Episode 42: The Design Build and EPC Book

This is Construction Law Today, the podcast of the American Bar Association's Forum on Construction Law. Construction Law Today is a podcast about current topics in American construction law. Your host for Construction Law Today is David Suchar. Our podcast, Construction Law Today, began in July 2019 and is now in its third season. In our first two seasons, my good friend Buzz Tarlow produced 25 episodes on a variety of timely and interesting topics in the field of construction law. In our upcoming season, I expect to produce similar podcasts at the rate of about one new podcast per month. As always, we welcome your questions and comments. Please let us know what we can do to improve. The contact information for Construction Law Today is found at the end of this podcast. On behalf of the American Bar Association's Forum on Construction Law, thanks for listening. Welcome to Construction Law Today. Today, we'll be diving into two-fold. We'll be talking about new forms of agreements that continue to evolve at the center of major construction projects. That's design, build, and EPC contracts. We'll also be talking about a book, an ABA Forum on Construction Law book that our guest edited along with a group of other talented editors. So our guest today is Ken Rubenstein. Ken is a seasoned construction lawyer and co-editor of that newly released ABA book on design, build, and EPC contracts. He is a director at Freddie Flaherty in the firm's Boston, Massachusetts and Concord, New Hampshire offices, and he co-chairs that firm's construction law group. For more than 20 years, Ken has represented a variety of parties in the construction industry. He is an active participant in the ABA Forum on Construction Law and many other professional activities that he works on, including he's a member of the American Arbitration Association's panel of construction arbitrators. Ken is an active participant in the ABA Forum on Construction Law and many other professional activities that he works on, including he's a member of the American Arbitration Association's panel of construction arbitrators. background in the construction law space? I actually grew up in the construction industry. My parents have a cost-estimating construction management firm in New York. When I was growing up, it was in Manhattan. It moved to Westchester. But the firm works on large projects, very often large public works, some very large public civil projects. So I spent the better part of my youth when my friends were schlepping golf bags and waiting tables. I was checking math on takeoffs and taping together critical path schedules. It was a natural segue when I became a lawyer to go into a field where I already speak the language. Ken, that's a good introduction to your background. Why don't you tell us a bit about how the idea to do a book on EPC and design-build contracting, how did that come to be? A very large percentage of my practice is in this design-build and or EPC contracts. I approached the ABA about doing a book and or a model contract since particularly on the design-build and EPC contracts, I've been doing a lot of design-build and EPC on the EPC side, there isn't a US-based standard form for EPC contract. So I approached the ABA, they connected me with Nicole Lentini and she and I started putting something together. And then while we were putting it together, the ABA let us know that Logan Hollibaugh and Wendy Benoit were also working on a similar book. So we decided to collaborate and consolidate efforts and the four of us worked together to get this done. That is a very impressive group of people that you have there to work on a book. Can you explain for our audience who this book is meant for? Who is the target audience for the book? This works on both the owner side, the contractor side, the design side. I would say it's primarily focused on the going in, which is if you're looking to structure a design-build relationship or an EPC relationship, initially it's for practitioners who are putting together these contracts. But at the same time, if you find yourself in a dispute, it can be useful knowing what's normal, what's market. What terms should I be looking for in the contract? So it can be a useful guide for litigators in terms of understanding the nature of EPC and design-build, but I'd say its primary resource is for those who are putting together the contracts. For those practitioners who may be newer to the EPC and design-build space, who may have much more experience with the traditional design-bid-build model, can you walk us through some of the fundamentals? What exactly is it? What exactly are the types of differences in design-build and EPC delivery models? How do they differ from design-bid-build? As you know, and as most of the listeners probably know, design-bid-build, the owner hires an architect or an engineer to put together plans and specs, and then gives the fully completed package of plans and specs to a builder who then builds in accordance with those instructions. The plus is that you have checks and balances. You have two professionals who will let you know if there's an error by the other. There's a few cons to it. One is it's gradual. Because of the nature of design-bid-build, where you get the complete package of plans and specs to the contractor to price and then contract for, it's linear. It's slower. You can't start the construction until the design is 100% complete. Another problem is that while you have checks and balances, you also have a little bit of head-butting and conflicting interests between the contractor and the designer. In other words, if there's a problem with the design, it's not a problem. It's a problem with the design. It's a problem with the designer. It's in the contractor's best interest to raise it, but that might give rise to a change order. They may want to change based on an error in the