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P3s, Design-Build Models and the Spearin Doctrine: A Shift in Design Risk

Generally, when a contractor is required to build according to plans and specifications prepared by the owner, the contractor is not responsible for the consequences of design.

Thus, under the typical building delivery model of design-bid-build, the general rule is that the project owner impliedly warrants constructability of the building design. This is not to say that a contractor will be entitled to additional compensation simply because it encounters unanticipated or greater difficulty in the performance of the construction work. Rather, this rule known as the Spearin Doctrine allows contractors relief when an owner does not fulfill its responsibility to furnish accurate and executable design specifications. Stated another way, in exchange for the right to specifically direct how a project shall be performed, the owner warrants that its directions are not defective.

Historically, design-bid-build has been the most common form of building delivery system. It is based on the assumption that the owner has the design plans in hand before bidding out the construction project to the lowest bidder. Based upon the project drawings and specifications, contractors establish costs and fees and submit a fixed-fee bid. The contractor then executes the work in accordance with the project design, with the expectation that the design, when executed, is constructible. Duty bound to follow the design, under the Spearin Doctrine the contractor may look to the owner for any additional costs incurred as a result of defective design.

With the increasing and immediate need for new facilities, upgrades and maintenance for existing infrastructure, coupled with a squeeze in public spending, public private partnerships have emerged to combine financing of public infrastructure by accessing private capital through various models and financing vehicles. While there are many variations of public private partnerships, one which is gaining popularity in the United States is referred to as the design-build finance operate maintain model (DBFOM). In this design-build model, the owner bundles the responsibilities for financing, design, construction, operations and long-term maintenance of the project to a private sector partner. DBFOM projects are generally either partly or wholly financed by debt leveraging revenue streams dedicated to the project, with concession benefits as sources of revenue. Concession benefits may be in the form of direct user fees such as tolls, rent, lease fees or direct payment for services generated by a franchise or business on the public owner’s property. The contracts are typically awarded to a single firm, a consortium, joint venture or other organization responsible for the financing, design, construction, operation and maintenance of the facility. This approach creates a single point of responsibility for all aspects of the project to the private sector partner.

To execute the projects, often a public owner selects a design build method for project delivery. In contrast to design-bid-build, where an owner supplies the design which the contractor executes, with design-build there is no longer a separation of roles and responsibilities for project design. Risks once belonging to the project owner have shifted to the private member now responsible for integrated design and delivery. Design-build projects and the many variations thereof, integrate methods for financing, design and construction to save time and money in public works projects. Design-build systems, at a minimum, shift design and construction to a single private entity, eliminating the competitive bidding of a finished design.

The evolution in building delivery methods will likely lead to some risk shifting in relation to the implied warranty of constructability in project design. Instinctually, the party that should hold responsibility for a design defect is the party that created the design. The courts in a long line of Spearin cases have affirmed that in a traditional design-bid-build, the owner typically holds responsibility for these defects, and the court regularly assesses liability to owners for design specification defects. Under a design-build model, the contractor is no longer provided with a set of design specifications from the owner. Logically, the rule of law is adapting to this change. In design-build projects where the contract provides that the design is expressly the responsibility of the contractor, the liability risk is shifting away from the owner.

Nevertheless, in cases where it can be established that the public owner has increased its participation in the review and approval of the design, the courts have not eliminated Spearin’s protections for the contractor. For example, in a construction manager at risk project (the contractor worked with the owner during the early phases of the project as a consultant and then served as the general contractor when the design phase was complete) the courts determined that since the contract contained a provision stating that the owner retained the right to reject the design, the owner remained liable for defective design under Spearin.

That said, as new building delivery models emerge, such as integrated project delivery systems (IPDs), whereby the owner, designer and contractor assume collective responsibilities for the design development and approval, the lines for design liability become blurred. In projects with shared design building delivery models, it seems unlikely that in the event of a dispute, the contractor will invoke the principles under the Spearin Doctrine as its best defense.

By eliminating the bidding process, public private partnerships provide a solution to the constraints of public financing and allow the private sector relative autonomy for project design and construction. This evolution in financing and project delivery effectuates a shift in design liability from the owner to the private member. With these changes, expect the courts to respond and erode the application of the Spearin Doctrine in typical design-build projects and emerging integrated project delivery models.

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