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Government and People
DC SPORTS & ENTERTAINMENT COMMISSION
Chair Contact Info: Mark H. Tuohey III
Vinson & Elkins LLP.
The Willard Office Building
1455 Pennsylvania Ave., N.W.
Washington, DC 20004
Fax (202) 639-6604
To: The Honorable Linda W. Cropp
From: Mark H. Tuohey, III
Reference: DLA Piper Memorandum 6-Feb-2006
Date: February 6, 2006
Subject: Response to DLA Piper Memorandum
We have reviewed the memorandum prepared by the Council's consultant with regard to the proposed Design-Build and Completion Guarantee Agreement between the D.C. Sports and Entertainment Commission and Clark/Hunt/Smoot (the "Design-Build Agreement"). For your convenience, we have attached a marked-up copy of the consultant's report which sets forth our response with regard to each of the issues raised by the consultant.
We have provided a detailed response with regard to all of the issues raised by the consultant. However, we would like to point out the following items where the consultant has mischaracterized the agreement or failed to consider significant issues that merit the attention of policy makers:
Project Delay - In conclusion number 1, the consultant seems to suggest that the District would be better served if the design was completed and the construction contract was purchased based on complete design documents. Such an approach is referred to as the "design-bid-build" approach. Such an approach would delay the project by at least 9 months and mean the ballpark would not be open until the 2009 season. The Baseball Stadium Agreement (the "BSA"), however, requires the District and the Sports Commission to use "reasonable best efforts" to complete the ballpark by 2008. If the District and the Sports Commission fail to use "reasonable best efforts", they would be exposed to a significant claim (in the tens of millions) for lost profits by MLB. Sports facilities are often built under a design-build or other fast-track construction method, and thus, there is a real risk that using a design-bid-build method as suggested by the consultant would not constitute "reasonable best efforts".
Moreover, the design-bid-build method suggested by the consultant would not eliminate the majority of the risks referred to by the consultant. For example, it would not eliminate the risks associated with zoning or assembling the land. It would also expose the District and the Sports Commission to some risks that would be covered by the design-builder under the proposed contract. Under the design-bid-build method, the Sports Commission would bear the risk of increases in construction cost (i.e. escalation) between now and the time the design-bid-build contract would be awarded in January 2007. However, under the proposed design-build contract, the design-builder bears this risk.
Value Engineering - The consultant contends that the design-builder has a unilateral right to value engineer this incorrect. This is incorrect. In the first place, the design-builder is required to deliver a ballpark that meets the "Minimum Design Requirements" and cannot implement a value engineering idea that would fall below the Minimum Design Requirements. As defined in the agreement, the term "Minimum Design Requirements" includes the agreed upon Program of Requirements. `See, for example, Section 2.1 which provides that the design-builder's right to value engineer is "subject to the Minimum Design Requirements" and Section 2.2.1 which provides that modification of the design shall not "result in a design that fails to meet the Minimum Design Requirements".)
Moreover, the design-builder is required to consult with the Sports Commission as the design is developed. This process is described in detail in Sections 2.2 and 2.3 of the agreement.
Clarifications & Assumptions - The consultant states that the GMP is predicated on certain assumptions and clarifications and that these can serve as the basis for a change in the GMP. The consultant is incorrect. Section 3.8.1 sets forth the only instances when the design-builder would be entitled to an increase in the GMP. Item #1 of the clarifications and assumptions expressly provides that "these clarifications are subordinate to the agreement to which they are attached, and the terms of the agreement shall prevail over any provisions that are inconsistent with the text of the agreement." Thus, they do not alter the scope of the design-builder's guarantee under the agreement.
Risk Transfer - The consultant's report provides that "[i]t is very possible that the documents reviewed provide as much protection as is commercially available at this stage of the project." We have tested the market place with three sophisticated, national builders and all indicated that they would provide similar guarantees and exclude risks similar to those excluded from the design-builder's guarantee. Thus, as suggested by the consultant, we believe the proposed design-build agreement transfers all of the risk that can be commercially transferred to the private sector.
In short, the proposed design-build agreement transfers all of the risk that can be transferred to a builder and represents the only viable alternative to delivery the project in accordance with the Baseball Stadium Agreement.
Should you have any questions or wish to discuss this matter further, please feel free to contact me.
DLA PIPER RUDNICK GRAY CARY
ATTORNEY-CLIENT PRIVILEGED DOCUMENT/DO NOT DISCLOSE
To: Chairman Linda W. Cropp and Council
of the District of Columbia
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
Response: This is incorrect. Section 3.1 provides that the Design-Builder shall deliver a Ballpark that meets the agreed upon Program of Requirements for a hard construction cost that does not exceed $320 million.
