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Reviewed Date: May 30, 2017
Legality of a Combination Design-Build Contract
MTAS was asked questions related to "design-build" proposals to convert a building to a city hall.
Knowledgebase-Legality of a Combination Design-Build ContractApril 22, 1996 You have the following questions related to "design-build" proposals to convert a building at the former Castle Heights Military Academy to a city hall: (1) Is the city council in violation of any state, federal or local laws or regulations if it accepts and votes on either proposal? (2) Could any member of the city council be held personally liable for voting to approve one of the proposals? In my opinion, the answer to question (1) is no. The answer to Question 1 renders Question (2) moot. Question 1 is predicated on the following documents you faxed to me: - "City Hall and Administration Building General Requirements" (Dated 1/26/96). - Memorandum from the Commissioner of Public Works to the Mayor/ Review Committee containing Castle Heights Main Proposal Comparisons (Dated March 13, 1996). - Proposed Ordinance No. 96-1459. - Minutes of Special Building Committee (Dated 2/7/96). Those documents indicate that the so-called Castle Heights proposal is a design-build proposal. Questions have been raised in some states about whether design-build contracts are legal within the framework of the municipal purchasing laws of those states. Apparently the state attorneys general in Kentucky, Virginia, Idaho, Indiana, South Carolina, and perhaps North Carolina and New York, have opined that design-build contracts are questionable under those states' governmental purchasing laws. [See Robert H. Buesing, "The Law Struggles to Keep Pace with the Trend of State and Local Government Experience With Design/Build," 11 Construction Lawyer, No. 4, Oct. 1991; Christopher C. Whitney, "An Evolving Perspective on Design/Build Construction: A View From the Courthouse," 15 Construction Lawyer, No. 2, Apr., 1995; Justin Sweet, Legal Aspects of Architecture, Engineering and the Construction Process, 5th Ed., West Publishing Co., St. Paul. Minn., 1994. Also see City of Lynn Haven v. Bay County Council of Registered Architects, Inc., 529 So.2d 1244 (Fla. App. 1988); Negley v. Lebanon Community School Corp., 362 N.E.2d 178 (Ind. App. 1977); J.F. Ahern Co. v. Wisconsin State Public Building Commission, 366 N.W.2d 679 (Wis. App. 1983); City and Borough of Juneau v. Breck, 706 P.2d 313 (Alaska. 1985); and Breck v. Ulmer, 745 P.2d 66 (Alaska 1987). ] I do not yet have a copy of opinions of those attorneys general, but based on the brief synopses of them found in Buesing, "The Law Struggles....," they are based on state laws that do not have an applicable counterparts in Tennessee law. The same is true of the above cases on the legality of design-build contracts. We will look at those cases momentarily. At this point it will be helpful to define the term "design-build" for the purpose of determining how design-build contracts are distinguished from traditional construction contracts, and why the design-build concept has generated the question of whether municipalities can enter into them: A Practical Guide to Tennessee Construction Law, 2nd Ed.: The "design and build" contract transforms the traditional scenario where the architect designs the project while the contractor performs the necessary construction, to a scenario in which one entity accomplishes both the design and construction of the project. The services of both the design and the construction of the project are incorporated into a single contract. The "design and build" entity is usually a large construction company which employs architects and engineers or retains them on a consulting basis. Other variations include architects and engineers and construction managers which offer design/build services and then subcontract the construction work to contractors. Another variation is the formation of a joint venture by an architectural firm and a contracting firm to perform the design/build work.... [At 4-5] Real Estate Law & Practice Course Handbook Series 261 Construction Contracts 1985: The basic idea of the Design Build arrangement is that a single party or a group of parties obligates itself to the Owner to produce the finished product from beginning to end. Although there are a myriad of variations, the two basic approaches to Design Build are Joint Venture Design Build Team and Design Build-Sole Contractor. [At 33] Sweet, Justin, Legal Aspects of Architecture, Engineering and the Construction Process, 5th ed., West Publishing Co., St. Paul, Minn. 1994: Transactions in which the architect or a contractor both designs and builds have become an important variation from the traditional methods of organizing for construction. D/B (design-build) can encompass at one extreme the homeowner building a single-family home patterned on a house that the builder has already built and at the other a large engineering company agreeing to both design and build highly technical projects, such