Managing Enhanced Risk in the Mega Project Era (2022)

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52 NCHRP LRD 86 Excerpt 36 – Incentives and Disincentives I-15 Express Lanes, UDOT Bidding Contract Time Section 1.7. Incentives/Disincentives related to Time A. Contract time related charges are determined by multiplying the number of calendar days accrued for each time segment by its corresponding time related cost rate and summing the products. … D. Incentive. 1. e Contractor is eligible for incentive when a milestone is achieved before the number of calendar days bid as determined by the Department. 2. Payment is made at the rate shown in column D for the dierence between the number of calendar days bid and the actual number of calendar days used to achieve the milestone when Column E is dened as “User Cost.” F. Liquidated Damages 1. Liquidated damages are assessed according to Section 00555 for the dierence between the number of maximum calendar days from Column G and the actual number of calendar days used to achieve the milestone. G. Timeline of Incentive, Disincentive, and Liquidated Damages. Refer to Figure 1. C. Post Award is section addresses certain risks and respective contract provisions associated with the post-award phase or implemen- tation phase. ese include liability for design defects, types of damages and provisions limiting damages, changes, including diering site conditions, force majeure events, changes in law, dis- covery of archaeological, paleontological, or cultural resources, and discovery of threatened and endangered species, and related clauses, litigation risk and dispute resolution provisions, risk of suspensions and terminations and relevant provisions, and nally, operation and maintenance (O&M) related risks.153 1. Design Liability Provisions a. Standard of Care Before delving into the nuances of size and project delivery methods, it is important to address the design professional’s 153 See, Loulakis, NCHRP LRD 68 supra note 72 for supplemental information regarding a number of these issues.

NCHRP LRD 86 53 Excerpt 37 – Incentives and Disincentives I-69 Major Moves, INDOT & Indiana Finance Authority 17.2.1 Lane Closures at times and locations not consistent with the requirements of the PPA Documents result in trac obstructions, inconvenience to the public and delay of vital commerce, and increased risk to highway users. All of these consequences result in direct and indirect nancial impacts to IFA, road users, businesses, communities, and taxpayers. ese impacts are not readily calculable and therefore, the Parties agree 0Section 17, Design-Build Contractor shall be liable for and pay to IFA liquidated damages in the amounts set forth in Table 10-1 of Exhibit 10 (“Prohibited Construction Closures Liquidated Damages”) for any Prohibited Lane Closures. e timelines set forth in Table 10-1 of Exhibit 10 shall commence as of the event and no notice is required nor cure period allowed.* Excerpt 38 – Incentives and Disincentives Project Neon, NDOT Appendix 23, Section 1.1 If design-builder achieves the US-95 Interim Milestone Completion in accordance with Section 1.1.6 of the Technical Provisions in less than 300 calendar days from initial Permitted Construction Closure for US 95 Department Project Infrastructure pursuant to Section 12.4.3.2 of the Technical Provisions (“Interim Milestone Completion Duration” for the US-95 Department Project Infrastructure), design-builder will be entitled to receive $97,000.00 per day for each day in advance of the Interim Milestone Completion Duration, up to a maximum aggregate amount of Interim Milestone Completion Incentive Payments for the Interim Milestone under this Section 2.1(b) of Appendix 23 of $5,820,000.00. 12.5.2 For the purpose of this Section 12.5, satisfactory completion shall have been accomplished when: (a) the Subcontractor has fullled the Subcontract requirements and the requirements under the DBA Documents for the subcontracted Work, including the submission of all submittals required by the Subcontract and DBA Documents; and (b) the Work done by the Subcontractor has been inspected and approved by DB Contractor and the nal quantities of the Subcontractor’s Work have been determined and agreed upon. standard of care. e standard of care for design professionals in the United States is well established by common law, which generally requires that, absent a contractual agreement to apply a dierent standard, professional services must be performed using the ordinary care exercised by similarly situated design professionals, on the same type of project, at the same time and place, under similar circumstances and conditions. Unlike con- tractors, design professionals do not typically guarantee that their services will be perfect or without errors. is common law standard governs a design rm’s liability for professional services rendered in connection with a DBB project, where the owner contracts directly with the designer. Under a contract for construction of a DBB project, the owner typically warrants to the contractor that the plans and specications will result in the intended outcome and the owner is responsible for any defects in the design pursuant to the Spearin doctrine.154 As the designer hired by the owner is only liable for breaches of the standard of care, if the plans and specications include a defect that was not caused by a breach of the standard of care, the owner is exposed to liability for that defect. In addition, the owner takes the risk of the interface be- tween the designer and contractor, which can lead to defects that are not readily identiable as either caused by faulty design or faulty construction. Essentially, the owner is taking on this liability gap. Even if the defect is clearly caused by a breach of the standard of care by the designer, the owner will be liable to the contractor for errors in the design but will only be able to recover those losses from the designer that result from a failure to perform services in accordance with the prescribed standard of care. 154 United States v. Spearin, 248 U.S. 132, 39 S. Ct. 59, 63 L. Ed. 166 (1918).

54 NCHRP LRD 86 the design-builder. Having a single point of responsibility trans- fers the interface risk between D&C work and eliminates the nger pointing that can occur between the designer and con- tractor on a DBB project. One of the benets of the DB and P3 delivery methods is the shi of the risk of D&C defects to the design-builder. Accordingly, the owner should not bear the in- terface risk and the liability gap. Insurance companies are will- ing to provide professional liability policies that cover design services at a higher standard of care depending on the design rm and project. Any owner losses due to defects in the work that are not covered by insurance will be the responsibility of the design-builder, which is typically a dierent entity than the de- sign rm. Without the risk shi, the owner would essentially be responsible for the interface risk and liability gap. Nevertheless, this approach is problematic for design rms as design-builders typically seek to transfer the risk to the design rms without a commensurate increase in compensation. A number of the DB and P3 projects surveyed for this legal digest include in their agreements a higher standard of care. e common law standard of care is set forth in the Design-Build Institute of America (DBIA), Standard General Conditions of the Contract between Owner and Design-Builder, which provides, “[t]he standard of care for all design professional services per- formed to execute the Work shall be the care and skill ordinar- ily used by members of the design professional practicing under similar conditions at the same time and locality of the Project.”158 e design-builder assumes signicant design liability in DB contracts, while the owner sheds signicant risks. Whether problems are caused by design defects or defective construction, the design-builder is responsible. e design contracts associated with DBB projects surveyed are subject to the generally accepted standard of care. However, of the approximately 18 DB projects surveyed in 13 jurisdic- tions, 13 required that design work be free from defects, subject to certain carve-outs. ere are various nuances with respect to the standard of care for design professionals. Some of these nu- ances are reected in the contract documents for the projects surveyed. For example, the DB agreement for the TxDOT SH 360 Project includes the provision in Excerpt 39 providing for a heightened standard of care while recognizing the Spearin doc- trine’s limitation on an owner’s ability to transfer design liability for prescriptive specications provided by the owner. Excerpt 40 shows an example of contractual language pro- viding for a more traditional standard of care that may be found in the DB agreement for the CDOT C-470 Tolled Express Lanes Segment 1 DB Project. 158 DBIA Document No. 535, Standard Form of General Conditions of Contract Between Owner and Design-Builder, section 2.3.1. (2010 ed.). See also, Loulakis, NCHRP LRD 68, supra note 72, at Section II (“Principles of Construction and Design Liability”) and Section III (“DB Contract Clauses Aecting Liability”), which provide a robust discussion of the standard of care and various clauses utilized in previous projects that impact design liability, as well as a case law review on reported decisions that elaborate on the rights and responsibilities of the parties to DB contracts during design development. e Spearin doctrine provides a basis for DBB and CM/GC contractors to make claims against the owner for construction problems arising from defects in design. It also provides a po- tential defense for a DBB or CM/GC contractor facing a con- struction defect claim.155 For projects using the CM/GC delivery method, the construction manager assists with the design por- tion and is oen involved in development of the project’s plans and specications. is may make it more dicult for the con- tractor to rely on Spearin.156 e Spearin doctrine may also provide a defense to design- builders with respect to owner claims alleging design defects, to the extent that the owner provided prescriptive specications or interposed itself in the design process.157 b. Size and Complexity e size and complexity of projects may increase the risk of design errors and liability. erefore, it stands to reason that the standard of care may be more highly negotiated for complex mega projects. Although there was no clear direct correlation between the size and complexity of the projects reviewed and the standard of care required for design services on such projects, the project delivery method was found to be a factor. erefore, the fact that most of the larger and more complex mega projects were delivered through alternative delivery methods led to an indirect correlation between the size and complexity of the proj- ect and the standard of care. c. Project Delivery Method Perhaps the greatest factor dierentiating the standard of care for professional services is the project delivery method. Alterna- tive delivery contracts may include a higher standard of care for the performance of professional services. e higher stan- dard of care oen requires the work, including design services, to be free of defects. is higher standard of care has become more controversial in recent years. As insurance markets have changed, design rms have found that they may not be able to obtain insurance coverage for design services that are required to be performed with the higher standard of care. is leaves them with the option of facing potentially devastating liability for design defects or foregoing participation in the project. Con- tractors, who generally seek to transfer the risk of design liability to the design rm, may nd that they need to retain some of the design liability risk in order to recruit qualied design rms to participate on their teams. Owners, on the other hand, contend that under a DB or P3 contract, the owner procures a team to design and construct a turnkey project. As such, the owner is relying on the design- builder as an expert to provide a project that is not defective and works as intended. e owner does not contract separately or directly with the design rm, rather the owner contracts with 155 Jeremy Neilson, Application of the Spearin Doctrine in the Context of IPD, 37 Constr. L. 30 (2017). 156 Nathan R. Sellers, Do Construction-Manager-at-Risk Contracts Alter the Spearin Doctrine? (Fabyanske, Westra Hart & ompson, Feb. 4, 2016). 157 See, Loulakis, NCHRP LRD 68, supra note 72, at 6, 47-49.

NCHRP LRD 86 55 Excerpt 39 – Standard of Care SH 360 Project, TxDOT DB Contractor shall furnish all aspects of the Work and shall construct the Project and/or Utility Adjustments included in the Work as designed, free from defects (except to the extent that such defects are inherent in prescriptive specications required under the DBA Documents) and in accordance with: (a) Good Industry Practice, (b) the requirements, terms and conditions set forth in the DBA Documents, (c) the Project Schedule, (d) all Laws, (e) the requirements, terms and conditions set forth in all Governmental Approvals, (f) the approved Project Management Plan and all component plans prepared or to be prepared thereunder, (g) the Safety and Health Plan, and (h) the Construction Documents, in each case taking into account the Project ROW limits and other constraints aecting the Project. For P3 projects, the private sector accepts long-term main- tenance obligations and strict performance requirements which may eectively place the liability for design defects on the de- veloper, regardless of whether the standard of care is specied. In addition, P3 contracts oen include handback provisions that require the developer to ensure the project meets certain performance requirements when maintenance of the project is returned to the owner at the end of the term. Nevertheless, many but not all of the P3 projects surveyed include a “free from defects” standard of care for design services. d. Legislation Some states have mandated through legislation particular standards of care for specied types of contracts, likely the re- sult of lobbying by design rms facing potential increased liabil- ity due to pass-through clauses in their contracts with design- builders. In 2019, the Texas legislature codied the standard of care for engineering services provided for transportation proj- ects, thus putting to rest arguments over the standard of care based on a long line of Texas case law distinguishing Spearin. Section 474.004 of the Texas Transportation Code provides: Sec. 474.004. ENGINEER’S OR ARCHITECT’S STANDARD OF CARE. A governmental entity may not require that engineering or architectural services be performed to a level of professional skill and care beyond the level that would be provided by an ordinarily prudent engineer or architect with the same professional license and under the same or similar circumstances in a contract: (1) for engi- Excerpt 40 – Standard of Care C-470 Tolled Express Lanes Segment I DB Project, CDOT e Contractor shall furnish the design of the Project and all engineering services required therefore in accordance with the skill, prudence, judgment and diligence as like situated members of the engineering profession commonly possess and exercise (but at least meeting the terms, conditions and requirements of the Contract Documents), and shall construct the Project as designed, in a good and workmanlike manner, free from defects, and in accordance with the terms and conditions set forth in the Contract Documents. neering or architectural services; or (2) that contains engineering or architectural services as a component part.159 It is noted that the contracts for the Texas projects included in the survey, which predate the 2019 legislation, require the higher “free from defects” standard of care for design services. e. Summary Recommendations It is imperative that proposed design rms and design key personnel are qualied and thoroughly vetted by the owner. As a strategy for managing the risk of design defects on alternative delivery projects, project owners should consider implement- ing a two-step procurement process and including submittal requirements and evaluation criteria in the RFQ that empha- size the experience and qualications of the design rm and its personnel. Design agreements entered into in connection with DBB projects should be subject to and include the general stan- dard of care requiring design services to be performed with the care and skill ordinarily exercised by similarly situated design professionals, on the same type of project, at the same time and in the same place, under similar circumstances and conditions. To transfer the risk of defects in the work to the private sec- tor, including the interface risk and liability gap, transportation agencies should consider requiring a higher standard of care for design services in connection with alternative delivery projects, if feasible. is requires an analysis of legislative constraints, as 159 Engineer’s or Architect’s Standard of Care, Tex. Transp. Code § 474.004 (2021),

