This article is an excerpt from The Art of Tendering: A Global Due Diligence Guide, which is available for purchase.
Many purchasing institutions are parting company with conventional approaches to project delivery in construction projects and are adopting approaches that put a premium on greater collaboration across the project team, as evidenced by integrated multi-party contracts with shared risks and reward structures and the early integration of the full project team during the design-planning stage of the project. As this article explains, by applying the Integrated Project Delivery, or IPD approach, project teams are increasing their success rates in meeting project objectives on time and on budget. The early success in using this approach in construction projects serves as a useful reference point for expanding the application of IPD principles to other types of complex procurement projects.
By way of background, in its January 2010 report entitled Integrated Project Delivery: Case Studies, the American Institute of Architects (AIA) defined IPD as having the following characteristics:
For the purpose of this study, IPD is defined by the following characteristics:
Early Involvement of Key Participants
Shared Risk and Reward
Collaborative Decision Making and Control
Liability Waivers Among Key Participants
Jointly Developed and Validated Project Goals
“Key Participants” includes the owner, architect, and builder who entered into the primary contract, as well as design consultants and subcontractors who sign “joining agreements” and are included in the shared risk and reward structure. Disciplines and trade contractors whose input has the most impact on project design and costing are considered the most valuable early participants.
The report also identifies the following highly desirable characteristics for IPD projects:
The following additional characteristics are considered highly desirable for IPD:
Mutual Respect and Trust Among Participants
Intensified Early Planning
Open Communication within the Project Team
Building Information Modeling (BIM) Used by Multiple Parties
Lean Principles of Design, Construction, and Operations
Co-Location of Teams (“Big Room”)
Transparent Financials (Open Books)
The AIA also noted that IPD creates a significant shift in the overall approach to construction projects:
Changing Roles and Relationships
IPD should be understood as a comprehensive process which addresses the entire sequence of programming, design, construction and building operations. Within the industry, there is a fair amount of confusion about the difference between lean construction and IPD and between IPD and BIM. Lean construction is a production control system that seeks to apply principles of the “Toyota Way” of manufacturing to the construction process. Just as BIM is a tool that is useful, but not in itself sufficient for implementing IPD, lean construction is a set of tools in support of IPD but is not the entire process.
These studies show that IPD is most successful when owners, architects, engineers, and builders step outside the boundaries of traditional roles into a more fluid, interactive, and collaborative process. What impact does this have on the principal participants?
Owners were all asked if the IPD process demands more from them than traditional methods of project delivery. All agreed this was not for passive owners and that it requires a level of sophistication and a willingness to “get your hands dirty,” but none could point to any additional resources required beyond what would be needed for a similar project under a traditional procurement process.
For architects, IPD is a change in the boundaries of the work and the sequence in which it is done. “If the owner’s going to get the early cost insight,” says architect Tom Van Landingham of Christner Inc., “then more design time has to be spent up front to generate the information for the builder to provide that insight. We’ve changed the way we do work plans so that time is pulled from the construction documents and contract administration phases – and the bidding/ negotiation phase completely goes away– then we add those hours to early design.” Value engineering is continuous – it doesn’t come as an unwelcome surprise at the end of design.
As the report explains, this collaborative approach results in the breaking down of the silos associated with more traditional design-bid-build approaches to construction:
One of the recurring themes of these projects is the blurring of lines (or the breaking down of silos) between design and construction and among the traditional phases of design. Instead of issuing packages of documents – schematics, design development, construction documents – designers involved in IPD are issuing documents on a “just in time” basis, and in a collaborative relationship with builders and suppliers. Decisions are made when they need to be made, and in many cases redundant work is eliminated. Documents generated from a single BIM model may be used for permitting, analysis, bidding, fabrication, and more. Appropriate information for the task is exported from the model as required and when needed. Architects are able to informally convey design intent without having to draw or model details that will be drawn or modeled again by fabricators. Builders and suppliers are able to share their knowledge and expertise when it is most valuable in the design process. And owners are able to participate in a more involved and “hands-on” fashion than is usually the case with traditional project delivery. Many participants in these studies found such a blurring of roles to be empowering and even exhilarating.
In an August 2010 article from the Journal of Construction and Engineering Management entitled “Understanding Construction Industry Experience and Attitudes toward Integrated Project Delivery”, David C. Kent and Burcin Becerik-Gerber provide a useful summary of the historic shortcomings of the design-bid-build approach to government construction projects and the resulting evolution of construction management, design-build, project alliancing, and IPD approaches to project delivery:
Public procurement policies since the 1940s have greatly embraced design-bid-build, making it the most widely used project delivery method in the United States for the majority of the 20th century (Miller et al. 2000). As buildings have become more complex, the construction industry has become more specialized, segregating a process that was formerly directed from inception to completion by one master builder. This approach resulted in the formation of multiple cultures within the industry, causing inefficiency, high levels of fragmentation (Department of Commerce 2004), and high costs of inadequate interoperability (Gallaher et al. 2004). Construction management (CM) was introduced in the 1960s as a solution to these problems and has been providing value to owners ever since (Tatum 1983) but has not changed the underlying problem of fragmented project teams and information.
