Michael Estrada is a shareholder in the legal firm Richards Watson & Gershon and the city attorney for San Fernando and Yucaipa; he can be reached at MEstrada@ rwglaw.com. Debbie Cho is an associate with Richards Watson & Gershon and can be reached at dcho@rwglaw.com.

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The Legislature recently granted California cities expanded authority to use the design-build project delivery method. Effective Jan. 1, 2009, Assembly Bill 642 (Chapter 314, Statutes of 2008) amended the Public Contract Code to allow cities to use the design-build project delivery method for building construction projects with costs in excess of $1 million. AB 642 also allows certain qualified entities to use design-build to construct regional and local facilities for wastewater treatment, water recycling and solid waste.

What Is Design-Build?

Traditionally, general law cities were required to use the “design-bid-build” delivery system for construction projects. Under this system, the city first contracts with a design professional to provide complete plans and specifications for the project. When the plans and specifications are finished, the city solicits bids from contractors to perform the construction work and awards the construction contract to the lowest responsible bidder.

In contrast, design-build is a project delivery method whereby the city contracts with a single entity for both design and construction services. Design-build contracts are usually awarded by a competitive process that does not limit selection to the lowest responsible bidder. This allows the city to consider other factors in addition to price, such as a bidder’s experience and performance on prior projects.

Before the passage of AB 642, the Public Contract Code authorized the use of design-build for only a limited number of public entities. Charter cities, however, continue to have the authority to use the design-build project delivery method if authorized by their city charter. (See, Section 1100.7.)

AB 642 Expands Use of Design-Build to All Cities for Limited Purposes

AB 642 amends the Public Contract Code (Section 20175.2) to authorize any city – with approval of its city council – to enter into design-build contracts for qualifying building construction projects that cost more than $1 million and extends these provisions until Jan. 1, 2016. Eligible projects include construction of a building and improvements directly related to the construction of a building, but specifically exclude streets and highways, public rail transit, water resource facilities and infrastructure.

AB 642 also establishes a pilot program of 20 projects for regional and local facilities for wastewater treatment, solid waste and water recycling. It (new Section 20193) authorizes a “qualified entity” – with approval of its governing body – to use design-build for projects whose costs exceed $2.5 million. In this instance, a “qualified entity” means a city, county or special district that operates facilities for wastewater, solid waste management or water recycling. Qualified entities must first apply to the state Office of Planning and Research and submit an approved notice of determination or notice of completion indicating compliance with the California Environmental Quality Act (CEQA) review process.

Although the two statutory provisions are similar in many respects, there are some differences. This article focuses on the process that cities must follow to use design-build for qualifying building construction projects.

Pros and Cons of Design-Build

There are several advantages to design-build. Using design-build:

• Speeds delivery. Design-build offers the potential for faster project delivery. With this method, construction can begin before the project’s final plans and specifications are complete. This reduces lead times, accelerates the project schedule and reduces overall project costs.
• Eliminates redundancies and cost. Design-build eliminates design effort redundancies, which typically exist between the designer and contractor. Because the contractor is involved in the design process from inception, he or she can provide helpful insights on construction materials and methods that can make the design more efficient and less expensive.
• Simplifies communication. The lead agency needs to deal with only a single point of responsibility: the design-build entity. Because that entity assumes the major administrative functions of overseeing the project, the city or agency can assign fewer staff to manage the contract and the relationship with the contractor.
• Reduces risk. Design-build reduces the project risk for the owner by shifting the liability and risk for cost containment and project completion to the design-build entity. Because the lead agency is not the guarantor of the completeness and accuracy of the design professional’s work, the owner can also avoid conflicts and disputes between the contractor and design professional.

On the other hand, design-build can also have some disadvantages, including:

• Loss of control. The city or public agency gives up some control when it enters into a design-build contract, because the project will not yet be defined in detail. When using design-build, the owner transfers many responsibilities to the design-build entity, which means there are potentially fewer checks and balances than in the traditional design-bid-build system.
• Potential cost increases. There may be increased administrative costs caused by the development and use of agreements that are unfamiliar to city staff, as well as by the required labor compliance program.

