Posted in practice
on February 28, 2014 10:14 am EST
IPD (Integrated Project Delivery) Contracts, Part 1
If you're looking to deliver projects more quickly, with higher quality and less waste of materials, time and energy, Integrated Project Delivery (IPD) might be your answer.
There are many differences between these contracts: if you are invited to sign any of them, your lawyer will be happy to discover the devil somewhere within the details.
Sharing risks and rewards in IPD is not the same thing as sharing information with BIM software, but both can help you move to a collaborative process with more shared decisions and fewer change orders.
Of course, before you start any project, integrated or not, you need a contract. That’s where the gritty (potential conflicts of interest, liability issues, profit and loss) meets the nitty (as in nit-picking attorneys and insurance underwriters). This column will take a quick look at various IPD contracts. In the next, I’ll review some recent IPD projects to see how innovative agreements work in practice.Crawling before walking
IPD is still new to many: last year, nearly seven out of 10 American Institute of Architects (AIA) members surveyed had no experience with it. Of the 30% who did, about 60% used “transitional” agreements that share some decision-making power, financial risks and rewards, and (perhaps) liability while maintaining traditional separation of responsibilities and Guaranteed Maximum Price (GMP). Most of the standardized IPD contracts used today are multi-party agreements that share more rights, responsibilities, risks and rewards. The highest level of IPD is the AIA’s single-purpose LLC agreement that unites the owner, designer and builder, and in some cases, major subcontractors in one company for the purpose of designing and constructing the project.
The good news is that so far, those who have ventured into the brave new world of IPD are happy they did.
Lawyers and insurers raise cautionary voices about the terms of such contracts. Most IPD contracts require that the parties carry standard insurance, possibly because there’s no other kind available. But the underwriters point out that their policies cover claims for damages due to negligence. Insurers understand that some kind of “no-fault” type of policy, with appropriate deductibles and “self-insured retentions,” would be appropriate for IPD, which emphasizes problem solving and shared responsibility over disputes and the assignment of guilt. But they aren’t writing these policies, in part because there still aren’t enough IPD projects to constitute a valid actuarial database.
IPD is neither as new nor as rare as some would have you think. It dates back to the previous century: well, the early 1990s. That’s when British Petroleum (BP) developed its pioneering Alliance Contracting agreements for its North Sea oil projects. Alliance Contracting does away with the GMP, pays contractor costs using open book accounting, and ties profits to project success. Uninsurable risks (plenty of those on the North Sea) are shared. Using this agreement, BP cut its projected costs for North Sea oil platforms almost in half. A few years later, the Australian Commonwealth adopted Alliance Contracting and has used it on over 100 infrastructure projects as well as the Australian National Museum.
In 2005, Sutter Regional Medical Foundation of northern California, with help from the San Diego-based Lean Construction Institute, developed an Integrated Form Of Agreement or IFOA. More recently, ConsensusDocs has developed a Tri-Party Agreement for Collaborative Project Delivery (TPACPD). Depending on which of its many boxes are checked, this contract can be used as an “IPD-lite” GMP agreement, a full profit-or-loss-sharing IPD agreement, or shades in between. The AIA has three separate forms of agreement to choose from. They range from a transitional agreement based on a GMP to a multi-party agreement broadly similar to the IFOA and TPACPD contracts, on to the single-purpose LLC contract.Coming into focus
What makes these contracts IPD agreements? Decisions about target costs and other design goals are made collaboratively. Contractors participate in the design phase to estimate costs and discuss construction issues. Project management is the responsibility of a multi-party team with owner, designer and builder represented equally. Issues this team cannot resolve are bumped up to higher levels of management with the same multi-party structure. The owner’s ultimate authority is invoked only if the highest-level team reaches an impasse and cannot resolve an issue.
The designer and builder share rewards with the owner. Time and materials costs are covered using open book accounting. Profits are deferred and are paid out of a fund that is also used to cover cost overruns and/or schedule delays. There may be additional incentives for beating the schedule, bringing the project in under the cost target that was agreed to by all parties in the pre-design phase, or for achieving certain quality goals such as LEED certification.
Sharing project risk and liability remains a murky area. These contracts require all parties to maintain traditional insurance. At the same time, they may contain language that, without waiving the parties’ right to sue each other for economic loss, makes it more difficult to claim damages. For example, the builder and designer might assume joint responsibility for construction mistakes along with design errors and omissions. The contract may limit the consequential damages that the owner could collect from the architect or the builder.
There are many differences between these contracts: if you are invited to sign any of them, your lawyer will be happy to discover the devil somewhere within the details. Next issue we will look at some agreements that were used on actual IPD projects. The good news is that so far, those who have ventured into the brave new world of IPD are happy they did.