Posted in practice on February 28, 2014 12:04 pm EST

IPD (Integrated Project Delivery) Contracts, Part 2

What does integrated project delivery look like in practice?


 

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TAGS: contracts, ipd,

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By Christian Doering

As we pointed out in IPD Contracts, Part 1 of this look at Integrated Project Delivery (IPD), both lawyers, who define contractual relationships, and insurers, who underwrite professional liability, are struggling with the transition from conflicting interests to collaborative decision-making. Nevertheless, owners seeking lower costs, higher quality and faster project delivery have managed to enlist adventurous design firms, general contractors and even major subcontractors in IPD. This issue’s Part 2 presents two real-world examples of IPD in practice.

Case Study: Sutter Regional Medical Foundation and IPD

Sutter Regional Medical Foundation of northern California developed its own IPD agreement, called an Integrated Form Of Agreement (IFOA) in 2005, with the help of the Lean Construction Institute in San Diego. The first step was a new medical office building in Fairfield designed by HGA Architects and Engineers based in Minneapolis and built by The Boldt Co. of Appleton, Wis. After engaging HGA through a typical competitive process, Sutter asked the designer to meet with Boldt and explore a more collaborative delivery method. Having worked together before on traditional design-bid-build projects, the two firms had reached a level of trust that enabled them to try a different arrangement on this project.

Although there are still bugs in the legal agreements as well as in BIM software, the benefits of IPD should continue to drive the AEC industry, along with the lawyers and insurers that serve it, towards increasing adoption.

The IFOA used on the Fairfield medical office building is a three-way contract that holds owner, designer and builder accountable to each other, with all books in regard to the project open to all as equal partners. The IFOA aims to reduce overall project risk by sharing it among all parties. The principal financial vehicle for this is a contingency fund that is jointly managed by all three participants, not just by the owner. The builder and designer assume joint responsibility for construction errors and design omissions. The project was managed by an Integrated Project Team (IPT), which met weekly and included representatives of the three IFOA signers along with any subcontractors or consultants involved in a particular stage. The IPT could bump issues up to a Core Team that included members of all three partner companies: they in turn could refer unresolved issues to an Executive Level committee. The IFOA did not include a “no sue” clause, but the parties did agree to resolve disputes within the Core Team, or failing that by involving an expert third party: mediation was the final resort.

The IFOA documents included an incentive plan, but it was not used on this first joint venture. Sutter has gone on to more IPD projects where incentives funded by project savings and pooled profits are used to reward designers (including consultants and builders, as well as subcontractors) for meeting and exceeding agreed project goals.

All three IFOA partners indemnified each other, taking out typical insurance, including architects’ professional liability insurance, at limits established in the contract. Liability for consequential damages was limited to the architect’s fee or the builder’s fee plus general conditions.

This type of agreement is still preferred by professional liability insurers, who have so far been extremely reluctant to underwrite the contractual liability assumed by architects who sign full-on IPD agreements. Insurers realize that a “no-fault” type of policy could be appropriate for IPD, but they aren’t writing them, in part because there still aren’t enough of these projects to constitute a valid actuarial database. So the lack of appropriate insurance coverage remains an obstacle to adoption of IPD. If the AEC industry is going to progress towards IPD, it will have to find a way to carry both the chicken and the egg across the road.

Specifics & Results

The IFOA had a CM-at-risk-type guaranteed maximum price (GMP) of $19.6 million, but this was set jointly by all three parties. The final cost was $19.4 million, $836,500 of owner initiated scope increases. The building came in on schedule 25 months after the project was started, even with scope increases and three months of re-programming at the start. Partly as a result of that, change orders were virtually eliminated.

Although using BIM software is not the same as IPD, the relational BIM database makes it easier both to visualize the as-built results of design stage decisions and to share information, both of which can foster collaboration based on shared risks and rewards. No doubt Autodesk, developers of the Revit BIM platform, had this in mind when they decided to explore the leading edge of IPD for a 2009 headquarters building in Waltham, Mass. Autodesk had typically used either the traditional design-bid-build model, or Construction Manager at Risk, in which the general contractor agrees to deliver the project at a guaranteed maximum price in return for greater consultative input into the design and development phases.

The Waltham project was a 55,000-square-foot tenant improvement that uses all three stories of a spec office building in Boston’s Route 128 technology corridor. A main design goal was LEED Platinum for Commercial Interiors: in this case, those interiors include conference rooms and training facilities, a café, and a 5,000-square-foot customer briefing center, as well as office space. All [components] had to be ready for occupancy in 8.5 months, when Autodesk had to leave its previous location. That hurry-up schedule would not have been possible without IPD, according to the participants.

Autodesk partnered with architect KlingStubbins of Philadelphia and constructor Tocci Building Cos, Boston. The three companies signed an Integrated Project Delivery Agreement (IPDA) that tied each party’s individual success to the performance of the others. Roles and responsibilities at each stage were spelled out in the contract. There were three layers of joint decision-making: Project Implementation, Project Management and Senior Management. All included representatives of all three partners.

The contract also included liability waivers, except for claims of fraud, willful misconduct or gross negligence. Any disputes would go to mediation first, with arbitration as a last resort. The agreement required all parties to carry traditional insurance, since the insurance industry is still working on IPD-tailored policies. The one change was an amendment that eliminated the usual “right of subrogation” (the ability to gain the rights belonging to one party against a third party who caused a loss) against the other partners.

The contract established an Incentive Compensation Layer (ICL) that put a plus-or-minus 20% variable into the builder’s and designer’s expected profits. If the final cost was under budget, 60% of the savings was added to the ICL. Any overruns were deducted from the ICL until it reached zero. Schedule overruns triggered daily deductions from the ICL, but there was no incentive to beat the schedule. Finally, a third party (a Boston-based architecture professor) was engaged to independently review the quality and design goals, with consideration of the budget and time constraints. The mechanical/fire protection, electrical and drywall subcontractors were brought in to the ICL, working at cost and making all their profits out of the ICL.

On move-in day, all the participants in this innovative agreement were happy. Despite owner-initiated scope changes that amounted to about 30% of the project, it was a “triple-win.” Cost was below budget, while both the designer and the builders (including the major subcontractors) realized profits above their projections.

IPD offers many benefits to all parties. Owners are reporting better quality, lower cost and tighter schedules than with traditional contracts. Architects can spend less time detailing without sacrificing quality and design control. Builders can realize “triple wins” where the owner saves money and at the same time the designer, general contractor and subcontractors all make higher profits. All parties seem to enjoy working on a basis of mutual respect, trust and collaboration rather than in a hierarchical and adversarial climate. Although there are still bugs in the legal agreements as well as in BIM software, the benefits of IPD should continue to drive the AEC industry, along with the lawyers and insurers that serve it, towards increasing adoption.

 

 

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