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Legal Issues Related to Large-Scale Airport Construction Projects (2020)

Chapter: II. PROJECT DELIVERY METHODS

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Suggested Citation:"II. PROJECT DELIVERY METHODS." National Academies of Sciences, Engineering, and Medicine. 2020. Legal Issues Related to Large-Scale Airport Construction Projects. Washington, DC: The National Academies Press. doi: 10.17226/25723.
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Suggested Citation:"II. PROJECT DELIVERY METHODS." National Academies of Sciences, Engineering, and Medicine. 2020. Legal Issues Related to Large-Scale Airport Construction Projects. Washington, DC: The National Academies Press. doi: 10.17226/25723.
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Suggested Citation:"II. PROJECT DELIVERY METHODS." National Academies of Sciences, Engineering, and Medicine. 2020. Legal Issues Related to Large-Scale Airport Construction Projects. Washington, DC: The National Academies Press. doi: 10.17226/25723.
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Suggested Citation:"II. PROJECT DELIVERY METHODS." National Academies of Sciences, Engineering, and Medicine. 2020. Legal Issues Related to Large-Scale Airport Construction Projects. Washington, DC: The National Academies Press. doi: 10.17226/25723.
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Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. ACRP LRD 38 5 be adequate. The contract would lack key provisions required for successful completion. Many architectural, engineering, and construction trade groups, as well as airport and governmental agencies, have drafted specific contract documents tailored to the unique aspects of various PDMs. Contracts drafted for these PDMs should address their unique characteristics as well as the organization’s specific policies, procedures, and applicable legal requirements and limitations. Since most PDMs generally in- tegrate design with construction, it is particularly important to note the various statutes that govern the practice of engineering, which could preclude or otherwise complicate use of the PDM. These include complications related to construction firms lead- ing a lump-sum DB team, professional liability, insurance cov- erage, or the lump-sum DB firm’s inability to obtain its own Errors and Omissions coverage, among many others (ACINA et al. 2012). B. Statutory Framework for Construction Contracts Under Various Delivery Methods Historically, public entities have been limited to using a DBB for construction projects. Two reasons for this limitation are: (1) the numerous laws and statutes that limited the procure- ment of construction services to the lowest responsible and re- sponsive bidder; and (2) the Brooks Act enacted in 1972 (Pub. L. No. 92-582), which limited the procurement of design services on federally funded projects to a qualifications-based selection method. The Airport Improvement Program (AIP) is a significant source of funding from the FAA, which was created by the Airports and Airways Improvement Act in 1982 (Silversmith 2008). In 1996, the use of lump-sum DB or progressive DB was explicitly authorized by the Federal Acquisition Reform Act for federal projects (Touran et al. 2009). However, lump-sum DB or progressive DB was not considered before 2000 for federally funded airport projects specifically, until Congress initiated a pilot program in the Wendell H. Ford Aviation Investment and Reform Act for the 21st Century to test DB contracting on seven AIP-funded projects. In 2003, the pilot program expired and was replaced by the Vision 100—Century of Aviation Reautho- rization Act, 49 U.S.C. § 47142, making lump-sum DB or pro- gressive DB eligible outside of the pilot program (FAA 2014a). The revisions to FAA Advisory Circular AC150/5100‐14D iden- tified changes to the procurement process for professional ser- vices and formalized the FAA’s acceptance of alternative PDMs (Touran et al. 2009). The FAA Airport Improvement Program Handbook—Order 5100.38D is the published policy for AIP-funded projects that currently provides guidance for conformance with statutory, regulatory, and policy requirements (FAA 2014a). Regardless of the PDM being utilized, for projects that are supported by the AIP, owners still need to follow the applicable FAA procure- ment and contracting standards outlined in the Code of Federal Regulations (C.F.R.) (Touran et al. 2009). This includes 49 C.F.R. § 18.36, “Procurement,” for agreements executed prior to De- cember 26, 2014, and 2 C.F.R. Part 200, “Uniform Administra- B. Limitations of the Study This digest provides an overview of key legal issues encoun- tered on large-scale airport construction projects and describes the lessons learned by airports related to those topics for proj- ects delivered using alternative PDMs. However, findings of the study should be taken with caution as to how they can be ap- plied to the specifics of each project or airport program. Every project is unique in its nature and its legal statutory framework; thus, legal issues on different projects can arise for various rea- sons. The lessons learned identified in this report are specific to those of the case studies. Therefore, the conclusions drawn from the interviewees should not be generalized for all other airport projects. The authors’ main objective is to highlight common issues in large-scale airport projects that could have legal im- plications, with a focus on projects using alternative PDMs. It is also worth noting that the use of