as petrochemical plants. The former is likely to be a builder with an in-house architect on its staff or one that engages an independent architect where it is required by law that design be accomplished by a registered architect or engineer. At the more complex extreme, the designer/builder may employ a large number of construction personnel and licensed architects and engineers in-house to offer a total package for projects such as power plants, dams, chemical processing facilities, and oil refineries. Between these extremes, D/B is often used for less technical repetitive work such as warehouses or small standard commercial buildings. Organizationally, D/B has variations. One method is an architect promising to design and build and employing a contractor to execute the design. Because of the capital needed, a more common technique is the D/B to be a contractor who engages a design professional to create the design. Finally, a D/B can be a joint venture between a design professional and a contractor. [At 367] A variation of the design-build contract is the turnkey contract. It is said in Legal Aspects of Architecture, Engineering and the Construction Process, above, that:There are a great variety of turnkey contracts. At its simplest, the contract is one in which the owner gives the turnkey builder some general direction as to what is wanted and the turnkey builder is expected to provide the design and construction that will lead to the satisfaction of the express needs of the client. In theory, once having given these general instructions, the owner can return when the project is completed, turn the key, and take over. Many turnkey projects are not that simple. The instructions often go beyond simply giving a general indication of what is wanted. They can constitute detailed performance specifications. Also, the obligation to design and build may be dependent upon the owner furnishing essential information or completing work upon which the turnkey contractor relies to create the design and to build. Finally, the owner who has commissioned a turnkey project is not likely to remain away until the time has come to turn the key. As in design-build, the owner may decide to check on the project as it is being built and is almost certain to be making progress payments while the project is being built. The most important attribute of the turnkey project is that one entity both designs and builds.... Some turnkey contracts require the contractor not only to design and build the building but also to provide the land, the financing, and interior equipment and furnishings. As these definitions of design-build contracts indicate, under a traditional contract to acquire the Castle Heights administration building, the city would probably have first bought the property. The actual conversion of the building into a city hall would have entailed the city hiring an architect who would have designed the building for use as a city hall, following which it would have hired a construction contractor to effect the architect's design. However, the design-bid concept eliminates the separate hiring of an architect and of a contractor; one entity is responsible for the design and construction. In addition, under the turnkey concept, it may eliminate the separate purchase of property. In the case of the Castle Heights design-proposal, one entity will be responsible for all of the following: the acquisition of the property; the design of the building for a city hall; and the construction of the design. That concept raises the question of what bearing the Tennessee laws governing municipal purchases, including professional services, have on it. In my opinion, design-build contracts let by municipalities in Tennessee are clearly subject to the competitive bid requirements contained in the Municipal Purchasing Law found at Tennessee Code Annotated, section 6-54-301. Arguably that is not true where the proposed design-builder is an architect or an engineer, on the premise that Tennessee Code Annotated, section 12-4-106, prohibits the competitive bidding of professional services. However, I doubt the courts would construe that prohibition broad enough to embrace design-build contracts, because of the public policy supporting the competitive bidding statutes, and because the competitive bidding statutes are construed strictly against the government. [Computer Shoppe., Inc. v. State, 780 S.W.2d 729 (Tenn. App. 1989); Browning-Ferris Ind. v. City of Oak Ridge, 644 S.W.2d 400 (Tenn. App. 1982).] But we do not have to consider either of those issues further because of an exception found in the Municipal Purchasing Law that applies to your city. That law generally requires "public advertisement and competitive bid" for most municipal purchases made with municipal funds and costing over $2,500 (which can be raised to $5,000 by ordinance). The law contains certain important exceptions, one of which is for "Purchases by authorized officials in municipalities having charter provisions or private act requirements governing competitive