Complex capital projects across all industries, from health care, oil, gas, mining, manufacturing and power generation all have at least one thing in common. According …
We are often asked whether negotiating an IPD agreement takes longer than negotiating a traditional agreement, such as a construction manager at risk contract. The answer is probably “yes”, although that answer is incomplete.
A better answer, would be that negotiating and crafting the IPD agreement is an important step that increases the likelihood that a project will be successful. Although we have long believed this, it was recently confirmed in a superb set of case studies published by the University of Minnesota. One of their “takeaways” was that “For the teams who were heavily invested in developing the contract, the contract discussions were structured to serve as training about IPD, and the teams believed that this contract-development process formed the foundation for trust, respect, and collaboration”.
We believe this alignment function supports the common understanding necessary for collaboration. In addition, during negotiation team members first learn and demonstrate how they will work together. For these reasons, contract negotiation is often the team’s first collaborative act.
Negotiation is the test drive
The quality and chemistry of the project team—including the owner—is critical to success. It is fairly easy to evaluate the experience and competence of team members—a good proposal and interview process should garner most of the needed information. But assessing the ephemeral qualities is more difficult. How well can the team work together? Can team members put project interests above their own? Are they transparent? Will they freely share information? Will they create the communicative environment necessary for innovation and creativity? What will the team members do when the going gets tough?
It is easy to be collaborative—or at least profess collaboration—during the interview process. The prospective team members aren’t faced with thorny problems with real consequences that can only be solved by putting the project ahead of their own interests. The rehearsed and polished presentations sparkle, but they are like a first date where everyone strives to make a good impression and carefully masks their less appealing qualities. But when you start to negotiate the contract, you get a glimpse of life after the honeymoon.
What you hope to see in IPD negotiation is a perceptive blend of personal and group interests. The basis for this IPD negotiation mindset was neatly modeled in the bar scene in the movie, A Beautiful Mind. Russell Crowe, playing Nobel Prize mathematician John Nash, had a breakthrough moment when he realized that he and his friends would have better dating success if they each did what is best for the group as well as best for themselves. The best outcome didn’t come from pure competition, (every man for himself) but from collaborative negotiation. In the same way, IPD negotiation is not selfless, but it does recognize that putting the project first while considering individual interests optimizes everyone’s outcome.
We often see negotiators that either understand this implicitly, or quickly have their own breakthrough moments. When faced with a negotiation problem, they try to understand the different viewpoints and interests and jointly develop a strategy that respects everyone’s legitimate interests. These firms will be good participants and partners throughout the project.
Less often, we see firms that can’t see beyond their own self-interest. These firms are happy to get new work but don’t really understand the IPD process. They can be mistrustful and view the negotiation process strictly from their own perspective. They can’t (or don’t care) to understand other’s legitimate concerns. When they realize that collaboration is contractual—that they will be bound to the project and to each other, they get nervous, defensive and then balk or try to skew the deal in their favor. And if this is how they act during the honeymoon, just think how they will act when the going gets hard.
Another problem exposed during negotiation is the power of the home office. We see this occurring when the local principals can’t make decisions because they must get approval from a senior decision maker who is distant from the project and is not committed to collaboration. In other instances, corporate policies (that might be irrelevant in an IPD project) can’t be modified. A corporate culture of home office control undermines the rapid and reliable decision making required by IPD.
We have had several instances where the negotiation process resulted in resetting the team. As doubts arose about the suitability of a team member, the team engaged in serious discussions to determine whether the non-collaborative participant really wanted to work on the IPD project. In some cases, this resulted in an “attitude correction” and in other cases, the firm left the IPD project and was replaced. Although these weren’t pleasant situations, it was far better to resolve them before the project was underway than it would have been if discovered later.
So, returning to the initial question. Does it take longer to negotiate an IPD agreement? Yes, because you are doing the real work of determining whether the team can work together. In our normal process, negotiation includes the team jointly assessing risk, opportunities, targets and distribution of responsibilities, i.e., figuring out how to work together. Contract negotiation is the test drive, where you get the opportunity to really see the team in action and to make changes before it is too late.