alternative PDMs on airport projects is relatively new; thus, an in-depth qualitative study of six large-scale alternative delivery projects may capture many of the lessons learned by airport authorities to date on alternative PDM projects. Nevertheless, the lessons learned included in this report may not be indicative of other owners’ experiences using these alternative PDMs. II. PROJECT DELIVERY METHODS Changes in procurement laws have allowed public agencies to utilize the ability of their private-sector counterparts in de- signing, constructing, operating, and/or maintaining facilities by employing alternative PDMs, such as CMAR, lump-sum DB, progressive DB, and PPPs (Touran et al. 2009). The Associated General Contractors of America defines a PDM as “the compre- hensive process of assigning the contractual responsibilities for designing and constructing a project. A delivery method identi- fies the primary parties taking contractual responsibility for the performance of the work.” (Kenig 2011). Thus, drafting a con- tract that reflects these responsibilities, given the applicable stat- utory framework, becomes one of the most significant tasks an owner undertakes to successfully implement a project. The fol- lowing sections thus will provide an overview of PDMs in terms of the contract formation process and statutory framework, as well as a description of key PDMs used in the airport industry. A. Overview of Construction Contracts Under Various Delivery Methods Construction contracts document the contracting parties’ agreements on many aspects of a project, including scope of work, consideration, and risk allocation. It is imperative that these contracts be drafted to reflect the goals and expectations of the parties. Contracts usually start with the owner’s standard terms and conditions, then typically include general terms and conditions, special conditions, terms of payment, drawings, specifications, and any other technical requirements for the work. With the use of an alternative PDM, a mere revision to a DBB contract document tailored to the PDM used would not

Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. 6 ACRP LRD 38 state laws, provided that such state laws do not address issues of broad (e.g., statewide) concern [56 Am. Jur. 2d Municipal Corporations, Etc. § 109 (2018)]. By way of example, in a home rule jurisdiction, a municipality subject to a state procurement statute that requires low-bid selection—which is problematic for most alternative PDMs—could potentially pass a local or- dinance that allows the airport to use QBS or best-value selec- tion methods, and that ordinance would arguably supersede the problematic state statute. Whether a local ordinance will in fact supersede the state statute is a case-by-case determination and is subject to legal analysis and potential legal challenge. As more lump-sum DB projects have been successfully implemented nationwide, legislation has been passed in many states allowing various other alternative PDMs, such as CMAR and PPPs (Touran et al. 2009). Under 2 C.F.R. § 200.317, “Pro- curement by States,” “When procuring property and services under a Federal award, a state must follow the same policies and procedures it uses for procurements from its non-Federal funds.” This is the same for nonstate airport sponsors (such as cities) as well. Thus, in general, if a specific state or city chooses to use an alternative PDM, federal regulations do not prohibit such use. With these changes over the last few decades, publicly owned airports have been increasingly able to choose alterna- tive PDMs for their capital improvement projects. As for privatization of airports (a particular type of PPP), the FAA’s Airport Pilot Privatization Program was established by Congress in September 1977 to “explore privatization as a means of generating access to various sources of private capi- tal for airport improvement and development.” (FAA 2019) To make privatization more practical to implement, the 2012 Reauthorization Act authorized the FAA to allow 10 public airport sponsors to sell or lease an airport, subject to specific restrictions, yet exempting the owner from certain federal re- quirements. These could include exemptions from repayment of federal grants, property return, or use of proceeds for airport purposes only. Of the 10 to be included in the program, only one large hub airport can participate and at least one must be a general aviation airport (Ernico et al. 2012). Based on updates from the FAA and industry press, as of August 2018, the program has one approved airport (Luis Muñoz Marín International Airport, San Juan, Puerto Rico) and three preliminary applications accepted (Hendry County Airglades Airport, St. Louis Lambert International Airport, and Westchester County Airport) (FAA 2018d). C. Forms of Project Delivery Methods A PDM encompasses the definition of the project scope, organization of various contracting parties (designers, contrac- tors, and consultants), and the sequence of design and construc- tion operations, as well as defining how the project phases will be delivered to the owner, and how risks will be borne by par- ties during the various phases of the project (ACINA et al. 2012; Touran et al. 2009). Thus, the key aspect in distinguishing among various PDMs is to note the ways that the various contracts are formed. How- tive Requirements, Cost Principles, and Audit Requirements for Federal Awards,” for new awards and additional funding to existing awards executed on or after December 26, 2014. In gen- eral, when an owner decides to use an alternative