Design and Build Contracts Explained

What Is a Design and Build Contract?

Design and Build Contracts – In the context of UK law, a design and build contract is a form of construction contract which has been incorporated widely in the sector. It is a simple idea although in effect it is only a development of the traditional contractual relationships which would ordinarily exist between a client and the designer and a client and a builder.
In its simplest form and plainest terms, such a contract combines the roles of the designer and the builder under its umbrella. Here, the client deals in whole or in part with one entity rather than two or more separate entities in a single transaction.
As a definition, a design and build contract is a form of construction contract in which the contractor agrees to both design and build a structure. The contract encompasses the design and construction phases of a construction project thereby providing a single point of responsibility for the client.
While this forms a neat logical theory, the reality is usually more involved. Design and build contracts are used largely because they save on time, costs and avoid the problems associated with the management of more than one set of contracts. However, whether this is actually achieved rests on those in the construction industry to deliver on.
Unlike a traditional or conventional contract in which the client , in most cases, has clear contractual rights against both the designer and the builder, those rights are not as clear cut under a design and build contract. In a design and build contract, the client only has a direct contractual relationship with the contractor. The client, therefore, has fewer direct rights than if the traditional or conventional contract is used.
From a legal perspective, a design and build contract is a hybrid or general contract. By way of example, under a PFI (Private Finance Initiative) contract (typically the ‘design, build, operate and maintain’ contracts), it is seen as impractical to enter into individual contracts with both the designer and the builder.
Contracts under the NEC form and the JCT (Joint Contracts Tribunal) have incorporated the concept of design and build into their standard agreements.
More than just a single point of responsibility, design and build contracts have to be reflected in the procurement and risk allocations adopted within the wider industry.
Any party to a design and build contract should ensure that they (or their chosen party) are sufficiently experienced and skilled to deal with all aspects of the contract. Only then can the contractors give proper and effective consideration to all relevant design and construction issues.

Benefits of Design and Build Contract

The main advantages of a design and build contract are generally seen to be as follows:

• Streamlined procedure – The process of appointing one party for both design and construction is more streamlined than appointing two separate parties. In particular, all interactions and contract administration are dealt with by one party.
• Key decisions made at outset – Design and build contracts allow the client to clarify its priorities at the beginning of the project and to pass these to the contractor early on so that they can be considered in the design development. The contractor can then take ownership of these and develop sensible designs enabling it to optimise cost whilst respecting the priorities.
• Single point responsibility – The contractor is responsible for the delivery, performance and design of the project. If you have appointed a competent main contractor then the client should not have to liaise with sub-contractors or manage works on site. Additionally, the contractor will have no recourse against the client for issues which may arise under the design and build contract – it will either have to absorb the losses or seek to remediate them from its design team.
• Potential for cost savings – The combination of reasons 1 to 3 discussed above should allow the client to make savings against appointing multiple parties for a traditional design and build process. However, there are some clients who may be so concerned about the risk of costs moving northwards that they are not comfortable with a design and build arrangement. Clients also need to understand that the drinking and swimming pool case cited above (see case study 8 – Single Point Responsibility) has been widely interpreted to mean that generally there is no such thing as a ‘fixed price’ within a design and build contract unless the contract specifically provides for this.

Disadvantages of Design and Build Contracts

Although there are many benefits for design and build contracts, there are also some challenges to consider. Integration of design and construction services can lead to conflict between parties. There may be instances where the contractor changes their design duty but does not advise the client, and vice versa. If this happens, this has the potential to alter the terms of the contract and is potentially a problem. The efficiency of a design and build contract is reliant on being able to deliver the project on time with all issues resolved in a timely manner so that the project meets the completion date. Any unforeseen events or impacts on the project can result in disagreements and disputes in the handing over of the completed works. As it is difficult to know with certainty in advance whether there will be sufficient funds available to cover the entire design and build project, it is important to have funds in place before entering into a design and build contract.

Key Terms in a Design and Build Contract

A design and build contract typically brings together several key components into one cohesive agreement. The main aspects that should be clearly outlined in a typical design and build contract include:
Scope of Works: This section should provide a comprehensive overview of the work the contractor is expected to carry out. This should be detailed as exhaustively as possible and can include information about the existing site conditions, demolitions, preparation and other items.
Drawings and Specifications: Your design details are essential for setting clear expectations for your contractor. This can include architectural drawings, engineering specifications or any other drawings required for the proposed work.
Contract Sum: This clause should state the actual amount of the contract and may also include breakdowns of various aspects of the project, such as labour and materials.
Progress Payments: This clause should outline the payment schedule for the project. The contract may allow for progress payments to be made as various milestones are met (such as completion of drywalling, bathroom installations, etc.).
Timing and Completion: Under a design and build contract, the design and construction aspects are typically tied together more closely than under other forms of contract. As a result, this clause will often force your design changes to be handled quickly so as not to delay the project. This can be good if you need to implement changes into your design quickly, or could have a negative impact on your design process.
Disputes and Dispute Resolution: No matter how carefully a project is planned, disputes can happen. This clause sets out how disputes will be handled (though many contracts will simply push the dispute to the courts, increasing your costs to resolve a dispute).
Warranties: This clause provides protection by providing a warranty on the work (often for one year) and requiring the contractor to return to the job site to remedy any defects that arise during this period.
Termination: In some situations, it may be necessary to terminate a contract for various reasons. This clause lays out the process for termination and any associated costs.