Negotiation Aligns the Team
We explained in Values First the importance of understanding why a project was being done and agreeing on the key values that will guide the project. Negotiation of an IPD contract, if properly done, addresses why the project is being undertaken, how it will be done, and what the team wants to accomplish. In short, it is a critical step in team alignment. In our workflow, the contract doesn’t lead this process, it follows and documents it.
The flowchart below lays out a generic approach from initiation to execution of an IPD agreement. Although it includes development of the IPD contract, it also has key workshops to develop the business and contract model, refine the model with the team, and jointly negotiate the final terms. In a 2-day contract workshop, easily one day is spent on training and alignment.
One observation from many contract workshops is that if the training/alignment is done thoroughly and well, the actual time spent negotiating the “legal” contract terms is greatly diminished. In one notable project, we held the project kickoff prior to the contract negotiation session because of scheduling difficulties. I withstood many frosty stares, when I announced to the lawyers who came ready to advocate for their client’s interest, (complete with binders bristling with tabs marking “major issues”) that we might get to contract language on the second day. But on the second day, after training and alignment, the lawyers told us that with this better understanding, they had very few comments to make. Had we started with contractual language, the legal side of the negotiation would not have gone so smoothly. Since that experience, we prefer to have training and alignment precede negotiating the IPD contract.
Negotiating the IPD agreement is hard, but valuable work. If done correctly, it starts teams on their collaborative journey and helps align them to the project goals. Moreover, it gives each participant the opportunity to learn who their potential partners are while the stakes are still low. If you could skip this by just signing a form contract with others that you had just met, would you really want to?
 It is incomplete because we often are negotiating with multiple key trades and consultants at one time, whereas in a traditional project these would likely be independent and sequential negotiations, that can take more effort. But as that isn’t the key point of this article, we will not worry about this detail.
 Cheng, R. et al, 2016. Motivation and Means: How and Why IPD and Lean Lead to Success. Place of Publication: University of Minnesota. <http://arch.design.umn.edu/directory/chengr/>
This post was originally published at hansonbridgett.com.
Tri-Party vs Multi-Party IPD contracts.
The tri –party agreement is certainly a step in the right direction by combining the 3 most influential parties in a building project, the Architect (A), CM/GC (C) and Owner. This can certainly help align the major stakeholder interests to one goal and dramatically reduce the finger-pointing of a traditional contract model. The multi-party agreement casts a wider net over the key trades and design partners as well. I have seen as many as 17 partners on one contract with the average being closer to 8. A key to making this determination is to understand what behavior a team wants from the trade partners (design and build).
Tri-Party Agreement – A contract where the owner, primary designer and primary builder execute a single contract for delivery of a project. Other partners for design and construction may be bound to the same terms as the primary signatories yet they do not sign the base agreement.
Multi-Party Agreement – A contract where the owner, primary designer, primary building and other key parties to design and construction execute a single contract for delivery of a project. Each member that is bound to the terms of the agreement is a primary signatory with at least 4 signatories and as many as the team chooses to include in the contract. (this is sometimes called a Poly-Party Agreement)
If your desire is to offer trade representation and a voice in: establishing and managing target cost, developing and managing risk and opportunity, procurement strategies, design packaging, operational efficiency management and contingency management, consider how this looks in each case.
IPD contracts contemplate consensus decision making to optimize the project for everyone involved. A tri-party agreement will typically have a 3 member management team and a multi-party will have as many as are signatory to the contract (8 on average). A tri party may seem to offer easier consensus, but often times the answer is not in the room and the principles must reach out to the extended partners anyway. The most affected parties should always be consulted.
The most important thing is to find a way to elicit input from trades in a meaningful way. If they are equal partners they are more likely to participate.
If your desire is to offer partners equal say in design, participate in the BIM, and to learn about and affect the work of others, the more equal partners the better.
A multi-party agreement breaks down traditional communication barriers. All parties are responsible to gain their own knowledge and information rather than funnel it through 1 party to many. Various subject matter experts can speak directly to their partners. Often this makes the A & C feel a loss of control, but the right parties with the most knowledge are making the decisions. Contracting directly with more than just the architect and the contractor helps empower the partners to speak more freely, improving communication.
Establishment and Management of Targets
If you want the trades to inform design, to meet a target cost, to confirm constructability coordination, to participate in schedule planning for the entire project, to shift scope beyond traditional boundaries, to improve outcomes, to strive for continuous improvement, to be responsible for complete implementation not just what is on the drawings, and to tie their outcome to that of the rest of the team regardless of individual outcome, bring them to the contract table.
