The Monday, March 7, 2011, Daily Journal of Commerce carried the following front page headline: “Integrated Delivery Raises Questions about Contracts/A Local Architect said one of the biggest hurdles in the using Integrated Project Delivery is lawyers.”
The lawyer reference was attributable to Jay Halleran of NBBJ. Mr. Halleran is a highly competent architect with a wealth of experience in Integrated Project Delivery (“IPD”). Our firm also has significant experience in the IPD procurement process. We can state from first hand experience that although lawyers may deserve criticism for many things, they are generally not the hurdle to IPD. Instead, the major impediment to IPD we encounter is the owner’s unwillingness to accept the risk of full participation in design and construction of the project which is a fundamental tenet in the IPD process.
(1) IPD Explained:
IPD grew out of “lean” construction which was first implemented in the Toyota Manufacturing processes. The “lean” construction approach is now generally termed “integrated delivery” which involves a three party agreement among the owner, architect and contractor. Integrated delivery requires more than merely a three party agreement. A non-exclusive list of features includes early involvement of design consultants, the contractor and key trade contractors in preconstruction; utilization of technology like modeling (using a single, shared model) during the design phase by the designer as well as the contractor and key trade contractors to create a three dimensional model for routing and conflict elimination; and “relational” contracting principles such as trust and confidence between the design team, construction team, and owner team to collaborate and cooperate with each other to further the interests of the Project. An example of language reflecting this unique relationship follows:
- The parties accept the relationship of mutual trust and confidence established with each other by this Agreement, and promise to furnish their best skill and judgment and to collaborate and cooperate with each other and with other project participants in actively pursuing an integrated project and furthering the interests of the Project. Notwithstanding this commitment, no fiduciary relationship is intended or created. The parties recognize that each of their opportunities to succeed on the Project is directly tied to performance of other Project participants. The parties shall therefore work together in the spirit of cooperation, collaboration, and mutual respect for the benefit of the Project, and within the limits of their professional expertise and abilities. Throughout the Project, the parties shall use their best efforts to perform the work in an expeditious and economical manner consistent with the interests of the Project. Nothing in this paragraph shall create a fiduciary relationship among the parties.
AHLERS & CRESSMAN PLLC represented the contractor in negotiating a three party integrated agreement for the Sutter Health Medical Campus in San Carlos, California and more recently in the Virginia Mason Hospital addition which utilized a traditional GMP contract between the owner and contractor, but implemented many principles of lean construction through a “Collaboration Guide” designed to promote high quality delivery by eliminating redundancy errors and waste. The Collaboration Guide aligned the interest of the owner, design team and construction team and incentivised the various members of the three party agreement with monetary awards for achieving certain objectives.
In graphic form, the integrated team concept is set forth below:
AHLERS & CRESSMAN PLLC partner Scott R. Sleight, who was involved in drafting and negotiating the contract documents for the Sutter Campus of San Carlos and the recent Virginia Mason Hospital addition, has shared his experiences in seminars and his power point presentation explaining the lean construction concept is available here.
(2) Key Elements to Successful IPD:
There are many varied and project-specific issues involved in construction/design contract negotiations. However, the key to a successful IPD project is an informed Owner willing to take a risk that the delivery method will reward the unique upfront cost expenditures. Critical owner issues include the following:
- The Owner must be truly committed to the three party shared decision making and have confidence in the process. Utilizing a relatively new and untested form of agreement as well as compensation structures demands that the Owner be confident and have absolute trust in the design and construction team. The Owner must be prepared to pay significant sums to the design and construction team during the design and preconstruction phases because IPD requires that the construction team, including the construction manager/contractor and key subcontractors (mechanical, electrical and plumbing (MEP)) become very involved in the early design stages to implement cross savings, Building Information Management (BIM) modeling, design development and budgeting.
- Key risk issues and decisions need to be negotiated early by the three parties (owner, architect and contractor jointly) including risk allocation, construction contingency percentages, allocation of any unused contingency, and liability limitations. Traditionally, the negotiations between the owner and designer are independent of negotiation of the construction contract by the owner and contractor, but an integrated agreement requires the designer and contractor to cooperatively negotiate risks and rewards.
- The IPD agreement presents new challenges for insurance and bonding companies. Insurance carriers and sureties may dictate certain terms to ensure that the agreement is in fact insurable and can be bonded. Typically IPD projects mandate an owner controlled insurance program (OCIP) which is only cost effective on larger projects.
- One critical feature of an IPD agreement is the shared contingency pool. Instead of having three separate contingencies, one for the contractor, one for the designer and another for the owner, the contingency monies are “pooled” and available to the design, construction and owner team to defray cost overruns on the project as reflected in the following diagram.
- Typically, design and construction agreements do not include language reflecting “relational” contracting. An example of “relational” language is set forth above. There is little to no case precedent providing guidance as to how courts will treat relational language unique to an IPD agreement.
Although lawyers are often a convenient target for criticism and, in some instances a deserved one, it is our experience that the charge leveled against lawyers in the DJC article was an unfair one. Lawyers generally are engaged to “write up the deal” the parties make. The party that needs the most coaxing in the IPD process is the Owner group which, due to lack of experience with construction or the IPD delivery method is often reluctant to take on the risk required to enter into a three party agreement with a sophisticated designer and experienced contractor.