When to Opt for a Design and Build Contract

Design and Build Contracts can be useful in all circumstances, however there are particular circumstances where it is more advantageous to use a Design and Build Contract.
A Design and Build Contract includes both the design and build of the works. This is in contrast to a traditional form of building contract, whereby an Employer will appoint an Architect to provide a design and Project Manager and then a Builder will be engaged to construct the works. Design and Build Contracts are suitable for smaller and medium sized projects, whereby the Employer is looking for certainty on price and time for delivery of their project.
There are usually two scenarios where a Design and Build Contract is preferred over traditional forms of contract: Without doubt, where a Design and Build Contract is most widely used, is following a design competition. In this situation, an Employer will invite a range of potential Designers to submit Expression of Interest and relevant information about their company, before then selecting a preferred Designer. The appointment of the preferred Designer will usually be conditional on them also delivering the works as well as the design of the works. This is usually a competitive appointment, whereby the Employer is looking at a number of different factors in assessing the successful Designer and Builder. In this regard, the Designer/Builder will work jointly on the tender submission, therefore working collaboratively to achieve the best submission for the Employer. In all cases, the Employer will then work with the successful Designer/Builder to agree a final scope of works and price, before appointment of a Design and Build Contract.
Another circumstance that a Design and Build Contract may be useful is in circumstances where the Employer does not have the time to wait for the full design of the scheme to be completed or developed before commencing the works. In this respect, a Design and Build Contract may be useful where the Employer needs to ensure that the works are completed quickly, for example in the case of a hospital wishing to expand their facilities. In such circumstances, a Design and Build Contract may be used where the Employer has provided a high level design of the works to be carried out, leaving the Designer/Builder to develop this in consultation with the Employer and its advisors as necessary. Where the Employer requires the works to be completed on an accelerated basis, care is required as to the intention of the parties. In particular, the intention as to who will take the design risk as between the Designer/Builder, and how this will be managed is key. A matter of interpretation and wording is therefore key to ensure adequate time is provided for the Designer/Builder to fully develop the design and to set out clearly any requirements imposed of the Designer/Builder as to its liability for defects and shortcomings.

Comparison With Conventional Contracts

When looking at the advantages of the design and build, it makes sense to point out the advantages of this of a design and build contract over any other type of traditional contract, which has not been explicit above.
Many people will be familiar with traditional contracts in which the contract administrator monitors progress and costs. The designer will be appointed to prepare the design and specifications required for the works. The contractor is appointed at a later stage and is required to construct the works in accordance with the design and specification.
Under a traditional contract the bulk of the design is completed in advance before the contractor is appointed. The contractor will usually only have a limited period to review the design. Once the contractor is appointed it is ‘stuck’ with the exceptional or unforeseen problems identified during the preceding design process.
Under a design and build contract, the tender stage is used to transfer risk rather than simply as a basis for comparison between contractors . The contractor is required to submit a price for the completion of all works and requisites necessary to deliver the project in accordance with the employer’s requirements. The employer’s requirements are issued by the employer but they do not contain the full design. The contractor is given the responsibility for completing the design. Much of that responsibility is allocated to design consultants appointed directly by the contractor. The contractor supplies a design and build price (based on its own design) at tender stage which is guaranteed as final. Adjustments are made only for specific variations or changes in circumstances.
As regards project management, the use of traditional contracts tends to encourage a more fractured and disharmonious relationship between client and contractor. Design and build contracts are generally entered into by the parties who themselves have established or will establish a harmonious relationship.