design, and the architect or the engineer may feel that this was something that was known or obvious or should have been inferred. And so you have buddy heads, and then the owner has two different professionals who are at odds, and they have to play referee. So you use design-build or EPC if you want a bit more collaboration. Now, having said that, it's really only for a sophisticated owner. Or if unsophisticated, the owner's got to hire a separate professional, like an OPM, owner's project manager, to come in. Because what you don't want is the two parties that were pointing fingers at each other instead of aligned to just point them at you and take sides against you. So if you don't know what's normal, what's usual, what you should be approving and not, design-build or EPC are not for you because you won't have a professional guide unless you hire one separately. It seems to me that, and I'm guessing the idea for the book, is that there is this similarity between design-build and EPC contracting and that you have one party that guarantees all of the work. How does that concept help to or raise certain issues that need to be addressed at the front end? That's a great point. And the exact verbiage that you note is one of the reasons why we really needed the book. Design-build is where the owner hires one entity who is both the designer and the builder. It's one head to hang. It's one body to shoot if something goes wrong. You don't have to figure out, was it a design error? Was it a construction error? Because one party has responsibility. Now, that party is not guaranteeing the outcome because there are things like force majeure events. There are things like unforeseen conditions that can come up. And a lot of owners may misunderstand and think that they are buying a guaranteed outcome, whereas they're buying a collaboration. And they're buying a likely outcome, but they still own the risks of the unknown. EPC is very similar to design-build. EPC stands for engineer, procure, construct. So much like design-build, the design-build contract or the bill, I'll just refer to them as the builder here, is responsible for the engineer, which would be the design piece of a design-build, and the construct, which is the construct piece of a design-build. The procure, which on an ordinary design-build, the builder is responsible for going out and getting the mechanical systems and whatnot. But we add the word procure in EPC because it's really talking about projects where you're building a think rather than building a place. You're building something that's going to be operational. So think water treatment facilities, wastewater, power, automation, manufacturing, things where substantial completion is not going to be defined by getting a certificate of occupancy. Substantial completion is going to be defined by meeting certain specified criteria that's necessary for that facility because of what it's doing, not just that it's a place for people to go. You mentioned that you were working at the same time as this book on a new form EPC agreement. That seems like a pretty monumental thing. Can you tell us about that? I've done several billion dollars of EPC contracts that I've put together on behalf of both owners and contractors. And one of the challenges I run into, particularly when I'm on the contractor side, is there is no standard form. So unlike the AIA documents or the consensus docs or EJCDC, where you're negotiating, the other party comes up with something you feel is really an outlier, and you want to bring it back and be able to have a conversation and say, that's not market, that's not standard. Can we at least get to something? I can't tell you how many arguments I had with owners council who would say, you're position is a market. Ours is market. Yours isn't. And I don't have an anchoring contract I can go back and refer to. I can refer to the AIA docs or I can refer to a design-build contract, but I get pushback saying, yeah, that's not what this is. This is a different form of agreement. So there was definitely a need in the market because of that gap. So I started talking to a number of practitioners who I know and trust, and they all agree the closest thing out there is there's something called the Fitch Silver Book, but that's international and that's based on international norms. So it really isn't set up for the way we do things here in the U.S. Instead of payment performance bonds, you have letters of credit. Instead of having litigation or arbitration, there's adjudication, which is a form that's much more common in Europe. And just a lot of the norms of the way that contractors and owners and subcontractors treat each other is different over there in terms of allocation of fees, in terms of consequences of damages. So that wasn't a fit. So once we confirmed that there isn't a competing product or something that fills the market need, I started talking to the ABA and they encouraged me to coordinate with my other editors. And so two out of the three of the other ones joined on for this project. That's impressive. I look forward to seeing the result of that. What about on the design-build side? I'm aware there is an AIA design-build agreement. I believe Consensus Docs has one too. Can you tell us about what forms are common in that space? The Consensus Docs and the AIA are far and away one and two, or two and one, I should say, in terms of most commonly used. I typically counsel clients that the AIA A141, which is the AIA's design-build, is a fair document, but it's got a lot of holes. So for example, it doesn't deal with progressive lien waivers. There's a lot of other things that it's just missing as a document. It's a good starting point. Whether you're on the owner's side or the contractor's side, you're going to need to make more revisions to plug those holes than you would on, say, an A101 and 201 if you were doing a design-build. It's not that