56 NCHRP LRD 86 ages provision to be enforceable. First, the amount specied in the contract must be an estimate of anticipated damages caused by the breach of contract and must have been reasonable at the time the estimate was made.161 Neither the purpose nor amount of liquidated damages may be considered punitive, or the liqui- dated damages may be determined to be an unenforceable pen- alty. Second, at the time the liquidated damages are established, the damages from the breach of the contract must be suciently uncertain or dicult to quantify such that the injured party may not be able to obtain adequate relief. Perhaps the most common use of liquidated damages in construction contracts is for completion delays. Because the amounts of liquidated damages are typically included in the bid documents, the contractor will know, when preparing its bid, the amount of damages for which the contractor will be liable to the owner in the event of delays to completion of the project that are the contractor’s responsibility. In the event a delay to completion for which the contractor is responsible occurs, the contractor will owe the specied liquidated damages regardless of whether the owner’s actual damages are greater, thus limit- ing the contractor’s liability for the delay. Another advantage of including liquidated damages for completion delays by the contractor is that such provisions are oen specied as the sole remedy for the default, which permits the contractor to pay liq- uidated damages while completing the project without fear of being terminated for default. e potential amount owed for liq- uidated damages for a specied breach may be further limited by an aggregate cap. If a liquidated damages provision is in the form of a per-day amount, contractors will negotiate lower daily charges or cap the total amount of liquidated damages that can be assessed in order to limit their liability.162 For example, the contract documents for several projects surveyed provide that daily liquidated damages for project completion delays are capped at 365 days. At the end of the 365 days, the owner will need to decide whether to permit the contractor to complete the project without assessing any further liquidated damages or whether to terminate the con- tractor and procure a replacement contractor to complete the work. An example of a contract that includes caps on liquidat- ed damages is that for the WSDOT Alaskan Way Alternative (SR 99) Bored Tunnel Alternative DB project. e contract for that project includes provisions respecting various types of liquidated damages, including liquidated damages for delayed completion, liquidated damages for failure to open lanes when required, and liquidated damages for failure to meet various contract milestones. e daily amounts of liquidated damages for delayed completion are separately capped at two years, and 161 California statutes provide that the amount must not be “manifestly unreasonable” under existing circumstances at the time the contract was entered into. Time for completion of work; Liquidated damages for delay; Bonus for early completion, Cal. Pub. Cont. Code § 10226 (2021). 162 James R. Artzer, Limitations of Liability: Take on the Project but Don’t Bet the Company, ConsenSusdocs (Mar. 27, 2019), https://www. consensusdocs.org/limitations-of-liability-take-on-the-project-but- dont-bet-the-company/. well as market factors, including the availability of professional liability insurance to cover design services for the project given the mix of bidders. 2. Provisions Limiting Contractor and Owner Liability With mega projects that carry large price tags comes poten- tial exposure to large risks of loss, both for the owner and the contractor. Contractors that bid on mega projects are typically large corporate entities that have boards of directors determin- ing which opportunities to pursue and whether any particular project opportunity is too risky. Such contractors may decline to bid on projects where the risk of potential liability is unlimited. As public entities, owners of transportation projects answer to the public and have a desire to be scally responsible with re- spect to the use of public funds. e parties are best positioned at the beginning of the project to manage expectations and allo- cate the risk of losses through clauses that are intended to limit the liability of one party to the other. a. Types of Limiting Clauses ere are a number of dierent contractual mechanisms or types of clauses that limit the liability of one party to another in a contract. In the mega project era, various types of damage lim- iting clauses have become more prevalent, including liquidated damages provisions, limitation of liability clauses, no damages for delay clauses, and waivers of consequential damages. Each mechanism operates dierently but all serve the same purpose: to lower the risk of unlimited losses by the parties. Each state has varying laws related to damages clauses. However, there are cer- tain requirements which must be met for limitations on dam- ages provisions to be upheld in courts. Liquidated damages. Liquidated damages are agreed-upon amounts specied in a contract that will be paid by one party to the other as damages for a specic breach of contract. Typically set at the time of contract formation and specied in the con- tract, liquidated damages represent the parties’ estimate of the amount of damages that will be suered by the non-breaching party for the specied breach.160 ere are several advantages to including liquidated damages for certain types of breaches. One advantage is that it provides the parties with more predict- ability regarding the amount of damages that may be owed for the breach than in cases where the damages are not specied up-front. Another advantage is that the owner is not required to prove actual damages aer the occurrence of the breach, po- tentially saving both parties time and the cost of litigating actual damages. Finally, it benets both parties to be able to negotiate an acceptable amount without leaving the decision up to a dis- pute resolver. While the nuances may vary in dierent jurisdictions, two general requirements must be met in order for a liquidated dam- 160 Wesley C. Zech, Clark B. Bailey & Larry G. Crowley, Robust Determination of Liquidated Damage Rates for State Highway Agencies, 2081 Transportation Research Record: Journal of the Transportation Research Board of the National Academies of Sciences, Engineering, and Medicine, 66-73, (2008).

NCHRP LRD 86 57 Excerpt 41 – Liquidated Damages Alaskan Way Viaduct (SR 99) Bored Tunnel Alternative DB Project, WSDOT Cap On Liability for Liquidated Damages In no event will WSDOT assess Liquidated Damages in excess of $75,000,000. Excerpt 42 – Limitation of Damages Grand Parkway Segments F1, F2 and, G Project, TxDOT Notwithstanding any other provision of the Contract Documents, to the extent permitted by applicable Law, TxDOT will not seek indemnication and defense under Section 18 (Indemnities) or to recover damages from Developer resulting from breach of this Agreement (whether arising in contract, negligence or other tort, or any other theory of law) in excess of the sum of: (a) all those costs reasonably incurred by TxDOT or any Person acting on TxDOT’s behalf in completing or correcting the Work or having the Work completed or corrected by another Person, including the cost of the work required or arising under the Warranties; (b) an amount equal to $100,000,000 (which amount shall specically include any Liquidated Damages paid pursuant to this Section 17); (c) any amounts paid by or on behalf of Developer which are covered by insurance proceeds; and (d) all Losses incurred by any Indemnied Party relating to or arising out of any illegal activities, fraud, criminal conduct, gross negligence or intentional misconduct on the part of any Developer-Related Entity. the contract includes an overall cap on all liquidated damages of $75 million. (See Excerpt 41.) Delays to project completion are not unusual, and extended delays result in signicant liability for the contractor, especially on mega projects. While not capping overall liability, limiting the total amount of liquidated damages for which the contractor may be liable is one of the more signicant risks faced by the contractor. Limitation of liability clauses. A limitation of liability clause caps the contractor’s liability to the owner in the event of a breach. is cap may be a single set number or a collection of damages, including items such as a cap on the amount of liq- uidated damages. It may also exclude certain types of damages from the cap, such as costs to complete the work, indemnity ob- ligations, losses covered by insurance, and damages due to gross negligence or fraud. Since a surety’s obligations with respect to completion of the project are derivative of the principal’s, any limitation of liability clause that does not include a carve out for costs to complete the work will limit the surety’s obligation to complete the project in the event of a contractor default. While a limitation of liability clause limits the contractor’s liability to the owner, the limitation of liability does not limit the liability of the contractor to third parties or limit the contractor’s risk of loss on the project, such as cost overruns or extended overhead arising from delays. Excerpt 42 shows a sample limitation of liability provision taken from the TxDOT Grand Parkway Segments F-1, F-2, and G project. Excerpt 43 shows a sample of a limitation of damages provi- sion regarding failure to open lanes in the NDOT Project Neon contract. No damages for delay clauses. Another way to limit liability is through a no damages for delay clause. is provision prohib- its contracting parties from recovering nancial losses suered due to project delays. No damages for delay provisions usually protect the owner from claims made by contractors, where it may be otherwise unclear whether the owner will be obligated to compensate the contractor for such damages as the result of delays due to waivers of consequential damages. While the contractor may be entitled to schedule relief, the contractor will assume the nancial risk of extended overhead ineciencies and other delay damages in the event of the occurrence of an unforeseen event that delays completion. In that sense, the no damages for delay provision is a risk sharing mechanism. is provision can be controversial, particularly where it purports to limit delay damages for owner-caused delays. Such a limita- tion on owner-caused delays may not be enforceable in some jurisdictions. Waivers of consequential damages. Mutual waivers of con- sequential damages are a common limitation of liability in pri- vate sector construction contracts and are also commonly seen in mega contracts for transportation projects. Such provisions prevent a party from seeking consequential damages from the other party in a dispute and can prevent potentially unlimited liability by a party that breaches the contract. Direct damages, also known as compensatory damages, are damages that directly result from the breach of contract, such as the cost to repair defective work, and are recoverable for a breach of contract. Consequential damages, also known as special damages, are losses or injuries that indirectly result

58 NCHRP LRD 86 Excerpt 43 – Limitation of Damages Project Neon, NDOT Appendix 19, Limitation of Damages for Failure to Open Lanes from a breach of contract. Classic types of consequential dam- ages include lost prots, lost revenue, and loss of use. Unlike direct damages, consequential damages may not be recoverable for a breach of contract. Consequential damages will only be recoverable if they were proximately caused by the breach of the contract and they were reasonably foreseeable or within the contemplation of the parties at the time of contract formation.163 Furthermore, a higher standard of proof is required to prove consequential damages. Because proving foreseeability and rea- sonableness of damages caused by the breach of the contract is very dicult, consequential damages are oen not recoverable in contracts. e unpredictability of an award of consequential damages has led to mutual waivers of consequential damages becoming common practice in private sector contracts and transporta- tion sector alternative delivery mega projects. Contracts typi- cally include a general waiver of consequential damages, along with a non-exhaustive list of specic types of consequential damages that are included in the waiver, and any exclusions from the waiver.164 Because liquidated damages specied in the contract may include an estimate of certain indirect damages, the waiver of consequential damages should expressly carve out any liquidated damages that include loss of revenue, loss of use, or other consequential damages from the waiver. Other carve-outs from the waiver may include losses that are covered by insurance, the contractor’s indemnities, losses arising out of the contractor’s release of hazardous materials and losses arising out of fraud, intentional misconduct, recklessness, and gross negligence on the part of the contractor. Excerpt 44 pro- vides the waiver of consequential damages provision included in the PennDOT Rapid Bridge Replacement project contract, 163 Alex Benarroche, Consequential Damages Can Create Extensive Liability for Construction Businesses,  LEVELSET (last updated Sept. 22, 2020), https://www.levelset.com/blog/consequential-damages/. 164 Kevin P. Walsh, Identifying and Mitigating the Risks Created by Problematic Clauses in Construction Contracts, J. Leg. Aff. Dispute Resolut. Eng Constr., ASCE, 9.3 (May 4, 2017). which follows best practices of expressly excluding certain types of damages that might otherwise be considered conse- quential in nature b. Size and Complexity e extensive size and complexity of mega projects will in- evitably lead to delays in various activities during the prosecu- tion of the project, as well as the occurrence of unforeseen cir- cumstances that could jeopardize a contractor’s ability to meet project completion deadlines. Due to the sheer size of mega projects and project costs, it is common to include limitations on the parties’ liability to one another. Limitation of liability clauses, such as mutual waivers of consequential damages, no damages for delay, and caps on liquidated damages, are some- times viewed as a necessity for larger and complex transporta- tion projects due to the signicant cost and nancial obligations of these contracts. c. Project Delivery Method In traditional DBB projects, where the contractor builds the project based on the design of the owner’s hired design team, the design team is typically liable to the owner for errors in design. Because of this, most design rms will not operate without a limitation of liability, oen based on their anticipated prot, as well as a waiver of consequential damages, in addition to relying on a professional liability insurance policy.165 Within alternative delivery methods, risks will be shied to dierent parties. None- theless, limitations of liability are a risk sharing mechanism that will help manage risks, regardless of delivery method. For exam- ple, on public sector DB projects, where the contractor assumes design responsibility, limitation of liability clauses that impose a ceiling on a design-builder’s total liability are not frequently used. However, exceptions have been seen on very large DB contracts, where the design-builder faces substantial potential 165 David Collings, Project-Specic Professional Liability: Who Really Pays for Design Errors?,  IRMI, May 2000, https://www.irmi. com/articles/expert-commentary/project-specific-professional- liability-who-really-pays-for-design-errors.

NCHRP LRD 86 59 Excerpt 44 – Consequential Damages Rapid Bridge Replacement Project, PennDOT Save where stated to the contrary, neither Party shall have the right to claim damages, including punitive and incidental damages, against the other Party for breach of this PPA, in tort or on any other basis whatsoever, to the extent that any loss claimed by either Party is for Indirect Losses. e Parties agree that, notwithstanding the foregoing limitation on each Party’s liability, such limitation shall not apply to or limit either Party’s right to recover from the other Party: (a) any Losses of the Development Entity arising under the Key Contracts as originally executed (or as amended in accordance with the terms of this PPA), which are not of themselves Indirect Losses; (b) any Losses (excluding defense costs) to the extent that they are either covered by the proceeds of insurance carried by the relevant Party or are required to be insured against pursuant to Article 19 (Insurance) or the Development Entity is deemed to have self-insured the Loss pursuant to Article 19 (Insurance); (c) Losses arising out of fraud, criminal conduct, intentional misconduct, recklessness or bad faith on the part of the relevant Party; (d) Losses arising out of any ird-Party Claims in respect of a Hazardous Materials Release or Pre-Existing Hazardous Materials; (e) amounts payable by the Development Entity to the Department under an indemnity set out in this PPA; (f) amounts payable by the Department to the Development Entity pursuant to Section 12.2 (Compensation Events); (g) any Monthly Maintenance Payment Deduction; or (h) interest, late charges, fees, transaction fees and charges, penalties and similar charges that the Project Documents expressly state are due from the relevant Party. Notwithstanding the foregoing, this Section 31.2 (Consequential Losses) shall not in any way be construed to limit the doctrine of sovereign immunity as applicable to the Department or the Commonwealth. liability.166 In addition, clauses that provide for waivers of conse- quential damages are oen found in DB contracts, particularly on large projects. Most of the DB contracts surveyed for this digest include provisions limiting an owner’s responsibility for delay and disruption damages. It is common for DB projects to include liquidated dam- ages for delayed project completion. Another form of liqui- dated damages that is not unusual in DB contracts, particularly where there is construction that may impact heavily congested or tolled projects, is lane rental charges, which are liquidated damages for the contractor’s failure to meet lane closure restric- tions. Still other types of liquidated damages may be found in DB contracts. e SBCTA I-10 Corridor Express Lanes Con- tract I project contract documents contain provisions respect- ing a number of dierent types of liquidated damages, including liquidated damages for delay, lane closure charges, fees for un- availability of key personnel, liquidated damages for failure to meet pavement smoothness requirements, and liquidated dam- ages for failure to maintain ITS elements. Many P3 agreements do not include limitation of liability provisions, however a P3 developer is typically a single purpose entity formed for the sole purpose of designing, constructing, - nancing, operating, and maintaining the project. Consequently, as a practical matter, the private sector participants’ liability is 166 Loulakis, NCHRP LRD 68, supra note 72, at 21. capped at the amount of equity contributed to the project by the private sector participants. If the project fails due to circum- stances that are the responsibility of the developer or if it ap- pears the developer’s liability may exceed the amount of equity in the project, the developer may le for bankruptcy. P3 agreements are typically set up to provide monetary incentives for the developer to open the project as quickly as possible. ese are in the form of toll revenues for full conces- sion projects and in the form of availability payments for such projects. For this reason, the private sector argues liquidated damages are not necessary, and P3 projects are less likely than DB projects to include such liquidated damages provisions. On the other hand, the project owner and traveling public may still suer damages due to delays to the project, and, there- fore, some owners will assess liquidated damages for delayed completion. P3 agreements generally require some form of security, such as a letter of credit, to secure the developer’s obligation to nance the project by a specied date. e P3 agreements surveyed pro- vide for forfeiture of the security as liquidated damages in the event the developer fails to achieve nancial close by the dead- line. Many P3 agreements also include a noncompliance points regime, where noncompliance points and associated liquidated damages are assessed for various specied breaches of the con- tract requirements. is provides a remedy to the owner and a tool to ensure the performance of certain developer obligations

