Integrated Project Delivery Can Work Well But Is Still No Utopia
Since 2006, lawyer Howard W. Ashcraft has structured nearly 80 multiparty integrated-project-delivery agreements for more than 30 owner-developer clients. He is such a believer in the ultra-collaborative, risk-and-reward-sharing model that, at times, he even has skin in the IPD game.
Of Ashcraft's 77 IPD projects, 75% are exceeding contractual targets for schedule, cost, quality or profitability, says the Hanson Bridgett LLP lawyer. "IPD projects are gorgeous," he adds.
All those experienced with IPD stress that success with the radical contract model hinges on project-first, not me-first thinking. "The biggest challenge is the culture change" to a collective swim-or-sink mentality, says Bart Bodway, a construction manager for IPD newcomer PCL Construction Services Inc.
Egos must be checked at the door. "That's why you don't see IPD at the starchitect level," says John Tocci, chief enabling officer of Tocci Building Cos. "Starchitects don't want to put fees at risk or have anyone question design decisions," says Tocci, who, as an IPD program manager, also risks his fee at times.
The ranks of IPD advocates are slowly growing, as beginners become veterans and early qualms disappear. "All four of our projects have been very successful, with extremely happy clients," says Jay Halleran, a partner with NBBJ—an early player in the IPD game. Jobs have come in on or under budget, ahead of schedule, and exceeded team design goals, he adds.
Successes aside, many agree an IPD utopia is a long way off. For starters, IPD is difficult because it requires more individual thinking and group problem- solving, says Dave Kievet, group president of the Boldt Co.
IPD is not for everyone. Even Ashcraft recommends against IPD—especially for simple projects, even if they are big. He also advises against it if the owner doesn't have ability to or interest in engaging in the design-construction process and if a client does not have legal ability to join the architect and contractor contractually.
Though IPD may not be spreading like wildfire, its sphere of influence is expanding. Many owners, fearing IPD's pains but wanting its gains, are going the IPD-ish route, encouraging the behaviors of IPD within traditional delivery models.
"With the right team, any contract method can be successful," says Timothy M. Gunn, construction vice president for Alberici Constructors Inc.
Other IPD proponents agree, but say IPD, if done right, offers the greatest benefits. Under other models, there is no way to enforce collaborative behavior, says Eric R. Lamb, executive vice president of DPR Construction.
IPD is distinguished by a single contract between—at minimum—the owner, design professional and builder. Main subconsultants and subcontractors are often signatories, as well, swelling the ranks to 10 or more.
Each project is organized much like a business. The model relies on early involvement of key players and team decision-making and control—though the owner retains veto power. Signatories agree, by signing liability waivers, not to sue each other, except for gross negligence and willful misconduct.
"Removing liability encourages you to focus on producing an economical design," says structural engineer David J. Odeh, a principal at IPD newcomer Odeh Engineers Inc.
In an IPD scenario, the owner pays signatories' direct costs and overhead, theoretically stripped of profit. Designers and contractors contribute to a profit pool, based on a target price. Profit is capped by the agreement.
"The risk, as far as losing money, is minimal," says Edwin Najarian, a structural engineer principal with TTG Corp. TTG's profit on IPD jobs has been "the same or a little less" than usual, he adds.
IPD proponents say the best projects combine IPD with the Lean Construction Institute's framework for minimizing waste and rework. Integrated Lean Project Delivery "is not easy, but the benefits are there if you approach ILPD the right way," says John Bennett, senior director, design and construction, of Universal Health Services Inc., an early adopter of ILPD for UHS's acute care and behavioral health hospitals.
The big catch is that IPD, or ILPD, is complicated to organize, manage and execute. Hammering out terms, assembling an insurance package, bookkeeping and validating the target cost is strenuous exercise. Even deciding what constitutes direct costs and overhead is not simple, because, among other things, firms calculate bonuses and profits differently.
For newcomers, orientation, called on-boarding, is critical because IPD's approach, process and vocabulary are "vastly different" from the norm, says Mike Doiel, program director at architect- engineer HDR Inc.
Profit Pools
Though deals vary, the profit pool typically contains 8% to 12% of the target cost. Designers pay in 1% to 2%; CMs and trade partners, 3% to 4% each.