PDM, it needs to make a case and demonstrate to the FAA the benefits of using the PDM. When using a DBB, FAA Order 5100.38D allows the pro- curement of services by means of sealed bidding or competitive negotiations (FAA 2014b). For projects delivered using a lump- sum DB, the FAA allows a process based on either qualifica- tion-based selection (QBS) or a competitive proposal selection (ACINA et al. 2012, Touran et al. 2009, FAA 2005b). Competi- tive proposal selection follows a two‐step process, starting with a request for qualifications (RFQ) that uses a QBS process to short-list several design–builder teams, followed by a request for proposal (RFP), which the owner issues to the short-listed teams and results in the team’s submission of separate technical and price proposals (ACINA et al. 2012). Under a CMAR, the owner selects a construction manager (CM) to conduct preconstruction services based on qualifica- tions and other factors. After selection, the CM coordinates with the design firm previously selected by the owner to further the project design. The CM then submits a guaranteed maximum price (GMP) to the owner, based on competitive bids it has re- ceived from subcontractors for the construction of the project, plus contingencies and allowances. This approach to contract- ing is not prohibited under the AIP. However, AIP-funded proj- ects are required to use QBS for the selection of design profes- sionals. This is also the case under many other federal and state procurement regulations (refer to the FAA Advisory Circular AC150/5100‐14D, Architectural Engineering and Planning Con- sultant Services for Airport Grant Projects, dated September 30, 2005, and other governing documents) (ACINA et al. 2012). State and local laws vary in terms of the extent to which they allow for the use of alternative PDMs on airport projects. Some states or local jurisdictions do not allow for the use of alternative PDMs at all, but others may allow their use for a specific project, a specific delivery method, or provide expansive procurement authority without any limitations. Considering that the level of adoption of PDMs by state and local authorities varies, alternative PDMs are still limited in their use on airport projects (FAA 2005a). Most states start by devel- oping a pilot program that authorizes a limited number of al- ternative PDM projects; often starting with authorization to use lump-sum DB (Touran et al. 2009). However, major changes in state procurement laws and codes are providing options for the use of alternative PDMs, including those in Arizona, California, and Florida (ACINA et al. 2012). Airports in “home rule” jurisdictions may have great flex- ibility in obtaining the statutory authority needed to use alterna- tive PDMs. Municipal and county airports are generally subject to restrictions imposed by state constitutions and state statutes. However, in home rule jurisdictions, the local government owner of the airport has broad discretion in managing its affairs and can even utilize local charters or ordinances to supersede

Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. ACRP LRD 38 7 fees are in the open, which diminishes adversarial relationships between components working on the project, while at the same time eliminating bid shopping” (Touran et al. 2009). 3. Lump-Sum Design–Build In lump-sum DB projects, the owner contracts with a single contractor, who provides both the design and construction ser- vices; therefore, the owner has a single point of contact, and the builder is highly involved in the design (Touran et al. 2009). In the proposal, the designer–builder submits a lump-sum bid for design and construction of the project, thus maintaining com- petitive tension among competing DB proposer teams for both the design and construction costs. With such a contract setup, the details of the design are generally no longer dictated by the owner, but rather are a function of the designer–builder (or a subconsultant to the lump-sum DB entity); thus, the owner is not engaged with a “designer of record.” However, it is very common for the owner to initially hire a designer to develop the conceptual design (bridging documents) in order to clarify the scope for the DB proposer teams to bid on. In terms of procure- ment methods, a variety of methods are used with lump-sum DB, whether low bid, QBS, or best value (ACINA et al. 2012). The major drivers for the use of lump-sum DB are (a) the ability to compress the project schedule, due to the overlap of both the design and construction processes (i.e., to fast-track projects) (Touran et al. 2009); and (b) the ability to shift the interface risk between design and construction to the designer–builder, in lieu of having the owner at risk for change orders related to the design. However, it is important to consider that with large and complex projects, there is the potential for reducing the number of bidders that would qualify. In this report, a lump-sum DB project is used to refer to a traditional DB project where a fixed price (whether lump sum or unit price) is agreed upon between parties prior to contract award. The second driver for use of lump-sum DB identified above— the owner’s ability to shift interface risk between design and construction to the designer–builder—is best understood in the context of what is alternatively called the Spearin doctrine, or the doctrine of implied warranties. This doctrine, which came out of the landmark U.S. Supreme Court case, United States v. Spearin, 248 U.S. 132 (1918), imposes on an owner an implied promise that certain