Targets are established by the parties and memorialized at signing this multi-party contract. This brings bore visibility and ownership by trades over the target and adjustments thereto. The multi-party agreement breaks down the barrier of trade to engineer (specialty consultant), creates tension between design and cost in search of the best solution, and empowers trades to assert cost authority until consensus.
If you want the trades to: influence the sequence of work for the best project outcome sometimes at the cost of their own productivity, to accurately predict duration of tasks and comply, to negotiate task handoffs, to manage and optimize work flow amongst all participants, and to assume field leadership for all personnel not just their own staff, then offer them the authority to do these things.
Traditional Architect and Contractor roles can be shared, distributed, assigned to partners to allow distributed leadership. The GC doesn’t need to manage the Trade Partner but relies on it to behave equally.
The industry for many years has treated the trades and designer consultants as Subordinate to the prime and they have learned to behave that way. A tri-party is not going to change that relationship or behavior. If you want the trades to behave differently you must start by treating them differently. A great way to do that is empowering them with equal status to the others on the project.
One might think negotiating with 8 parties at one time is much more complicated than with 2, but my experience is quite the opposite. When you gather 8 firms around the same table it often helps drive a much fairer contract all around. With 8, it is really difficult for one party to try to gain advantage for themselves. In the tri-party, both the Architect and Constructor have to quickly turn around and contract with their “sub-contractors” but have far less latitude to address specific terms as they have already been established with the owner. This leaves the sub-tier with an almost take it or leave it approach.
There is a bit more “cat herding” required with more parties to a contract to ensure all comments and changes are considered and managed timely. There may also be some trepidation with sub-contract tiers and their understanding of their ability to influence a traditional customer while still carrying the risk of each other. This is a required education regardless of tri-party or multi-party agreements, so take it as an early challenge to gain the benefits and behaviors described above.
The trades and the sub consultants provide major portions of the project deliverables, why should they not be properly represented at the contract table? The outcomes far outweigh any education needed at the outset. Be prepared to challenge and change traditional relationships and build a new culture.
This post is the 2nd of a 3 part series looking at Integrated Project Delivery. The first post focuses on IPD agreements (contracts), this post focuses on IPD as a Lean Operating System, and the final post focuses on culture.
When a team is aligned financially, traditional operating systems are not efficient for strong team performance (note: the operating system development starts with the earliest negotiations of the contract.)
To maximize the value of the contract structure, teams require a new work philosophy focused on efficiency and reliability. A Lean Operating System delivers customer value, through streamlined processes practicing continuous improvement.
We will focus on lean processes and tools for each part of this definition first by looking at ways to define and document customer value, then at processes for efficient value creation and finally at feedback systems to allow for evaluation and systematic improvement of processes used by project teams.
To successfully deliver a project with minimal waste, the project team must clearly define the customer’s expectations.
IPD teams are included at the start of a project, often prior to finalization of the owner’s business case. Understanding why a project exists prior to developing conceptual designs, teams have freedom to explore diverse options to deliver value. The final business case, budget, schedule, and program are captured in a collaborative report called a Validation Study.
Set Based Design:
Traditionally, teams look to make decisions about options before detailing them. Set Based Design is a concept of advancing multiple designs in order to make the best decision based on additional information gained from further design development.
Instead of picking a structural system for a new building prior to detailing it, a team may advance three systems into the Design Development phase along with floor plans and shaft layout. By continuing to advance multiple sets, the team can make a better decision with significantly more information. This process also reduces or eliminates negative iterations that occurs when one of the options becomes unviable.
An A3 is a structured process of documenting a problem, options, proposed solution, and action plan on a single sheet of paper (A3 refers to a standard 11”x17” paper).
Developing an A3 is done collaboratively with all stakeholders. The process generates consensus around the proposed path forward by first gaining consensus around the problem statement. You can learn more about A3 here.
Choosing by Advantages:
Choosing by Advantages (CBA) is a systematic decision making process developed by Jim Suhr which focuses on advantages of options. While most systems focus on pros and cons, CBA removes cons by recognizing that a con can also be expressed as an advantage for one or more of the other options.
