Question

What are the main reasons for Design Build not being legal in some states?

What is the main reason for CM at Risk not being legal in some states?

What is the difference between CM (Agency sometimes called for fee) and CM-at-risk? If you were an owner, whose advice would you consider to be more objective?

Answer 1

What are the main reasons for Design Build not being legal in some states?

Design Build is having some disadvantages which leads for being it illegal in some of the states. Even though it has a lot of advantages the design build has been pushed back due to what they consider a lack of historical data around the method and a lack of transparency.

State-by-state obstacles

Currently, about half of all U.S. states allow design-build with no limitations, according to Richard Thomas, director of state and local legislative affairs for Design-Build institute of America. Three states have no provisions for the delivery method, and others are a mixed bag in which some agencies allow it but not others.

Citing the old adage of "all politics are local," Thomas said there are a few common threads as to why some agencies still don't permit design-build. Midwest states tend to have the most limitations, he said, with many contractors laboring under the assumption that more design-build projects will somehow result in an influx of construction teams from outside the area racing in to monopolize available work — an assumption that Thomas said was false.

However, he noted that the biggest issue is typically labor. "Unions are very powerful special interests, particularly public employee unions," he said. On the other hand, Thomas added that some trade unions are supportive, although it varies depending on the region of the country. In fact, that also seems to be the rule of thumb when it comes to dealing with design-build laws around the country.

The complex regulations of New York

In New York for example, not only are there laws preventing state and local agencies from engaging in design-build, but it is the only state in the union that also has regulations in effect that prevent design-build in the private sector. It's a New York State Education Department law, according to John Patrick Curran, partner at Sive, Paget & Riesel in New York, that makes New York the outlier in the private design-build world.

"There is a tension between the education law, which says only licensed design professionals can perform and be compensated for design services, and the ruling by the court of appeals in the Charlebois case that said (design-build is permitted) as long as a contractor has a contract with a design professional, and the contractor has a contract saying that," Curran said. Nevertheless, he said the Education Department maintains that design-build is not lawful.

Adding to the confusion, the state passed a 2014 law, with the support of the governor, allowing certain state agencies to enter into design-build contracts, according to Curran. That new regulation did nothing to change the Education Department's law, and, further, some interpreted the new state measure "as a tacit acknowledgment by the legislature that it was still unlawful" in the majority of circumstances.

The design-build environment in California and Texas

Things are simpler in California, where the design-build laws are broadening, according to Lisa Dal Gallo, partner at Hanson Bridgett. "It's becoming very available," she said. The design-build process in California must be contractor-led because contractors are inherently better equipped to manage costs and schedules, she noted.

The architect is still the architect of record, but the actual contract with a public agency must be with the contractor. State agencies are increasingly adopting design-build because "design-bid-build doesn't work" and is fraught with "delays, overruns and change orders," she said.

"You're paying a designer to design something you may or not be able to bid," Dal Gallo said. There's no way to come up with firm costs until the project is put it out to bid, and when those numbers come back, the owner is either stuck with the lowest responsible bidder or has to pay the architect to go back to the drawing board. "It's a vicious cycle," she said.

In Texas, Thomas said it seems that public agencies only want to use design-build for megaprojects, whereas in Florida, one is likely to see a multitude of design-build projects done every day for projects of all sizes.

He added that some architects are skittish about design-build for fear that the design-build team will usurp the relationships they have built with owners. For example, in Missouri — a state that took years to hammer out full authority for design-build — architecture industry representatives were fine with design-build being authorized for use on transportation projects over $1 million, but were more comfortable with a minimum contract amount of $7 million for buildings.

This, Thomas said, kept the possibility of design-build out of the typical architect's territory of customers. "It's important for us to try to get the whole industry in each state to collaborate and come up with a solution that works for everyone," he said.

What is the main reason for CM at Risk not being legal in some states?

A growing number of Minnesota cities may be violating the competitive bidding laws by awarding construction management at risk (CM at risk) contracts for new facilities.