specifications contained in a contract are free of material defects (Golden and Thomas 1995). Though there are nuances to how this doctrine is applied, in the words of the Supreme Court in the Spearin case, this doctrine generally provides that “if the contractor is bound to build according to plans and specifications prepared by the owner, the contractor will not be responsible for the consequences of defects in the plans and specifications” (Golden and Thomas 1995). In contrast to DBB, where the owner requires the contrac- tor to build a project according to owner-provided plans and prescriptive (not performance) specifications, the DB delivery method increases the opportunity for an airport owner to shift interface risk between design and construction to the private sector. The principal reason for this sentiment is that lump-sum DB contracts require the designer–builder to build the project ever, this needs to be differentiated from the management method used with any PDM (Touran et al. 2009). According to Associated General Contractors (2004), a management method “is the mechanics by which construction is administered and supervised,” which the owner could select to retain or not. Also, a PDM is not to be confused with procurement methods, such as low-bid selection, QBS, or best-value selection (ACINA et al. 2012). The selection of a PDM, factored with a procurement method, ensures that the advantage of a PDM is not turned into a disadvantage (Touran et al. 2009). The following sections pro- vide a brief description of five key PDMs used in the airport industry. 1. Design–Bid–Build DBB is viewed as the traditional PDM in the United States and is well understood and accepted by the industry. In DBB, the owner contracts with a designer and a contractor separately, with design and construction performed by the different par- ties, and with each project phase distinct in work scope and schedule. The owner hires a team of design professionals to de- sign the project and prepares the construction documents used to solicit bids for construction. The role of the design profes- sional may extend during the construction period to administer and ensure conformity with the construction contract (ACINA et al. 2012; Touran et al. 2009). Although DBB is still commonly used by airports, including for less-complex, smaller projects, alternative PDMs are starting to gain popularity (Ahasic and Sheren 2017). 2. Construction Manager at Risk CMAR is characterized by a contract between an owner and a CM, who becomes at risk for the final construction cost and time. The owner holds another contract with the designer, and the CM coordinates with the designer. The CM is otherwise involved in preconstruction services, such as constructability reviews, cost reviews, and procuring subcontracts (ACINA et al. 2012). When compared to a DBB, where innovations for cost and schedule savings are only realized by the builder, in CMAR, the owner benefits from the innovations by having the CM in- volved during design development. Being “at risk,” the CM—not the owner—contracts with subcontractors and thus becomes responsible for the man- agement and the risk of the construction cost (ACINA et al. 2012). This involvement facilitates builder input into the design process at very early stages of design and results in more ac- curate estimates and schedules (ACINA et al. 2012; Touran et al. 2009). The CM also provides professional management ser- vices through all phases of the project, the most significant of which involves addressing the details of the project life cycle. In CMAR, the contract usually requires the parties to set a GMP as well as an incentive clause for the parties to share any savings below the GMP (ACINA et al. 2012; Touran et al. 2009). Gener- ally, the CM procures the subcontracts that form the basis for the GMP when the design has reached somewhere in the range of 60% to 90% complete. According to the CMAR State Statute Compendium “transparency is enhanced, because all costs and

Legal Issues Related to Large-Scale Airport Construction Projects Copyright National Academy of Sciences. All rights reserved. 8 ACRP LRD 38 5. Public–Private Partnership (Revenue Risk and Availability Payment) Airport operators continue to look for additional ways to al- locate risks and maximize revenue sources to fund their capital projects, especially with the increased complexity and costs of projects (ACINA et al. 2012; Nichol 2007). This has driven an increase in use of PPPs for various components of U.S. airports; although its use still lags in the United States, compared to its use worldwide. This lag could be attributed to resistance to involv- ing private entities, whose interests may not always be aligned with public entities, as well as concerns that a PPP may result in higher costs for users, and ultimately passengers, whether such concerns are justified or not (Ahasic and Sheren 2017). From an investor’s perspective, the project should make economic sense and provide the investor with a reasonable rate of return, given the risks of investment in the project (ACINA et al. 2012). In addition to full privatization of an airport, an airport PPP arrangement can be based on the airport committing to make availability payments to, or share project-related revenue with, the private developer, or a hybrid of both, in exchange for the services covered by the PPP agreement. Availability-payment PPP transactions transfer the risks of project design, construc- tion, financing, operation and/or maintenance to the private developer, with the owner retaining control of the