it is missing protections for one side over the other or that it slants it for one side or the other. It's just there are things that should be there that aren't. The Consensus Docs is a fair document. It's a fair document. Consensus Docs is a more thorough document and more complete document. But if you're using it, you should know that the Consensus Docs is much more favorable to the contractor than the owner. There are a lot of areas where it really slides the advantage over to the contractor. So if you're an owner looking to use one of those two forms, either way, you're going to need to make a significant number of modifications. Moving from some of these contracting issues in general onto the book. What are some of the things that you're going to need to make a significant number of modifications? I noticed that the book seems to cover a variety of pretty practical topics from licensing to insurance, dispute resolution. Tell us a bit about what the book covers and what are some of the more common legal or practical challenges that practitioners run into on these projects? Our goal in putting together the book was really to identify the issues that you're going to come up with if you want a complete agreement. So we start with understanding the roles of the contractor. We start with understanding the roles of the contractor and the owner. And just that point that we talked about earlier, that a design-build contract or an EPC contract, they're not a guarantee of the outcome. They're an allocation of responsibility, but making sure that people understand that. There was one case that I was asked to consult on that involved a prison. I'm going to play with the facts a little bit, but broadly speaking, the state hires design builder to do a prison. They work on the project. And then at the completion, the bar is up. And then at the completion, the bars are gleaming, the cells look great, and the warden's office is beautiful. But as you're walking from the hallway, from the cells to the office, it's exposed cinderblock. And the owner says to the contractor, when are you going to finish building it? And the design builder says, oh, we're done. And the owner says, well, what about this exposed cinderblock? And the design builder says, it wasn't in the basis of design. So if we had priced that, other people wouldn't know. And we would have been high bidder. We wouldn't have been high bidder. We wouldn't have been low bidder. And you wouldn't have hired us. So we priced exactly what you included and nothing more. So part of the goal of the book is to help people understand why, if you're an owner, you need to either be sophisticated or have another professional who's guiding you to make sure that your criteria is everything you want. We have a section on insurance so that owners and design builders can understand the insurance nuances. There are things like rectification insurance. You don't get a typical design bid build contract. How does the builder's insurance interplay with the builder's risk that the owner's going to have to carry? So dealing with issues from roles and responsibilities to understanding the different form contracts. We talked about how AIA is pretty down the middle, but has some things that's missing. Consensus Act is pretty far on the contractor side, but very thorough. You've got the DBA, you've got EJCBC. So there are other form contracts out there. And then we wanted to talk in here about the issues that are going to pop up during the project in terms of some of the challenges of subcontracting, the challenges of bringing in a design professional. There are things with a design professional where on a typical design bid build relationship, design professionals are used to excluding consequential damages and they're used to having a limitation of liability. When I'm the prime contractor and I'm subcontracting to a designer so that I can be either an EPC, I can be an EPC, I can be an EPC, or a design build contractor, I don't want to give a limit of liability to my designer because if I do and they screw something up, I now own the entire responsibility. The contractors are used to being able to push all of their risk down to the subs. And the architects are used to having a very clear cap of liability. And so sometimes finding a way to merge those two expectations can be a challenge. Thanks for that broad overview of what the book covers, Ken. We'll head to a break now. But when we return, I want to talk more about some of what the book covers, some of the issues that are facing folks on EPC and design build projects, and maybe some practical tips that you may have for practitioners. So we'll be right back with more construction law today. Welcome back to Construction Law Today. When we broke, Ken Rubenstein and I were talking through some issues that are covered in this new ABA form on construction law book. And I thought to ask you, Ken, can you tell us anything notable about the structure of the book? Ken Rubenstein We've got this laid out, with the first section being issues in design build contracting and looking at all the issues from the design build perspective. The second section is EPC contracting, and it addresses the issues from the perspective if you're doing an EPC project. And then the third is common issues to design build and EPC contracting. That would be things like insurance, subcontracting, bonding, and speed resolution, where the principles that we talk about are going to be the same regardless of whether you're doing EPC or design build. Ken Rubenstein You talked about in that third section, some of the crossover between the two different forms of agreements and projects. Can you tell us about the differences? How is design build contracting different from EPC contracting? Ken Rubenstein Design build and EPC are very similar. And with both of them, the owner is hiring one entity to do both the design work and the