With few exceptions, cities and other public owners in Minnesota must publicly bid all construction contracts. On these jobs, owners publicly advertise for bids and general contractors submit bids that incorporate all of the work. The general contractor's bid includes subcontractor and supplier quotes, which are incorporated into the general's bid, and the owner awards to the "lowest responsible bidder" or to the bidder whose bid provides the "best value" to the owner.

Cities and other public owners are also allowed to use multiple prime bids for a job. On a "multi-prime" job, the owner accepts bids from the different trade subcontractors and awards separate contracts to the lowest responsible bidders in each category. The owner holds all the contracts and usually hires a construction manager to manage the job for an hourly rate. These CMs are known as "agency CMs" because they are not at risk of losing money on the job. Public owners can select agency CMs without public bidding.

The legislature recently passed a statute, Minn. Stat. §16C.34, which authorizes the State of Minnesota and its agencies to use another type of construction manager, a CM at risk. A CM at risk advises the owner during the design phase, holds all subcontracts, and agrees to build the project for a Guaranteed Maximum Price, which includes the cost of construction and a fee. Like any other contractor, a CM at risk may lose money on the project. To protect the public from fraud and favoritism, the CM at risk law requires a public request for proposals that lists the selection criteria, the relative weight of the selection criteria, and "procedures for making an award in an open, competitive, and objective manner, and according to the stated criteria." The law also requires the appointment of a three-person selection committee that includes at least one member with construction industry experience.

The CM at risk law does not apply to cities. The statute governing municipal bidding, Minn. Stat. §429.041, requires either low-bid or best-value construction contracting. Despite the absence of express authority, some cities are now using CM at risk contracts. They typically hire a contractor as an agency CM without pubic bidding; publicly bid and award the separate trade contracts; assign all of the trade contracts to the CM; negotiate a fee with the CM; and amend the agency CM contract into a CM at risk contract. Voilà! The agency CM becomes a CM at risk and acts no differently than a general contractor except that the CM does not perform any of the work. By transforming an agency CM to a CM at risk, cities may violate competitive bidding laws by in effect selecting their general contractors without public bidding and without any of the safeguards that apply to the selection of CMs at risk by the State of Minnesota.

Cities that award CM at risk contracts are jeopardizing their projects. If challenged and found to violate the public bidding laws, the contracts could be deemed illegal and void as a matter of law. The CM at risk contractor may forfeit its right to receive any payment and, if Minnesota adopts some of the remedies adopted by courts in other states, the contractor might even be required to disgorge all payments previously received. As far as this author is aware, no municipality has exercised its right to request an attorney general's opinion on the legality of CM at risk contracting.

The CM at risk may also present some issues deserving consideration as well. This type of project delivery method may not work perfectly on smaller projects. During the early stages of the project and before the GMP has been established, there is sometimes ambiguity concerning the scope of work included under the GMP.

An important disadvantage could be that the architectural design team may not take input from CM if brought in during later planning or pre-construction stages. Blueprints that are incomplete or inaccurate can still result in change orders that can drive up costs.

Also, while the owner reduces their exposure to cost overruns with the GMP, they may be financially liable for exclusions and inconsistencies in the contract documents. The perception by the owner that price competition is limited may lead them to believe they are not getting a fair price.

References

Huber, B. (2018). If it Walks Like a Duck Construction Management at Risk Contracts a Risky Move for Cities. Roseville: MC&MCA Contractors Association.

Marwood Constructions. (2017). Design-Build Advantages / Disadvantages.

RODRIGUEZ, J. (2019, July 4). Construction Management at Risk. Retrieved from The Balance Small Business: https://www.thebalancesmb.com/advantages-of-cm-at-risk-844536

Slowey, K. (2016, oCTOBER 13). construction dive. Retrieved from https://www.constructiondive.com/news/inside-the-complicated-legal-terrain-of-the-design-build-delivery-method/428154/