CBA works well to gain consensus with a large group of people with differing goals and values. The system also makes the decision-making process more transparent and more collaborative. With CBA, the advantages and the cost are shown separately so that the team can see the cost vs advantages trade-offs of their options. You can learn more about CBA here.
Traditional processes for communication and accountability contain inherent waste, leaving much room for improvement. Integrated teams are driven to work in a manner that levels workload and reduces waste.
Last Planner ® System:
IPD teams use the 5 connected conversations of the Last Planner ® System to manage activities from early feasibility studies through construction and commissioning. Projects are started with high level milestones, then phase pull plans are created as the work proceeds. Look ahead planning, weekly work planning, and learning (measured through PPC and variances) are implemented to manage the weekly work of the team.
To better align teams and remove barriers to collaboration, large IPD teams use a single office space, co-location space, for the owner, designers, and builders. There may be people from 5 to 15 or more companies all working together in this shared office environment.
Smaller projects will develop a way of working collaboratively in shorter sessions (ex: 1 day every two weeks) or through online tools. Designers and builders work directly with each other in an effort to break down traditional silos.
Building Information Modeling:
Many complex projects use Building Information Modeling or BIM during design and construction for coordination, prefabrication, scheduling, cost estimating, and facilities management. Smaller projects may not use the full capabilities of a multi-trade model, only designing the architecture in 3D.
Teams start with a discussion of what elements of BIM will be used on the project. This collaborative discussion between the owner, designers, and builders focuses first on desired outcomes (risk mitigation, prefabrication, operation efficiency, etc), then which elements and systems will be modeled (level of detail, etc).
With an integrated team, flow and control of information can still be wasteful. Teams implement a central point of storage for each type of project information, usually a cloud based documentation platform with a systematic naming structure.
Processes for using and sharing project information are developed by the team, documented and displayed for members to review.
High performing teams maintain a commitment to continuous improvement. Teams are self-aware of their processes and breakdowns, allowing them to reflect and improve.You can learn more about Continuous improvement here.
Teams create a feedback loop by implementing 4 steps in series: Plan, Do, Check, and Adjust. A process is implemented with an expected outcome. The actual outcomes are measured against the expected outcomes. A deep dive is done to discover the drivers of the measured variance and a countermeasure is integrated into the revised process. You can learn more about PDCA here.
To truly understand the root cause of a deviation from the expected outcome, teams implement a process called 5 Whys. This process involves asking Why 5 times, each time drilling down into why the previous activity occurred. The goal of this process is to arrive at the driver of an issue, to treat the cause and not just symptoms of a problem.
A specific way to drive positive change is to implement a plus/delta improvement cycle. A team takes 5 minutes or less to capture Plus / Deltas at the end of each meeting and event.
- Plus: Something that went well and should be repeated.
- Delta: Something that didn't go well and should be changed or altered next time.
Teams assign each delta to a specific individual with an action plan and commitment for completion. With a commitment to identifying and adjusting deltas, processes will improve over the life of a project or team and lead to outstanding results.
Aligning teams with a contract provides motivation to collaborate but does not guarantee it. A Lean Operating System is needed to remove traditional silos, speed up communication, and reduce rework.
While Lean processes are integral to successful projects, they don’t work without a collaborative culture, which is the topic of the next blog post.
James Pease will be presenting this content in a webinar on May 3rd. REGISTER HERE
This is Part 2 of a 3 Part Series on Integrated Project Delivery.
See part 1, The Contract
A recording of Part 1 is available here: View Part 1
This post was original published on the Lean Construction Blog.
An Australian Perspective on Integrated Project Delivery
In many parts of the World, contracting can seem like the modern-day equivalent of a Roman gladiatorial battle, where a single project cost blow-out can end a promising political career or bankrupt a once profitable company.
The Rules of the Game
The rules of the contest are set out in the construction contract and rival teams of lawyers seek to negotiate their side an early advantage in the battle to come through the introduction of carefully crafted indemnities, notification regimes, liability caps and risk transfer, with little or no consideration as to whether the party that ends up liable for a risk is best able to manage it. This process commonly results in a Zero-Sum game or a game where one only party can win at the expense of the other.
