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 …
Target Value Design
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.
Zul- Is soft cost for IPD much higher than design-bid-build? Does the savings in rework or hard cost able to pay off the added soft cost?
James– There is not a black and white answer to this question. The biggest difference I think is that you are spending more of your soft cost upfront. When you are hiring the contractor early, you are investing in your RFI process during design instead of doing it later. So, you are spending more money upfront, from a cash flow point of view and you are also making a lot of detailed decisions much earlier than you typically would. One thing that we have learned that CA cost is not dropping off though, we are still paying for CA and in many cases for more CA because it benefits the construction to have more people on staff to answer questions really quickly. We are co-locating our CA staff, we are having them on site with dedicated chunks of time throughout the week to answer questions. In design-bid-build you try not to pay as much for CA and having them stay in their offices to answer RFI’s through emails.
Does the cost pay off? My belief is that it does.
On our big projects what we had seen is before going with IPD, anything over a $100m we delivered significantly over budget and significantly late. Since adopting IPD we have delivered $1.9B projects collectively 3% under budget. One of the projects went over but the whole program was under. We currently have $2.9B projects that are 75% through construction right now and tracking at 4% under. So what we are finding now is that if we give our board a number, we can actually make it happen. Then it’s up to the board to decide whether they want to fund that project or not. The problem before was that we would take something to the board and they would say yes we want to do that and then halfway through we would say you know what we can’t actually do it for that much and it’s gonna be late and you can’t stop at that point- you’re stuck. In IPD a lot of times we find out early that its going cost a lot more than what we thought it would and the board would say we are not going to fund that project if it costs that much- in a way that is an acceptable outcome.
In order to maintain affordable care for our patients yet grow access, we need to maximize the quality and quantity of facilities that we can build within the capital that we have available for investment.
Zul- Do you see less RFIs in IPD?
James– Yes, we have streamlined RFI processes by letting the team discuss a solution first then document it rather than shooting RFIs as soon as the issue is raised for every little thing.
Zul- What are the specific challenges for the owner, designer and contractor in IPD compared to design-bid-build?
James– For the Owner- a lot of our users, our doctors, nurses, executives are pushed to make decisions much earlier because we want to design every little drawer before we submit for permit as everyone wants certainty on cost. But they are used to waiting, saying I don’t want to make that decision until right before I move in. We’re asking them 3 or 4 years ahead of time to make decisions. That is a challenge for us and we’re figuring out how to work through that.
There are also challenges like benchmarking cost because you are not bidding the project. We get questioned a lot about how do you know that is the right number- it seems too expensive! So we’re working on better benchmarking and better conceptual estimating so we can know roughly how much the project should cost. That way we can be more comfortable with our team setting the target value- we’ll say this is what it should cost and we’ll make it work for less than that.
For the designer- I think the big piece for them is they are not accustomed to having good trade input upfront, so they are not totally sure how to use it yet. I find they still end up drawing things that eventually get redrawn and we’re constantly reminding them just call the trades and ask them for the real info.
I also see that a lot of architects who have been around in hard bid environments try to control quality of work by putting in a lot of stuff on the drawings. We are telling them you don’t need to draw that stuff, we already got the people on board, just tell them what your expectations are so that they can draw and price it appropriately. We’re telling the engineers don’t draw the framing details, just ask the framer and give him your design criteria and he’ll draw it for you.
Its changing the way the designers work with the contractors and I find they still very much want to say “give us three months we’ll go away and we’ll figure it out and then come back and show you.” We say- no you need to be more iterative and open book.
On the contractor side- one big thing that we need is conceptual estimating. We are bringing people in early and we’re saying things like “how much should this hospital cost?” And they are say okay, “give us the drawings and we’ll price it.” But we don’t have any drawings yet. We just want to know how much should it cost? There are a lot more of rules of thumbs like cost per sqft vs linear ft, this kind of skin system vs that kind, because we are using cost as a part of our design criteria. So before you draw anything, tell us what we can afford to buy. That’s challenging for the contractor.
Zul- To what extent do the designers need to use BIM?
James– They don’t have to use BIM. If it is a smaller project- it may not make sense to use BIM. If it larger than 20,000 sq ft ground up building then it works.
BIM is used as a natural risk mitigation tool. The team may say our profit is at risk, we’re going to need to model the thing so we can make sure that it would all fit. We ask the team to develop a BIM plan at the beginning of the project. This way they don’t say you haven’t told us that we had to model that project. We say, we are not going to tell you what to model, you look at what your risks are and come up with a way to mitigate that risk and if BIM is a way for mitigation then we’re willing to pay for it.
Zul- How do you see leadership fit into IPD?
James– leadership is hugely important. This model is not about telling people what to do, it’s about figuring things out as a team. It does take people stepping up and proposing solutions and then taking actions. A lot of people think that IPD is a way for the owner to do less work and transferring a lot of risk to the contractor and the designer. Our finding is it is actually more work for the owner. Owners needs to roll up their sleeves and be more involved. I think where people in IPD get into trouble is when they tell the team to collaborate and they don’t show up. Then the project fails and then they say- IPD doesn’t work!
That’s what I’m going to discuss in my upcoming webinar on Feb 8, 2018.
