AGC Adopts Family of Design-Build Subcontracts

Kegler Brown Construction Newsletter

With the increasing popularity of design-build contracting in the construction industry, AGC has attempted to seize leadership from AIA with respect to contract documents by formulating a complete set of design-build documents, including four types of design-build subcontracts —the AGC 450, 455, 460 and 465.

The AGC 450 is to be used when there is no Guaranteed Maximum Price ("GMP") expected from the Subcontractor and the Subcontractor has not been retained to provide substantial design work on a design-build project. The AGC 455 is virtually the same design-build subcontract, but containing a "pay if paid" clause shifting the risk of Owner non-payment from the Design-Builder to the Subcontractor.

Both the AGC 460 and 465 envision a GMP and a substantial design role, but the AGC 465 contains a "pay if paid" clause.

All of these design-build forms contain several one-sided provisions that are found in the AGC 650 (regular subcontract) including two provisions that could cause financial ruin for any Subcontractor signing the document. First, if the Owner suspends the work or terminates the Design-Builder (with or without cause), the Subcontractor's sole remedy is limited to what the Design-Builder can recover against the Owner on the Subcontractor's behalf. If the Design-Builder is terminated by the Owner for cause (i.e., a failure to perform unrelated to Subcontractor's scope of work), that recovery will likely be absolutely nothing, depriving the Subcontractor of any reasonable opportunity to recover even if he has satisfactorily performed his work in all respects.

Secondly, while mediation is required in the event of a dispute, arbitration is not. In the event the Subcontractor cannot be joined to the Design Builder/Owner dispute, and the Subcontractor's claim involves (in whole or in part) disputes between the Design-Builder and the Owner, the Sub's claim is to be stayed pending the conclusion of the Design-Builder/Owner dispute, depriving Subcontractor of a meaningful and timely remedy through no fault of his own. The Subcontractor's claim (and recovery) could be stayed for years while the Owner and Design-Builder battle it out in an arbitration or the courts.

Design delegation also presents significant risks for Subcontractors under these documents. Under the AGC 450 and 455, the Subcontractor is to provide the design necessary to "satisfactorily complete" the work. The design services are to be provided by a licensed design professional who is required to sign and seal the documents. The Subcontractor is ultimately responsible to "conform" the design with the design concept.

Under the AGC 460 and 465, the Subcontractor is actively responsible for preparing design documents and for "coordinating" its design with the project design.

As with any design-build work, Subcontractors are cautioned to make sure that they are covered adequately with insurance coverage specially designed for the unique risks of design-build work and that all of their "designers" (architects and/or engineers) are also adequately insured for design errors and omissions. Subcontractors also should be sure that the design-build concept is legally permitted in the jurisdiction where the project is located.

The GMP documents, the AGC 460 and 465, also pose special risks for Subcontractors who could perform all of the upfront design work only to have the Design-Builder shop the work to another Subcontractor for a lower price and have that second Subcontractor use the Design-Build Subcontractor's plans and specifications. Under the AGC 460 and 465 in the event the Design-Builder does not like the Subcontractor's GMP, the Design-Builder may elect to proceed without a GMP, or upon seven days written notice to the Subcontractor, terminate the agreement and award the Subcontractor's work to another Subcontractor and utilize the design documents prepared by the terminated Subcontractor. Although there is general language about reimbursing the Subcontractor for all "unpaid compensation then earned," the amount of compensation to be paid in that event is unclear and will likely not include lost profits on the unperformed work. It also is contrary to the AIA documents which traditionally maintain ownership of the documents with the design professional who prepared them, and avoids this risk of having the Subcontractor's work product utilized by others. If the Design-Builder uses the terminated Subcontractor's documents on the project, he does so at his own risk and indemnifies the Subcontractor from such claims. However, this indemnity is only as good as the collectability of the Design-Builder who has acted in such a questionable manner.

In conclusion, while design-build provides many opportunities for both Contractors and Subcontractors in the rapidly changing construction industry, design-build documents should be closely scrutinized. General contractors are likely to consider utilizing these AGC documents on their design-build work. Subcontractors should carefully evaluate the risk in these evolving documents and pay particular attention to certain one-sided provisions that appear to exist in the AGC design-build subcontracts.