In the 1990s, design-build was established. Shortly after its inception, a study was conducted gathering empirical evidence that showed design-build could improve the cost, schedule, and quality of building projects over traditional delivery methods (Konchar and Sanvido 1998). During the same time that design-build was being developed in the United States; a delivery method known as project alliancing was being used successfully for a number of infrastructure projects in Australia (Noble 2007). This delivery method seeks to improve project outcomes through a collaborative approach of aligning the incentives and goals of the team (Australian Department of Treasury and Finance (ADTF) 2006). Project alliancing is the model for a new project delivery method that has recently emerged in the United States, commonly referred to as integrated project delivery (IPD).
Among other applications, IPD has materialized as a delivery method that could most effectively facilitate the use of building information modeling (BIM) for construction projects. BIM is the development and use of a computer software model that is data rich, object-oriented, intelligent, and parametric digital representation of a facility used to simulate the design, construction, and operation of that facility (The Associated General Contractors of America (AGC) 2006). BIM is not only a tool but also a process (Eastman et al. 2008) that allows project team members an unprecedented ability to collaborate over the course of a project from early design to occupancy. Like project alliancing, IPD attempts to create the collaborative atmosphere required for the most comprehensive use of BIM by aligning the goals of all team members and incentivizing them to work closely together throughout all phases of a project. The coupling of BIM with IPD enables a level of collaboration that not only improves efficiency and reduces errors but also enables exploration of alternative approaches and expansions of market opportunities (Middlebrooks 2008).
As this article explains, the three core elements to the IPD approach are the multi-party integrated agreement, shared risk and reward, and the early involvement of all parties. As the authors explain, the multi-party agreement typically includes the owner, architect, and builder, along with key subcontractors, in one agreement with the purpose of breaking down silos and facilitating collaboration:
Multiparty agreement: In traditional project delivery, the owner typically has a separate contract with the architect and the general contractor. When IPD is used, there is typically one contract for the entire project that is entered by the owner, architect, general contractor, and any other party who may have a primary role in the project. The primary goal of IPD is to maximize collaboration and coordination for the entirety of the project, and these contracts are the vehicle that allows these goals to be reached successfully without being complicated by separate contracts that create opposing motives.
The authors further note that IPD agreements are based on a shared risk-reward approach that better aligns incentives and motivations across the project team:
Shared risk and reward: Most existing IPD contracts include elements that are designed to encourage teamwork and promote the success of the project rather than any specific team member. Unlike traditional projects where each party typically takes careful steps to minimize their own risk, IPD contracts combine the risks and rewards of all team members and incentivize collaboration in order to reach common project goals. These goals may vary but are usually associated with cost, schedule, and quality metrics commonly used to measure project success. An example of an associated risk includes covering budget overages with each entity’s overhead and profit, but if the project is under budget the team may receive a compensation bonus. The following risk/ reward sharing methods are found in literature:
Based on value—incentivizes the project team by offering a bonus linked to adding value to the project;
Incentive pool—reserves a portion of the project team’s fees into a pool that can increase or decrease based on various agreed upon criteria before being divided up and distributed to the team;
Innovation and outstanding performance—in which the team is awarded for hard work and creativity;
Performance bonuses—provides an award based on quality; and
Profit sharing—in which each party’s profit is determined collectively rather than individually.
Finally, the authors explain that the early involvement of all parties is a key differentiator between IPD projects and more traditional approaches to project delivery:
Early involvement of all parties: One of the most fundamental advantages that IPD affords is the ability for all parties to be present and involved with a project from the earliest design phase. Early collaboration, under the right conditions, can directly address the problem of fragmentation between design and construction professionals that results in inefficient work practices and costly changes late in the construction phase. While it is important to recognize that this early collaboration does not require the use of technological tools such as BIM, these tools can greatly increase the efficiency of collaboration throughout all phases of a project.
As noted by the University of Minnesota in its March 2012 IPD Case Studies report, institutions that selected the IPD approach to project delivery are motivated by a series of factors. On the supplier side, a key motivator is the ability to achieve a market advantage by being among the first to gain experience with the new approach to major projects, while on the owner side, project teams are attracted to the ability to better manage the inherent major project risks of cost and schedule overruns:
Even in this early stage of the study, we have seen teams find their initial reasons for choosing IPD are evolving as they better understand IPD’s benefits and challenges. In some cases, great value has been found in unanticipated areas.