There are however growing signs of battle fatigue as contract directions and awards are increasingly fought in court, tying up resources on both sides and leaving even the winner with a large legal bill and potential reputational damage.
Owners seek better value from projects and Architecture, Engineering and Construction (AEC) companies desire greater certainty for their shareholders.
Step forward Integrated Project Delivery.
If implemented correctly, Integrated Project Delivery (IPD) contracts can deliver a project win for both the Owner and the AEC companies.
How is that possible?
Under an IPD model, value (from the Owner’s perspective) is carefully defined and the AEC team engaged early in a project’s development on a multi-party contract that incentivises delivery of the defined value. This contrasts with a traditional contracting model where each party contracts separately, either with the owner or main contractor and is purely focused on delivering value for themselves.
Under an IPD model, the AEC team are reimbursed their actual costs incurred on the project based upon agreed cost rates plus an agreed Fee for overhead and profit. This reimbursement model, coupled with a shared risk contingency pool provides a greater degree of certainty in respect of the AEC team’s financial return.
An Australian Perspective
On the face of things, the IPD contract model seems very similar to Alliance contracts that have been used in Australia for nearly 20 years. Both are multi party collaborative contracts that reimburse the participants based upon their agreed costs and incentivise them to achieve value for the owner. If IPD contracts are to be successful it is important to review the reasons why, in twenty years, Alliance contracts have not become more widely used in Australia and beyond.
With Alliances all participants agree to a ‘no blame’ culture and the contract specifically precludes any party seeking legal redress for any lack of performance by another. This can lead to a situation where it is not possible to adequately address a party’s poor performance and the performance of the Alliance as a whole suffers.
This is not an issue with IPD contract forms as they contain provisions that allow the parties to seek legal redress for a party’s poor performance which should provide a big enough threat to ensure performance without any need to follow through with action.
The Alliance delivery model has been a victim of its own success with early government funded projects coming in significantly under budget and the AEC team sharing the under run. The fact that the owner also shared in the under run was overlooked and there was a perception amongst the general public that budgets had been set too high.
Recently, there have been attempts to address this issue through the introduction of mandatory independent third-party reviews of budgets and ‘competitive alliances’ where two teams work independently to develop an initial design and budget with a winner chosen (based upon overall value) to move forward to the construction stage.
There has also been a lot of work done to refine the incentivisation model to allow for any share of saving payment to be modified by the team’s performance against other non-cost key result areas in terms of value to the owner- something that IPD contracts to date have not allowed for.
On the flip side, under traditional Alliance forms, the maximum downside for the AEC team if the project budget is exceeded is the loss of their Fee, Reimbursement of all agreed costs incurred is guaranteed which can again seem like the AEC team does not have much skin in the game.
This issue is addressed in some forms of IPD by the introduction of a Guaranteed Maximum Price which places a limit on the amount of agreed costs payable to the AEC team.
Whilst some Alliance forms include provision for sub-alliances, the Alliance team rarely comprises more than the main consultants, designer, owner and main contractor. Any further required trade contractors or speciality consultants are engaged using traditional forms of contract. This limits the
extent of possible collaboration and therefore benefits that can be obtained.
IPD forms of contract allow for greater engagement with the wider supply chain on a collaborative basis.
Alliance contracts do not generally mandate any elements of Lean Construction such as Building Information Modelling (BIM) or Pull Planning thus missing an opportunity to improve overall value to the Owner.
IPD contracts, provide an opportunity in Australia to address the issues with the Alliance form (perceived or otherwise) and reinvigorate collaborative contracting as a delivery model which in turn can provide a foundation for the adoption of lean construction principles and processes.
Elsewhere, Australia’s experience with Alliance contracts can be used to further refine and improve the IPD model in order to allay any concerns with its use and to accelerate take up.
A win- win in the move towards win – win project outcomes!
You need to pick your battles at every step whether you are an owner, a designer or a contractor in construction. Depending if you win or lose the battles affects your bottom line. That’s the adversarial relationship among these parties which plagues the industry so deeply that while the non-farm industries raked high productivity and quality since 1960, construction industry suffered a decline.
