Design/build is the procurement under a single contract of both design and construction services. Design/build contracts allocate risk at varying degrees to the owner and the design builder. The degree of risk allocation depends on the project, the contract terms, and the amount of discretion the design builder has to perform the contract. An owner may limit the design builder’s discretion when variables are foreseeable to avoid large contingencies. Or, the owner may seek to leave the design-builder’s discretion open-ended when variables are unforeseeable – to allocate more risk to the design builder.

The level of risk a design builder may assume is illustrated by Fluor Intercontinental, Inc. v. Department of State, CBCA Nos. 490, 491, 492, 716, 1763, 1555, 12-1 BCA ¶ 34,989 in which the Civilian Board of Contract Appeals (CBCA) applied traditional design/build legal precedent to reject over $24 million in claims. The contract in Fluor contained significant risk-shifting provisions affecting performance of the work in a remote location.

Request for Proposals for Out-of-Theatre Work

Fluor filed six appeals with the CBCA arising out of a fixed-price design/build contract with the Department of State (DOS) for the construction of an embassy in Astana, Kazakhstan, seeking a total of $24,070,202.

The request for proposals (RFP) contained the DOS’s Standard Embassy Design (SED); a Site Utilization Plan (SUP) and an Engineering Feasibility Study (EFS). The SUP outlined 10 site conditions identified within a geotechnical report prepared by a local contractor. The EFS was created to aid DOS in “evaluating economic market conditions prevailing in the territory” and topics ranged from permit requirements to material availability. In its discussion, the board found the EFS did not provide specific details or recommendations for construction and emphasized that the solicitation required offerors to do their own site investigations. Further, the site and surrounding areas lacked existing roads and utilities, and the contract required the contractor to coordinate with local authorities for road construction and utility connections. Liquidated damages were set at $18,011 per day.

In discussions following issuance of the RFP, schedule duration and overtime concerns were the bidders’ focus. DOS maintained that no time extensions would be permitted. Fluor made a pre-proposal site visit in Astana in July 2003, and DOS ultimately awarded the project to Fluor for $63,057,022 in late September 2003.

The Risk-Shifting Contract Documents

Despite Fluor’s alleged reliance on DOS’s contract documents and multiple theories of recovery asserted, the Fluor decision turned primarily on the risk-shifting language in the contract. The contract stated that the contractor must “complete all work to design and construct the [embassy complex]”; “[t]he Contractor remains solely responsible and liable for design sufficiency and should not depend on reports provided by the [Government] as part of the contract documents”; “[d]rawings are included for the sole purpose of illustrating the design intent of the owner”; “Design/Build Contractor shall gather the required data during the site visit and design phase”; and each offeror was responsible for “ascertaining the availability of all materials and equipment necessary to produce the work required by the proposed Contract Documents, of sufficient skilled labor to perform the work, and of the availability of transportation to the site.”

CBCA’s Denial of Fluor’s Claims

The decision first addressed Fluor’s $4,218,426 Infrastructure Claim. When Fluor mobilized on site in February 2004, no paved roads, public water, or permanent power services were in place. Further, Fluor originally planned to dewater the site with pumper trucks to a sewer system; though no sewer system existed.

In its Infrastructure Claim, Fluor argued that the EFS and SUP impliedly warranted that utilities and other infrastructure would be available at the beginning of the project. DOS countered that Fluor’s preproposal site visit in July 2003 clearly indicated the lack of infrastructure. The board agreed with the government and found that “[s]tatements highlighted by Fluor make no promises, but are instead fairly generic statements.… Fluor ignores other statements that refer to the need to coordinate with the local government, who bears responsibility for installing the utilities….” The board found that the contract clearly placed all burdens, which were the subject of the Infrastructure Claim on the contractor, and Fluor’s failure to observe the lack of infrastructure in 2003 “was to ignore the obvious.”

In discussion of Fluor’s $10,574,751 Pile and Encasement Claim, the board emphasized that Fluor discovered after contract award that its reinforced concrete pile design exceeded local subcontractor driving capacities and that locally-available rebar failed to meet contract requirements. This spurred Fluor to change its design to steel H piles, but Fluor failed to obtain government approval prior to encasing the new piles in concrete. After encasement, the government approved the new pile design without encasement. Fluor argued that the government made warranties as to the local conditions and that the government misinterpreted the contract in requiring Fluor to encase the new piles. Citing established design/build precedent, the board rejected Fluor’s argument and – again – relied upon the contract’s risk-shifting provisions.

Fluor’s perimeter wall and foundation plan encroached on adjacent property line boundaries and failed to comply with the contractual International Building Code requirement of footings below the frost line. In response to Fluor’s $1,817,770 Perimeter Wall Claim – alleging changes and delay – the board characterized Fluor’s claim as again “seek[ing] to distance itself from the responsibilities that it took on as the design/build contractor…. The risks, and the consequences, of Fluor’s design choices fall solely upon Fluor.” The board also denied Fluor’s Acceleration Claim as the board found no excusable delays and found that Fluor failed to follow the time impact analysis contract requirements. All of Fluor’s other claims suffered the same fate.

Essentials for a Design/Build Contractor

Throughout the Fluor decision, the board emphasized that the contract shifted all risk to the design/builder. The board concluded that Fluor simply failed to accept this risk. To worsen Fluor’s problems, the board found that Fluor failed to conduct adequate pre-bid and pre-mobilization site investigations and failed to understand the local market and material availability for the project.

Although the board’s denial of $24,070,202 in claims is a harsh result, this decision illustrates that the degree of contractor discretion afforded by contract documents drives whether particular specifications are design or performance type. Where a request for proposals appears to require the contractor to provide for all design work without reliance on any documentation provided by the owner – as was the case in the Fluor decision – the amount of risk absorbed by the contractor is substantial.