Again, for the owner- if you are going to go with this model then you need to be not only a leader like you need to know how to lead the team, but you also need to do your equal part. Show the team that you are also vulnerable and transparent. If you want them to be transparent, you need to show them your budget, you need to show what your constraints are, explain why sometime you may not have an answer. A leader doing that- that’s a good tone for the rest of the team. It is about both recognizing top down leadership and encouraging bottom up leadership.
When you see someone stepping up, say loudly- that was awesome, do it again!
We continually allow people with junior titles to take ownership of things. And then you are amazed, because they get really good results! For me that part is really rewarding when you see people on your team promoted within their own company through the project team advocating for them.
The first IPD project I did was 9 years ago after a lot of lump sum work. When I finished, I thought “that was awesome! I want to do that again!!” I’m still friends with people I worked with on that job!!!
Zul- Would you like to add anything?
James– It all sounds too good to be true. I want to make sure that people understand that it is hard work and it takes a long time. We find building a big collaborative team, like if you are building a hospital, it takes between 12 to 18 months to get the culture to a really collaborative point.
The other thing that is really hard for contractors, owners and architects is to say no I can’t do that. There is a tendency in the industry to say yes to everything even if you know you can’t do it. We would much rather people say they can’t do that or you can do that but there are all these constraints that you need to be aware of. Then you can make realistic decisions.
It’s hard, not easy- but if you are willing to do the work then you get pretty awesome outcomes!
That’s where we ended the interview by thanking James Pease. Read Part 1.
This post is edited for clarity and vetted by James Pease. He can be reached at firstname.lastname@example.org
This post was originally posted at Leadership for Quality.
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 email@example.com
See original post at Leadership for Quality.
A common concept in the construction industry is that there are three legs to a project: Schedule, Cost, and Quality. An owner is advised to pick any two, and thereby sacrifice the third (i.e., you can have cost and schedule, but not the quality you want. Or vice versa, you may get the quality and schedule that you want, but not within your budget.)
One of the most powerful and misunderstood components of Integrated Project Delivery is the systematic thinking of Target Value Design or Target Value Delivery (TVD). The primary concept of TVD is to drive down the cost (or maintain cost and increase value) of a project through the design and delivery phases without reducing the quality provided or the schedule for completion. In essence, TVD is a process to make sure that the owner receives all three legs of schedule, cost and quality.
In order to drive down cost while maintaining schedule and quality, teams set cost targets for design and construction that are usually below the current estimates. These targets are usually set up as stretch goals to push the teams to innovate new ways of delivering projects, not just to be more efficient in doing things by traditional means.
Targets can have two effects: they can either motivate a team to get amazing results, or they can break down the culture of a team and push members into traditional behaviors.1
FIVE THINGS TO CONSIDER WHEN SETTING TARGETS FOR A SUCCESSFUL TVD PROCESS:
1.Do not set targets arbitrarily. There should be some logic to support the targets.
Targets can be set in many different ways. They can be set as a percentage reduction to the current budget or the owner’s allowable cost, as a cost per square foot, a cost per unit (i.e., per exam room or per bed in healthcare), with a comparison to a similar project, or other methods. Pick types of target that make sense for the project and that are relevant to the team. Many teams will push back against a target with a large lump sum reduction without some justification to support the reasoning behind the target.
2. Involve the team in setting targets, don’t set them in a vacuum.
The more you can involve the individual team members and companies in the rationale behind the targets, the more buy-in the team will have to the targets. Even if the targets seem like a stretch, understanding how a target is set is the first step in engaging the team to go after the target. Without this belief and understanding in the targets, teams can become disconnected and go back to traditional project delivery behaviors.
3.Make them within reach, not something so aggressive it seems impossible.
Targets should be a stretch goal to motivate the team to innovate. If the target is too easy, the teams will achieve them by being slightly more efficient, but the culture will not change and true innovation will not occur. If the targets are too aggressive, the team will find them to be unobtainable and will instead focus on protecting their profit and limiting their risk.
4.Focus on optimizing the whole, not any one piece.
If targets are set by company or by individual system, team members will be driven to optimize their given piece without considering the project as a whole. Setting target by system (i.e., MEP, Core/Shell, etc) can allow for give and take between team members to drive down the overall cost or increase the value delivered on the project. This transfer of scope and reimaging of delivery methods is often what allows a team to reach an aggressive target.
5.Focus on the process, not just the numbers.
The process of setting targets drives a deeper understanding of the project for all participants. By setting construction targets which stretch the team, it will free up the team to think about how projects are delivered and allow them to come up with new solutions. The process of understanding cost drivers is one of the early steps in actually hitting the targets. Once a team deeply understands what drives cost, they can focus on finding levers to lower the risk and drive down the cost to deliver the project.
Without intentional management, projects tend to increase in cost through the scoping, design, and construction phases. Target Value Design / Target Value Delivery offers strategies to manage a project’s costs through its development and construction. Setting cost targets for a team can align thinking and motivate members to innovate. How those targets are set and who is involved in setting them is just as important as what targets are actually set on the project. Through a focused strategy, projects can achieve the desired scope, schedule, and cost.
This post was originally published at The Lean Construction Blog.