As a response to an increasingly demanding market place, project delivery methods have evolved from the more traditional methods of design-bid-build, design-build, and construction-manager-at-risk into what is known as Integrated Project Delivery (“IPD”). In the typical construction contract, each party seeks to avoid and transfer risk to other parties. The IPD approach employs a different philosophy—the project participants accept and manage design and construction risks as a team. The pure IPD method often does this with a single, multi-party contract that is executed by the owner, general contractor, and designer. The team members to a multi-party contract share financial risks and rewards using a profit/incentive pool that is based upon measurable project-outcomes. Team members collaborate on how the profit and incentive pool is structured to ensure that each member is accountable for its contribution to the project outcome. The goal is to motivate each member in a way that encourages candid communication and accountability for overall design and construction.
When contractual relationships are properly structured, the IPD approach has repeatedly proven to reduce the number of requests for information, change orders, delays, disputes, and claims made at the project. The risk of those contingencies are collectively managed by the project participants, who prioritize the owner’s objectives over protecting their bottom line. As discussed in this post, the IPD approach facilitates this end by directly linking project participants’ financial incentives to the achievement of negotiated, agreed-upon, and measurable goals that tie back to the owner’s objectives.
There are a number of ways to structure the IPD relationships to achieve that goal. The propriety of a given approach will depend on the type of project, team members’ dynamics, and how the owner wants to manage project risks. Put another way, the IPD process and contracting structure can and should be tailored to the specific needs of a given project. It is important to note that the IPD model discussed below focuses primarily on the structure found in the American Institute of Architects (“AIA”) C191 contract documents. ConsensusDOCS 300 is another commonly used suite of IPD contracts. Suffice to say that one must first become familiar with how IPD generally works before deciding which of these approaches is best suited to one’s construction project.
Unique Features of an IPD Multi-Party Contract
1. Structuring the Project Staffing
The project participants typically take a tiered approach to staffing the project. The AIA C191 requires each team member to assign staff to one of two project administration teams: the Management Team or the Executive Team. The Management Team plans and manages the day-to-day project activities of each member’s project-implementation staff. The Executive Team oversees the Management Team and makes decisions that will have more significant impact on the project’s budget, schedule, and quality. If the Management Team cannot unanimously resolve an issue, they escalate that issue to the Executive Team, which is then asked to unanimously resolve the issue. Issues that cannot be resolved by the Executive Team are referred to a third-party neutral whom the project participants agree upon ahead of time. The unanimous nature of their decision-making is key to the ensuring that each team member has an equal say unless they agreed otherwise at the beginning of the project.
2. Developing the Target Cost and Target Cost Design Proposal
The project’s initial conceptualization and criteria development phases are the foundation of the IPD. They are foundational because those phases determine the project’s performance goals such as the owner’s final programming, quality, workmanship, schedule, budget, sustainability, and long-term maintenance requirements. The team generates a Target Cost and Target Cost Design Proposal that the owner then accepts, rejects, or asks be revised until they are acceptable. If they are eventually accepted, the team then collaboratively develops the detailed design and construction/implementation plan.
This structure highlights one of the central ways in which the IPD model differs from traditional delivery models; an IPD team uses the Target Cost Design Proposal to develop the project’s final design. In other words, the cost dictates the design. On the other hand, the more traditional approach requires that the general contractor generate a cost estimate based on the design information available at that time. The traditional approach is ripe for cost overruns because the contractor is incentivized to submit a bid (often based on incomplete information) that is as low as possible, while leaving room to make up for shortfalls using exclusions, change orders, hidden contingencies, or any number of other mechanisms. The goal of the IPD is to eliminate those perverse incentives and reorient the focus to be on collectively containing the project’s costs while achieving the project’s goals.
3. Incentive Pool Development
The team members collaboratively develop how the incentive pool of funds will be structured. They also collectively decide how those funds will be allocated among the members based on pre-determined and agreed upon tangible goals. There a numerous ways that this can be done. Typically it involves setting goals that relate to the project’s performance metrics such as quality, schedule, safety, changes, communications, business, and environmental issues.