60 NCHRP LRD 86 e. Summary Recommendations In considering whether to limit a contractor’s liability to the owner, the owner should be aware of any constitutional or leg- islative constraints on the ability of an owner to limit a contrac- tor’s liability or indemnity obligations. In addition, the owner should consider the size of the project. With mega projects the potential liability for increased costs, including extended overhead during delays, can be exorbitant. For this reason, the inclusion of liability-limiting provisions in contracts for mega projects delivered through alternative delivery methods should be considered. Without such limitations, it may be dicult to nd robust competition for the procurement. Where damages for a particular type of default may be dicult to ascertain, the parties should try to negotiate liquidated damages provisions. Finally, any limitation of liability or waiver of consequential damages should consider what types of damages should be carved out of the limitation, which should include the cost to complete the project or lost revenues included in liquidated damages amounts. 3. Changes Changes and deviations from original plans occur oen and are nearly inevitable in construction projects. is underscores the importance of including language that enables the parties to modify the scope and terms of a construction contract to ad- dress changing circumstances.171 Each transportation agency utilizes a changes clause that reects its own claims process. ere are various templates for dierent types of project delivery contracts. For example, DBIA has created a form of agreement between an owner and design- builder that provides a relatively short provision. If either design-builder or Owner believes that it is entitled to relief against the other for any event arising out of or related to the Work or Project, such party shall provide written notice to the other party of the basis for its claim for relief. Such notice shall, if possible, be made prior to incurring any cost or expense and in accordance with any specic notice requirements contained in applicable sections of these General Conditions of Contract. In the absence of any specic notice requirement, written notice shall be given within a reasonable time, not to exceed twenty-one (21) days, aer the occurrence giving rise to Respect to Delay in Building or Construction Contract, 74 A.L.R.3d 187, 201 § 2[a] (1976 &2007 Cum Supp.) (“it is well established, apart from a single jurisdiction, that there are certain exceptions” to no damage for delay clauses). 171 Navigating Changes to Construction Contracts, Bell, Davis, Pitt Blog, Construction Design And Law (Sep. 25, 2018), https://www. belldavispitt.com/blog/construction-and-design-law/navigating- changes-construction-contracts. Research from the Kentucky Transportation Center discusses how change order processes are approached. It details that in order to properly allocate and manage risks on a project, the owner must establish processes in the construction contract for identifying the occurrence of risk events, assessing appropriate mitigation eorts, evaluating the impacts or potential impacts of the risk event, and providing relief to the contractor as appropriate. See, Paul M. Goodrum, Timothy R.B. Taylor, William Lester, Alex McCoy, Mohammed M. Uddin & Youngwei Shan, Lessons Learned from Change Orders, Rpt. No. KYSPR384-09-1F, Kentucky Transportation Center (2010). under the agreement without having to resort to a termination for default, while at the same time permitting the developer to proceed with the project without fear that it may be terminated for a minor breach of contract. While the deduction regime is typically based on an analysis regarding the developer’s incen- tives to meet performance standards, the deductions amounts will need to also be justied as liquidated damages, to enable the owner to defend against claims that the amounts are unreason- ably high relative to the damages incurred by the owner. d. Legislation In general, any provisions intended to limit liability for damages from one party to the other need to consider federal, state, and local laws, and case law, which may constrain the parties’ ability to agree to limitations on liability and indemni- ties and may also aect the owner’s ability to assess liquidated damages. With respect to limitations on liability, some state courts consider various factors such as whether the clause was negoti- ated, the relative bargaining power of the parties and whether the contract is one of adhesion in determining the enforceability of limitations of liability clauses.167 With respect to indemnities, state law may preclude or limit an owner’s ability to indemnify a contractor for certain types of losses, and may also aect the owner’s ability to require indemnities from the contractor.168 Whether a provision limiting an owner’s liability for delay damages will be strictly enforced is also dependent on the juris- diction. In some instances, cases dier on this issue within the same state. Statutes and case law in at least 29 states have deter- mined that a party cannot escape liability for delay damages caused by its intentional or wrongful acts.169 In the event the delay was due to the party’s own misconduct, the provision may not be upheld in court, allowing the other party to recover dam- ages for delays regardless of the no damages for delay clause.170 167 See, Lucier v. Williams, 366 N.J. Super. 485, 841 A.2d 907 (2004); Markborough California, Inc. v. Superior Court, 227 Cal. App. 3d 705, 277 Cal. Rptr. 919 (1991) 168 See, e.g., City of Dillingham v. CH2M Hill N.W., Inc., 873 P.2d 1271 (Alaska 1994), nding a clause limiting the engineer’s liability violated the Alaska Anti-Indemnity Act, Alaska Stat. §  45.45.900, which prohibits a party from holding harmless another party from its sole negligence. See also, Mont. Code Ann. §  28-2-702 (2021), providing with limited exceptions for contracts involving sports or recreational activities, “all contracts that have for their object, directly or indirectly, to exempt anyone from responsibility for the person’s own fraud, for willful injury to the person or property of another, or for violation of law, whether willful or negligent, are against the policy of the law;” and Contractual modication or limitation of remedy, Mont. Code Ann. 30-2-719 (2021). 169 See, e.g., Cal. Pub. Cont. Code § 7102 (2021), Colo. Rev. Stat. § 24-91-103.5 (2021), Kan. Stat. Ann. § 16-1907 (2021), Minn. Stat. §  15.411 (2021), Mo. Rev. Stat. §  34.058 (2021), N.J. Rev. Stat. §  2A:58B-3 (2021), N.C. Gen. Stat. §  143-134.3(2021), Ohio Rev. Code §§ 4113.62(C)(1) and (2) (2021), Va. Code § 2.2-4335(A) (2021), Wash. Rev. Code § 4.24.360 (2021). 170 Zachry Const. Corp. v. Port of Hous. Auth. of Harris Cty., 449 S.W.3d 98, 116-117 (Tex. 2014). See also, Maurice Maurice T. Bruner, Annotation, Validity and Construction of “No Damage” Clause with

NCHRP LRD 86 61 substantial compliance test for determining whether a failure to comply with notice requirements may serve as a bar to recovery for changes. e OCTA I-405 Improvement DB project is constructed in a highly congested interstate corridor and as seen in Excerpt 45 includes an acknowledgment by the design-builder of the im- portance of timely notice and what matters will be considered in determining whether the owner is prejudiced by a lack of notice. In addition to notice requirements, transportation construc- tion contracts may include other requirements and provisions respecting change orders, such as provisions respecting nego- tiated change orders, pricing for force account work including xed mark-ups, unit priced work, limitations on delays dam- ages, compliance with owner directives, and the continuation of work during the pendency of disputes. According to a study on highway construction, the four most common causes for change orders include unforeseen condi- tions (2 percent), agency directed (1.5 percent), plan quantity (0.6 percent), and plan errors/omissions (0.6 percent).173 Based on the results of project surveys conducted for this legal digest, the owner representatives for two of the large DB projects re- ported claims relating to diering site conditions. One project is a greeneld project and the other a reconstruction project in a congested urban corridor. ere were claims and change orders related to utilities on several projects. One project owner reported the discovery of archeological resources resulted in a 173 Douglas Alleman, Arthur L. C. Antoine, M. Scott Stanford & Keith R. Molenaar, Project Delivery Methods’ Change-Order Types and Magnitudes Experienced in Highway Construction, 12 J. Leg. Aff. Dispute Resolut. Eng. Constr. (2020), abstract available at https:// doi.org/10.1061/(ASCE)LA.1943-4170.0000380. the claim for relief or aer the claiming party reasonably should have recognized the event or condition giving rise to the request, which- ever is later. Such notice shall include sucient information to advise the other party of the circumstances giving rise to the claim for relief, the specic contractual adjustment or relief requested and the basis of such request172 Whether more or less detailed, change order provisions gen- erally include the following requirements as a condition to relief: (1) timely notice by the contractor with strict deadlines for delivering notice to the owner aer actual or constructive notice of the relief event, (2) notice must be in writing, (3) notice must be provided to a specic representative of the owner, (4) timely submission of supporting documentation, including a time im- pact analysis demonstrating delays, and (5) timely submission of cost impact information. Notice requirements permit the owner to mitigate and sub- stantiate risk events, as well as potential cost and schedule im- pacts to the project when the risk events occur. For this reason, courts in some jurisdictions will permit the contractor to intro- duce evidence that the owner had actual knowledge of the risk event and thereby overcome the owner’s defense that notice re- quirements were not followed. Actual notice may show that the owner was not prejudiced by the lack of notice where the owner had actual knowledge of both the occurrence of the risk event and the cost and schedule impacts to the contractor. In some jurisdictions, prejudice due to lack of compliance with notice requirements is assumed, and the owner is not required to show that it lacked prejudice if the contractor failed to comply with the notice requirements. In other jurisdictions, the owner may not avoid liability for a change order unless it can show it was prejudiced by the lack of notice. Still other jurisdictions apply a 172 DBIA, § 10.1.1. Excerpt 45 – Changes I-405 Improvement Project, OCTA 13.3.2.4 Importance of Timely Response Design-builder acknowledges and agrees that, due to limitations on funding for the Project, timely delivery of notication of such events and situations and Requests for Change Order and updates thereto are of vital importance to Authority. Authority is relying on design-builder to evaluate promptly upon the occurrence of any event or situation whether the event or situation will aect the Project Schedule or Contract Price and, if so, whether design-builder believes a time extension and/or Contract Price increase is required under the Contract. If an event or situation occurs which may aect the Contract Price, a Critical Path or a Completion Deadline, Authority will evaluate the situation and determine whether it wishes to make any changes to the denition of the Project so as to bring it within Authority’s funding and time restraints. e following matters (among others) shall be considered in determining whether Authority has been prejudiced by design-builder’s failure to provide timely notice: (a) the eect of the delay on alternatives available to Authority (that is, a comparison of alternatives which are available at the time notice was actually given and alternatives which would have been available had notice been given within ten days (or 30 days, as applicable pursuant to Section 13.3.2.1.1) aer occurrence of the event or when such occurrence should have been discovered in the exercise of reasonable prudence); and (b) the impact of the delay on Authority’s ability to obtain and review objective information contemporaneously with the event.

62 NCHRP LRD 86 timelines for the parties to meet and agree upon the scope of the proposed change, as well as the submission of estimated cost and schedule impacts, so that potential changes to the scope of work could be evaluated and implemented expeditiously to avoid project delays. ere were several of owner-initiated change orders that were issued to accommodate changes origi- nating from stakeholders. e complexity of a project can also inuence the number of change orders. Projects of greater complexity typically require more coordination among disciplines and project risks can be less predictable and more impactful if they occur. is can lead to increased costs and schedule delays that become the subject of change orders. It is typical for complex projects that are de- livered through non-traditional methods to have specialized change order provisions that address specic project risks of concern to the owner and proposers during the procurement. e contract for the Hampton Bridge–Tunnel Expansion P3 project in Virginia included separate relief and change order provisions for diering site conditions that impact the tunneling improvements and those that impact the roadway and bridge improvements, which were treated as separate risks.174 b. Project Delivery Method In terms of the most common types of changes in dier- ent project delivery methods, DBB projects experience greater occurrences of change orders in the categories of unforeseen changes, quantity changes, and plan errors than both DB and CM/GC. e owner takes the integration risk between D&C on DBB project, which can lead to more change orders. In addi- tion, the DBB construction contracts generally include prescrip- tive standard specications and are awarded on a low-bid basis. ese factors aord the contractor an opportunity to absorb extra costs or delays through contingencies or to make up cost or schedule loss in one area through innovation in other areas. Accordingly, less risk is transferred from the owner to the con- tractor on DBB projects. e overwhelming majority of owners surveyed felt that the DBB project delivery method results in more change orders than alternative delivery projects. e owner of one of the DBB projects surveyed noted that low-bid contracting incentivizes contractors to make claims to realize the prots they did not include in their bids. DB project owners interviewed nearly unanimously agreed that the DB project delivery method led to fewer change orders. Of the change orders issued, owner-directed changes were found to be most impactful on DB contracts. is may be related to, in part, the use of DB delivery and other alternative delivery methods for projects that are of greater size or com- plexity than is typical for the owner’s other projects. Some states limit the use of alternative delivery to projects above a certain dollar threshold.175 e size and complexity of a project may 174 See, Section II.B.3.a Diering Site Conditions, for additional discussion. 175 See e.g., Ala. Code §  23-1-40(h)(3) (2021) (minimum $100 million cost threshold for P3 projects); Tex. Transp. Code Ann. § 223.242(d) (2021) (minimum $150 million for DB projects). change order. A common cause for change orders on the alter- native delivery projects was owner-directed changes. Certain types of risks that cause changes, are commonly ad- dressed in both traditional and alternative delivery construction contracts: diering site conditions, force majeure, change in law, the discovery of threatened or endangered species, and the dis- covery of archeological, paleontological, or cultural resources. a. Size and Complexity On nearly all projects surveyed, the owners agreed that the size and complexity of mega projects increased the number of change orders. However, some of the owners interviewed reported that the use of DB on their mega projects actually resulted in a reduction in the number of change orders. ey noted that if the mega project had been delivered as a DBB project, there would have been more change orders due to the magnitude of the cost and scope of the project. For the projects where the owner did not observe an increase in change orders, such as the NCDOT Herbert Bonner Bridge, the low number of change orders was attributed to having robust information exchanges during the procurement phase, including many one- on-one meetings, discussions with proposers, and requests for clarications, that were designed to prevent future issues that can cause change orders. One trend evidenced by the projects surveyed is that mega projects provide a greater opportunity for changes in scope that are initiated by the project owner. One reason is that the contractor is mobilized for a longer period of time and project owners may use the contractor to complete related work while the contractor is still mobilized. Another reason is that projects with larger footprints oen involve a greater number of stake- holders requesting changes in the scope or work. Large hori- zontal projects may pass through a number of dierent political subdivisions, such as cities and counties, with some form of jurisdiction over the project. Each one of these local govern- mental entities may place unanticipated conditions on neces- sary approvals for the project or may request that extra work on related projects be performed by the contractor. is arrange- ment can aord advantages over procuring a separate contrac- tor, since the contractor is already mobilized and will be able to coordinate the additional work with the original scope of work to mitigate schedule impacts. A disadvantage to this approach is that the contractor will not have the same incentives to keep its pricing and terms competitive as it would under a competitive bidding approach. e $1.04 billion Grand Parkway Segments F1, F2, and G project in the Houston area is an approximately 40-mile green- eld project that lies within the jurisdiction of four counties (Harris, Montgomery, Chambers, and Liberty Counties), two ood districts, and three tolling entities, all of which had some approval authority on a portion of the project. e contract documents for that project included a process for the owner to obtain information from the contractor relating to cost and schedule impacts in order to evaluate whether to implement a change in the scope of work that could be requested by the owner or requested by a stakeholder. e process included short