Under IPD, rework, inefficiencies or come-back work is paid by the profit pool until it is used up. That motivates trade partners to train workers to practice built-in quality and to be mindful of hand-offs to trades that follow, says Raul Rosales, a vice president of Skanska USA.
With IPD, if everybody is aligned and focused, "it is very difficult to fail," says Victor Sanvido, senior vice president of mechanical design-build contractor Southland Industries Inc.
Nearly 10 years ago, Southland signed an integrated form of agreement for a Sutter Health project. Sutter, a system of nonprofit hospitals and doctors' groups in northern California, developed IPD as a better way to put in place its $5.5-billion capital program. Sutter's IFOA evolved into a model relational contract form.
Though Sutter has declined to share metrics on its ILPD program, Digby R. Christian, Sutter senior program manager, says ILPD has become a successful model. "We finally have a system we can rely on for on-time, on-budget delivery and getting what we asked for," he says.
Until recently, most IPD projects were in the health-care sector—long considered broken in terms of delivery. Of late, other players are testing IPD waters, including the Walt Disney Co. Projects have expanded to entertainment, academic, sports, life-science, biotechnology and data-center buildings.
IPD also is stretching its legs geographically. At first, most projects were in California, with a smattering in the Midwest. Currently, there are also projects in the East, Pacific Northwest and Canada.
Research is beginning to back up veterans' rave reviews. A report due out soon—based on a 2013-released study of 35 IPD projects completed by the University of Wisconsin's Construction Engineering and Management Program—even compares design-bid-build, construction management (CM) at risk, design-build and IPD. The ratings take into account client relations, schedule and budget compliance, quality and safety statistics, financial metrics and communication among stakeholders.
IPD "demonstrates superior overall performance when compared with other delivery systems," concludes "Evaluating Integrated Project Delivery Using the Project Quarterback Rating," soon to be published by the American Society of Civil Engineers' Journal of Construction Engineering and Management.
"More team integration means fewer surprises, more predictability and better performance," adds Mounir El Asmar, a professor and senior sustainability scientist in the School of Sustainable Engineering and the Built Environment at Arizona State University. As a PhD candidate at the University of Wisconsin, El Asmar contributed to the original IPD research and quarterback rating research, conducted under the supervision of Awad S. Hanna, chairman of the program, which is part of the University of Wisconsin's Dept. of Civil and Environmental Engineering. Wei-Yin Loh, a University of Wisconsin professor of statistics, also contributed to the IPD research.
Lawyer Ashcraft says IPD has "definitely" become easier. Sutter's Christian agrees: "It's always easier with [veterans]. We tend to reuse companies that we have had positive experiences with."
Contracts can take less time to execute. For a first-time client, it can take six or seven months to work out an agreement, most often because of insurance issues, says Bernita Beikmann, director of lean strategy for architect HKS. For repeat clients, a contract can take a few weeks.
After six IPD projects since 2006, Boldt's Kievet says he is not sure whether IPD is easier, but the results are better.
James Mobley, chief operating officer of Devenney Group Ltd. Architects, does not think IPD is getting easier or better. "It takes just as long to complete the construction documents and obtain permits, a risk-averse contractor mentality still prevails, and our most profitable project matches typical profit margins," he says.
Room for Improvement
Mobley, an IPD proponent, sees room for improvement. "From a business point of view, IPD has not always been profitable for architects and engineers," he says.
Devenney's first IPD project was the pioneering 11-party Sutter Eden Medical Center. Mobley considers the job a success, though signatories made only 80% of expected profit.
In total, Devenney has completed six IPD acute-care and behavioral-health hospitals for three owners. Another is nearly done and one is just under way. One job was six months ahead of schedule, three were on schedule, and two were late by four and seven months. Another is trending three months late, says Mobley.
Three of those projects did not produce a profit; two projects went over budget; and Devenney had to return anticipated profit, which had been distributed at certain project milestones, on two.
Further, some agreements put the architect's profit 100% at risk but not the contractor's. That inequity pits the designer against the contractor, subverting the collaborative spirit, says Mobley.
In addition, during preconstruction, the design team is dependent on the contractor's cost estimates, which often are low. That results in an aggressive target price and sets the stage for trouble.