Motivations for selecting IPD fall into five categories:
Market advantage: Choosing to use IPD can give market advantage. IPD may give the firms valuable experience upon which to market themselves as industry leaders. Improving the delivery may also be a market advantage if measureable results can be attained. For serial owners, savings on one project done in IPD can be leveraged across many buildings. The healthcare sector trends show that IPD may become an expected standard delivery method.
Cost predictability: All projects would like to meet budget, however, for some the predictability of cost is a notably driving factor.
Schedule predictability: Similar to cost, all projects share the goal of meeting their planned schedule, but for some projects this is a major factor.
Risk Management: Reducing or managing risk can be tied with cost or schedule, but also may include transactional risk inherent to project type, site or other conditions. If risk management is a critical factor, the increased communication in IPD may be of particular advantage.
Technical Complexity: A high degree of complexity will usually demand integration of expertise and require a level of coordination that is achievable in an IPD environment.
The tactics for achieving the goals in each of these areas may or may not be exclusive to IPD, however, for projects that have strong motivations in several categories, IPD may offer an advantage over traditional delivery. Collaboration and integration can occur in any project delivery method, however, IPD sets up structures that make it more likely to occur than not. In particular, study participants noted good collaboration in design-build is raised to an even higher level in IPD. This improvement can be credited to a variety of sources, but most cited was the early involvement of a larger and more diverse set of expertise areas, including trade contractors.
In fact, in its follow-up September 2015 report entitled IPD: Performance, Expectations, and Future Use, the University of Minnesota stated that collaborative approaches to project design planning increase project success rates:
Effective project delivery meets or exceeds owner’s expectations for schedule, cost and quality. There is an emerging body of research that shows more collaborative/integrated delivery is more likely to lead to successful outcomes and high-level team performance. Within that context, this survey takes a snapshot of current perceptions of effectiveness on projects using multiparty agreements, the most formal and contractually binding of the integrated delivery methods.
The study included the following key findings from a survey of IPD users:
Responses are significantly positive, strongly supportive of IPD as a superior delivery method.
Distribution of responses is weighted heavily toward the most positive possible answers, not clustered around the neutral point.
The overwhelmingly positive response is consistent across all demographics: stakeholder type, project type, project progress, project averages, and past respondent experience.
Owners’ expectations were met or exceeded more than architects, contractors, or others. When owners compare their expectations of IPD at the start of the project to the project outcomes, they overwhelmingly say their expectations were met, exceeded, or significantly exceeded.
By way of further support to these conclusions, in a November 2013 article from the Journal of Construction Engineering and Management entitled “Quantifying Performance for the Integrated Project Delivery System as Compared to Established Delivery Systems”, Mounir El Asmar, Awad S. Hanna, and Wei-Yin Loh summarized a series of similar findings relating to the use of IPD in construction projects. As the authors explain, their study found measurable benefits in the IPD approach across six performance areas:
Abstract: Integrated project delivery (IPD) is an emerging construction project delivery system that collaboratively involves key participants very early in the project timeline, often before the design is started. It is distinguished by a multiparty contractual agreement that typically allows risks and rewards to be shared among project stakeholders. Because IPD is becoming increasingly popular, various organizations are expressing interest in its benefits to the architecture/engineering/construction (AEC) industry. However, no research studies have shown statistically significant performance differences between IPD and more established delivery systems. This study fills that missing gap by evaluating the performance of IPD projects compared to projects delivered using the more traditional design-bid-build, design-build, and construction management at-risk systems, and showing statistically significant improvements for IPD. Relevant literature was analyzed, and a data collection instrument was developed and utilized in detailed interviews to gather quantitative performance data from 35 recently completed projects. Univariate data analyses, such as t-tests and Mann-Whitney-Wilcoxon tests, were performed to evaluate IPD performance.
The results indicate that IPD achieves statistically significant improvements in 14 metrics across six performance areas: quality, schedule, project changes, communication among stakeholders, environmental, and financial performance. The major contribution of this paper is demonstrating that IPD provides higher quality facilities faster and at no significant cost premium. These results would be extremely valuable in the hands of decision makers to enable them to choose the appropriate delivery system for their projects.
In this study, the authors contrasted the traditional design-bid-build project delivery system with the adoption of the design-build approach in the 1990s, and with the more recent evolution to IPD:
Definitions of Terms
There are several existing definitions of a project delivery system. For example, Cho et al. (2010) summarized the different definitions under three components: commercial terms, organizational structure, and management system. However, two elements are consistently found in the majority of delivery systems definitions: (1) relationships of project stakeholders; and (2) their timing of engagement in the project (Sanvido and Konchar 1998), regardless of the tools and processes used. Therefore, this paper defines a project delivery system as a system that determines the relationships between the different project stakeholders and their timing of engagement to provide a built facility.