AB 642 Imposes Many Requirements

A city must satisfy a number of requirements to use the design-build project delivery method authorized by AB 642. The city council must first establish and enforce a labor compliance program (LCP) for design-build projects or contract with a third party to operate such a program. The program must conform to section 1771.5 of the Labor Code and regulations adopted by the Department of Industrial Relations and must be approved by the department director. LCPs are required, among other things, to:

• Inform contractors about their prevailing wage obligations;
• Monitor compliance by obtaining and reviewing certified payroll reports;
• Investigate complaints and other suspected violations; and
• Take appropriate enforcement action when violations are found.

AB 642 sets forth a four-step process that entities must follow. The four-step process does not need to be followed in sequence, and in some cases steps can be combined. The city must:

1. Retain a licensed and registered design professional to prepare documents setting forth the scope of the project. That design professional will not be eligible to bid on the project.

2. Prepare a request for proposals (RFP) inviting interested parties to submit sealed proposals, which must identify:

• The project’s basic scope and needs, expected cost range and the methodology by which the city will evaluate proposals, specifically addressing whether the contract will be awarded on a lowest responsible bidder basis, and other information the city deems necessary.
• Significant factors the city expects to consider, including cost, price and all non-price related factors.
• The relative weight assigned to the selection criteria. If the city uses a nonweighted system, it must disclose whether the combined evaluation factors, other than cost or price, are significantly more important, approximately equal in importance or significantly less important than cost or price.
• Whether the city wants to reserve the right to negotiate with responsive bidders. If so, the city must include in the RFP or separate publication the applicable rules and procedures it will follow to ensure that negotiations are conducted in good faith.

3. Develop and use a standard questionnaire to prequalify design-build entities, in consultation with the construction industry, including representatives of the building trades and surety industry. Detailed requirements are provided for information that the questionnaire must cover, including evidence regarding the qualifications and financial capacity of the design-build entity. The design-build entity must verify, under oath, all of the information it submits.

4. Establish a procedure for final selection of the design-build entity based on either the lowest responsible bidder or the best value. Best value is defined as “a value determined by objectives relative to price, features, function and life-cycle costs,” assigning specified percentage weight to specific factors enumerated in AB 642. Once the evaluation is complete, the city must rank the top three responsive bidders and award the contract to the responsible bidder whose proposed bid is determined, in writing, to be the most advantageous. The city must publicly identify the winning contractor and release a written notice stating the basis of its award and listing the city’s second- and third-ranked choices.

AB 642 also requires that:

• The selected design-build entity must have sufficient bonding and errors and omissions insurance coverage;
• If using subcontractors not listed by the design-build entity, the city must select them in accordance with a process established by the city;
• If the city obtains a performance and payment bond, retention amounts cannot exceed five percent; and
• If a city uses the design-build method, it must submit a report to the Legislature before Dec. 1, 2014, providing specified information regarding the project and the selection process, including an assessment of the most appropriate uses for the design-build approach.

Conclusion

AB 642 reflects the Legislature’s desire to enable more cities and public agencies to use cost-effective options for building and modernizing public facilities. It also recognizes the national trend of public entities relying on design-build as a project delivery method.

The law provides a powerful new tool in the toolbox of available alternatives to traditional contracting for public construction projects. But it comes with a price, in the form of a somewhat daunting list of requirements that local governments must satisfy before they can take advantage of design-build. On balance, the flexibility that AB 642 affords public entities will probably be worth the effort.

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About Legal Notes

This column is provided as general information and not as legal advice. The law is constantly evolving, and attorneys can and do disagree about what the law requires. Local agencies interested in determining how the law applies in a particular situation should consult their local agency attorneys.

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This article appears in the May 2009 issue of Western City
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