Quantifying those goals can be done by pro-rating reward payments using targets related to, for example, the number of punch list items at the end of the project, requests for information, and change orders issued during the construction phase. Schedule-related metrics might include delivery speed such as achieving completion dates or construction pacing as measured by number of square feet completed per day. Project changes might be tracked on the basis of change-order- or request-for-information-processing times. The variables and how they are quantified is only limited by the team members’ creativity.
4. Continuous Design Validation and Optimization
IPD is transparent and open book, allowing the team members to immediately coordinate value engineering and other cost-savings and design-optimization ideas whenever such opportunities arise. This is done using a Building Information Model (“BIM”) that allows each team member to participate in design development. Using a BIM eliminates many, if not all, of the pitfalls associated with using multiple design-related drawings from multiple sources by seamlessly integrating and consolidating that information in real time. This is critical because one of the most common issues driving cost overruns and project delays is a lack of coordination between various trades and the design-drawings. This is especially true on complex, multi-trade projects such as health-care facilities or manufacturing plants.
Sophisticated BIMs now allow project participants to track in real time the numerous project-critical variables that include not only construction details but also schedule and cost data. When the latter two variables are included in a BIM, the BIM is described as a 4D or 5D model, respectively. That way, use of a BIM ensures design conflicts are discovered and resolved well in advance of the trades beginning their work in the field.
5. Joint Project Controls—Project Management Information Systems
The team members exercise joint control over decisions during the project’s life span. The AIA C191 contract documents facilitate this using a responsibility matrix that breaks down the project decisions into various categories and subcategories for each stage of the project’s life cycle. Such joint control is best managed within a web-based, centralized database that is often called a Project Management information System (“PMIS”).
One way to think about this aspect of the IPD is that BIM organizes the physical structure’s design-related information and PMIS organizes the project’s administration-related information. PMIS is an efficient way to foster collaboration because administration-related information is entered once and is then scrutinized by everyone. The resulting scrutiny increases the likelihood that errors will be discovered sooner rather than later.
6. Liability Waivers
The team members agree to waive certain types of first-party claims to ensure candid contributions from each member without fear of reprisal. This is why the incentive pool is designed to reward the members for their contributions. The unique restructuring of each party’s liability and risk profile can, however, create issues regarding an insurer’s willingness to insurer the project. Insurers are slowly recalibrating their policies, but some are still uncertain about how to insure an IPD project. One way many IPD projects address the issue is to use an Owner Controlled Insurance Plan. IPD participants should consult with their insurance broker early in the process in order to give themselves sufficient time to secure the required insurance.
When Should One Consider Utilizing an IPD Contracting Model?
Even though the IPD approach has been in use for well over a decade, project participants often hesitate when asked to participate in a project that will use IPD. That hesitation is understandable. Not only is IPD new to many but, as discussed above, the approach is markedly different than how traditional construction-project contracts are set up. With the right type of project, prospective participants typically move past that hesitation once they learn more about how and why the IPD method works. However, the IPD model is better suited for certain types of projects than others.
Generally, an IPD model is well suited for projects that have the following characteristics: (i) complex construction that requires sophisticated multi-trade coordination such as health-care facilities, manufacturing plants, and infrastructure projects; (ii) sufficiently large (>$5M) to render the increased initial administrative/participation costs economical; (iii) where the team members have a high level of trust and willingness to collaborate; (iv) each team member is familiar with and can contribute to a BIM (and PMIS); (v) each team member has sufficient staff and can address issues in real time; (vi) the members have worked together in the past; and/or (vii) there is an opportunity for continued working relationships on subsequent projects. If a project has all or most of those factors, that project will be much better suited for an IPD contract.
This post briefly touches on some of the complex issues that must be considered and resolved when negotiating an IPD contract. There are other important issues that the project participants need to consider before committing to using such a model. However, with the right team whose members trust one another, IPD has proven to be a very effective delivery model; it dramatically decreases the risks that a project will be delivered late, over budget, and/or be lower quality than anticipated by the owner.