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DLA PIPER RUDNICK GRAY CARY
ATTORNEY- CLIENT PRIVILEGED DOCUMENT/DO NOT DISCLOSE
To: Chairman Linda W. Cropp and Council of the District
Following the February 3, 2006 Mayoral briefing of the Council of the District of Columbia (the "Council") we were provided copies of (a) the Design Build and Completion Guarantee Agreement (the "GMP Agreement") to be entered into between The D.C. Sports and Entertainment Commission ("DCSEC") and Clark/Hunt/Smoot, a Joint Venture ("Contractor") (including the GMP Basis Documents), and (b) a commitment letter (the "AWC Commitment") dated February 3, 2006 executed by the Anacostia Waterfront Commission ("AWC") intended to reduce the exposure of the District to certain types of potential cost overruns which may arise in the course of site acquisition, land assemblage and remediation of environmental hazards associated with the proposed South Capitol Street development site for the baseball stadium complex (the "Baseball Site"). We have reviewed the GMP Agreement and the AWC Commitment; (collectively, the "Agreements") and set forth herein are our observations and conclusions.
It should be noted that for purposes of this summary we have assumed that all actions required to be taken by the Council under the Agreements will be taken (including timely approval of the Stadium Lease, final plans and specifications, public financings (and the taxexempt status thereof) , TIF(s), PILOT Agreements and other matters referenced in the materials). We have also assumed that location, density and requirements affecting the private development rights to be created, as referenced in the AWC Commitment are acceptable and will be approved by the District.
Our conclusions can be summarized as follows:
Conclusion No. 1 The GMP Agreement is well drafted and provides some comfort regarding the costs to be incurred by the District in development of the proposed Stadium. However, (a) given the current status of architectural planning for the Stadium, (b) the need to use a "Design-Build Fast-Track" approach to construction given the limited time to complete (which permits construction of project elements prior to completion of all architectural plans, engineering and shop drawings for such elements), and (c) the conditions to and exclusions from the Contractor's Guarantee, there exists no hard cap on the cost to the District arising out of the Stadium project; and
Conclusion No. 2 While the AWC Commitment provides some protection against certain potential costs overruns relating to land assemblage and environmental remediation, (i) the AWC Commitment is not unlimited and therefore exposure to the District for costs in the categories covered, while reduces, still exists, (ii) the "credit" standing behind this Commitment is dependent and conditioned on financing to be obtained (the terms and availability of which are uncertain), and (iii) while the AWC Commitment indicates that the sources of funding for the Commitment "do not include existing District revenue sources" (emphasis added), the identified sources for funding include conditional commitments of private developers to pay for air rights to be created at a price that may or may not reflect: fair market value, TIF and PILOT programs to be adopted by the Council, and the dedication of parking revenues, thereby creating a highly contingent Commitment which may deprive the District of additional revenues for rights to be created, property taxes and other potential revenue sources associated with the Stadium development which the Council may have assumed it or its agencies would receive.
In order to assist the Council in its evaluation of the documents it has received, a more detailed discussion of the basis for the foregoing conclusions which addresses certain issues presented or questions is raised by Council members follows:
Question: Does this GMP Commitment provided a "cap" on the District's liability for hard construction casts relating to the Stadium Project?
Discussion: While the GMP Agreement is a tool used by owners/developers to tie contractors to certain cost commitments, the need to use a Design Build Fast Track approach to the Stadium project (which materially increases the likelihood of change orders when compared to Owner-Contractor Agreements based on full plans and subcontractor bids for labor and materials) severely impacts the, parties' ability to provide a commitment for a true "hard cap" on District costs. Change orders (which we must assume will increase the Contract Price) do not require Contractor to use its contingency and, accordingly, the aggregate price increase, net of any price decreases, of all such change orders will increase the District's financial obligation. While the DCSEC Cost Estimate does provide for a significant owner contingency to address these net increases, it cannot be assumed that this contingency will be adequate. Given the lack of preliminary or final. architectural and engineering plans for the Stadium and the time constraints for completion, Contractor, working with DCSEC, undoubtedly did what it could to provide a meaningful "Guarantee," however the Agreement is fairly porous in that innumerable circumstances within and outside of the control of the District permit the Contractor to increase the GMP or delay the "Contract Time" (outside date for completion). While it is possible that some value engineering during the design phase or after construction bids are received may provide alignment of project costs and the District's maximum approved funding, value engineering can only occur to extent the reduced scope and costs are consistent with the Program Requirements and GMI Basis Documents, which include the minimum requirements imposed by Major League Baseball
Question: What circumstances permit the Contractor to increase the GMP Price or delay the Contract Time.