Several types of project delivery systems are being used today. Fig. 1 displays differences between the traditional design-bid-build (DBB) system, the more collaborative design-build (DB) system, and the emerging IPD system. The two key focus areas are in accordance with the definition stated previously with respect to the relationships between project stakeholders and their timing of engagement. For example, under DBB, the owner contracts with the designers, and then when the design is 100% complete, the owner contracts separately with a general contractor (GC) to build the facility. In DB, the contractor generally would be involved when the design is approximately 20% complete (the portion of design complete varies based on the project), and the designer and GC would join forces, thereby providing a single point of responsibility for the owner.
In contrast, IPD is different in the following two key aspects: (1) all key project stakeholders sign one multiparty contract (2) before the design even starts, i.e., when 0% of the design is complete. Key stakeholders can include many project parties, such as the owner, GC, architect, consultants, subcontractors, and suppliers. Consequently, this paper defines IPD as a delivery system distinguished by a multiparty agreement and the very early involvement of key participants. The term IPD-ish will be introduced subsequently in the paper to describe projects that, although using the IPD integration concepts and philosophy, do not meet this study’s strict definition of IPD because they do not include all the necessary characteristics of the definition, namely, a multiparty contract. It is important to note that IPD is a relatively new concept that is evolving and is still far from being universally standardized.
The authors summarized how the need for increased collaboration was a key factor behind the adoption of IPD approaches to project delivery:
Several industry problems and changing factors ultimately led to the development of IPD. The emerging IPD system is believed by many in the industry to be revolutionizing the way projects are delivered by fostering early involvement and collaboration of project stakeholders through the use of different concepts, such as shared project leadership, shared risk and reward between all project participants, and liability waivers. The need for more collaboration in general and for IPD specifically is best expressed by the 2004 and 2007 reports of the CURT (CURT 2004, 2007). The earlier report encouraged owners to drive the construction industry change “by leading the creation of collaborative, cross-functional teams comprised of design, construction, and facility management
In their review of existing IPD literature, the authors noted that “most studies provide some evidence for more collaborative delivery systems being superior to less collaborative systems”, and concluded their own study by finding that IPD displayed statistically measurable superior results across multiple project metrics:
This study provided the first quantitative understanding of IPD performance through presenting a comprehensive statistical comparison of IPD and non-IPD projects. The IPD projects displayed a superior performance on 14 different metrics belonging to six out of the nine performance areas investigated. If the more lenient 0.10 significance level was used instead of the 0.05 level, then eight out of nine performance areas would show significant differences for IPD. Using a very strict threshold in which p-values need to be less than 0.01, IPD was proven to have a superior performance in metrics related to quality, communication, and change performance.
The quality of the facility is arguably the most important metric that IPD enhances. IPD projects also see less changes, faster processing times, and significantly faster delivery times. Although the first few cost performance results seemed to confirm findings of a previous study that shows no performance differences between IPD and non-IPD projects, comprehensively looking at the remaining performance metrics strongly contradicts the previous literature. Not only does IPD provide schedule and quality improvements, it also offers enhancements on many additional performance metrics.
These findings were supported by similar conclusions found in by the University of Minnesota in its third IPD study published in November 2016 entitled Motivation and Means: How and Why IPD and Lean Lead to Success. The study looked at the use of IPD, along with Lean construction methods, in ten recent, successful construction projects across the United States and Canada, and came to a series of conclusions regarding the advantages of applying both IPD and Lean construction methods to project delivery:
The report Motivation and Means: How and Why IPD and Lean Lead to Success presents a study of ten recent successful building projects in the United States and Canada using an integrated form of agreement. The yearlong, in-depth study focused on the questions of how and why are integrated project delivery (IPD) and Lean effective. Our conclusion is that IPD sets the terms and provides the motivation for collaboration; Lean provides the means for teams to optimize their performance and achieve project goals.
The overall findings are consistent with the larger body of research showing that teams using IPD and Lean are more reliable in terms of the schedule and cost and in meeting the owner’s goals. This research adds to the evidence of the effectiveness of IPD and Lean, and by documenting positive examples in a systematic and rigorous manner, begins to identify the motivations and mechanisms for collaboration that are key to project success.
In fact, the University of Minnesota study found across-the-board success in this project delivery approach, irrespective of the location or type of construction project:
Our major finding was a striking uniformity of success for all the teams in this study, regardless of project type, scope, geographic location, or previous experience with IPD and Lean. The second finding was that the powerful complementary strength of IPD and Lean supports success. While there was a great deal of variation in how success was achieved, these teams reinforced current research conclusions that IPD and Lean teams are reliably able to meet schedule and cost and in meeting the owner’s goals for quality.