bidding and purchasing." [Tennessee Code Annotated, section 6-56-301 and 302.] Your City Charter contains such a provision; Article XII, Section 3, provides that: Section 3. Sealed bids required for certain purchases. Be it further enacted that all purchases of equipment or materials in excess of Two Thousand Five Hundred Dollars ($2,500) shall be let to the lowest and best bidder upon sealed bids. [ch. 685, art. XII, sec. 3, pr. acts of 1929, as amended by ch. 1, pr. acts of 1929 (Extra Session); ch. 410, pr. acts of 1949; and ch. 330, pr. acts of 1974, sec. 1.] That provision is unquestionably a competitive bidding and purchasing requirement. It covers only materials and equipment; however, there is no requirement in the Municipal Purchasing Law that the competitive bidding and purchasing requirement in the charter be all inclusive. It clearly says only that, "This part [The Municipal Purchasing Law] shall not apply to purchases by authorized officials in municipalities having charter provisions or private act requirements governing competitive bidding and purchasing." It is the law in Tennessee that absent a statutory requirement reflected in a general law, private act or ordinance, a governmental entity is not required to make purchases by competitive bidding. [See City of Alcoa v. Ingram, 546 S.W.2d 809 (Tenn. Ct. App. 1976); State ex rel. Britton v. Wilson, Unpublished opinion, Tenn. S. Ct., August 3, 1987.] While competitive bidding requirements are construed strictly against the government, that doctrine does not negate the authority of the state to create a statutory exemption from such requirements. The cases on the legality of design-build contracts under state municipal purchasing laws are interesting, but do not appear helpful in construing Tennessee's statutes governing municipal purchasing, including the purchase of professional services. In Lynn Haven, the city decided to build a public safety building costing $120,000. It obtained a set of blueprints from a private contractor and invited bids on the project. The bid instructions provided that the successful bidder would have to provide architectural drawings for the project. The Court upheld an injunction issued by the trial court prohibiting the city from letting the contract. Florida's Consultant's Competitive Negotiation Act (CCNA) required cities directly seeking architectural (or other professional) services to publicly announce in a uniform and consistent manner that architectural services were required for public construction contracts, to competitively select an architect from no fewer than three architectural firms deemed to be the most qualified to perform architectural services for the construction contract in question, and to negotiate a contract with the most qualified architectural firm that was fair, competitive and reasonable. The Court noted that the city admitted that it could not directly obtain an architect to design the public safety building without complying with the CCNA, and held that the city could not do indirectly what it could not do directly. In support of its holding, the Court cited the legislative intent contained in the CCNA, which was "an intent to further open competition which is a basic tenet of public procurement; to reduce the appearance and opportunity for favoritism; and to ensure that contracts are awarded equitably and economically." [At 1246] [Florida changed its competitive purchasing laws as a result of this case. Municipalities in that state are now statutorily authorized to enter into design-build contracts.] The problem with applying this case to the purchase of architectural services by a municipality in Tennessee through a design-build contract is the dissimilarity of the Florida and Tennessee statutes providing for the municipal procurement of architectural (and other professional) services. The Florida CCNA expressly provided for the competitive bid of such services, prescribed an elaborate set of steps for such competitive bids, and contained an express statement of legislative intent. Tennessee Code Annotated, section 12-4-106 expressly prohibits the competitive bid for such services, providing that: (a) Contracts by counties, cities, metropolitan governments, towns, utility districts and other municipal and public corporations of the state, for legal services, fiscal agent, financial advisor or advisory services, educational consultant services, and similar services by professional persons or groups of high ethical standards, shall not be based on competitive bids, but shall be awarded on the basis of recognized competence and integrity. The prohibition against competitive bidding in this section shall not prohibit any entity enumerated from interviewing eligible persons or groups to determine the capabilities of such persons or groups. (b) Any person providing fiscal agent, financial advisor or advisory services to any county, city, metropolitan government, town, utility district or other municipal or public corporation shall perform such services only pursuant to a written