construction, and is expecting a finished product without having to contract. With another entity to get it done. Where the distinction really comes in is on the procurement, which again, would be subsumed in a design build contract. But where the EPC contracts really differ is in the treatment of that equipment. EPC contracts will have far more robust language dealing with acceptance criteria. We talked a little bit at the beginning about how with design build, typically, you're building a place. So certificate of occupancy is the finish line. If you're doing a power project, it's going to be how much power can we put off to the grid or off to whoever the purchaser is. If we're doing an automation and warehouse project, we're looking at what's the throughput, how many pallets per minute, how many cases per minute can be moved. Within that, separate from the acceptance criteria, we're also going to focus a lot on training. Because at the end of the day, the design builder or the EPC contractor is going to be turning over a turnkey product. Then at the end of the day, the design builder or the EPC contractor is going to be the owner is now going to need to know how to use and operate. And more than just walking in and turning on the lights, if we're talking about a complex warehouse management system, they need to know and understand how the software interacts with the hardware. They need to understand how do they shift from one transmission line to another. Training is a big part. Commissioning. It's not enough that it's ready. We've got to get it up and running and work the bugs out. So whereas typically on a design build project, we're going to need to know how to use and operate. And more than just walking in and turning on the lights, if we're talking about a complex warehouse management system, they need to know how to use and operate. And more than just walking in and turning on the lights, we're going to need to know how to use and operate. And more You often have to run it. You'll have a period of time, often referred to as a run-in, where the system, whether it's a water treatment facility, a power facility, warehouse management, is being operated so that we can see issues that pop up in operation that you couldn't see before it was live and operating product or live and transmitting power or filtering water. There are things that you can't see until it's working. So on an EPC project, you often have this test period. When substantial completion has been reached, it can do what it's supposed to do, but now let's get doing it, and then we can figure out the bugs to achieve financial completion when we get those squared away. So really, because of the equipment piece, it really, between commissioning and acceptance criteria and instruction, there's a lot more that needs to be done for handover. In terms of the book, I note that you have several other editors who you worked with, that being Nicole Antini, Logan Hollibaugh, Paul Varela, and Wendy Vinoy. Can you tell our listeners about how having that great group of editors added to the book in terms of their backgrounds and experience in the industry? This was great, because having people with the experience of these co-editors really enhanced the book. We were very good. We were very good at collaborating. So while all of the editors took a few chapters and took the lead on coordinating with the authors to get those done, we really made a concerted effort to not be silos, so that we would each read the chapters and look at them and could coordinate to make sure that the chapter on the design-build side worked well with the chapter on the EPC side of maybe the same issue. The other editors are fantastic. Logan being at Bechtel, Wendy having been at Suffolk, Nicole having her brother. And Paul having his fantastic practice at Varela Lee. I had worked or coordinated or crossed paths with all of them, except for Nicole, who ironically is the one who I started off working with before this project. In looking back on the book after having put a great deal of effort into it, are there any favorite chapters or portions of the book that stick out to you? I am certainly partial to chapter two, which is assessing the owner's need in the design-build context. Okay. Okay. Okay. Okay. I co-authored that with a colleague at my firm, Nicholas Duby, which was a really fun exercise. Nicholas is a younger attorney in my firm, but who's of counsel and is really a rising star. Harvard undergrad, Phi Beta Kappa, Harvard Law School, editor of the Law Review. Just an excellent, excellent writer with great perspective. So that was a lot of fun to put together. Who would you say is the target audience for the book? Who is this book written for? This is really designed for the going inside. So for anyone who is. It's helping a client put together a relationship, to put together the contracts to enter into a design-build or an EPC contract. It doesn't favor the owner side or the contractor side. It takes a very even and balanced look and identifies advantages to both. But it's really designed as a resource for those who are entering into it. One of the nice things is that we wrote this with the expectation that it can be used both for people who are just learning about these delivery methods and those. Who have dealt with these types of contracts for decades. Because with the editors we have and the quality of the authors that we have, we were really able to dive into some of the nuances that even people who are experienced may not have had this particular issue pop up on their particular project. What about in terms of the design-build and EPC landscape outside of the book? Just taking a step back for a moment. Are there any trends or innovations in the industry? With respect to those two types of project delivery methods that you think our listeners should be aware about? Both are becoming far more popular as the years go