Furthermore, the study found that the implementation of Lean construction approaches helped to serve as a catalyst for implementing IPD methods, and that the use of IPD agreements in turn helped to facilitate greater group collaboration:
There is a common industry perception that collaborative behavior occurs spontaneously within a group of high performing team members and that it cannot be dictated by contracts or mandated by decision-making structures. Our findings offer a different reading of how collaboration occurs: we believe it can be fostered by IPD contracts and Lean processes and tools. One architect in our study said IPD and Lean are “always a carrot, never a stick.” As “carrots,” they enhance team members’ willingness and ability to collaborate. We found examples of team formation that place emphasis on motivating, aligning, and mentoring the team, as well as using active and intentional on-boarding and off-boarding processes. Together, these practices cultivated high-performing team behaviors because members were supported, encouraged, and rewarded for collaborative approaches to project challenges.
The University of Minnesota study found a correlation between the facilitation of collaborative approaches and overall project success rates:
In our previous research (see literature review for past case studies and surveys), we closely examined team culture and how it can be measured as an outcome as well as a contributor to overall project success. Based on a study of projects with a range of outcomes, we were able to establish a causal relationship between positive building outcomes, positive team outcomes, and the key ingredients that contributed to both, namely, mutual trust and respect, accountability, and effective communication. For this study, we chose to build upon that work and focused more specifically on how the team interacted with the owner and translated the owner’s goals into action. All the projects in this study had very positive team cultures, ranking as high as any of the top-performing projects we have studied—this makes it harder to establish causal relationships since the results are so uniformly positive. However, the findings in this study align with prior research, which validates these findings. This study provides the industry with a guide to why these teams were successful.
Furthermore, the report found that the clear identification of the owner’s goals was a key element to project success, since clear goals helped to drive co-ordinated project planning:
Remarkably uniformly, all owners in this study believed their goals were extremely well met. It’s notable that there was a range in the degree of ambitiousness of owners’ goals: some owners limited their goals to pragmatic issues, such as reliable budget and schedule, others had aspirations to use the project as a model to lead or change the industry. Alignment around the owner’s goals was marked by clear communication, a team culture that placed the highest priority on the project agenda, identification of issues, and predicting areas of complexity. The most successful teams were able to use their alignment to create actionable and measureable goals.
While the report found that the planning stages required greater resources than some project team members anticipated, project teams found a return on that early time investment in smoother downstream project execution:
Unquestionably, team members spent more time in meetings, collaborative planning, and fiscal reporting than in traditionally delivered projects. Companies varied in their ability to predict and budget for the additional time. The shift in amount, timing, and, sometimes, level of personnel devoted to the project were topics that many teams discussed. Most teams commented that the investment of time early in the project paid off with less time spent later.
The report also found that enhanced collaboration served to break down the silos that impede innovation in traditional construction projects:
We documented behavior that departed from the silo mentality typically observed in traditional delivery methods. Many team members indicated, specifically, that the project first or team-first attitude of IPD projects made them feel comfortable in doing or saying something they would not normally. Most of these examples were crossing boundaries between signatory companies or trades (designer/contractor, subcontractor/engineer) and, occasionally, bridging outside the team for trade partners, designers, or owners to interface with manufacturers in ways that typically would be mediated by the general contractor. When it was possible to measure, the benefits of this collaborative behavior often yielded significant cost and/or time savings.
The University of Minnesota’s third study also stressed the importance of clearly defining the profit and payout formulas under the IPD contracts in order to avoid tensions across the project team:
All of the teams in this report had some formal contractual mechanism for sharing the reward pool and uniformly believed that the pool created some degree of incentive for collaborative behavior. Tensions sometimes occurred around the distinction between assigning unexpected costs to either the owner’s funds, the project contingency (if there was one), or risk/reward pool. Resolution of this tension usually relied on communication and fiscal transparency. Proportionally, architects typically had a far lower dollar amount at stake than contractors or major trade partners. Architects and others with small stakes, such as specialized consultants or trades, commented that the financial rewards were negligible and their motivation for project success lay in other arenas. However, there were trade partners without a large stake who believed the financial incentive transformed their attitudes and behaviors. The architect for Autodesk is very experienced with IPD and estimates that their typical profits on IPD projects are higher than other delivery types, in a range between 20–25%.
