December 2018
by John A. Greenhall and Michael Metz-Topodas, Cohen Seglias Pallas Greenhall & Furman, P.C.
Performance specifications in a construction contract can dramatically alter decisions about costs, pricing, and quantities, and therefore profits. Often they make a design-bid-build job feel like it is operating more like design-build, disrupting the predictable process essential to construction contracting and work. So, a contractor must properly understand and account for such specifications in bidding and performance. The following provides some considerations and measures general contractors can employ to protect their legal interests and business objectives when faced with contracts containing performance specifications.
Design and Performance Specifications
Specifications for construction projects come in primarily two types: design and performance. Design specs are a roadmap to the construction. They describe—often in precise detail—the materials the contractor must use, the quantities for such materials, the location and requirements for installing such materials, and certain measurements and tolerances. For example, for a water treatment facility, design specifications would require a specific type of water pump, the precise installation location, and its particular connection to other equipment. However, they stop short of directing a contractor’s means and methods—how a contractor performs its work, such as scheduling and manpower.
In contrast, performance specifications outline or set a standard or objective for the final construction, leaving the contractor to select the design, methods, and materials necessary to achieve that objective. Performance specs can even include how a project performs over time after construction has completed, as LEED energy efficiency standards illustrate. As an example, a performance specification for a water treatment facility may require certain flow rates and pressure standards for water systems, but leave it to the contractor to select the pumps, determine their installation, and create a system that meets these flow rates and pressure standards.
Each type of specification has inherent advantages and disadvantages. Design specifications ensure great precision and predictability. The owner has a very exact expectation of the finished product it will receive, and the contractor can determine with reasonable certainty the labor, materials, and equipment needed for the job. Conversely, because a contractor must comply with design specifications it cannot modify, should the contractor discover more effective or efficient means of construction as the project progresses, it cannot undertake such cost-savings work unless all parties agree in writing. Accommodating such changes requires going through an often slow and tedious change order process.
Performance specifications trade predictability for flexibility. Because the contractor determines the design, the contractor can explore different construction options and determine the most effective and efficient methods, thus delivering the best product at the best value. Also, the contractor can quickly and independently make small design changes to handle unforeseen developments. Despite these advantages, the contractor bears full responsibility for whether the project as designed and built meets the performance standards set, and thus, full responsibility for the costs to get the project right.
Project Delivery Methods: Design-Bid-Build v. Design-Build
The type of project specifications bear direct relationship to the project delivery method: design-bid-build (D-B-B), which typically relies on design specifications, or design-build (D-B), which uses primarily performance specifications. In a D-B-B project, an owner hires an architect or engineer to design the construction based on the owner’s instructions (or wishes). At the owner’s invitation, contractors review the design and submit bids to perform the work. The contractor awarded the project has the obligation to build according to that design, subject to owner-approved changes. Because a contractor needs only to follow the design, the owner and, of course, the designer have responsibility for any design problems.
The D-B model flips the D-B-B model on its head in some respects. Essentially, the owner contracts with one entity to perform the entire project, both its design and construction. The contractor will often form a design-build team to work together to understand the owner’s goals and complete construction accordingly. Because the contractor has control over project design, it bears responsibility for any design problems, a risk contractors need to consider in negotiating design-build jobs.
The D-B model creates synergies and efficiencies for contractors and owners. Unifying project design and construction under one team eliminates the tension between designer and contractor about causes of project failure. Also, design changes require a less formal process. On the other hand, design-builders need to allocate for extra costs should the project require multiple re-designs and re-constructions to achieve performance objectives. An owner may also find that a contractor employs a design that works to its advantage in terms of cost and efficiency, but not necessarily the owner’s. These advantages and disadvantages of either delivery method play a significant role in contractors’ expectations in entering a construction project contract, in particular, cost, time, planning, and profits.
How Specifications Can Make Design-Bid-Build Feel Like Design-Bid
Unfortunately, not all D-B-B projects use only design specifications, and not all D-B projects use just performance specifications. More often, contracts contain a mix of both. Although D-B-B projects feature mostly design specifications, they also rely on performance specifications. For example, in a wastewater treatment plant project, the contract would likely specify acceptable water pumps by size, type, makes, and models and delineate installation requirements—all design specifications. The contract may also require that water moving through the treatment system using such pumps achieve or deliver certain flow rates—a performance specification. Presumably, where the system does not deliver such flow rates, the contractor has breached the contract and must investigate and correct the problem, even if the system as constructed meets all design specifications.