Various delivery models have been tried out but none of them made any headway through the productivity crisis in construction. The most recent experiment has been IPD or Integrated Project Delivery that seems to show a silver lining. The model has been developed by borrowing ideas from Toyota production system. It uses a new single contract to bind the owner, designer and contractor to work through open book accounting, sharing risk and reward in a friendly and supportive work environment. So far the success rate is very promising in delivering highly productive and quality projects.
Zul– How can IPD lower project cost, shorten time, avoid scope creep and ensure high quality?
James– With IPD we are onboarding the designer and the builder very early, even prior to a completed business case. The biggest thing here is that we make sure we adequately priced and estimated what we want to build so that we fund the right project. Then we use Target Value Design for continual updating of the budget throughout the design phase and make sure we don’t deviate from the budget that we funded. With this process, our goal is to provide high value facilities at an affordable cost to provide amazing care for our patients.
So much waste can be eliminated from designing and redesigning when the detailed design is handed off to the trades. We can get our design to a shop drawing level before we submit for permit with the people that are actually going to build it. We eliminate a lot of redesigning during the construction phase. The goal of doing all this work is to lower project cost, shorten time and avoid scope creep while achieving high quality.
Zul– How do you engage these people early before the project is funded?
James– For projects over $10m, we request for a small amount of seed money, maybe 1%- 2% of the expected project budget and hire a team of contractors and consultants. They will help us develop the budget and the schedule to go into the program. Ideally the actual contract is signed as soon as the project is funded.
Also at Sutter Health we use a single contract, for a single dollar value, between owner, designer and contractor with the goal of delivering the project scope. So it’s not based on a set of drawings, it’s based on meeting the owner’s intent within a set budget and schedule. We guarantee the cost by having the designer and the builder risking their profit if the project goes over budget in exchange for shared reward if the project comes in under. If the project goes over budget they will complete the project at their cost but won’t lose money. The key here is everyone trying to collectively come under budget. If one party didn’t come under but if they helped others to come under then everyone get a share of the bonus.
An important note- the contract budget is usually set slightly below the funding to encourage the team to drive the cost down.
Zul– Currently IPD is being used for about 1% of $1.5T construction industry but IPD has started a revolution in the industry. Which sector of the industry is leading the revolution? And who is following?
James– The healthcare industry has been the pioneer, e.g. Sutter Health and UHS (Universal Health Services) have done a number of projects. Kaiser is also moving in this direction. Outside of healthcare there are several biotech firms that are piloting their first IPD projects. Proctor and Gamble announced last October that they would use IPD for some of their major projects. Intel experimented with it already. I think the next wave you will see coming from the big biotech companies.
These companies are trying to solve their unique challenges through IPD that traditional delivery models are unable to solve. For example, Intel thinks about expanding their facility about 5 years before they know what product will be produced in that facility. That is a very unique challenge and everyone has a challenge like that either that is about their product, their budget or something else.
Zul– Who facilitates the IPD process from beginning to end?
James– Owner, architect and contractor form a core group to lead and facilitate and they take turns as appropriate.
Zul– Is there any new set of project management skills required for success?
James– This is something new that needs learning. There are definite skill sets that we haven’t had before that we need, and it’s about being able to lead teams and facilitate discussions and conversations as opposed to the people who just know all the answers. Because everyone is coming onboard earlier and the traditional work structuring is all up for grabs. We are finding that the new role is, as some call it, the project integrator. It can be a consultant or someone from the core group may be found to have the knack for facilitating conversations.
Zul– Do you take the project integrator role in your projects?
James– In my projects I only lead those discussions where I can contribute the most or have vested interest. Then others take over based on their individual expertise that I have no expertise on and I would just participate in the conversation. The most successful teams I’ve seen where you actually try to break down the traditional hierarchy to allow people to step up within their niche.
Part 1 of the interview ends here. Read Part 2.
This post is edited for clarity and vetted by James Pease. He can be reached at firstname.lastname@example.org
See original post at Leadership for Quality.
This is a 3 part series focusing on Integrated Project Delivery as a contract, a lean operating system and a culture.
Integrated Project Delivery (IPD) is gaining popularity among owners, contractors and design teams as a means to unlock creativity, drive reliability, and successfully deliver complex capital projects.
With all of the recent hype about the success of IPD and many large owners looking to pilot their first IPD projects, what exactly is Integrated Project Delivery? This series will explore Integrated Project Delivery as a contract form, a lean operating system and as a transformational culture.