Turning to the details of IPD agreements, in a 2014 article in the Journal of the Canadian College of Construction Lawyers entitled “Integrated Project Delivery Agreement—A Lawyer’s Perspective”, Howard W. Ashcraft, Jr. identifies key factors for the creation of IPD agreements. As the author explains, while the IPD approach to project delivery is expanding in the US and the United Kingdom, it remains a relatively new model in Canada, which requires lawyers to adapt to a new way of thinking about project agreements:
Integrated Project Delivery (“IPD”) has been successfully used in the United States and the United Kingdom (under different terminology), to deliver a broad range of construction projects. In many instances, these projects have significantly outperformed traditional market approaches and IPD is increasingly being used by major facility owners, especially those interested in high-performing projects. IPD projects are now beginning to appear in Canada with projects underway, or completed, in Ontario, Alberta, and Saskatchewan and projects being developed or considered in other Provinces. The Canadian Construction Documents Committee is currently working on IPD documents and conferences sponsored by Canadian trade and professional associations have explored IPD and its use in Canada.
Canadian lawyers are being asked by their clients to evaluate this new form of project delivery and advise their clients in the negotiation of IPD agreements. To provide good counsel, the attorney must understand that IPD approaches design and construction from a fundamentally different perspective. Successfully negotiating an IPD agreement requires a fresh perspective, unfettered by traditional contracting concepts.
In many instances, the contract negotiator must “unlearn” rules that have served him or her well, but are not functional or relevant to an integrated project. Moreover, negotiating an IPD agreement is not a separate act from the project itself. The negotiation process is the IPD team’s first collaborative effort and will deeply influence its ability to smoothly collaborate as the project unfolds.
The author also notes that the creation of an IPD agreement requires a more collaborative and flexible approach to contract negotiations that is driven by objectives, rather than on the standard contract wording that is typically based on outdated approaches to project delivery:
2.1 Collaborative Negotiation
Negotiation is not about contract language. It is about finding and defining the intersection of the parties’ interests. Getting the deal right is the first step in negotiation. But in too many instances, contract language is exchanged before the key business issues are addressed, thus diverting attention away from the fundamental issues. Worse, the exchange of contract language may lock in terms that work against the parties’ needs or preferences. The better practice is to follow the rule: deal first, language second.
As the author warns, frustration may arise if lawyers approach the IPD negotiations with the same mindset that they would apply to traditional standard-form construction contracts. Rather, the parties should work towards developing a term sheet of key business terms that identify the key business objectives of the project before getting buried under standard legal boilerplate:
Unless mindsets are changed, negotiating an IPD contract may be difficult and frustrating because effort will be wasted on the wrong issues. One solution is to have an IPD workshop before any negotiation takes place. The workshop covers what IPD is, why it works, how it differs from traditional project delivery approaches, and discusses holdover thinking, such as the three issues highlighted above. The workshop creates a common level of understanding, allowing the parties (and their counsel) to focus on the issues that will make their IPD agreement successful. One approach we have used successfully is to have a two-part workshop where the first segment focuses on IPD education and alignment, followed by a second segment, with participation limited to principals and counsel that addresses the contract itself. If the owner does not have prior IPD experience, we also have found it helpful to meet with the owner’s staff and key stakeholders, prior to the larger workshop, in order to create internal owner alignment and to explore the owner’s goals and limitations that will be boundaries for any project.
The negotiations should begin with an open discussion of each party’s legitimate interests and concerns, which should be documented to guide later negotiations. The goal of the IPD agreement is to create a project where all participants benefit by its success and are equally motivated to avoid its failure. This cannot be accomplished if the parties’ interests are hidden or ignored.
The next step is to define the principle elements of the commercial terms and record them in a key terms summary. It should be compared to the guidance document developed previously to assure consistency with the parties’ self-defined interests. Because it is short and spare, the key terms summary reveals the fundamental points in the parties’ agreement with a clarity that may be lost in the detail of a completed contract.
The final step is to create a contract that fully expresses the agreement documented in the key terms summary. A contract created through this process should be aligned to the parties’ interests and a tool that helps them manage the project, not just a weapon wielded in litigation.
As the author observes, since traditional standard-form construction contracts are based on a fundamentally different set of assumptions regarding project roles and responsibilities, negotiating parties should avoid being anchored into those assumptions and should avoid starting their negotiations based on the standard terms from those outdated contracting models:
2.2 Changing Mindset
Experienced contract negotiators have mental “do” and “don’t” lists developed through hard experience. Similarly, contracts contain language that reflects scars of prior battles. Many of these provisions are designed to prevent a rare failure rather than designed to address fundamental issues that affect success. The accumulation of these provisions clogs the contract with terms that obscure the fundamental business transaction and do little to help the parties achieve success. Moreover, they may anticipate a problem that does not even exist in an IPD project.