Moreover, the approach suggested by the Council's Consultant ("Consultant") would require the Sports Commission to delay the project by at least 9 months and would ensure that the Ballpark was not delivered until the 2009 season. Under the terms of the Baseball Stadium Agreement, the Sports Commission and the District government could be exposed to MLB's lost profits for late delivery if the District and the Commission fail to use "reasonable best efforts" to deliver the Ballpark by 2008. Thus, the Sports Commission and the District government could be exposed to significant damages if they were not to proceed as expeditiously as possible. A design-build delivery method is a customary method of project delivery for stadiums, and thus, it is quite possible that such a method of project delivery would fall within the definition of "reasonable best efforts."
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 reduced, 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.
Response: To be provided by AWC.
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 raised by Council members follows:
Question: Does the GMP Commitment provided a "cap" on the District's liability for hard construction costs 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 GMP Basis Documents, which include the minimum requirements imposed by Major League Baseball.
Response: The design-build agreement does provide a cap on hard construction costs. It contains, however, a number of exclusions that would exist in any commercial transaction. Such exclusions, however, would exist if the Sports Commission were to proceed with the methodology suggested by the Consultant. In fact, in a design-bid-build method suggested by the Consultant, contractors normally provide a more narrow guarantee of cost. Under such an approach, the Sports Commission would bear all of the risk until the design is completed. For example, if there was a significant increase in construction prices between now and the time the design is completed (say November 2006), the Sports Commission would bear this overrun. Under the design build approach that we have proposed, the design-builder will bear such cost overrun risks.
The conclusion reached by the Consultant fails to recognize the current situation facing the District government and the legal obligations under the Baseball Stadium Agreement (the "BSA"). In order to meet the delivery date established by the BSA, the Sports Commission must proceed with a fast-track method of construction. Given this reality, the Sports Commission could either use a design-build method of project delivery or a construction manager (either at risk or as an agent) method of project delivery. Under the Construction Manager method of project delivery, the owner (here the Sports Commission) would bear all of the design risk. We believe the design-build delivery method minimizes the risk at this stage of the project.
Section 3.8.1 of the Agreement provides an exclusive list of reasons that would justify an increase in the contract cost. These items are discussed below.
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.
Response: The Design-Build Agreement provides that the Design-Builder must deliver a Ballpark that meets the Minimum Design Requirements. The term Minimum Design Requirements means: (i) the agreed upon Program of Requirements; and (ii) the design documents (which are referred to as the GMP Basis Documents). Moreover, the term Minimum Design Requirements provides that if there is a conflict between the Program of Requirements and the GMP Basis Documents, the Design-Builder must meet the more expensive standard for an amount that does not exceed the GMP.
Therefore, the Consultant's position is incorrect.
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.
Response: The Consultant's position is incorrect. There are two issues here. First, the contract does not allow the design builder to implement value engineering that falls below the Minimum Design Requirements. Moreover, Section 2.3.1 requires the design builder to consult with the Sports Commission prior to implementing any such value engineering changes.
Second, the point being advanced should be of little concern to the District and the Sports Commission. The District and the Sports Commission are contractually obligated to deliver a ballpark that meets the Program of Requirements. By the Consultant's own admission, the design builder may not value engineer below this standard. Thus, there is no legal reason why the Sports Commission would be required to deliver a ballpark that exceeds the standard established by the Program of Requirements.
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.
Response: This is incorrect. Even if the design to budgets are exceeded, the contractor will be required to deliver a ballpark that meets the Program of Requirements for a Cost that does not exceed the GMP. As noted above, Section 3.8.1 establishes the only events that justify an increase in the GMP. The assumptions and clarifications referred to by the Consultant expressly provide that "these clarifications are subordinate to the agreement to which they are attached, and the terms of the agreement shall prevail over any provisions that are inconsistent with the text of the agreement."
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.
Response: This is correct. However, we believe the risk is minimal. The Sports Commission has undertaken an exhaustive environmental mitigation study that included an inventory of historical and archaeological resources. This study found that there were no significant archaeological or historical resources.
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.
Response: AWC has agreed to provide cost overrun coverage for this risk. We believe the amount provided by AWC is a reasonable level of contingency.
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" relating 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 (d) 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.
Response: Section 3.8.1 sets forth the exclusions to the guarantee. It should be noted that the Consultant, at the conclusion of the report, states that the contract provides "as much protection as is commercially available at this stage of the project". With regard to the items referred in above, please note the following:
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 matters arguably within the identified categories.
Response: The Sports Commission has included reasonable funding amounts for these expenses. The Office of the Chief Financial Officer has reviewed the estimate and concluded that the amounts be carried are reasonable.
Section 7.2 and 16.3 The combination of the Change Order provisions (Section 7.2) and the definition of a "Change Event" (Section 16.3) 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, the 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.
Response: The Consultant is incorrect. The term "Change Event" refers to an event that the contractor ."believes" may entitle it to an adjustment to the contract price. The change event provisions are procedural in nature but do not govern whether the contractor is entitled to increase the contract price. As noted above, Section 3.8.1 provides an exclusive list of items that would entitle the contractor to an increase in the price. Simply put, if the condition does not fall within Section 3.8.1, the contractor does not get an increase-in the price. The Consultant's reading of the agreement is incorrect.
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 as 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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