contract to be entered into prior to, upon or promptly after the inception of the relationship, specifying the services to be rendered, the costs therefor, and the expenses to be covered under such contract. That statute prescribes no procedures for broadcasting an announcement that architectural services are required, or that the architect be competitively selected from a group of candidates. Such services are only to be obtained by written contract, "entered into prior to, upon or promptly after the inception of the relationship, specifying the services to be rendered, the costs therefore, and the expenses to be covered under such contract." No express legislative intent is found in that statute; however, its language suggests a legislative intent different from the express intent found in the Florida CCNA. The express intent of the Florida CCNA was to foster open competition, reduce the appearance and opportunity for favoritism, and to ensure that contracts were awarded equitably and economically. Tennessee Code Annotated, section 12-4-106, on the other hand, is anti-competitive, requiring only that contracts for professional services be awarded on the basis of "recognized competence and integrity." It does not appear to represent a statutory scheme requiring that it apply to a city's procurement of an architect through the indirect means of a design-build contract. The same result is reached even when Tennessee Code Annotated, section 12-4-106, and Tennessee Code Annotated, section 62-2-107, are read together. The latter statute provides that:(a) Neither the state, nor any county, city, town or village or other political subdivision of the state, shall engage in the construction of any public work involving architecture, engineering or landscape architecture for which the plans, specifications and estimates have not been made by a registered architect, registered engineer, or registered landscape architect [(b)unless the project costs less than $25,000 and does not alter the structural, mechanical, or electrical system of the project]. Nothing in that statute appears to require that the architect, engineer, or landscape architect who does design work on public works projects be the architect, engineer, or landscape architect directly employed by the city. One of the disadvantages of the design-build contract cited by construction law experts is that the architect or engineer is not the city's architect or engineer, and for that reason may be more committed to his or his employer's interest than to the city's interest. However, that is a disadvantage that has to be weighed against the advantages of a design-build contract, and in Tennessee does not appear to go to the question of whether design-build contracts comply with municipal purchasing laws. In any event, your city did not call for competitive bids for the Castle Heights project, and by extension did not call for competitive bids for architectural services associated with that project. The city's call was for proposals for a "turnkey" project. As pointed out above, under Article XII, Sec. 3, in your City Charter, the city would not have been required to competitively bid the Castle Heights project even had it been a traditional construction project, and is not required to bid the Castle Heights project as a design-bid project. In Negley, the design-build contract for a school building would have been held illegal under Indiana's municipal competitive bidding law had the entity which built the school been covered by the law. That law required various municipal entities, including school corporations, "to adopt plans and specifications and award a contract for such public work or improvement to the lowest and best bidder who submits a bid for the performance thereof." That statute, said the Court, "clearly requires school corporations, in constructing school buildings at the public's expense, to submit plans and specifications for competitive bids and to accept the lowest and the best bid." [At 181] However, said the Court, the entity was not a school corporation and was not otherwise an entity covered by the statute. That case is not helpful with respect to design-build contracts contemplated by Tennessee municipalities because there is no comparable provision in Tennessee Code Annotated, 6-56-301 et seq., or Tennessee Code Annotated, section 12-4-106, or Tennessee Code Annotated, section 62-2-107, or in any other statute. Negley declared that the statute at issue required municipalities to adopt plans and specifications on the front end of a public works project, then to award the contract for public works project. That arrangement is, as far as I can determine, neither expressly nor impliedly required in Tennessee law. City of Juneau and Breck arise from the same case; the Court denominates them Breck I and Breck II. Breck was a pro se plaintiff in both cases. In Breck I, the City of Juneau let a design-build contract for over $5 million for a parking garage and marine park. After the design-build proposals were solicited, but before a