Drafting an IPD agreement requires forgetting as well as creating. The IPD craftsman should draw on experience, but not be bound to it, because IPD presents a different set of issues that require new responses.
If all of the parties and their principal representatives have prior IPD experience, you can begin by developing the intersection of interests— or if they are all highly experienced with IPD and with each other—may move directly into documenting the agreement. But in current practice, a significant number of the participants (including their counsel) will not understand what IPD is and why IPD works. Thus, they will raise concerns and propose solutions that are valid in other contexts, but are antithetical to IPD principles and undermine the IPD agreement. Once taken, these positions are not easily abandoned and can derail or complicate negotiations.
As the author states, standard construction contracts contain fundamentally different assumptions regarding pricing and profit and that those assumptions are not aligned with the IPD approach. To facilitate the IPD contract, negotiators should strive towards establishing a fixed profit amount so that project team members are motivated to find efficiencies rather than look to create more work as a means of creating more profits for themselves:
Fixed Profit. Profit in traditional projects is related to the amount of work done. Construction Fees are based on a multiplier applied to the cost of the work. For designers, profit is embedded in each hour billed.
Profits grow as work increases, which incentivizes inefficiency. In an IPD project, the parties agree to a fixed prospective profit that is not linked to the actual labor, materials, or project cost.
A fixed profit creates an incentive to reduce the variable costs to increase each parties’ margin. Because variable costs (labor, material, and equipment) account for most of a project’s cost, reducing these costs directly benefits the owner. Moreover, because adjustments in scope do not affect the fixed profit, work may be easily transferred between parties. For example, if one party can efficiently install all the hangers needed for electrical, mechanical, plumbing, and fire protection, then the work can be shifted to that party. No one needs to fight for scope in order to maintain their profit. This allows the project team to look at what resources the project needs, remove duplications, and improve efficiency.
The author also debunks the myth that fixed-cost contracts protect owners from cost overruns since change order and cost overruns are rampant in design-bid-build contracts. Furthermore, since IPD contracts are designed based on a pre-established budget with the owner assuming all direct costs, the risks of cost overruns triggered by scope changes is not a factor in the way it is under traditional construction contracts:
Variable Costs Without a Cap. A lump sum, Guaranteed Maximum Price (GMP), or Not to Exceed (NTE) contract transfers—at least on paper—the risk of a project overrun to the contracting parties. If this really worked, then you would never see change orders or litigation on these types of projects, except for true owner’s elective changes. What actually occurs is that the contracting parties insert contingencies into their prices to protect against a cost overrun and they use change order and claims provisions to escape the constraints of the lump sum, NTE or GMP. Worse yet, this padding is inserted into each sub-tier contract because the fixed price cap is imposed on these parties, too. This results in multiple (and in the aggregate, excessive) contingencies and creates the possibility that the owner will pay for this risk twice—through initial pricing and then change orders and claims.
In the IPD business model, the owner agrees to pay for the variable costs (not the profit) without any cap. Thus, there is no need for the excessive contingencies carried in most projects. Moreover, because IPD projects generally use a design-to-cost-target approach, design contingencies are not required either. The result is that the owner only pays for what the project actually costs, not for the parties’ excessive perception of their risk. Although the absence of a contractual cost cap may seem bold, it is balanced by strict limitations on change orders and the ability to use party profit as a buffer against overruns. And as mentioned above, lump sum and GMP do not prevent cost overruns and claims.
The author also notes that contractor profits should be based on achieving defined project outcomes, and that those contractor profits should be at risk if those objectives are not met. This approach helps to keep all parties equally incentivized in meeting project objectives, including budgetary and scheduling targets:
Profit Based on Project Outcome. The fixed profit is contingent on project outcome. If the goals are not met, project profit is reduced or even eliminated. If the project performs better than the goals, the project profit is increased. Each party shares in the increase or decrease based on their percentage of the project profit. The profit should be 100% at risk.
This increases the buffer against overruns and maintains the distinction between profit and variable costs. Alignment among the participants is strengthened because individual profit can only be preserved, or increased, by improving overall project performance with respect to the agreed goals.
The most common performance metric is project cost. In the simplest model, the parties agree to a target cost and a fixed at-risk profit (Figure 3). The parties are paid their actual costs (without profit) and if those costs are equal to the target cost, the parties receive the agreed profit. If they can deliver for less than the target cost, their profit is increased; if the costs are greater than the target cost, the profit is reduced— potentially to nothing. In that case the owner remains responsible for costs—without profit—until completion.
