manager/general contractor, (10) general contractor /construction manager, (11) construction manager, (12) alternative delivery system. The focus of this appendix is transportation projects. Some states permit an alternative delivery method to be used in some other types of projects but not transportation projects. For example, state code of Florida allows using CMR for educational facilities but no statute was allowing this application for DOT projects and because of that, Florida is considered a “not authorized” state. Another point is that in some states, the lawmakers have given authority for using an alternative delivery method for some special projects. In other words there is no statute in the state code of that state authorizing DOT for using alternative delivery method but some projects are done under DB or CMR contracts. These states are still considered “not authorized” states. The results of the search are explained in the following parts. The states are divided into four distinguishable categories. There are some states that have statutes in which all the public entities (including DOTs) can apply an alternative delivery method. There are some other states that allow DOTs to use DB and/or CMR. These states are listed under “fully authorized” states. In some states DOTs cannot choose an alternative delivery method unless they get an approval from another governmental entity like governor or legislator. These states are considered as states which are “authorized but needs extra approvals” for alternative entities. Any in-house approval does not mean extra approval. There is another group of states in which a pilot program for alternative delivery methods is defined by law and/or a limit is put on its usage. These states are listed under “authorized for a pilot program and/or with some limitations”. The rest of the states are those where no statute was found for alternative delivery method authorization in transportation projects at the time of this research. These states are listed as “not authorized” states. Design-Build Design-Build is arguably the oldest delivery method in the construction industry. The practice goes back in history for centuries. Many large cathedrals of Europe were built by Master Builders who were roughly equivalent to today’s DB contractors. In this method, a single entity is chosen by the owner after the completion of conceptual design or preliminary engineering and when the performance requirements are defined. This entity completes the design and constructs the project, often simultaneously with the final design phase. The design-builder assumes almost all the responsibilities of the detail design and construction and delivers to the owner the final product Northeastern University The Research Report 200

TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs which should fulfill the performance requirements previously defined. Almost all the projects in the USA have used a kind of design-build method up to the 19th Century (Miller 2000). Based on the current laws, 17 states have fully authorized DOTs to apply DB in their projects. For example, in Colorado, C.R.S. § 43-1-1401 says that the department of transportation is authorized to enter into design-build contracts and to use an adjusted score design-build selection and procurement process for particular transportation projects regardless of the minimum or maximum cost of such projects. Two states need extra approval from an entity outside of the DOT, like the house or senate. As an example, in Louisiana, La. R.S. 48:250.2-4 mentions that the secretary of the DOT, with approval of the House and Senate Transportation, Highways and Public Works Committees, may use the design- build method on any transportation infrastructure project in an area impacted by a hurricane. In 18 states, lawmakers have decided to define a pilot program for using DB or have put some limitations (either the number or cost of projects in a period of time) on using this delivery method. For example, in Ohio (ORC Ann. 5517.011) there is a limit of $250 million for the total dollar value of the contracts made under DB delivery method. Another example is the state of Montana (Mont. Code Anno., § 60-2-135) where the DOT is authorized to establish and implement a design-build contracting pilot program (2003-2008) for highway construction. Based on the aforementioned data, 37 states use DB in their transportation projects while 13 state DOTs still do not have the authority to do so. The states are categorized in the table below. Table C-1 - Legal status of states regarding the use of Design-Build in transportation projects Fully authorized (1) Authorized but needs extra approvals (2) Authorized for a pilot program and/or with some limitations (3) Not authorized (4) AK, AZ, AR, CO, DE, FL, HI, ID, IL, IN, KY, ME, MD, NJ, SD, TN, VA LA, OR CA, GA, MA, MN, MS, MO, MT, NV, NH, NM, NC, OH, SC, TX, UT, WA, WV, WI AL, CT, IA, KS, MI, NE, NY, ND, OK, PA, RI, VT, WY Figure C.1 illustrates the same results schematically. Northeastern University The Research Report 201

TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs Figure C-1 - Design-Build statutory status of all the states in December 2006 Construction Manager at Risk (and/or CM/GC) Construction Management-at-Risk (sometimes referred to as Construction Manager/General Contractor (CM/GC)) is a delivery method in which a contractor comes on board early during the project design phase to help the owner with managerial duties and also to increase the feasibility and constructability of the design. While some experts distinguish between CM-at-risk and CM/GC due to perceived levels of risk, many agencies use these terms more or less interchangeably (Associated General Contractors of America). CM-at-risk can and is expected to provide realistic project cost estimates early in the project life cycle. It is anticipated that after a certain amount of design is complete and the project is sufficiently defined, the owner will enter into a contract with the CM-at- risk for providing construction services. States agencies usually reserve the right to go out for bid if they think that the CM-at-risk price is not competitive. But if they come to an agreement the construction manager will be obligated to deliver the project with a guaranteed maximum price (GMP). In general, Construction Management is mainly divided into two categories: construction manager at risk, and construction management agency. The main difference between these two is about their role and responsibility in the project. CM agent is simply an advisor to the owner; the CM is not responsible for any delay or cost overrun as long as he does his duties according to the contract. CM agent will be paid based on a fee and because of that some specialists refer to this method as CM for Fee. CM at risk on the other hand takes many of the general contractor’s responsibilities. It should choose subs and award different parts of the project. CM performs the general conditions and maybe some small parts of the project. All the terms mentioned above can be found in state codes and two types of CM have almost the same definition. The main issue is to differentiate between Agency CM and CM at Risk based on the wordings of statutes. Based on the search done in the 50 state codes, 14 states have authorized their DOTs to use CMR in their projects. For example, in North Carolina (N.C. Gen. Stat. § 143-128.1) the construction manager at risk shall contract directly with the public entity for all construction; shall publicly Northeastern University The Research Report 202

TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs advertise; and shall prequalify and accept bids from first-tier subcontractors for all construction work under this section. Construction Management at Risk is allowed to be used in DOT projects in two states only after obtaining an extra approval. For example, in Massachusetts (ALM GL ch. 149A, § 1) it is mentioned that “prior to using the construction management at risk delivery method, the public agency shall obtain a notice to proceed from inspector general.” It is possible to use Construction Management at Risk in three states but with limitations in each fiscal year. For example based on the Minnesota legislation, (Minn. Stat. § 16C.34), construction manager at risk contracts may be used but not for “more than five percent of its total projects let, by number, in each of the fiscal years 2006 and 2007, and ten percent of its total projects let, by number, in each fiscal year thereafter.” Most of the states have not passed a law which allows DOTs or even other public entities to use CMR in their projects. This research shows that 31 states have not accepted CMR as a legal project delivery in public projects. All the 50 states are categorized in Table C-2, as to the legality of the CMR. Table C-2 - Legal status of states regarding the use of CM-at-Risk in transportation projects Fully authorized (1) Authorized but needs extra approvals (2) Authorized for a pilot program and/or with some limitations (3) Not authorized (4) AZ, AR, CT, GA, KY, ME, NH, NC, SD, TN, UT, VA, WV, WY MA, OR MN, TX, WA AL, AK, CA, CO, DE, FL, HI, ID, IL, IN, IA, KS, LA, MD, MI, MS, MO, MT, NE, NV, NJ, NM, NY, ND, OH, OK, PA, RI, SC, VT, WI Figure C.2 illustrates the same results for Construction Management at Risk. Northeastern University The Research Report 203

TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs Figure C-2 - Construction Management at Risk statutory status of all the states in December 2006 Regulatory and statutory limitations Public agencies have found that the traditional way of awarding and executing a project is not necessarily the best way of delivering all the projects; not using other methods of project delivery in public construction is actually foregoing some opportunities of adding value to the money spent on these projects. The best value for the money may not always be achieved by using a traditional design-bid-build project delivery method. This has been the main motive for states to pass various laws which allow other methods of procuring construction projects. Some potential issues include conflicts between lowest cost based bids of contractors vs quality based selection of engineers in Design-Build, and the fear of favoritism and added unnecessary cost in Construction Management at risk. These issues have played a negative role in this transition phase and the lawmakers have been hesitant to authorize public agencies in using these new methods. Because of this, there has often been a transition phase between the “only DBB authorized” and “all methods authorized” in states. In the transition phase some limitations are put in for using a method. For example, only a few pilot projects are allowed to use the method and these projects should be first selected by a board mentioned in the law. In Virginia for example, a “review board” defined in the state code has the duty of deciding on project delivery methods. In other words, this board studies each project suggested for utilizing Design-Build or Construction Management at Risk and approves or rejects the proposal. (Va. Code Ann. § 2.2-2405 (2006)). SUMMARY The results of a comprehensive survey to identify the legality of using alternative project delivery methods in state-funded transportation projects were explained in this appendix. The survey covered design build and CM-at-risk (and/or CM/GC) project delivery methods. It was found that dividing Northeastern University The Research Report 204

TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs Northeastern University The Research Report 205 the states into authorized or non-authorized would not provide the full picture. There are many cases where authorization is provided on a case-by-case basis or comes with various limitations. In order to respond to this, four different levels of authorization were considered in the survey: (1) fully authorized, (2) authorized but needed extra approvals, (3) authorized only within pilot progra other types of limitations, and (4) not authorized. Comparing the results of this survey with previously done surveys on the legality of alternative delivery methods shows that more states are moving towards authorizing various alternative delivery methods for transportation projects. The history of c ms or urrent authorizing statutes and the succession of major changes in state codes confirm is trend. List of codes found in the survey for each alternative delivery method .200 de § 20209.6 81 3615/4.06 RS § 65.025 -4 65-1-85 338.1711 and Nev. Rev. Stat. Ann. § 408.388 36-28.11 RC Ann. 5517.011 -26 nd Tex. Local Gov't Code § 271.119 . § 33.1-12 47.20.785 7-2D-2 th Design Build: Alaska in Alaska Stat. § 36.30 Arizona in A.R.S. § 28-7363 Arkansas in A.C.A. §27-65-107 California in Cal Pub Contract Co Colorado in C.R.S. § 43-1-1401 Delaware in 2 Del. C. § 2003 Florida in Fla. Stat. § 337.11 Georgia in O.C.G.A. § 32-2- Hawaii in HRS § 103D-303 Idaho in Idaho Code § 67-2309 Illinois in 30 ILCS 535/75 and 70 ILCS Indiana in Ind. Code Ann. § 5-30-2-2 Kentucky in KRS § 45A.180 and K Louisiana in La. R.S. 48:250.2 Maine in 23 M.R.S. § 753-A Maryland in Ann. § 3-602 Massachusetts in ALM GL ch. 149A, § 14 Minnesota in Minn. Stat. § 161.3410-12 Mississippi in Miss. Code Ann. § Missouri in R.S.Mo. § 227.107 Montana in Mont. Code Anno. § 60-2-135 Nevada in Nev. Rev. Stat. Ann. § New Hampshire in RSA 228:4 New Mexico in N.M. Stat. Ann. § 13-1-119.1 North Carolina in N.C. Gen. Stat. § 1 New Jersey in N.J. Stat. § 27:25-11 Ohio in ORC Ann. 5543.22 and O Oklahoma in 61 Okl. St. § 202.1 Oregon in ORS § 383.005 and ORS § 279B.085 South Carolina in S.C. Code Ann. § 57-5-1625 South Dakota in S.D. Codified Laws § 5-18 Tennessee in Tenn. Code Ann. 12.10.124 Texas in Tex. Transp. Code § 223.203 a Utah in Utah Code Ann. § 63-56-502 Virginia in Va. Code Ann. § 2.2-4303 and Va. Code Ann Washington in Rev. Code Wash. (ARCW) § West Virginia in W. Va. Code § 1

TCRP G-08 – Project Delivery Methods Appendix C - Legality of Alternative PDMs Northeastern University The Research Report 206 Wisconsin in Wis. Stat. § 84.11 at Risk: . 06-134 Sec. 21 0 5 , § 1 § 143-128.1 .1 -47 and S.D. Codified Laws § 5-18-51 ) § 39.04.220 and Rev. Code Wash. (ARCW) § 39.10.061 yoming in Wyo. Stat. § 16-6-701 and Wyo. Stat. § 16-6-702 Construction Management Arizona in A.R.S. § 41-2579 Arkansas in A.C.A. § 19-11-801 Connecticut in PUBLIC ACT NO Georgia in O.C.G.A. § 36-91-2 Kentucky in KRS § 45A.04 Maine in 5 M.R.S. § 1743 Massachusetts in ALM GL ch. 149A Minnesota in Minn. Stat. § 16C.34 New Hampshire in RSA 21-I:78 and RSA 21-I:80 North Carolina in N.C. Gen. Stat. Oklahoma in 61 Okl. St. § 202 Oregon in ORS § 279B.085 South Dakota in S.D. Codified Laws § 5-18 Tennessee in Tenn. Code Ann. 12.10.124 Texas in Tex. Local Gov't Code § 271.118 Virginia in Va. Code Ann. § 2.2-4301 and Va. Code Ann. § 2.2-4306 Washington in Rev. Code Wash. (ARCW West Virginia in W. Va. Code § 11-15-2 W