contract was let, Breck appeared nine times before city council alleging that the design-build method violated a provision of the Juneau City Charter requiring "contracts for public improvements for an amount estimated to exceed fifteen thousand dollars shall be by competitive sealed bid and be awarded to the lowest qualified bidder." The charter provided for two exemptions: (1) "contracts involving the obtaining of professional services such as, but not limited to, services rendered by architects, attorneys, engineers, and other specialized consultants," and (2) "Where calling for bids on a competitive basis is unavailing or impossible...." In spite of Breck's protests, the design-build contract was let to the highest bidder. Four months after the contract was let, and after approximately 40 per cent of the project was complete, Breck sued. The trial court granted Breck an injunction, stopping the project. The Supreme Court of Alaska overturned the injunction, holding that Breck's delay in bringing suit was unreasonable and represented Laches. There is no hint in Breck I in which direction the Court would have gone on the question of whether the design-build contract violated the city's charter. In Breck II, Breck sought to hold the Juneau city council members who let the design-build contract personally liable for payments made in violation of the city charter requirement that contracts be competitively bid. Another provision of the charter declared that officers and employees of the city who knowingly authorized or made payments in violation of the charter would be jointly and severally liable for the fill amount paid. The Court held the city council members were acting within the scope of their authority and exercising a discretionary function, and thus entitled to qualified immunity for their decision in awarding the design-build contract to the highest bidder, because their conduct did not violate clearly established law. The assistant city attorney had advised the council that the design-build or turnkey method of procurement was defensible under the professional services procurement exemption. The problem with Breck I and Breck II is that neither contain much of a hint of how the Court would have ruled on the question of whether the design-build contract violated the competitive bidding law. The Court said that, "At the time of the contract award in May 1984, no case law existed interpreting the CBJ charter, CCBJ Chapter 53.50, or the equivalent state law provision." [At 73] I find no evidence that those provisions have been subsequently interpreted. But a ruling either way would not have had much precedential value for your city's design-build proposal. As repeatedly pointed out above, your city is exempt from Tennessee's Municipal Purchasing Law because of Article XII, Section 3, of its charter. For that reason, we need not even reach the question of whether Tennessee Code Annotated, section 12-4-106, would have exempted the city from that law had Article XII, Section 3 not been in the charter, although I am convinced that it would not have done so because competitive bid laws are construed strictly against the government. Finally, in A.J. Ahern, the state waived the competitive bidding requirements for several office buildings in favor of design-build contracts. The plaintiff, an unhappy contractor, challenged the waiver, pointing to a statute that provided: No state board, agency, officer, department, commission or body corporate shall enter into a contract or agreement for the construction, reconstruction, remodeling or addition to any building ... which involves a cost in excess of $15,000 by any means whatsoever, without completion of final plans. [The court's emphasis.] The Court declared that the term "final plans" could mean final architectural plans, or final plans consistent with the construction process used, and held that the term meant the latter. The truth is, the state was probably very lucky on that point; clearly, the Court wanted to bend over backwards to support the design-build concept. The state was statutorily entitled to waiver competitive bidding requirements whenever the building commission "determines that the use of innovative types of design and construction process will make better use of the resources and technology available in the building industry...." The unhappy contractor also argued that the state should not have granted the waiver. The design-build concept met the innovative design and construction test, held the Court. Neither the Municipal Purchasing Law or any other statute contains a "no contract before final completion of plans" provision. It is my opinion that design-build contracts on the part of municipalities in Tennessee are legal. However, generally they are required to be competitively bid under the Municipal Purchasing Law. However, Article XII, Section 3, in your City Charter exempts your city from the competitive bid requirements of that law with respect to the Castle Heights project. Sincerely, Sidney D. Hemsley Senior Law ConsultantSDH/