NCHRP LRD 86 63 ments impacting liability for various risks, the change order pro- cess itself is generally governed by the regulations, policies, and guidelines of the project owner. at said, when draing change order provisions, the draer should be aware of any legislation that may impact the change order process. For example, notice requirements and statutes of limitations are generally governed by statute. e dispute resolution process may be statutory and must be followed if parties are unable to reach agreement on a change order. Some transportation agencies, such as Caltrans, provide written guidelines for writing change orders. 3.1. Differing Site Conditions e discovery of diering site conditions is a risk for any construction project, where the conditions found at the site vary from what is in pre-proposal documentation or that which would ordinarily be expected at the site. ere is a ubiquitous diering site conditions clause that must be used for federal- aid DBB contracts, and many state and local governments in- clude essentially the same clause in non-federal-aid contracts. But with the advent of mega projects and alternative project delivery systems, such as DB and P3s, owners have explored other options and strategies for the allocation of risk of dier- ing site conditions between the parties, including narrowing the denition for relief, placing limitations on the right to rely on pre-proposal documentation, using cost-sharing mechanisms, requiring post-award verication of pre-proposal documenta- tion, or shiing the entire risk to the contractor. An important strategy for reducing the risk or severity of consequences of encountering diering site conditions is to conduct sucient geotechnical investigations in advance of obtaining bids for the construction of the project. e perfor- mance of targeted due diligence can reduce the need for bid contingencies. One of the project owners surveyed for this legal digest not only provides diligent geotechnical investigations to bidders, but also permits each bidder to request additional geo- technical investigations in areas specied by the bidder based on the project design. is strategy reduces duplication of eorts by the owner and the bidders during the procurement, while reduc- ing the risk of diering site conditions and bid contingencies. Another owner included a post-award period in the contract during which diering site conditions claims must be brought. is risk allocation strategy permits the selected contractor to perform additional geotechnical investigations to validate the information provided by the owner, thus reducing bid costs and contingencies, while at the same time limiting the period during which diering site conditions claims may be brought. Prior to the inclusion of diering site conditions clauses in construction contracts, contractors would bear all the risk of dif- fering site conditions, leading to costly site investigations being conducted by multiple bidders or bidders increasing their bids to include contingencies for such risks. It was later determined by the federal government that it would be more cost ecient to pay for diering site conditions should they be found on the job site by including relevant clauses in the contract permitting an equitable adjustment in payment, rather than pay premiums for risks that may not be realized. impact the number of owner-directed changes.176 e design- builder’s responsibility for the integration risk between D&C is another factor, as it limits the design-builder’s ability to claim extra costs or schedule relief for changes in quantities or plan errors. Since the design-builder is provided with incomplete plans177 accompanied by performance-based specications, the design-builder is aorded greater exibility to nd innovative and ecient solutions to designing and constructing the project and is able to absorb more risk than a contractor constructing a DBB project. In addition, the use of a best-value selection pro- cess for alternative delivery projects permits the contractor to include contingencies in its bid to cover risks allocated to the contractor, while permitting the owner to consider technical and other factors in the selection process. erefore, more risks of unforeseen events are transferred to a design-builder than a traditional contractor, limiting the design-builder’s ability to ob- tain change orders. All but one of the P3 project owners interviewed found that fewer change orders were pursued by the contractor utilizing the P3 project delivery method than with traditional DBB proj- ects. P3 projects typically have increased risk transfer from the owner over other delivery methods, in particular, full conces- sion P3s. e owner for one of the availability projects surveyed indicated that the only change orders issued on the project were for owner-directed changes. While availability payment P3 contracts transfer nancing risk, concession P3 contracts also transfer revenue risk. is transfer of the risk of less than antici- pated revenues is accompanied by the transfer of the potential benet of greater than expected revenues. Greater construction risks may be transferred under the concession P3 model under the theory that the concession agreement provides the P3 con- tractor with the opportunity to make up construction cost over- runs through the collection of additional revenues during the long-term operations and maintenance phase of the project. e research was inconclusive on whether the CM/GC proj- ect delivery model impacts the number of change orders. Some owners believed there were more change orders, while others stated there were fewer change orders than with a traditional DBB model. c. Legislation FHWA has promulgated regulations, policies, and guidance for changes in construction contracts, providing for the use of standardized changed condition clauses for certain projects, and for the review and approval of contract modications for federal-aid projects. While states may have statutory require- 176 See, Section 14.a, Size and Complexity. 177 Since project design is included in the design-builder’s scope of work, design-builders are provided with plans that are progressed to less than 100 percent. The standard range for owner- provided plans is 15-50 percent. For some owners, the level of owner-provided plans is prescribed by statute or regulations. (See e.g., Tex. Transp. Code Ann. §  223.246 (a) (5) (2021), which requires a request for proposals for a DB project to include “a design approximately 30 percent complete” among other information.

64 NCHRP LRD 86 “and aer investigation decide for themselves the character of the materials.”182 e appellate court found that the contractor did not perform the necessary investigation and agreed with the trial court’s opinion that “where a contractor ‘has opportunity to learn the facts, he is unable to prove ... that he was misled by the contract.’”183 It should be cautioned, however, that requiring independent investigation during the procurement may not necessarily re- lieve an owner from liability where the requirement conicts with the diering site conditions and the owner’s statements. In Metcalf Constr. Co. v. United States,184 a federal court of ap- peals reviewing an application of the FAR diering site con- ditions clause in connection with a construction project on a U.S. military base in Hawaii rejected the trial court’s ruling that an adjustment of the contract was not warranted because the contract required further investigation during the performance of the work. e court of appeals found that the investigation obligation did not negate the express diering site conditions clause when coupled with information provided by the govern- ment during the procurement, including a statement that dif- fering site conditions would be handled through a change order given in response to a proposer question. Further, the court of appeals held that even requirements for pre-bid inspection by the contractor have been interpreted cautiously regarding conditions that are hard to identify accurately before work begins, so that “the duty to make an inspec- tion of the site does not negate the changed conditions clause by put- ting the contractor at peril to discover hidden subsurface conditions or those beyond the limits of an inspection appropriate to the time available.”185 Following the federal diering site conditions clause, written notice to the owner is required when the contractor encoun- ters diering site conditions. However, some federal courts have overlooked the requirement as long as the owner received actual notice and the owner’s benets were not infringed.186 is was the case with the VDOT projects, where the contracts did not specify the consequences of failure to properly notify the owner of diering site conditions. A change to the diering site condi- tions clause was made in 2016 that strictly required the contrac- tor to provide timely written notice of diering site conditions to the owner in order to receive the benet of contract price adjustment provisions. Although nearly all of the contracts for the projects surveyed for this digest included a diering site conditions clause and some form of relief for site conditions, only two of the projects reported delivery of a notice of diering 182 Stuyvestant Dredging, 834 F.2d at 1579. 183 Id. at 1582 (quoting Vann v. United States, 190 Ct. Cl. 546, 420 F.2d 968, 982 (1970)). 184 742 F.3d 984 (Fed. Cir. 2014). 185 Id. at 996, citing Foster, 435 F.2d at 888; see also, e.g., Hollerbach v. United States, 233 U.S. 165, 170-71, 34 S. Ct. 553, 555, 58 L. Ed. 898, 901 (1914). 186 James Germano, Changes to Diering Site Conditions Clause in VDOT Construction Contracts Specication, 38 VA. Lawyer (Dec. 2016). It exists precisely in order to “take at least some of the gamble on sub- surface conditions out of bidding”: instead of requiring high prices that must insure against the risks inherent in unavoidably limited pre- bid knowledge, the provision allows the parties to deal with actual subsurface conditions once, when work begins, ‘more accurate’ infor- mation about them can reasonably be uncovered.178 ere are generally two types of diering site conditions recognized in diering site conditions clauses: type I diering site conditions are site conditions that dier materially from the information provided in the contract; type II diering site conditions are site conditions that materially dier from the in- herent or ordinary conditions encountered in the same type of work. Contracts generally state that contractors are only entitled to compensation if the site conditions are materially dierent from the plans and specications, not commonly encountered or recognized in relevant work, or of an unusual nature. For fed- eral agency contracts: To prevail on a claim for diering site conditions, the contractor must prove, by a preponderance of the evidence, “that the conditions ‘indi- cated’ in the contract dier materially from those it encounters dur- ing performance.” P.J. Maei Bldg. Wrecking Corp. v. United States, 732 F.2d 913, 916 (Fed. Cir. 1984) (citing Arundel Corp. v. United States, 515 F.2d 1116, 1128, 207 Ct. Cl. 84 (1975)). e conditions actually encountered must have been reasonably unforeseeable based on all the information available to the contractor at the time of bid- ding. United Contractors v. United States, 368 F.2d 585, 594, 177 Ct. Cl. 151 (1966). e contractor also must show that it reasonably relied upon its interpretation of the contract and contract-related docu- ments and that it was damaged as a result of the material variation between the expected and the encountered conditions.179 erefore, to better protect the owner from this type of claim, this contract provision should shi the responsibility for discovering concealed conditions to the contractors by means of reasonable investigation, such as requiring contractors to review public records of underground utility conditions before the start of work. ere are two commonly used standard diering site condi- tions clauses: those similar to the Federal Acquisition Regula- tion (FAR) clause 52.236-2,180 which is utilized in federal con- struction contracts, and the AIA clause, 3.7.4,181 which may be utilized in state and private construction projects. State agencies may utilize their own form of diering site conditions clauses or none at all. In order to properly allocate diering site conditions risks, both the owner and the contractor should perform site investiga- tions and environmental assessments. In Stuyvesant Dredging, the technical provisions of a contract for dredging included estimated quantities for dredging and also a requirement that the bidders examine the site and the records of previous dredg- ing that were available at the U.S. Corps of Engineer’s oces, 178 Metcalf Constr. Co. v. United States, 742 F.3d 984, 996 (Fed. Cir. 2014), citing Foster Const. C. A. & Williams Bros. Co. v. United States, 193 Ct. Cl. 587, 612, 435 F.2d 873, 887 (1970); see also H.B. Mac, Inc. v. United States, 153 F.3d 1338, 1343 (Fed. Cir. 1998). 179 Stuyvesant Dredging Co. v. the United States, 834 F.2d 1576, 1581 (Fed. Cir. 1987) (citation omitted). 180 48 C.F.R. 52.236-2 (2021). 181 AIA Document A201-2017.

NCHRP LRD 86 65 Excerpt 46 – Diering Site Conditions I-64 Hampton Roads Bridge-Tunnel Expansion Project, VDOT Section 4.3.1.3. Design-builder shall not be entitled to any adjustment in the Contract Price and/or Contract Times due to impacts of Diering Roadway and Bridge Improvements Site Conditions encountered during construction of the Roadway and Bridge Improvements not identied during the Scope Validation Period, unless Department, in its sole discretion, determines that the circumstances associated with such Diering Roadway and Bridge Improvements Site Condition justify making such adjustment. Section 4.3.2.3. If design-builder establishes (i) that the actual ground conditions encountered qualies as a Diering Tunnel Improvements Site Condition and (ii) that such Diering Tunnel Improvements Site Condition has adversely impacted design-builder’s costs and/or time of performance, then design-builder shall be entitled to submit a request for a Work Order for an adjustment in the Contract Price and/or Contract Times. site claims. In each instance, the owner denied the request for change order and the rejection of the claim was not appealed. For projects with elements that may be impacted dier- ently by the discovery of diering site conditions, the Hamp- ton Bridge–Tunnel Expansion project and the East End Cross- ing project P3 contracts are instructive. Both are projects that include various types of construction elements such as bridge, tunnel, and roadway improvements. Each project’s contract documents allocate the risk of diering site conditions dier- ently depending on which elements of the project the discovery of diering site conditions impacts. Diering site conditions for roadway and bridge improve- ments are site conditions at the roadway and bridge site that dif- fer materially from the contract documents or are unusual in nature. Diering tunnel improvements site conditions are site conditions at the site of tunnel improvements that dier materi- ally from specic geotechnical reports or are unusual in nature. Additionally, the relief respecting each type of diering site con- ditions has dierent requirements, as provided in the contract provisions for the VDOTI-64 Hampton Roads Bridge-Tunnel Expansion project in Excerpt 46. e contract for the Grand Parkway Segments F1, F2, and G project has a narrowly dened diering site conditions deni- tion that is not uncommon for DB projects. (See Excerpt 47.) e Alaska Way Viaduct contract distinguishes between dif- fering site conditions relating to ATCs and those not relating to ATCs, as shown in Excerpt 48. a. Size and Complexity e size and complexity of the project impacted the risk allocation for diering site conditions on the projects reviewed. e projects that entailed complex elements such as bridges and tunnels had specialized contract provisions for dealing with diering site conditions.187 In general, these types of contracts emphasize the obligation of the contractor to perform its own investigations and more narrowly dene what is considered a diering site condition for purposes of relief. In addition, the character of the project had some impact on the risk allocation for diering site conditions. For example, the Grand Parkway Segments F1, F2, and G project, a newly con- 187 See, for example, sample provisions for the Hampton Bridge – Tunnel Expansion Project and the Ohio East End Crossing project P3 contracts. Excerpt 47 – Diering Site Conditions Grand Parkway Segments F1, F2, and G Project, TxDOT Diering Site Conditions shall mean: (a) subsurface or latent conditions encountered at the actual boring holes identied in the geotechnical reports included in the Reference Information Documents listed in Exhibit 19, which dier materially from those conditions indicated in the geotechnical reports for such boring holes; or (b) subsurface or surface physical conditions of an unusual nature, diering materially from those ordinarily encountered in the area and generally recognized as inherent in the type of work provided for in the Agreement. e term shall specically exclude all such conditions of which Developer had actual or constructive knowledge as of the Proposal Due Date. e foregoing denition specically excludes: (i) changes in surface topography; (ii) variations in subsurface moisture content and variations in the water table; (iii) Utility facilities; (iv) Hazardous Materials, including contaminated groundwater; (v) acquisition of real property for drainage purposes; and (vi) any conditions which constitute or are caused by a Force Majeure Event.