Furthermore, the author identifies joint-project control as a critical element to the success of the IPD model. This means that project team members must be committed to the project and should have the authority to bind their respective organizations, rather than being subject to the after-the-fact senior-level second-guessing, which is toxic to the collaborative team environment:
In an IPD project, joint project control is affected through a project management team comprised of representatives from at least the owner, contractor, and designer. The project management team manages the project to achieve the jointly agreed objectives. Each member of the project management team must be able to bind its respective entity and each party must be able to rely on the agreements of the others. This direct decision making is foreign to some organizations that reserve final decision to senior levels. But senior management “second-guessing” of project level decisions is toxic, undermines trust, and reduces the parties’ willingness to place project objectives ahead of their short-term interests.
Finally, given the importance of group collaboration as a key element for success in IPD projects, efforts should be made to enhance the efficiency of the group collaboration process. In an October 2012 joint-study entitled Making the Integrated Big Room Better, Stanford University’s Center for Integrated Facilities Engineering (CIFE) and DPR Construction recommended a series of improvements in the use of collaborative work spaces in IPD projects. That report provided the following background explaining the expanding use of collaborative design techniques in complex projects, including the use of building information modeling (BIM) software, and the use of integrated work spaces:
The last decade has seen a push towards lean construction techniques and integrated project delivery, including extensive use of building information modeling (BIM) and collaboration software, along with new organizational approaches such as the “Integrated Big Room.” The Integrated Big Room is an on-site co-location space that physically brings together designers, builders, and often facility operators to work together.
The Integrated Big Room has several different objectives and provides many benefits, both directly and indirectly. First and foremost, it aims to improve collaboration through greater team integration. Early integration enables a team to deliver a higher performing building, on time and on budget. Through the intense interdisciplinary collaboration that happens, teams are able to design a building with systems that complement and support each other and the goals of the project. Co-location also makes it easier to ask team members for the latest information, reducing the time wasted looking for up-to-date information, or working with outdated information.
As construction projects have grown increasingly complex, especially in highly technical facilities such as hospitals and data centers, the industry has necessarily responded with more and more specialization. This in turn has led to the vast array of subcontractors and consultants that contribute to projects today, including key trades such as mechanical, electrical, and plumbing, along with auxiliary trades such as glass and glazing, elevators, pneumatic tubes, medical gas, landscaping, and so forth.
The coordination of 20 to 30 individual firms on a single project can and does quickly become highly complicated. Simply getting a question answered by a different specialty can take days or weeks, and many teams do not realize that the time it takes for requests for information (RFIs) to be answered often becomes a driving force behind the length of their production schedule. By bringing key project stakeholders together in one place, team members are able to literally turn to one another to get answers, rather than waiting for RFIs to be answered in another city or time zone. In the Integrated Big Room, knowledge sharing is further enhanced by 3-D and 4-D visualizations.
However, the report cautions that the project teams to should be careful to properly organize their big rooms so that the right people are integrated into the working group at the right time. As the authors explain, enhancing big-room efficiencies calls for a more sophisticated understanding of the information flows that drive proper project design:
It is easy to become enthusiastic about the potential benefits of co-location and co-creation, especially as owners and teams begin to see the positive outcomes of working side-by-side, such as compressed schedules (through fewer RFIs) and decreased rework (through collaborative design practices). It is more difficult to determine which trades and subcontractors should be integrated into the process during different phases of the project.
To make the Integrated Big Room more efficient, we must first understand who is interacting with whom, about what, and when. Once we reveal the nature of the interactions, we will be able to focus on the quality of those interactions to achieve better, more predictable project outcomes.
Information Sharing and Flow
The flow of information within a team can reveal where information interdependencies lie, and therefore who must collaborate most often with whom. Because teams use file sharing software and computer models extensively, there is a wealth of electronic data than can be used to reveal information workflows. For example, if the structural engineer and the electrical subcontractor very frequently view files created by one another, they clearly each have knowledge that the other needs, and should both be located in the Integrated Big Room at the same time to make that collaboration more efficient. Conversely, the foodservice or landscape designers may collaborate infrequently with other trades, and therefore it may not be cost-effective to co-locate them.
As the report concludes, a better understanding of information flows can help optimize the use of the collaborative work efforts in big room design planning:
By identifying where the most frequent information exchanges occur at various times throughout a project, a team can understand who is absolutely necessary to have in the Integrated Big Room and other collaboration periods (such as integrated concurrent engineering (ICE) sessions). This allows the team to become more effective, and more efficient in its use of time and resources.
While IPD remains in the relatively early stages of implementation in public sector projects, the initial indicators remain positive regarding the use of this project delivery method. Purchasing institutions should consider adopting this approach where appropriate in their major construction projects and should also considering implementing IPD principles in other complex projects, including large-scale information technology projects, where cost overruns and delays are also common. As early studies have shown, creating contractual structures that help facilitate collaboration across the project team appears to have significant potential as a means of mitigating the risks associated with recurring project failures.