on. And the big thing that they have in common is what's driving their popularity, which is collaboration. We're seeing in construction a move towards collaboration and a move away from the different constituents be siloed. Because there's a lot of knowledge that the builder has that could be useful during the design phase. To make the design work for the construction. To help the designer design for construction. And if you do the traditional design-bid-build model, you lose that. Because the contractor doesn't get involved until the design is complete. So both EPC and design-build have that collaboration of the contractor and the designer working together. It also, as owners are becoming more and more results-driven, and they want that guaranteed outcome, or at least they want a turnkey product. EPC and design-build. Both cater towards owners who want to just tell you what they want, and then come back when it's done. Again, if you're not a sophisticated owner, there's a danger in that. In that you may not get exactly what you want unless you're looking closely. But as we get owners who want that greater collaboration, who want that less siloed approach, both EPC and design-build are becoming more and more popular. You and I, when we were talking through what the book is about, you mentioned that there. There are some dispute resolution portions of the book. Can you tell us what the book covers in that regard? And what are some more important things that you're seeing in the industry in that regard? One of the things the book goes into on the dispute resolution side is having an appropriate process. So the more sophisticated your project is, the more you're going to want to have a sophisticated dispute resolution process. Just having an arbitration clause isn't enough. Ideally, if you're doing. Resolution, you should be looking at having phased resolution. You want a step process. Ideally, for these projects, which often are $10 million is a small project in the EPC world. You're looking at $10, $50, $100 and up in terms of millions. So on a project like that, not everything needs to go to litigation. Not everything needs to go to a big hearing. And the project may go on for an extended period of time. So we'll put in clauses that require negotiation first. First, you have the project teams work it out. But if they can't work it out, you move the discussion to one level above project. So that the people of the business outcomes and who aren't as tied to the specifics of what happened and don't feel like they're admitting fault if they compromise, get it to them. If that doesn't work, then you can look at partnering, maybe hiring a joint expert. Some of the things that you can do to try and figure these out, again, short of having a big formalized fight that's only going to happen in a few days. That's going to happen in a few days. That's going to hurt the relationship, particularly on a project that's going to go on for a long time. How about in terms of your practice and having gone through all this effort to put this book together, can you give our listeners any tips about the practice of EPC contracting or design-build contracting? The number one thing that owners and contractors need to do at the outset of an EPC or design-build relationship is align expectations. Understand if we're in the powerhouse, we're in the powerhouse. If we're in the powerhouse, then look at all of the issues, not only relating to the construction work itself, but what is the expected output? What is the reliability of that output? What is the maintenance time that's going to be necessary? You don't want the builder thinking, well, of course, there's going to be a certain amount of maintenance and an unsophisticated owner having an economic model that doesn't take into account the downtime that the design builder thought was assumed. You want to look at how are we treating delays? Liquidated damages. There are a lot of contractors out there who hate LDs. Personally, when I'm on the contractor side, I like LDs because if I have LDs, I'm not agreeing to consequential damages, and I'd much rather be able to price and expect what are the consequences if I'm going to be a day, a week, or more late. Owners will always put in clauses that say time is at the essence. Well, I don't want to be one day late and have the owner have the right to terminate me. So I want a buffer period where if things haven't gone as planned, I still have a little bit of a buffer where, sure, the owner had a right to expect it by the agreed-upon date, and they'll be compensated by that. But I don't want the owner to have the right to terminate. So liquidated damages both provides a manageable expectation and a buffer, and then there can be an end date when the LDs run out. Those are some very good practical tips, Ken. This is a logistical issue, but can you tell people, all they can go about getting the book? The ABA's website makes it available. You can go to shopaba.org. And if you're at any of the upcoming ABA conferences, typically they'll have a table where they'll be selling the book as well. Ken, thank you for the fantastic overview of design, build, and EPC issues that are facing the construction industry and also about the book. I look forward to picking up a copy of it and seeing you at the next forum meeting. Thanks for joining us today. Thanks for having me. You have been listening to Construction Law Today, the podcast of the American Bar Association's Forum on Construction Law. All rights relating to this podcast are owned and controlled by the American Bar Association. No reproduction or reuse of this podcast is permissible without the express written consent of the American Bar Association. For more information about Construction Law Today, or if you have any questions or comments, you may contact our host, David Suchar, at david.suchar.com. 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