66 NCHRP LRD 86 contracts.188 However, while transportation agencies may con- sider for inclusion in federal-aid DB contracts diering site condition clauses “which are appropriate for the risk and re- sponsibilities that are shared with the design-builder,”189 state 188 See, 23 C.F.R. § 635.309, which provides, in pertinent part: (1) Diering site conditions. (i) During the progress of the work, if subsurface or latent physical conditions are encountered at the site diering materially from those indicated in the contract or if unknown physical conditions of an unusual nature, diering materially from those ordinarily encountered and generally recognized as inherent in the work provided for in the contract, are encountered at the site, the party discovering such conditions shall promptly notify the other party in writing of the specic diering conditions before the site is disturbed and before the aected work is performed. (ii) Upon written notication, the engineer will investigate the conditions, and if it is determined that the conditions materially dier and cause an increase or decrease in the cost or time required for the performance of any work under the contract, an adjustment, excluding anticipated prots, will be made and the contract modied in writing accordingly. e engineer will notify the contractor of the determination whether or not an adjustment of the contract is warranted. (iii) No contract adjustment which results in a benet to the contractor will be allowed unless the contractor has provided the required written notice. (iv) No contract adjustment will be allowed under this clause for any eects caused on unchanged work. (is provision may be omitted by the State DOT’s at their option.) 189 23 C.F.R. § 635.109(c) (2021). structed section of the planned 180-mile loop around the city of Houston, includes a $50,000 deductible for claims for diering site conditions and provides no schedule relief. is risk alloca- tion is made possible because the project is a nearly 40-mile- long greeneld project within a wide ROW corridor that pro- vides the contractor with signicant exibility to work around risk events, including diering site conditions, if they occur. b. Project Delivery Method While the project delivery method was found not to have im- pacted whether a diering site conditions clause was included in the contract documents, the form of relief did vary between project delivery models. e DBB projects typically provided direct and indirect costs and schedule relief for the discovery of Type I or Type II diering site conditions, consistent with the approach mandated by FHWA for federal-aid projects. e alternative delivery project contracts surveyed typically provide some relief for diering site conditions but with greater risk transfer, such as through a more narrowly tailored deni- tion for diering site conditions or requirements for relief. Some projects limit the Type I diering site conditions to specic re- ports or the borings data within the reports. Other contracts limit the type of relief that is available. c. Legislation As previously mentioned, federal law requires inclusion of a standard diering site conditions clause in federal-aid DBB Excerpt 48 – Diering Site Conditions Alaska Way Viaduct (SR 99) Bored Tunnel Alternative Project, WSDOT Differing Site Conditions (except with respect to ATCs) means (1) actual subsurface or latent physical conditions at the Site that are substantially or materially different from the conditions identified in the Geotechnical Baseline Report, the Environmental Baseline Report, or the Geotechnical & Environmental Data Report as set forth in Section 5.7.2 or a foundation type for a Structure that is substantially or materially different from the foundation type identified in TR Appendix S for said Structure, or (2) unknown physical conditions at the Site that are of an unusual nature, differing materially from those ordinarily encountered and generally recognized as inherent in the type of Work provided for in the Contract and the Work site characteristics and that could not have been reasonably anticipated as potentially present by an experienced civil works contractor. The foregoing definition shall not apply to Utilities. Diering Site Condition relating to an ATC, means (1) subsurface conditions or latent physical condition at the Site that are substantially or materially dierent from the conditions indicated in design-builder’s geotechnical investigation conducted for purposes of the ATC prior to the Proposal Date (to the extent said investigation complies with the WSDOT Geotechnical Design Manual), and which are not discoverable from a reasonable investigation and analysis of the site, or (2) unknown physical conditions at the Site that are of an unusual nature, diering materially from those ordinarily encountered and generally recognized as inherent in the type of Work provided for in the Contract and the worksite characteristics and that could not have been reasonably anticipated as potentially present by an experienced civil works contractor. e foregoing denition shall not apply to Utilities.

NCHRP LRD 86 67 b. Project Delivery Method e DBB projects surveyed include typical force majeure denitions. In general, the CM/GC projects surveyed also in- cluded standard force majeure clauses. Whereas the denitions for force majeure events in the DB contracts varied greatly. In some contracts, the denition for force majeure events lists any events that are beyond the control of the parties and that are treated similarly for purposes of relief. e concession P3 projects typically limit force majeure events to uninsurable or potentially uninsurable events, such as war, terrorism, nuclear explosion, and civil riot and commotion. ere is generally no cost relief for these events, although they may result in an ex- cusable delay, unless the relief event is ongoing for a signicant period of time and ripens into an extended relief event. ere is typically some form of relief for extended relief events be- yond excusable delay, such as an extension of the term of the P3 agreement or compensation. e East End Crossing P3 agreement provides schedule re- lief for force majeure events and includes the denition shown in Excerpt 49. e P3 contract for the Rapid Bridge Replacement project includes a denition that is limited to events that are dicult to insure against, as shown in Excerpt 50. c. Legislation e force majeure provisions in contracts are typically agency specic and governed by state law. d. Summary Recommendations Unlike diering site conditions, where robust site investiga- tions may ameliorate risk, force majeure events are generally of a nature that is dicult to mitigate against through due dili- gence eorts. Certainly, historical weather data may be instruc- tive, however it may not be useful in predicting severe weather. Allocating force majeure risk to third parties, such as through insurance, is a typical strategy to lessen the risk to the parties. In addition, some form of risk sharing mechanism between the owner and contractor should be considered on DB projects in order to provide both parties with incentives to mitigate against impacts. For P3 projects, it is important to clearly allocate the risk of uninsurable force majeure risks, which may be accepted by the private sector within limits. 3.3. Changes in Law e law is in constant ux and thus changes in law pose sig- nicant risk to the contracting parties. Some changes, such as those involving the governmental approval process or standards aecting the work, can signicantly aect the contractor’s obli- gations and ability to complete the project on time. Given the nature of the risk and the fact it is generally outside the control of the parties, construction contracts oen provide some relief to the contractor for changes in law. ere are dierent contract provisions employed to handle such risks including contract pro- visions that allow for some risk sharing, in particular when the contractor knows or should know of coming changes in law or where the parties are aware of likely changes in law but cannot law governs diering site conditions liability and the interpre- tation of any diering site conditions clauses in DB contracts. d. Summary Recommendations e best way to mitigate against diering site conditions is to conduct robust geotechnical and site investigations prior to entering into a construction contract. is should be conducted by the owner and supplemented by the bidders. It is of particular importance that care is taken with respect to investigations in connection with mega projects that may have an expansive foot- print or tunnel or bridge elements. For such projects, consider- ation should be given to tailoring the diering site conditions provisions in the contract to the project, which may include dif- ferent risk allocation provisions for tunnel or bridge elements than roadway elements. In addition, owners and bidders should consider if there are particular types of cost or schedule impact- ing conditions that may be found in the area but are not identi- ed in the site investigations. Such conditions may be carved out of blanket diering site conditions provisions and addressed separately with incentives for avoidance and mitigation by both parties. rough contractual risk sharing mechanisms the par- ties will be incentivized to work together to nd an ecient solution to managing the site conditions. 3.2. Force Majeure Events Force majeure events refer to Acts of God, such as epidemics, natural disasters and wars, which could not have been reason- ably foreseen or prevented by the owner or contractor. is type of event is generally considered as excusable delay, which quali- es for a time extension but not additional compensation.190 e contractor bears the risk of cost impacts, however many of these events are covered by the insurance the contractor is typically required to carry. For alternative delivery projects, the term “force majeure events” may include other types of matters that are beyond the control of the parties. It is not uncommon to see relief in the form of direct costs, in addition to schedule exten- sions, where there are other matters included in the denition of a force majeure event. It should be noted that because this legal digest researched projects that are completed or near completion, none of the projects included in the survey specically address COVID-19, which may be covered under force majeure provisions, depend- ing on the express language of the contract.191 a. Size and Complexity No specic trend was observed in connection with project size and complexity. However, risks that were particular to the geographic location of the project were oen qualied to ex- clude frequently occurring events that should be expected. For example, only earthquakes above a specied magnitude or ood events beyond a specied measure were sometimes included. 190 Charles S. Phillips, Construction Contract Administration, Society for Mining, Metallurgy, and Exploration, Inc. (1999). 191 See, e.g., JN Contemporary Art LLC v. Phillips Auctioneers, 507 F. Supp.3d 490 (S.D.N.Y. 2020).

68 NCHRP LRD 86 Excerpt 49 – Force Majeure Events East End Crossing P3 Project, Indiana Finance Authority Force Majeure Event falls within definition of Relief Event. Force Majeure Event means the occurrence of any of the following events that is (i) beyond the reasonable control of Developer, (ii) not attributable to the negligence, willful misconduct, or breach of applicable Law or contract by any Developer-Related Entity, and (iii) actually, demonstrably, materially and adversely aects performance of Developer’s obligations (other than payment obligations) in accordance with the terms of the PPA Documents to a material extent, provided that such events (or the eects of such events) are not caused, and could not have been avoided by the exercise of caution, due diligence, or reasonable eorts, by Developer or any Developer-Related Entity: (a) war (including civil war and revolution), invasion, armed conict, violent act of foreign enemy, military or armed blockade, or military or armed takeover of the East End Crossing or the Site, in each case occurring within the State of Indiana and/or the Commonwealth of Kentucky; (b) any act of terrorism, riot, insurrection, civil commotion or sabotage that causes direct physical damage to, or otherwise directly causes interruption to construction or direct losses during operation of, the East End Crossing or the Site; (c) national strikes not specic to Developer, embargoes, acts or omissions of a port or transportation authority, unavailability or shortages of materials, wars, and currently-listed events that occur outside of the State that, in each case, directly causes interruption to construction or direct losses during operation of the East End Crossing; (d) nuclear explosion that causes direct physical damage to the East End Crossing or the Site, or radioactive contamination of the East End Crossing or the Site; (e) Flood Event, re, explosion, gradual inundation caused by natural events, a tornado with an enhanced Fujita Score Rating of EF2, sinkhole caused by natural events, or landslide caused by natural events, in each case directly impacting the physical improvements of the East End Crossing or performance of Work at the Site; (f) any governor-declared Emergency within the limits of the Project Right of Way, except one consisting of or arising out of trac accidents and (g) a Seismic Event. Excerpt 50 – Force Majeure Events Rapid Bridge Replacement Project, PennDOT Force Majeure Event means the occurrence after the date of this PPA of: (a) war, civil war, invasion, violent act of foreign enemy or armed conict; (b) nuclear, chemical or biological contamination unless the source or cause of the contamination is brought to or near a Project Site by the Development Entity or its Key Contractors or is as a result of any breach by the Development Entity of the terms of this PPA; (c) ionizing radiation unless the source or cause of the ionizing radiation is brought to or near a Project Site by the Development Entity or its Key Contractors or is as a result of any breach by the Development Entity of the terms of this PPA; (d) any blockade or embargo; (e) any: (i) ocial or unocial strike; (ii) lockout; (iii) go-slow; or (iv) other dispute, generally aecting the construction industry or a signicant sector of it; or (f) any act of Terrorism, which directly causes either Party (the Aected Party) to be unable to comply with all or a material part of its obligations under this PPA.

NCHRP LRD 86 69 e SH 360 Project in Dallas includes in the force majeure event denition a number of events that are treated similarly for purposes of providing relief to the DB contractor, including (f) [Any] change in law that (1) requires a material modication of the project design, (2) requires DB Contractor to obtain a new major State or federal environmental approval not previously required for the Project, (3) results in an increase in DB Contractor’s costs directly attributable to the Change in Law of at least $500,000, or (4) speci- cally targets the Project or DB Contractor.194 In the event a force majeure event occurs, the DB contractor would be entitled to its direct costs incurred and an extension of completion deadlines, provided the DB contractor complies with the change order provisions of the contract. e term “change in law” is dened in the SH 360 Project DB agreement as shown in Excerpt 51. For the North Tarrant Express Segments 1 & 2 project in Fort Worth, Texas, the developer is entitled to schedule relief for a change in law. Compensation is also provided if the change in law is discriminatory, as well as for changes in law consisting of the imposition of new or added federal, state, or local taxes on tolls or gross toll receipts (Excerpt 52). c. Summary Recommendations e size and complexity of a project does not have a bearing on the risk of changes in law. As with force majeure events, it is dicult to mitigate against changes in law through due dili- gence eorts prior to award of the construction contract. e exception is with respect to bills that have been led but not yet adopted for procurements that are concurrent with a legislative session. It is important for both the owner and contractor to pay attention to pending bills that could impact the project or work and address the consequences of any potential changes of law in the contract documents. In addition, the parties should con- sider whether changes in the standards applicable to the work, such as design, construction, operations or maintenance stan- dards, should be complied with and, if so, whether or not such change in standards should be treated as changes in law. e project delivery method will also be a factor in determining the allocation of risk for changes in law. us, it is of key importance 194 TxDOT, SH 360 Project, Design-Build Agreement Executed Version, Exhibit 1, Abbreviations and Denitions (May 15, 2015). quantify that risk at the time of contracting. Some state agen- cies provide relief for changes in law in their contracts, whereas others do not. a. Size and Complexity e size and complexity of projects was not found to im- pact the relief provided for changes in law. e project delivery method was a better indicator of whether and to what extent relief was provided. b. Project Delivery Method e contracts for many DB projects oer time and money for changes in law. ese provisions may exempt certain types of changes in law, such as increases in payroll or other taxes, which apply to all businesses and are considered a cost of doing business. Under a P3 contract, the private developer is required to comply with all applicable laws and make sure their sub- contractors do the same.192 If the developer fails to do so, it may lead to a termination for default. Some types of changes in law, such as increased taxes, inevitably lead to additional expenses. If a change in law was foreseeable during the procurement, the developer should include the nancial impact in its bid. For un- foreseeable changes in law, risk sharing between the public and private parties is generally accepted. Even where the owner of the contract is a state agency, the agency may have little or no control over changes in state legislation. erefore, the devel- oper may bear the risk of nondiscriminatory changes in law that impact similarly situated projects or developers in the state. Conversely, the owner oen assumes the risk of discrimina- tory changes in law, meaning changes that apply specically to the project or developer.193 If such an event occurs, the developer would be entitled to monetary compensation and schedule relief, provided that the developer is expected to mitigate negative im- pacts resulting from the discriminatory change in law. In some projects surveyed, the owner received the benet of a change in law that reduced costs or increased revenues on a project. 192 Guiny, supra note 49, at 15-1. 193 APMG Int’l, 1.4.1 Changes in law – Specic and Discriminatory Changes in Law, https://ppp-certication.com/ppp-certication- guide/141-changes-law-–specic-and-discriminatory-changes-law. Excerpt 51 – Changes in Law SH 360 Project, TxDOT Change in Law shall mean: (a) the adoption of any Law aer the Proposal Due Date, or (b) any change in any Law or in the interpretation or application thereof by any Governmental Entity aer the Proposal Due Date, in each case that is materially inconsistent with Laws in eect on the Proposal Due Date; excluding, however, any such Change in or new Law that also constitutes or causes a change in or new Adjustment Standards, as well as any change in or new Law passed or adopted but not yet eective as of the Proposal Due Date. e term “Change in Law” also excludes any change in or new Law relating to DB Contractor’s general business operations, including licensing and registration fees, income taxes, gross receipts taxes, social security, Medicare, unemployment and other payroll-related taxes.