Legal Issues With Design and Build Contracts

The design and build process presents some very interesting issues regarding the contractual arrangements between the parties involved. Although a full analysis of this area is beyond the scope of this article, there are a number of issues which must be considered.
Firstly, it is important to understand whether the builder has actually designed the works or whether it is simply providing a service to design the works. Clause 10 of the JCT 2005 DB provides for the contractor to carry out all design work necessary to enable it to produce the design documents for the Works. This is a duty of care provision which means that the contractor does not actually need to carry out the design work. It is common in practice for the contractor to pass on the whole or a substantial part of its design obligation to a third party designer and so it does not carry out any design work itself.
If the JCT 2005 DB is used, then clause 13 provides that the value of carried out design work will be agreed and the contract price will be adjusted accordingly. This minimises disputes as to "who did what" in the event of a disagreement as to responsibility for design liability.
Importantly, the JCT 2016 DB has removed the provision in the JCT 2005 DB which provides for an adjustment to the contract price for carried out design work. This therefore means that the risk is passed on to the contractor to agree the price with any external designer and make no adjustment to the contract sum for design work. Further, the contract also imposes the responsibility upon the contractor to co-ordinate third party design information. Clause 11.1.4 places the responsibility for ensuring that all third party design information is issued to the contractor within the required timescale. Immediately, the contractor is responsible for both co-ordination and checking for accuracy of the third party design information. This gives rise to two important practical points. First, the contractor needs to be mindful of the timescales for review of the third party design information or risk doing so at its own cost. Second, if no adjustment is made to the contract price for carried out design, the contractor should either carry out design work in order to ensure that third party design is adequate or should take such risk into account when agreeing the schedule with the client.
In the event that third party design is inadequate and the contractor relies upon it, there is an important legal issue which will affect the contractor’s recovery against the third party designer for all or part of the loss. In the case of a sub-contractor, the main contractor will be entitled to a temporary right of contribution against the third party designer without having to prove a breach of contract. As discussed above, the contractor then has a responsibility to co-ordinate and check for accuracy all third party design information and therefore may not be entitled to recover unless there is a breach of contract. In addition, where there is a concurrent delay situation, if a part of the delay was caused by the inadequate design (rather than the contractor’s failure to coordinate the design), the contractor is likely to struggle to recover in respect of the delay as against the designer due to the contraction of its concurrent delay obligations.
It has been made clear in this article that there is a fundamental difference between the 2005 and 2016 forms of the JCT design and build contracts. Consequently, the appropriate form of contract should be selected carefully such that it meets the requirements of the specific project.

Case Studies With Design and Build Contracts

Case studies and real world examples where design and build contracts and/or specialist sub-contractor packages have been successfully utilised
For the refurbishment of a high-end retail unit, the principal contractor made a successful application under an unamended JCT Design and Build Contract for their clause 2.3 amendment to the Schedule of Amendments to incorporate bespoke obligations on records management and procedures for dealing with Client variations. In this case, the contractor successfully sought to rule out liability for an undeclared contra charge for loss of profit which had been levied by the employer, as the adjudicator found that the onus was on the Client to prove its case on such a contra charge on the balance of preponderance of probability. The adjudicator found that sufficient documents had not been served on the Client to discharge this onus. The adjudicator also identified the limitation of liability clauses which supported the exclusion of such damages.
A high-end residential project involved both a design and build contract and a design and build sub-contract where disputes arose on the quality of finish. The contractor was able to avoid substantial and vulnerable claims for rectification costs due to the strict adherence of the sub-contractor to the terms of the JCT Design and Build form. The contractor achieved a significant level of success in what was labelled a "defective works claim" relating to faulty product requiring replacement. Due to the level of detail required on quality of work, the form of contract allowed them to limit the impact on the Contractor’s entitlement and in turn the Employers’ ability to recover compensation for defects on a no-fault basis.
An EPC contractor was able to avoid vulnerability by relying on strict contractual defences to avoid honouring a contractually agreed subcontractor notice period by relying on contractual terms which permitted the contractor to terminate in the event of the insolvency of the subcontractor. The failure of the Subcontractor to meet production milestones under the terms of an EPC contract was taken by the Contractor as cause to terminate the Contract, thereby relieving it of its obligations to pay the Subcontractor sums due upon expiry of the notice period as set out in Clause 7 of the subcontract. The adjudicator held that the fixed term of the contract and the sub contract itself (which expressly allowed for a contractually agreed notice period) protected against any vulnerability or set-off claim on the part of the Subcontractor.
A prompt parties response to numerous extensions of time notices was vital in this case where the contractor successfully defended its position on prolongation costs under an amended ICE form of design and build contract. In circumstances where the contract required the contractor to itemize the extension of time in its application at the end of each month and provide an updated completion programme going forward, the employers failure to do so entitled the Contractor to be deemed to have achieved substantial completion when it said it did and avoided a substantial damages claim.

Future of Design and Build Contracts

Design and build contracts have a future in the UK construction market. The Government has a strategy to build one million new homes by the end of this decade. Construction of large numbers of new residential units will require the engagement of professional designers; and why not engage the designers and builders under the same roof? With increasing pressure on land availability, and the recognised need to build at higher density in urban areas, there is a growing reliance upon and increasing creative use of brown-field sites. This means the use of the design and build contracts to deliver carefully designed building projects on small and tight urban sites helping to alleviate the pressure on planning authorities as well as helping the government reduce empty properties and the provision of public housing. This increased demand will inevitably lead to the demand for the increased use of the design and build contracts. However, the use of design and build contracts with strict performance criteria may not provide the full answer . Designers may be left exposed to performance risk whilst the builders who are adept at building may only be familiar with one aspect of the whole process of creating a building. In order to allow the system to function properly the designers must be involved in the risk-matrix. This requires a fundamental change in approach to the building process by all parties. The solution may lie in a revised standard form of the design and build contract. Significant discussions are taking place between the National Federation of Builders and the various professional bodies. There is a theory (ultimately baseless!) that the National Federation of Builders have made a deliberate effort to keep the revered NEC form of construction contract at arms length because they find it too complex. Now, the National Federation of Builders and the Royal Institute of British Architects are creating a hybrid form of design and build contract. It will be interesting to see if the proposed changes are sufficient to increase the market for design and build contracts and whether this will result in some improvement in the building process where design and construction are linked together at the outset. Watch this space!