cash flow. After completing construction, the developer may operate and/ or maintain the project for a set time period, noting that some PPP agreements may not include an operational component (the owner retaining responsibility for operations). During the operations and/or maintenance period, the owner disburses “availability payments” to the developer, provided that these payments are subject to reduction if the developer fails to meet set performance goals and other specified contract require- ments. The first use of this type of agreement in the United States occurred in the highway industry, and it is now being used in the airport sector, as a way to incentivize contractors to achieve high‐quality construction and maintenance (ACINA et al. 2012). Currently, Los Angeles World Airports is using the availability-payment PPP structure for two separate contracts: one for an automated people-mover project and another for a consolidated rental car facility. Denver International Airport is using a hybrid of this structure for its redevelopment of the Great Hall (Jeppesen Terminal). PPP revenue risk arrangements, where the private developer is entitled to project-related revenues in exchange for its servic- es, are favorable when the revenue stream attached to the proj- ect is predictable, such as the revenue streams for terminal lease agreements (Ahasic and Sheren 2017). These arrangements are common for ancillary facilities that have their own profit/loss statement, such as maintenance, hangars, cargo, and parking fa- cilities, as well as for the management of services, where owner control is not a major concern. Another form of PPP seen in airports is the management of airports or terminals by private operators, who have greater experience in managing airports, when compared to an air- port authority management team. These smaller PPPs are eas- based on a design that the design–builder completes. This under mines the contractor’s ability to assign responsibility for design-related problems to the owner. While the Spearin Doc- trine is consistent with this position in a well-drafted request for proposals and lump-sum DB contract, the “principles be- hind the Spearin doctrine apply to any situation where an owner provides a detailed specification that has been reasonably relied upon by a bidder to its detriment. The fact that a design- builder will ultimately be the designer-of-record does not alter this principle” (Loulakis 2013). Consequently, if the owner includes detailed specifications/design requirements in its lump-sum DB contracts instead of performance specifications, the Spearin doctrine may still serve as a basis for contractor relief. 4. Progressive Design–Build A variation of the traditional lump-sum DB model that is emerging in the airport industry is the progressive DB model (Ahasic and Sheren 2017). Progressive DB involves components of both lump-sum DB and CMAR. This model is called “pro- gressive” because it moves in a stepped process, starting with the designer–builder being selected on a qualification-based or best-value basis, after which both the owner and the designer– builder progress with the design and establishment of the con- tract price (Touran et al. 2009). Thus, it is similar to lump-sum DB, in that the owner contracts with a single contractor who provides both design and construction services. However, un- like lump-sum DB, the designer–builder is generally selected based on qualifications, and is not required to submit a lump- sum bid for construction with the proposal. This offers the owner the advantage of hiring a designer–builder early in the process without a price commitment until all reasonable design details are defined (Touran et al. 2009). Following selection— similar to that for CMAR—the selected designer–builder works with the owner to “progress” the design development (e.g., de- velop the design to somewhere in the range of 60% to 90% com- plete) before the two parties negotiate either a lump-sum price or GMP for the finalization of design and project construction. The key difference between progressive DB and CMAR is that in progressive DB, after selection of the designer–builder, the design work is performed by the designer–builder and not a separate design firm hired by the owner. This approach to project delivery allows the owner to shift responsibility for design development to the designer–builder, while maintain- ing greater control over project design than when using lump- sum DB. However, such control comes at the cost of not being able to lock in the project cost up front, when there is arguably greater competitive tension to keep the project cost down. If the price cannot be agreed upon, then the owner can resort to an “off-ramp” option, in which the owner can terminate the pro- gressive DB contract and enter into an agreement with another contractor to deliver the project using the design developed by the designer–builder. San Francisco International Airport was one of the leading airports to adopt the progressive DB method.

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Large-scale, complex airport construction projects have the same issues as construction projects on a smaller scale, but they present a series of specialized legal issues.

The TRB Airport Cooperative Research Program's ACRP Legal Research Digest 38: Legal Issues Related to Large-Scale Airport Construction Projects focuses on those legal issues causing the most significant risks during planning, design, permitting, procurement, and construction.

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