70 NCHRP LRD 86 site or artifacts, as opposed to risking project stoppages if dis- coveries were made later in the middle of projects. Applicable notication of the location and nature of artifacts should be made immediately, and written conrmation within two days are expected. (3) Protecting the Artifacts: Some contracts made the contractor responsible for protecting the (suspected) artifacts. Contractors are expected to not damage the discoveries; some provisions further delegate the responsibility of securing the immediate area to the contractors. (4) Contractor Participation in Salvaging Eorts: Contract provisions may require contractors to participate in the removal of (suspected) artifacts. Clauses usually specify the specic party or person who would direct the contractor to do so. is extra duty is regarded as extra work; or executed “in accordance with the ‘Changes in the Work’ provision”; or subjected to “equitable adjustment” in contract provisions. (5) Ownership of Artifacts: Few of the contracts studied clearly stated who would be entitled to the artifacts, and that the contractors are not allowed to remove artifacts without permission. e discoveries are generally regarded as the federal or state government’s properties. (6) Resumption of Work: Fewer contracts -contrary to “stop working” provisions- have a “resumption of work” clause. In general, the provisions instruct contractors to not resume work until they are “directed” or “notied” by parties such as the engineer, the contracting ocer, or the owner’s representative. (7) Compensation for Delays: is article points out that the halt in construction incurs additional costs from items such as idle equipment and overhead costs. e authors suggested that the extent of compensation due to any reasons, including the discovery of artifacts, should be clearly stipulated in the contract. Typical compensations include time extension and actual-cost-incurred compensation. (8) Cancellation of Contract: Should the discovery of artifacts be as signicant; the project may be canceled. e owner can be protected by including a cancellation provision that states that the owner can unilaterally modify or cancel the project should artifacts that are entitled to protection be discovered. (9) In addition, specic though rarely used provisions such as requiring the contractor to obtain archaeology clearance and hiring of qualied archaeological consultant can be written in the contract. to clearly dene what constitutes a change in law in the contract to stave o future disputes over whether relief is provided for a particular change. 3.4. Archaeological, Paleontological, or Cultural Resources e discovery of archaeological, paleontological, or cultural resources can cause signicant disruptions to the work on a project. Any number of agencies and groups may get involved in dealing with the discovery and disposition of the resources. In addition to providing training to individuals working on the project on how to handle such nds, the contract may allocate to the owner and contractor specic responsibilities in addressing the discovery. ese may include suspending all or a portion of the work, as well as specic relief for the contractor, including time extensions and additional costs associated with the nds. e preservation of historic artifacts may cause issues such as costly interruption of construction activities.195 Preconstruction surveys should be done to uncover a potential archaeological 195 See, Jimmie Hinze & eresa Antal, Construction contract provisions for preservation of artifacts, 117 J. Constr. Eng. & Mgmt., ASCE (1991), at 106-117. Some of the common clauses suggested in the Hinze study were: (1) Stop Work: Most respondents included a “stop work” provision, using phrases such as “temporarily discontinue/ suspend,” “terminate all further operation in immediate area until archaeological preservation agency has had the opportunity to survey the site,” “suspend work in the immediate area for a reasonable time/not to exceed (X) hours.” (2) Notication: Aer suspending work due to discovery of artifacts, there should be another provision that obligates contractors to notify the owner or relevant parties of such ndings. From the survey respondents’ contracts, relevant parties include the contracting ocer, the contracting ocer’s representative, relevant federal agencies, archaeologist, the SHPO, and the engineer. One contract provision specically wrote the procedure and timeline of notication - verbal Excerpt 52 – Changes in Law North Tarrant Express Segments 1 & 2 Project, TxDOT Change in Law shall mean: (a) the adoption of any Law aer the Proposal Due Date, or (b) any change, amendment to, repeal or revocation of any Law or in the interpretation or application thereof by any Governmental Entity aer the Proposal Due Date, in each case that is materially inconsistent with Laws in eect on the Proposal Due Date; excluding, however, any such Change in or new Law that also constitutes or causes a change in or new Adjustment Standards, as well as any change in or new Law passed or adopted but not yet eective as of the Proposal Due Date. Discriminatory Change in Law means any Change in Law during the Term which is principally directed at and the eect of which is principally borne by Developer or private toll road operators in the State, except where such change (a) is in response, in whole or in part, to any failure to perform or breach of the CDA Documents, violation of applicable Law or Governmental Approval, culpable act or culpable omission on the part of any Developer-Related Entity (other than NTTA), (b) is a directive by the U.S. Department of Homeland Security or comparable State agency, unless such directive is directed solely at or solely aects the Facility and requires specic changes in Developer’s normal design, construction, operation or maintenance procedures in order to comply, or (c) is otherwise expressly permitted under the CDA Documents.

NCHRP LRD 86 71 includes a “scope validation period” aer the execution of the contract during which the contractor was able to make addi- tional investigations and surveys to validate its assumptions regarding site conditions and other matters on ROW that was not available during the procurement. e contract provides the contractor with direct costs and a time extension, but not delay damages, for the following: discovery within or immediately adjacent to the Project Right-of- Way of archeological, paleontological or cultural resources (including historic properties), excluding any such resources known to design- builder prior to the end of the Scope Validation Period or that would have become known to design-builder by undertaking reasonable investigation, subject to the Pre-Bid Site Access Limitations, during the Scope Validation Period.196 Of the P3 projects surveyed, the availability payment projects were more likely to provide greater relief than the concession projects that include the transfer of revenue risk. Some contracts for P3 projects provide time extensions without compensation, while others provide a time extension and direct costs. Only one of the projects surveyed, which is a full concession project, transferred all of the risk of discovery of archeological, paleon- tological and cultural resources to the contractor. e owner for that project commented that the owner had performed signi- cant archeo/paleo/cultural investigations that were provided to the proposers during the procurement, and the proposers be- came comfortable with bearing the risk. c. Legislation e National Historic Preservation Act (NHPA)197 of 1966 was enacted as a systematic approach to preserve Historical Archaeology Advisory Committee (HAAC) resources. It has been the major statute for HAAC preservation ever since. Other than being a legal requirement, cultural preservation has also 196 I-64 Hampton Roads Bridge-Tunnel Expansion Comprehensive Agreement, Exhibit 1, Art. 9.2.10 (Adjustment of Contract Price). 197 Pub. L. 89-665, 80 Stat. 915. provisions were included in the contract documents for the projects surveyed for this digest. Also included were risk allo- cation provisions for the alternative delivery projects surveyed. While the DBB construction contracts typically provide for both schedule relief and compensation, including associated delay damages, alternative delivery contracts will typically in- clude risk sharing provisions that provide for less than full relief for cost and schedule impacts. a. Size and Complexity e size and complexity of the project was not found to be as impactful a factor in determining risk allocation strategies as was the project delivery method. In addition, the archeo- logical, paleontological, and cultural resources risk allocation provisions were impacted by whether there were any known resources near the project. b. Project Delivery Method e project delivery method impacts the risk allocation for archeological, paleontological, and cultural resources, inasmuch as all but one of the alternative delivery projects surveyed in- cluded some form of risk sharing for costs and delays attrib- utable to the discovery of such resources. Some DB contracts provide relief in the form of compensation for direct costs and a time extension but disallow indirect costs or delay damages. An example of contract provisions that provide schedule relief, direct costs, and delay costs to a design-builder for impacts due to archeological, paleontological, and cultural resources is found in the contract for the WSDOT Alaska Way Viaduct project (see Excerpt 53). Others provide schedule relief only, without entitlement to any compensation. Another approach to risk sharing for the discovery of archeological, paleontological, and cultural resources is in the Hampton Bridge P3 Project documents, which provide relief for schedule impacts and direct costs. e contract for that project Excerpt 53 – Archaeological, Paleontological, or Cultural Resources Alaska Way Viaduct (SR 99) Bored Tunnel Alternative Project, WSDOT Archaeological or historical objects, such as ruins, sites, buildings, artifacts, human skeletal remains or other objects of antiquity that may have significance from a historical, cultural, or scientific standpoint, which may be encountered by design-builder, shall not be further disturbed. Upon notification by design-builder under this Section 5.8.1, the WSDOT Engineer will determine if the objects need further documentation or treatment. Design-builder will be required to stop Work in the vicinity of the discovery until such determination is made. The WSDOT Engineer will require design-builder to suspend Work in the vicinity of the discovery until said documentation or treatment is accomplished. If the WSDOT Engineer nds that the suspension of Work in the vicinity of the discovery increases or decreases the cost to perform the Work or will result in a Critical Path delay, WSDOT shall issue one or more Change Orders (a) to compensate design-builder for additional costs directly attributable to changes in the scope of the Work arising from the site conditions, and (b) to extend the Completion Deadlines and compensate DBer for delay damages with respect to any Critical Path delay caused by such conditions.

72 NCHRP LRD 86 d. Summary Recommendations An important factor in mitigating the risk of archeological, paleontological, or cultural resources is the performance of preconstruction surveys to determine the presence of such resources. e responsibilities of the owner and contractor with respect to any resources discovered, whether or not identied prior to contract award, should be clearly dened in the con- tract. In addition, for alternative delivery projects, provisions allocating cost and schedule risks for unknown archeological, paleontological, or cultural resources should include some form of risk sharing, such as the mechanisms described in this section. 3.5. Threatened or Endangered Species Like the discovery of archaeological, paleontological, or cultural resources, the discovery of threatened or endangered species on a project has the potential to disrupt the project devel- opment. Once the discovery is made, it is necessary to avoid tak- ing action aecting the species pending receipt of a biological opinion and other required approvals from federal and state agencies. Project opponents are likely to challenge the validity of such approvals, and may succeed in obtaining an injunction requiring construction to stop. While discovery of threatened or endangered species may not be a signicant risk for particular projects, since the consequences of occurrence of the risk are severe, it is advisable for the owner to address this risk in the contract terms, including identifying each party’s responsibil- ity should a discovery occur. Nearly all of the projects surveyed included some form of clause addressing the risk of the dis- covery of threatened or endangered species. e NCDOT I-77 Express (HOT) Lanes P3 project provides both compensation and schedule relief for such discoveries, as shown in Excerpt 54. e environmental analysis process for a project includes assessment of potential impacts to threatened and endangered species and development of plans to mitigate impacts. For most of the case studies included in this digest, the project owner con- ducted a study of the project area as part of the environmental review, to identify species found in the area or likely to be en- countered during construction. e owner then draed contract terms and conditions to address risks of encountering species and require compliance with mitigation measures to avoid im- pacts to known species. For example, the FDOT SR 83 (US 331) project included provisions addressing the parties’ responsibili- ties upon discovery of sturgeons, manatees, and indigo snakes in the area, while the Gateway Express project, an FDOT project in an area not inhabited by such species, did not. e East End Crossing project required compliance with mitigation measures for species that were known to be present and that were already considered in the environmental review process, as part of the base scope, but included discovery of new species in the list of Relief Events. (See Excerpt 55.) a. Size and Complexity e size and complexity of the project was found to have little impact on the risk allocation for threatened and endan- been regarded as the responsibility of civil engineers by the American Society of Civil Engineers.198 e NHPA, adminis- tered by the State Historic Preservation Oce (SHPO), indi- cates actions that need to be taken upon discovery of artifacts. e Act also requires a preconstruction survey on HAAC arti- facts on an undertaking, meaning a project that is carried out by or on behalf of a federal agency, or requires a federal per- mit, license, or approval, on the National Register of Historic Places (NRHP) or other relevant properties. e NHPA is also enforced should artifacts be discovered during the course of construction. e project will be put on hold until a decision is made on the signicance of the discovery. It is important to note that NEPA and the NHPA are indi- vidual statutes with separate regulations, but they are related in some ways. Section 106 of the NHPA is the principal statute that reviews how an undertaking, or its alternative(s) would aect HAAC properties, and whether these actions are eligible for Categorical Exclusion (CATEX) under NEPA. e agency of the undertaking is responsible for aording the Advisory Council to comment on the project’s impact on HAAC resources. Before making the CATEX determination, Section 106 review must be completed and have a FONSI signed, or Record of Decision issued. Department of Transportation Act Section 4(f) may be reviewed with NHPA section 106 when HAAC evaluation is conducted for transportation agency highway projects. e Section 106 review process starts with determining the aected area. e area of potential eects (APE) is dened as the geographic area(s) within which an undertaking may directly or indirectly cause alterations in the character or use of historic proper- ties, if any such properties exist. APE is inuenced by the scale and nature of an undertaking and may be dierent for dierent kinds of eects caused by the undertaking.”199 e next step is to identify HAAC resources in the APE. Aerwards, the project’s potential impacts to HAAC proper- ties will be determined, which will arrive at one of the follow- ing conclusions: no historic properties present in the APE; no adverse eect on historic properties; or there are adverse eect on historic properties. When making determinations, there are other acts that are oen sited with the NHPA, including: the Antiquities Act of 1906,200 the Historic Sites Act of 1935,201 the Reservoir Salvage Act of 1960,202 the Archaeological and Historic Preservation Act of 1974,203 and the Native American Graves Protection and Repatriation Act.204 198 Mario G. Salvadori, Historical sites and the construction engineer, 102 J. Constr. Div., ASCE, June 1976, at 295-301. Are Tsirk, Archeological resources, planning, and construction, 105 J. Constr. Div., ASCE, March 1979, at 79-94. 199 36 C.F.R. § 800.16 (d) (2021), Denitions. 200 Pub. L. 59-209, 34 Stat. 225. 201 Pub. L. 74-292, 49 Stat. 666. 202 Pub. L. 86-523, 74 Stat. 220. 203 Pub. L. 93-291, 88 Stat. 174. 204 Pub. L. 101-601, 104 Stat. 3048 (1990).