Answer: The following are a few of the provisions of the GMP Agreement which would permit the Contractor to make changes in the guaranteed price or time for delivery of the Stadium (references are to Sections of the GMP Agreement):
General It should be noted that the scope of the project set forth in the GMP Basis Documents is subject to differing reasonable interpretations and the Contractor will claim "extras" to the extent design is not "reasonably inferable from and a logical development of the design reflected in the GMP Basis Documents." The better owner approach would be to require Contractor to design and build all scope and improvements which are "reasonably inferable" from the Program Requirements and GMP Basis Documents.
Section 2.1 The foregoing potential variance in interpretation of what is required by the Program Requirements and GMP Basis Documents is of particular significance in that this section allows the Contractor unilaterally to (a) revise the design and/or (b) perform value engineering, to ensure that the GMP cost or time to complete will not be exceeded, so long as the changes comply with the Program Requirements and GMP Basis Documents, as so interpreted. If the District or DCSEC requires design changes or even clarification after long lead items are ordered by Contractor, such changes will constitute change orders and will impact the price and/or time to complete.
Section 3.1 The GMP is predicated on certain assumptions and clarifications set forth in Contractor's "GMP Design to Budgets" attached as Exhibit D to the GMP Agreement. If any such assumption or clarification is inaccurate, increases resulting therefrom will impact the costs and/or time to complete.
Section 3.6 This Section permits Contractor to adjust price or time based on the existence at the site of archaeological or historical remains. If such items are discovered, they are not covered by the AWC Commitment.
Section 3 7 This Section permits adjustments in price or time based on the existence at the site of hazardous materials. Price may be increased if the cost of remediation exceeds the $8 Mil. budgeted therefor. While the AWC Commitment purports to cover the risk of additional costs, the issues regarding reliance on the AWC Commitment noted in Conclusion No. 2 above exist.
Section 3.8 This Section identifies the areas of greatest risk for District funded cost overruns and delays in completion. As stated in this Section, "it is economically impractical for the Design-Builder to assume certain risks" mating to the Stadium project. The eleven categories of causes for increases in price and/or delays include many which the District (or its agencies) control and some which are outside of its control. These should be examined carefully. Of particular interest are (a) subsection 184.108.40.206 (increases arising from labor disputes "not unique to the Project), (b) subsection 220.127.116.11, which permits a delay in the projected completion date if land assemblage is not completed by 3/1/06, and increases in price if the land assemblage is not completed by 6/1/06, (c) subsection 18.104.22.168 (delays in obtaining zoning, land use and regulatory approvals), and (1) subsection 22.214.171.124 (delays arising out of "an act or neglect of the [DCSEC] or its employees, or anyone else for whom [DCSEC] is liable." In addition, pursuant to Section 3.8.6, Contractor may procure and charge to the District as an extra a delay damages insurance policy, which is highly unusual and may be very expensive.
Section 5.4 This Section delineates 18 categories of owner responsibility. Verification that all such matters have been adequately budgeted for is required, since Contractor will not be required to pay for any natters arguably within the identified categories.
Section 7.2 and 16.3 The combination of the Change Order provisions (Section 7.2) and the definition of a "Change Event" (Section 15.3) create material risk of cost increases. Pursuant to Section 16.:3 "Any condition, event, act, omission or breach, other than issuance of a Change Directive (by DCSEC), which the Design-Builder believes entitles it to a change in the Guaranteed Maximum Price, the Base Fee, they Incentive Fee, or the Substantial or Final Completion Date" permits Contractor (pursuant to the procedures set forth in subsection 7.2.4) to demand an adjustment in price or time to complete. This carve-out is extremely broad and swallows up the GMP by permitting unilateral Contractor determinations of the existence or occurrence of Change Events based solely on its "belief" which are binding on the District.
It is clear that much time and effort has been spent to provide the Council with some comfort that Stadium project costs will not exceed its expectations. It is very possible that the documents reviewed. provide as much protection a:; is commercially available at this stage of the project. However, cost certainty or a fairly firm "Guarantee" thereof is not afforded by the documents.
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