Integrated Project Delivery (IPD) is a delivery model for delivering construction projects using a single contract for design and construction with a shared risk/reward model, guaranteed costs, waivers of liability between team members, an operating system based on lean principles, and a collaborative culture.
It is often referred to as Lean Integrated Project Delivery or Lean IPD to show the strong tie between the contracting method and the implementation of lean principles in the management of the project.
There are several multiparty agreements on the market right now. For the purposes of this post, we will call the contract an IPD Agreement.
Integrated Project Delivery teams are contractually tied together differently than traditional design/bid/build, CM-at-risk, and Design/Build agreements. The typical IPD agreement includes the primary design firm, the primary builder, and the owner in a single contract for a single dollar value. The contract lays out the responsibilities of the designer, contractor and owner but also makes it clear that successful delivery of the project is the responsibility of all three.
Signatories: The contract is always signed by the owner, lead designer and lead builder. Some owners choose to have more than 3 signatories to the agreement, bringing in other design and trade partners to be primary signatories. If the other parties are not signatories, they are typically subcontracted under one of the primary signatories and language is incorporated into the subcontract to tie them to the terms of the master IPD agreement. A later blog post will explore the pros and cons of tri party vs poly party agreements (more than 3 signatories).
Some of the designers and subcontractors will agree to put their profit at risk alongside the primary designer and builder. For this post we will call firms risk/reward partners if they put their profit at risk.
Other trades and consultants will be brought into the agreement with traditional subcontract structures on either a lump sum or time and material basis. They can be negotiated or traditionally bid, typically once the design is significantly complete.
Risk/Reward Parties: IPD contracts have a shared risk/reward component based on the financial outcome of the project. The signatories and other risk/reward partners agree to put their profit at risk in exchange for a guarantee of their costs and shared savings if the project performs well. These firms agree to be reimbursed on a transparent cost plus overhead and profit basis.
For design firms, their billing rates are separated out into a direct cost component, an overhead component and a profit component. This is often calculated as a multiple of direct labor cost.
For construction firms, all labor, material and subcontracts are billed at direct cost plus an overhead percentage and profit.
For any party participating in the risk/reward pool, the rates and overhead are subject to an audit by an independent audit firm. While the audit may not take place on smaller projects, it is highly likely on larger contracts and can be a time consuming process.
Contract Amount: The contract is typically structured with costs for design, construction and a shared contingency for the team. All of the risk/reward parties have their profit fixed as a lump sum amount at the time the contract amount is negotiated and agreed to by the team.
Risk / Reward Plan: The contract will lay out the terms by which the risk/reward parties can lose some or all of their profit if the project does not meet its budget and schedule goals. If all profit is lost, the owner typically agrees to pay for the project at cost (including overhead although this may be capped), thus allowing the team members not to profit on the project but also not to lose money. There is a massive opportunity cost for firms to deliver a large project and only recover their costs.
If the project is delivered below its financial targets, the team will get all of their fixed profit and share in the savings of the project, thus improving their profit. A negotiated percentage of the savings goes back to the owner and the rest is split between the risk/reward partners.
Leadership Team: The contract defines a leadership team that is responsible for delivering the project on time, on budget and at the quality requested by the owner. Some agreements call this the Core Group or the Project Management Team (PMT) and there are surely other names. The important concept is that the project is jointly managed by a representative from the owner, architect and contractor. Others may be added to this leadership team such as a user representative (client) or other representatives from the risk/reward partners.
The primary goal of this contract model is to remove barriers to collaboration and innovation while aligning incentives for the project team.
The contract structure allows scope to transfer between firms based on who can most cost-effectively deliver the work. Design and trade partners can work together without traditional silos. Firms know that they will not lose money on the project and back charges among risk/reward partners are eliminated.
Through the IPD agreement, the major parties are contractually aligned to “sink or swim together.” Success is based on the overall financial and schedule outcomes of the whole design and construction team instead of individual successes or failures. While the IPD agreement is a major deviation and improvement from typical contracting structures, it is only part of Integrated Project Delivery.
This Material was presented in a Webinar on Feb 8th, 2018. A recording of the webinar and pdf copy of the slides are available. Purchase Here.