NCHRP LRD 86 73 beyond the control of the parties, the project contracts gener- ally include a limitation on delay damages for risks that are be- yond the control of both parties on alternative delivery projects. Other strategies include requiring due diligence by the contrac- tor prior to the commencement of construction and limiting change orders to discoveries that would not have been found by reasonable investigations. c. Legislation e ESA was passed with the purpose of protecting and re- covering imperiled species, their ecosystems, and habitats. e ESA is administered by either the U.S. FWS or the National Marine Fisheries Service (NMFS), depending on the habitat of the species. e primary purposes of the of ESA are to provide a means whereby the ecosystems on which endangered and threatened species depend may be conserved and to provide a program.205 e ESA denes endangered species as those “in danger of extinction throughout all or a signicant portion of its range.”206 reatened species are those “likely to become an en- 205 16 U.S.C. § 1531(b) (2021). 206 Id. § 1532(6) (2021). gered species. While the damages resulting from extensive delays to a larger project may be greater than the damages that would be incurred for delays on a smaller project, the conse- quences of the discovery of threatened or endangered species on a project can be severe regardless of the project’s size or complexity. A great factor informing risk allocation decisions was found to be the location of the project and likelihood of the occurrence of the risk. Certain projects located within ight paths or near habitats of threatened or endangered spe- cies included provisions addressing the parties’ responsibili- ties and providing for risk sharing if such species were found. None of the projects surveyed for this digest experienced any claims for the discovery of threatened or endangered species on the project. b. Project Delivery Method A correlation was found between the project delivery method of the project and the allocation of risks related to threatened or endangered species. e DBB projects include entitlement to costs and schedule extensions including delays costs resulting from the discovery. e DB and P3 projects typically included some form of risk sharing. As with other unforeseen events Excerpt 54 – reatened or Endangered Species I-77 Express (HOT) Lanes P3 Project, NCDOT 1. Compensation Event means any of the following events, provided that such events are beyond Developer’s control and are not due to any act, omission, negligence, recklessness, willful misconduct, breach of contract or Law or violation of a Governmental Approval by any of the Developer-Related Entities, and further provided that such events (or the effects of such events) could not have been avoided by the exercise of caution, due diligence, or reasonable efforts by Developer (and subject to any limitations, claims submission requirements and other conditions set forth in the Agreement): 2. … (r) Discovery at, near or on the Project Right of Way of any reatened or Endangered Species (regardless of whether the species is listed as threatened or endangered as of the Technical Proposal Due Date), excluding any such presence of species known to Developer prior to the Technical Proposal Due Date or that would become known to Developer by undertaking Reasonable Investigation…. Excerpt 55 – reatened and Endangered Species East End Crossing P3 Project, Indiana Finance Authority Relief Event means any of the following events, subject to the requirements, limitations, deductibles and the duty to prevent and to mitigate consequences that are set forth in the Agreement for such events: (q) Discovery at, near or on the Project Right of Way . . . of any reatened or Endangered Species (regardless of whether the species is listed as threatened or endangered as of the Setting Date), excluding any such presence of the American Bald Eagle, the Indiana Bat or other species known to Developer prior to the Setting Date or that would become known to Developer by undertaking Reasonable Investigation; reatened or Endangered Species m0eans any species listed by the USFWS as threatened or endangered pursuant to the Endangered Species Act, as amended, 16 U.S.C. §§ 1531, et seq. or any species listed as threatened or endangered pursuant to the State endangered species act.

74 NCHRP LRD 86 old or to avoid destruction or adverse modication of a critical habitat. Where the FWS or NMFS, as relevant, determines that a project will result in take of listed species or will adversely modify a critical habitat, but will not jeopardize the species or destroy or modify the critical habitat, the agency will issue an incidental take statement (ITS). e ITS authorizes the take of listed species and will include certain measures to minimize the impacts of the authorized taking. Where a planned project will result in the take of listed species but has no federal nexus, the project proponent (including states, counties, and local governments) may apply for an incidental take permit. e permit application must be accompanied by a habitat conservation plan, which sets forth the measures the ap- plicant will take to minimize and mitigate the impacts of the pro- posed taking to the maximum extent practicable, describes the funding that will be available to provide such measures, and other elements described by ESA Section 10. e issuance of an incidental take permit must comply with NEPA and must also comply with ESA Section 7. It is worth noting that mitigation costs required under the permits can be signicant. e ESA provides a process designed to exempt development projects from restrictions should the “Endangered Species Com- mittee” decide that the benets of the project clearly outweigh that of endangered and threatened species conservation in that area. However, only three such determinations have been made by this committee since its establishment in 1978 in response to ESA halting construction of the nearly completed Tellico Dam because of the presence of the endangered snail darter.214 ere are myriad ways the ESA can impact construction activities. ESA compliance is required under the EPA’s general construction permit (GCP)—including for areas directly and indirectly aected by stormwater discharge. Other projects may require federal approvals such as coverage by one or more Sec- tion 404 Clean Water Act permits or approval of federal ROW, which would trigger the obligations of Section 7 of the ESA. Still others may be subject to federal funding compliance with Sec- tion 7. For projects that are neither federally funded nor require federal authorization, approval, or permitting, the prohibition on take of listed species nevertheless applies. In addition to the requirements of the ESA itself, states may also implement measures aimed at compliance. For example, the Endangered and reatened Species Guidelines of NYDOT215 suggest that at the nal design stage, special construction methods, timing, or limits listed to protect endangered and threatened species should be stated in special notes or specications in the Design Approval Document and construction transmittal pack- age. ey should be clearly presented to and understood by con- tractors and site inspectors. Contract documents should also re- 214 See, Tennessee Valley Auth. V. Hill, 437 U.S. 153, 98 S.Ct. 2279, 57 L. Ed.2d 117 (1978) (superseded by statute). See also, U.S. Fish & Wildlife Serv., Listing and Critical Habitat, updated June 4, 2021, https:// www.fws.gov/endangered/what-we-do/critical-habitats.html. 215 New York Department of Transportation, Engineering Division, the Environmental Manual, Endangered and reatened Species, § 4.4.9.3 (2010). dangered species within the foreseeable future throughout all or a signicant portion of its range”207 Section 4 of the ESA requires FWS and NMFS concurrently with listing a species as threat- ened or endangered, to the extent prudent and determinable, to designate the critical habitat for the species.208 Critical habitat may include the occupied and unoccupied habitat of the spe- cies. e occupied critical habitat is where physical or biological features essential to the conservation of the species are found and may require special management considerations or protec- tion.209 Unoccupied critical habitat must be determined by the FWS and NMFS to be essential for the species’ conservation. Section 4 of the ESA authorizes the FWS and NMFS to exclude areas from critical habitat designation where the benets of ex- clusion outweigh the benets of inclusion, unless exclusion will lead to extinction of listed endangered and threatened species.210 is exclusionary analysis specically includes consideration of the economic impact of critical habitat designation. Once a species is listed as endangered, Section 9 of the ESA prohibits unpermitted “take” of that species. “Take” is dened by Section 3 of the ESA as “to harass, harm, pursue, hunt, shoot, wound, kill, trap, capture, collect, or to attempt to engage in any such conduct.”211 e term “harm” includes habitat modication or degradation “where it actually kills or injures sheltering.212 Take may be permitted via one of two mechanisms: an inci- dental take permit under ESA Section 10 (non-federal projects only); and an incidental take statement under ESA Section 7. In both circumstances, take may only be permitted where such take is incidental to, and not the purpose of, the project. Section 7 of the ESA requires federal agencies to ensure that activities authorized, funded, or carried out by those agencies will not jeopardize the continued existence of endangered and threatened species or result in destruction or adverse modica- tion of designated critical habitat.213 e prohibition on jeopardy of endangered and threatened species and on destruction or adverse modication of a designated critical habitat does not equate to a prohibition on land development. However, where there is a federal nexus, an additional process may be required in order to comply with Section 7 of the ESA. Where a planned project with a federal nexus (e.g., federal funding or authorization) may aect endangered and threat- ened species or a designated critical habitat, federal agencies must consult with the FWS and/or NMFS, as relevant, to ensure compliance with Section 7 of the ESA. Oen, where the project eects are likely to adversely aect listed species or are likely to destroy or adversely modify a critical habitat, it may be neces- sary to modify the plans in order to avoid the jeopardy thresh- 207 Id. § 1532(20) (2021). 208 Id. § 1533(a)(3)(A)(i) (2021). 209 Id. § 1532 (5) (2021). 210 U.S. Fish & Wildlife Serv., ESA Basics – 40 Years of Conserving Endangered Species (Feb. 2017), https://www.fws.gov/endangered/esa- library/pdf/ESA_basics.pdf. 211 16 U.S.C. § 1532(19). 212 See, 50 C.F.R. § 17.3(c)(3) (2021). 213 16 U.S.C. 1536(a)(2) (2021).

NCHRP LRD 86 75 could be set forth in the contract to precede litigation, such as mediation, arbitration, and dispute review boards (DRBs). 217 Owners and contractors have their own views as to the e- cacy and fairness of the dierent dispute resolution options. ese viewpoints must be considered in determining the appro- priateness of a particular dispute resolution process. is sec- tion will discuss the various methods used and their pros and cons, including partnering and its employment early on in the project. Excerpt 56 shows the dispute resolution ladder (starting from project level to chief executive ocer) that was followed by OCTA on the I-405 Improvement project. e DRB process is increasingly being used by transporta- tion agencies. It was rst adopted in the Washington Boundary Dam Project in 1960s and later applied in the second bore project of the Colorado Eisenhower Tunnel in 1970s, which avoided delays and cost overruns that happened at the rst bore project. Since then, the practice has been spread to other parts of the United States and the world; well-known mega projects like Boston’s Big Dig included a DRB.218 In some states, the law allows for a non-binding DRB process, with disputes not otherwise resolved proceeding to litigation. Clauses concerning DBR authority, scope of work, responsibilities, etc., should be carefully draed in order to maximize the board’s utility and to avoid the need to take disputes to litigation. e FDOT “Disputes Review Board Member Selection Pro- cess Guidelines” contemplate inclusion of “Special Provisions 8-3.7 Prosecution of Work – Disputes Review Board” and “Pay Item 999-20- Disputes Review Board” in the contract to allow use of DRBs for appropriate projects.219 Special Provision 8-3.7 explains that the purpose of a DRB is to provide expertise to resolve disputes and claims between the department and the contractor in a timely and equitable manner. e provision in- cludes, among other things, how DRB members are selected, when to introduce the DRB to the project, and how DRB mem- bers are paid. Excerpt 57 shows the DRB provision used on the WSDOT’s Alaska Way Viaduct/SR 99 Bored Tunnel Alternative DB Project. Another proactive technique that has also seen great trac- tion in the transportation industry is partnering, which can be either formal or informal (voluntary). Partnering is a process that creates a teamwork atmosphere to improve communica- tion, prevent disputes, and create success for all parties involved in the project. It is generally recommended to use partnering in conjunction with DRBs and other alternative dispute reso- lution methods. Partnering provisions typically contemplate an 217 Ghada M. Gad, Ayodeji K. Momoh, Behzad Esmaeili & Douglas G. Gransberg, Preliminary investigation of the impact of project delivery method on dispute resolution method choice in public highway projects, UBC (2015). 218 Michael T. Kamprath, e use of dispute resolution boards for construction contracts, 46 Urb. Law 807 (2014). 219 “‘Special provisions’ are specic clauses adding to or revision the standard Specication, setting forth conditions varying from or addition to the standard specications for a specic project,” Florida Department of Transportation, Workbook, Disputes Review Board Member Selection Process Guidelines, Jan. 2020. ect the agency’s specic commitments made to endangered and threatened species, and any deviations from the clauses should be coordinated with relevant regional agencies.216 ird parties who are opposed to a given project have a vari- ety of ESA-related avenues to challenge the project. For exam- ple, a third party could sue a project proponent for a failure to enter into formal consultation under ESA Section 7 or to obtain an ITP, or could sue the FWS or NMFS for alleged deciencies in the issuance of an ITS or ITP covering a given project. d. Summary Recommendations. As with site conditions and archeological, paleontological, or cultural resources, it is important for the owner to con- duct diligent investigations to ascertain whether threatened or endangered species may be present at or near the site. Such investigations enable mitigation measures to be identied and help to make both parties comfortable that the risk is low. e project locale is also a key factor. However, even with robust due diligence prior to contract award, it is possible that previously unidentied threatened or endangered species may impact the work. For example, species that live underground may not be discovered until the contractor starts excavation in the area. To address this possibility, it is important for the contract to clearly delineate the parties’ responsibilities if such a discovery is made. e contract should also include risk allocation provisions that incentivize both parties to work together to nd solutions to mitigate against the impacts of the discovery of threatened or endangered species. 4. Dispute Resolution As with all types of project delivery methods, the complexity and the risks entailed in the mega project make it almost in- evitable that claims and disputes will occur. Disputes occur for dierent reasons that could be related to schedule, coordination, culture, contract ambiguity, etc. e construction industry has been adopting many forms of dispute resolution mechanisms, starting from the most formal (litigation in courts) to the most amicable (partnering and negotiations). Between these two ends, there are many forms of alternative dispute resolution methods which are quicker and relatively less expensive that 216 See also, Julie Sullivan, ACRP Report 122: Innovative Airport Responses to reatened and Endangered Species, Transportation Research Board, National Academies of Sciences, Engineering, and Medicine of Washington, D.C., 2014, for a discussion on innovative solutions taken by an airport authority to protect endangered and threatened species, including critical habitat management. e owner managed Florida scrub jay critical habitat by taking the initiative to regularly inform contractors of the limits of the critical habitat in addition to erecting a physical barrier. It also provided contractors with information about the bird and reminded them of the importance of its identication. is approach applied during construction and extended through post-completion maintenance. e author also suggested the use of assessment and documentation tools for endangered and threatened species, such as listed species identication cards, wildlife incident reports, construction project environmental awareness brochures, and environmental resources inventory methodology checklists.