Too often during construction, collaboration breaks down, costs escalate, and "we watch our profits turn into revenue for the contractors," says Mobley. The architect's "leadership and vision are still too often overshadowed by aggressive behaviors of builders focused solely on risk and reward," he adds.
Boldt's Kievit says a way to get around too-aggressive preconstruction pricing is to let trade partners know that it's their job to lose, if real prices don't match estimates. "If you play nice in the sandbox, we will award you a contract," he says.
The onus is on the owner to work out fair terms and assemble good partners, agree all. Team selection is quality or best-value based. If an owner has a relationship with a specific party, it may start with that party and select others that are compatible. At times, an owner will shortlist entire teams or architect-CM combinations.
UHS prefers to select one partner first and then the rest. For all picks, Bennett pays close attention to how candidates run their own organizations. He looks for "genuine indicators" that firms are lean, collaborative and technically proficient and use prefabricated components.
Expensive Insurance
With IPD, lines can blur between design and means and methods. Initially, there were no insurance products to cover entire integrated teams with regard to professional liability. That has changed.
"Zurich was the first to jump in" with an integrated project-insurance program, says Keith Jurss, senior vice president for construction with insurance broker Willis North America. "It's a good product, but it can be expensive," he adds.
Professional liability coverage protects the integrated team from claims by third parties and, through rectification coverage, protects the integrated team from project deficiencies, without the delay and expense associated with assigning liability to a single party.
"These are early days in the evolution of project insurances applicable to IPD because coverage is still founded securely in the concept of liability and duty of care," says Mike Hastings, managing director of broker Marsh USA Inc.'s construction practice. Underwriters don't have the history to look at projects and say IPD actually works, he adds.
Consequently, IPD policies have retentions from 25% to 50% of the profit pool, which pays out the retention. That scares some away from IPD policies.
Hastings predicts that within 10 years, there will be a "truly" integrated project insurance program that combines elements of builders risk, general liability and professional liability policies.
Even with the many success stories, most owners are either afraid of IPD, not equipped to manage it or not interested. A recent study's aim was to develop an owner's guide to IPD's best practices. It turned into a guide to maximize integrated delivery because only four of 204 respondents had ever executed a multiparty IPD project.
For IPD-like jobs, Alberici advises clients to attach a collaborative project charter, with Lean processes and behaviors, to the contract. Alberici did this for St. Mary's Health Center in Jefferson City, Mo., where the owner wanted the "legal protection of the AIA CM-at-risk agreement and the relationships and processes of an IFOA," says Gunn.
The building opened in November, two months early and $3 million under budget. It beat Alberici's IPD projects, which Gunn says were also winners.
Program manager Tocci has devised his own version of highly collaborative project delivery. "HCPD draws out IPD's best processes and behaviors," he says.
With HCPD, a percentage of fee is at risk, tied to schedule, quality of work, innovation and change-order elimination. Subs bid on schematic design documents. If winners can't hold their prices through completion of design, the owner maintains the right to go out to bid.
Gaining Traction
IPD veterans think the multiparty model will eventually spread—even to commercial buildings—within limits. "IPD will gain traction, but too much of the industry—starting with owners—still thinks lowest bid upon completion of design is 'best and cheapest,'" says Michael J. Kotubey, president of mechanical contractor TDIndustries.
"Whether IPD becomes as common as other delivery methods will depend on how successful [project outcomes] are for all the participants," not just some, says Steve Peppler, project manager for architect SmithGroupJJR. "There will always be individuals and entities who will never attempt IPD because they just 'know' that mistrust is better than collaboration and will never be convinced otherwise, regardless of the evidence."
To help IPD first-timers, Tocci recommends reading two books by Patrick M. Lencioni, published by Wiley: "The Advantage" and "Death by Meeting."
To aid IPD, Ghafari Associates LLC sells software for managing shared project plans, says Samir Emdanat, Ghafari's director of vPlanner product development.
UHS's Bennett advises owners embarking on IPD for the first time to start small. "Take baby steps," he says. "It takes time, like anything of value."
This article was updated on July 6, 2015, to include additional information on the IPD research team at the University of Wisconsin.