Contractors faced with such situations typically turn to the project designer for assistance. Unfortunately, design professionals sometimes simply demand that builders comply with the contract, including the performance specifications. Doing so may require the contractor to redesign parts of the project, usually at the risk of increased costs—time, labor, materials—far beyond the builder’s expectations when entering the contract. Further, redesign to satisfy specific performance specifications may result in breaching certain design specifications. A design-bid-build project suddenly looks much more like design-build.
Courts’ Treatment of Specifications
Issues surrounding performance specifications have confounded courts as well. Some clarity came with the development of the Spearin Doctrine. Based on the Supreme Court’s holding in United States v. Spearin, the doctrine provides that plans and specifications provided by an owner or the owner’s designer carry an implied warranty of producibility (or accuracy). The designer implicitly guarantees that if the contractor follows the plans without deviation, the design will yield the intended building. That means that if in constructing the project a contractor follows the plans and specifications provided, that contractor satisfies its contractual obligations and would face no liability for design failures or other defects. Instead, the designer has that responsibility.
The difficulty comes when a contractor complies with the design specifications, but the project still fails to achieve the performance specifications, as the above water pump example illustrates. If the design specifications restrict the contractor so much that it no longer has sufficient discretion to meet design objectives, courts should find the contractor not liable under the Spearin Doctrine. Contractors, however, cannot rely on a court reaching this result in every instance. So contractors should look to proactive measures to manage and mitigate this risk.
How to Handle Performance Specifications
Contractors can manage the risks and potential liabilities of performance specifications during both the bidding process and once the project is underway.
At Bidding
- Identify Performance Specifications: In reviewing the contract and bidding documents, contractors should keep a keen eye for performance specifications, assess their cost implications, and modify the bid amount accordingly. Language that refers to measurable standards or testing requirements—such as flow rates and water pressure in a wastewater system—often indicate performance specifications.
- Seek Clarification: The pre-bid questioning period provides an excellent opportunity to resolve confusion and add precision to contract specifications. By taking advantage of this process, contractors can better understand and refine contract terms. In particular, questions about performance specifications should seek to make contractual language and, thus, expectations, as clear and precise as possible.
- Assess Cost and Factor Into Bid: Bid amounts should account for expected costs from an initial design failing to comply with performance specifications. Those costs should anticipate redesign, testing, and additional construction expenses.
During Performance and After
- Contract Review: Reviewing the proposed agreement should include identifying all performance specifications and preparing for potential related design and construction issues.
- Keep Written Records of Design Issues: Industry practices afford many ways to document design issues related to performance specifications. Contractors should make use of all those available, such as RFIs, meeting minutes, change order requests, correspondence, and email communications.
- Focus on Intent: Some legal commentators have suggested that rather than sorting specifications into design and performance buckets, courts should look at the contract’s overall intent about who has design responsibility—the designer (like in a D-B-B project) or the contractor (like in a D-B project). Confirming that intent in writing can help to resolve ambiguity in the contract.
- Determine Whether Performance Specifications Set Impossible Expectations: For contracts with a mix of performance and design specifications, design restrictions may rob the contractor of the necessary discretion to comply with performance specifications. That would allow the contractor to argue the owner cannot enforce such performance specifications. To provide the proper factual support for this argument, contractors should document how the design and performance specifications conflict as thoroughly (and as often) as possible and communicate that analysis to the owner and designer.
Performance specifications can cause confusion for both construction professionals and legal practitioners alike. The above provides only a general framework of this problem and some broad directives on how to handle this issue. Given some uncertainty in this area of the law, however, cases involving performance and design specifications are often resolved on a fact-specific basis. Further, what a contractor does on a project today can have consequences for future legal disputes. As a result, contractors faced with such issues should consult with their legal counsel for day-to-day advice with an eye toward litigation and the potential end-game resolution.
John A. Greenhall is a partner and Michael Metz-Topodas is an associate in the Construction Group at Cohen Seglias Pallas Greenhall & Furman, P.C.. They can be reached at (215) 564-1700 or jgreenhall@cohenseglias.com and mmt@cohenseglias.com.
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