76 NCHRP LRD 86 Excerpt 56 – Dispute Resolution I-405 Improvement Project, OCTA 19.2.2 Request for Dispute Resolution If design-builder objects to any decision, action, order or position of Authority (including any rejection or modication of a proposed Change Order by Authority), then design-builder shall le with Authority a written request for dispute resolution. [***] 19.2.3 Project Level Resolution Upon commencement of the dispute resolution process, the Parties shall rst attempt to resolve the dispute between Authority’s Project Manager and design-builder’s Project Manager. ose two parties shall meet in good faith within ve business days aer the date that the written request for dispute resolution is submitted, and attempt to resolve it. ere shall be at least one meeting to attempt project level negotiation. [***] 19.2.4 Executive Level Resolution 19.2.4.1 Authority’s Executive Director of Capital Programs and design-builder’s Chief Executive Ocer (or other ocer of either Party with authority to make nal decisions subject only to board approval and any required third party approvals) shall meet within ten days aer receipt of the written request for executive level negotiation, and attempt to resolve the dispute. . . . ere shall be at least one meeting between Authority’s Executive Director of Capital Programs and design-builder’s Chief Executive Ocer (or such other ocer described above). 19.2.4.2 If Authority’s Executive Director of Capital Programs or design-builder’s Chief Executive Ocer (or such other ocer described above) is not available during the time period he or she needs to participate in any dispute resolution procedure, the person authorized to perform any or all of such ocer’s duties during his or her absence may participate in said dispute resolution procedure instead. 19.2.4.3 Authority will issue a written Authority Decision to design-builder within ve business days aer the meeting between Authority’s Executive Director of Capital Programs and design-builder’s Chief Executive Ocer (or such other ocer described above) described in Section 19.2.4.1; provided that if no written decision is issued, Authority shall be deemed to have denied design-builder’s protest and an Authority Decision to that eect shall be deemed received by design-builder at the end of such ve business day period. 19.2.5 Chief Executive Ocer Resolution 19.2.5.1 Authority’s Chief Executive Ocer and design-builder’s Chief Executive Ocer shall meet within ten business days aer receipt of the written request for chief executive ocer level negotiation, and attempt to resolve the dispute. ere shall be at least one meeting between Authority’s Chief Executive Ocer and design- builder’s Chief Executive Ocer. Excerpt 57 – Dispute Resolution Alaska Way Viaduct (SR 99) Bored Tunnel Alternative DB Project, WSDOT 24.2 Disputes Review Board e Disputes Review Board (“DRB”) is hereby created as part of the dispute resolution process to be utilized when WSDOT and Design-Builder are unable to resolve the dispute through negotiations and prior to the ling of a claim pursuant to Section 24.3. e DRB will consider disputes referred to it and furnish recommendations to WSDOT and Design-Builder to assist in the resolution of the dierences between them. e purpose of the DRB response to such issues is to provide nonbinding ndings and recommendations designed to expose the disputing parties to an independent view of the merits of the dispute.

NCHRP LRD 86 77 a. Size and Complexity Many large, complex projects include DRBs as their primary dispute resolution forum. Contractors oen push to have DRBs on projects. But prior to going to a DRB, there is oen an esca- lation process in the contract, requiring project level and then executive level negotiations, and sometimes mediation, prior to submitting a matter to the DRB. is informal escalation ladder was identied by several owners as key to getting claims settled and keeping the projects moving. is may be connected to the observation that large projects tend to have a signicant number of sizable claims. By partnering, the parties avoid the time and eort that goes into a DRB hearing and can focus on keeping the project moving forward. b. Project Delivery Method DRB’s are frequently included in alternative delivery contracts, possibly due to the leverage held by the short-listed contractors in the proposal process. Some of the interviewees stated a belief that P3 projects seemed to have more claims than projects using other methods, and those claims were typically related to diering site conditions where the contract shied signicant risk to the con- cessionaire. ese claims can be very expensive and very disrup- tive and are thus less likely to be resolved through the dispute resolution ladder and more likely to be submitted to the DRB. initial partnering retreat to discuss dispute resolution methods followed by execution of a partnering charter. Although this charter does not constitute a contract modication, it helps to set the framework for ongoing collaboration and encourages the parties to resolve disputes using alternative dispute resolution techniques. e goal of partnering is to ensure that the parties remain in communication to achieve win-win results and maxi- mize the eort of DRBs or neutral experts in case of disagree- ments. Some of the projects studied used a non-binding process (See I-69 Major Moves Project example in Excerpt 58), while others used a binding process. However, partnering is not a “miracle cure” and has its pit- falls. Although partnering tries to create a “team” that eliminates the “us-versus-them” mindset, it is an abstract attitude that can be dicult to maintain. Partnering cannot guarantee success, particularly for projects facing major issues where each party is likely to get entrenched in its own position and it will be di- cult to get senior management to agree to compromises. Never- theless, partnering’s chances of success may be improved if the facilitator has enough construction experience and expertise to create solutions and allow more time for frequent follow-ups so that problems can be identied and dealt with earlier. Excerpt 58 – Dispute Resolution I-69 Major Moves, INDOT & Indiana Finance Authority 19.1 Partnering 19.1.1 e provisions of this Section 19.1 are not part of the Informal Resolution Procedures or the Dispute Resolution Procedures contemplated under this Agreement. Compliance with the provisions of this Section 19.1 or the terms of any partnering charter is not required as a condition precedent to any Party’s right to initiate a claim or seek resolution of any Dispute under the relevant procedures specied in this Section 19. IFA and Design-Build Contractor have developed and intend to continue fostering a cohesive relationship to carry out their respective responsibilities under this Agreement through a voluntary, non-binding “partnering” process drawing upon the strengths of each organization to identify and achieve reciprocal goals. 19.1.3 e objectives of the partnering process are (a) to identify potential problem areas, issues and dierences of opinion early, (b) to develop and implement procedures for resolving them in order to prevent them from becoming Claims and Disputes, (c) to achieve eective and ecient performance and completion of the Work in accordance with the PPA Documents, and (d) to create mutual trust and respect for each Party’s respective roles and interests in the Project while recognizing the respective risks inherent in those roles. 19.1.4 In continuance of their existing partnering process, within ninety (90) days aer the Eective Date IFA and Design-Build Contractor shall attend a teambuilding workshop and through such workshop negotiate and sign a mutually acceptable non-binding partnering charter to govern the process of partnering for the Project. e charter shall include non-binding rules and guidelines for engaging in free and open communications, discussions and partnering meetings between them, in order to further the goals of the partnering process. [***] 19.2 Dispute Resolution Procedures 19.2.1 General Provisions Disputes Governed by ese Procedures (a) Any Claim or Dispute arising out of, relating to, or in connection with this Agreement that is not resolved by partnering per Section 19.1, including the question as to whether such dispute is subject to nonbinding arbitration, shall be resolved pursuant to this Section 19.2.

78 NCHRP LRD 86 stop work responsibilities, costs to terminate subcontractors and vendors. ese risks may be allocated based on the circum- stances of suspension and termination. a. Size and Complexity Project size and complexity should not aect whether a con- tract has suspension and termination clauses, as virtually every construction contract should have them. Excerpt 59 presents a suspension and termination provision used on the VDOT I-64 Hampton Roads Bridge-Tunnel Expansion project. e permitted periods allowed for suspensions for conve- nience may vary based on the size and complexity of a project as multi-year contracts can more easily absorb longer suspen- sions, and complex projects may require the owner to suspend work more frequently to accommodate interests impacted by the project. b. Project Delivery Method ere is a signicant dierence between a DB contract ver- sus a P3 contract with respect to the grounds for a termination for default and related payments. P3 contracts will usually in- clude certain nance-related defaults as well as those for severe underperformance. Compensation for termination of a DB contract for convenience typically includes recovery of docu- mented costs for all work performed, including mobilization, as well as costs of demobilization and work done to secure the project for termination, including reasonable overhead and ac- counting for any refunds payable with respect to insurance pre- miums, deposits, or similar items. e design-builder is also en- titled to a fair and reasonable prot on work performed if it can establish that it would not have sustained a loss on the project. e design-builder may also receive costs incurred in settling and paying claims associated with the termination. When a design-builder’s contract is terminated for de- fault, the design-builder and its surety are liable to the owner for the cost to complete the work along with losses incurred by the owner and third parties, administrative costs, and liquidated damages due and owing. ese amounts are deducted from the remaining contract balance, and if the contract balance is not enough to cover those costs, the design-builder and surety will be liable for the excess amount. Given the relative newness of the P3 delivery method, one owner commented that DRBs may not be well suited for P3s at this time because board members are not always knowledgeable about the delivery method and issues unique to P3s. c. Summary Recommendations It is critical to provide for dispute resolution in any contract for a mega project. e rst challenge is in determining which process to use. Owners and contractors have diering views as to which is the most appropriate method. At a minimum, the dispute resolution process should include a mandated nego- tiation phase. Partnering can be eective, provided the parties are committed to the process and they have selected an eec- tive facilitator. DRBs, whether binding or non-binding, are a commonly used dispute resolution option for mega projects. Properly formulated and used, DRBs can quickly and eciently address disputes. However, where the parties have diametrically opposed positions with respect to an issue, the DRB process can become similar to full-scale litigation, without appellate review. One best practice that has emerged from the interviews is to have at least one attorney on the DRB panel—preferably as the chair—as well as members with relevant technical expertise who will understand the complex engineering issues associated with disputed issues. is can help the DRB to focus on the con- tract terms in making their recommendations. 5. Suspension and Termination Suspension in construction refers to taking a temporary pause on a contractor’s work. Termination refers to ending or concluding a contractor’s work with no intention to resume. ere are events during the course of construction where the owner’s interest would be best protected by taking one or both of these two actions, which require clauses in the contract to allow them and specify how they will be executed. Contracts should contain suspension and termination clauses for use in situations where the owner needs to suspend or terminate work for either convenience or default of the con- tractor. In some circumstances, the contractor may also have the right to suspend or terminate the work. e suspension and termination provisions should address how to allocate the vari- ous risks, such as curing defaults, protection of the work, other Excerpt 59 – Suspension and Termination I-64 Hampton Roads Bridge-Tunnel Expansion, VDOT Department may, without cause and for its convenience, order design-builder in writing to stop and suspend the Work. Such suspension(s) shall not exceed sixty (60) consecutive days or more than ninety (90) days in the aggregate during the duration of the Project. b. In case of suspension of work, Department shall issue instructions and directions to design-builder as to the implementation of the suspension, which may include directing design-builder to develop a maintenance and transition plan. Unless specically directed otherwise by Department, design-builder shall, during the suspension period, continue to have full responsibility for the Project, including but not limited to its obligations to take such precautions as may be necessary to prevent damage to the Work, comply with Governmental Approvals, and ensure public safety.

NCHRP LRD 86 79 of their funds for the D&C of the facility. Such payments will not be for the full amounts outstanding, but rather a portion of them such that the lenders have an incentive to make sure the concessionaire does not default on the contract. 6. Operations and Maintenance As project delivery methods for transportation projects have evolved and project sizes have increased, owners have increas- ingly been interested in including O&M in the contract, to en- sure that the design-builder has appropriate incentives to design and build a project that will be cost-eective to operate and maintain in the long term. In traditional DBB, CM/GC, and DB projects, the contractors are usually not responsible for O&M of the completed project, although they may have short-term warranty obligations. However, as the delivery method moves toward the P3 end of the spectrum (DB-maintain (DBM), DB-nance-maintain (DBFM) DB-nance-operate (DBFO), or DB-nance-operate-maintain (DBFOM)), O&M becomes a critical component of the project.221 e contract documents include standards for operations, maintenance, and construc- tion to establish the quality expectations and protect the public interest and concerns. 222 Excerpt 60 is from the I-77 Express (HOT) Lanes Project P3 contract provisions that address the 221 See, e.g., Federal Highway Administration, Design-Build Finance Operate Maintain (DBFOM) Concessions, Center for Inno- vative Finance Support, https://www. wa.dot.gov/ipd/alternative_ project_delivery/dened/new_build_facilities/dbfom.aspx. 222 Iris N. Ortiz, Jerey Buxbaum, Protecting the Public Interest in Long-Term Concession Agreements for Transportation Infrastructure, 13 Pub. Works Mgmt. & Pol’y (Oct. 1, 2008), at 126-137. Terminations of P3 contracts are more complicated than DB contract terminations, with the contract including extensive provisions setting forth how termination compensation will be paid. e key dierence between termination compensation for a P3 project and a DB project relates to the private nancing included in a P3 deal and the protections required by lenders before they will lend money to the project. Accordingly, for a P3 contract, even if the termination is based on a default by the concessionaire, the owner will be obligated to make payments to enable the concessionaire’s lenders/bondholders to recover at least a portion of their investment as compensation for the use of their money to deliver a facility or portion thereof to the owner. c. Legislation Legislation in some states provides requirements and limita- tions regarding termination payments for P3 projects.220 d. Summary Recommendations Contracts should contain suspension and termination clauses to allow the owner to stop or terminate the work for either the owner’s convenience or due to a breach or poor performance on the part of the contractor. Termination provisions must clearly set out the procedures to be followed and payments, if any, to be made. While it is very unlikely a termination for default will result in payment to the defaulting contractor, the termination of a P3 contract for default will almost always include provisions for payment by the owner to compensate the lenders for the use 220 See Tex. Transp. Code §  371.101 (2021), (Termination for Convenience) and §  371.102 (2021), (Termination of Certain Comprehensive Development Agreements). Excerpt 60 – Operations & Maintenance I-77 Express (HOT) Lanes Project, NCDOT 8.2 Developer Obligations…. 8.2.1 General. e O&M Work performed by Developer shall be in accordance with (a) Good Industry Practice, as it evolves from time to time, (b) the requirements, terms and conditions set forth in the CA Documents (including the Technical Provisions and Technical Documents), as the same may change from time to time in accordance with the terms hereof, (c) all Laws, (d) the requirements, terms and conditions set forth in all Governmental Approvals, (e) the approved Developer Management Plan and all component parts, plans and documentation prepared or to be prepared thereunder, and (f) all other applicable safety, environmental and other requirements, taking into account the Project Right of Way limits and other constraints aecting the Project. Developer is responsible for keeping itself informed of current Good Industry Practice. In addition to performing all other requirements of the CA Documents, Developer shall cooperate with NCDOT and Governmental Entities with jurisdiction in all matters relating to the O&M Work, including their review, inspection and oversight of the operation and maintenance of the Project. … 8.9 Handback Requirements 8.9.1 Handback Condition. Subject to Section 8.9.3.2, on the Termination Date, Developer shall provide the Project and other Elements maintained by Developer under the CA Documents, including all Upgrades, to NCDOT, at no charge to NCDOT, in the condition and meeting all of the Handback Requirements, including the requirements for Residual Life at Handback specied in the Handback Requirements.