Integrated Project Delivery – an overview of its purpose and promises

Clive Lawrence MBA, SCMA, CCCA, CCME, PMP

Jerry Crawford PMP, PQS, GSC

Integrated Project Delivery

- an overview of its purpose and promises

1. Background: Project delivery in the North American construction industry has been facing a series of challenges and opportunities over time . Some of the challenges that the industry faces include: • Declining Labour Productivity:

Labour productivity index as reported by Statistics Canada (Anon ., 2016) shows that productivity in the construction industry rises at a slower rate than the national rate . Between 2010 and 2014, labour productivity for the Construction sector increased 0 .8% per year on average . In comparison, labour productivity for the wider Canadian Economy increased 1 .2% per year . • Narrow Margins: The typical margin of a construction company averages around 5%, therefore construction companies have very little room for error and must negotiate terms and conditions to protect, if not to increase, this margin through change orders .

• Low Collaboration and Conflicts

between the Stakeholders: Traditional project delivery strategies such as

Design-Bid-Build have a reputation of strictly allocating scope and risks among the owner, the engineer and the contractor . The traditional methods also rely extensively on competitive bidding, which pushes down margins and hard-codes the contractual allocation of scope and risks .

• A highly diversified industry

with many players: There were 138,795 employers in the Canadian construction industry up to November 2014 according to Statistics Canada .

These companies have vastly different capacities, capabilities and geographic focus . • Rising Capital Costs: Many projects experience rising costs which negatively impact the initial cash flow projections that justified the project in the first place . Some of the factors which account for this include: unrealistic expectations with respect to cost, schedule, approval time and productivity; inaccurate quantities, low attention to access and

constructability challenges; disparate computer systems and programs that cannot communicate with each other . In spite of the many challenges the industry faces, there are unbounded opportunities arising from: • New and more collaborative approaches in delivering projects, such as integrated project delivery (IPD); • Lean construction and Lean project delivery; • Technological advances such as building information modeling and building information management; • The expanded use of drones and robots to capture all the physical and dimensional information about the site and construction progress; • Radio Frequency Identification (RFID) tagging of plant, inventory and equipment deployed at construction sites to measure and track efficient usage of equipment .

2. Characteristics of IPD: IPD as defined by the American Institute of Architects (AIA) is a project delivery approach that integrates people, systems, business structures and practices into a process that collaboratively harnesses the talents and insights of all participants to optimize project results, increase value to the owner, reduce waste and maximize efficiency through all phases of design, fabrication and construction . The Canadian Construction Documents Committee (CCDC) has defined IPD as “a method of project delivery distinguished by a contractual arrangement among a minimum of owner, contractor and design professional that aligns the business interests of all parties . IPD motivates collaboration throughout the design and construction process, tying stakeholder success to project success . ” The key characteristics of IPD are: • Early involvement of key participants • Optimized risk allocation and sharing of rewards • Joint project management • Alignment of the interest of all parties to collaborate deeply • Increase relatedness .

3. A Brief History and Evolution of IPD:

The name Integrated Project Delivery was coined and trademarked by a group of contractors in Florida who successfully utilized the strategy to bring value to owners and who later formed a company called IPD Inc . The Lean Construction Institute later licensed the right to use the term Integrated Project Delivery from IPD, Inc . The Lean Construction Institute combined the ideas from IPD Inc . with relational contracting strategies that they were researching in Australia and other countries, and created the first relational contract for the US construction industry (Wilson, 2014) .

However, integrated project delivery is evolving into the next generation of project delivery system, lean project delivery (LPD) . Lean Project delivery is a project management process that strips away unnecessary effort, time and cost in the planning, design and construction of capital projects to deliver what the owner values (Spata, n .d .) . The ten key features of lean project delivery are: • The system is the focus, not the parts • As variation is reduced, reliability increases • Contingencies mutually defined around

“sticky” variability • Necessity self-imposed to force innovation • Flow where you can, pull where you cannot, push where you must • Action taken at least responsible moment • Product and process are designed together • Standards are starting points for improvement • All product life cycle stages are considered in design • Alignment of interest (Spata, 2010) Lean project delivery borrows and modifies many of the cutting edge manufacturing techniques that were introduced by Toyota .

4. Selecting a Project Delivery Strategy:

The selection of a project delivery strategy is one of the most important decisions an organization can make . According to Tim McManus, Vice President of Capital and Infrastructure Projects at McKinsey & Company, it is essential to first determine the owner’s priorities for a project before evaluating which delivery method is appropriate . Factors to consider include (McManus, n .d .): • Access to funding and cost of capital • Risk assessment, position and appetite • Schedule, milestones and timelines • Innovative technology and systems involved in project scope • Community and local business considerations • Regulatory and environmental considerations • Local construction marketplace capacity • Design and project scope definition • Regulatory and permitting • Land and site control • Owner’s organization capabilities • Current local market place • Project and owner priorities . Mckinsey & Company has observed that there is a significant trend around the world towards non-traditional project delivery methods away from EPC, DBB and other traditional project delivery methods; however, one would be well advised to approach the selection of a project delivery strategy as objectively as one can, since all projects are different and there is no standard delivery model that fits all scenarios .

Economic recessions, more than any other aspect of a business cycle, have a significant impact on the construction industry psyche and play into the decision in selecting a better project delivery strategy . IPD significantly reduces integration risks by allocating responsibilities and risks for project development and execution quite differently than other delivery methods .

5. Selecting Participants for an IPD

Project: The owner conceptualizes the project, assesses the economics, and then develops criteria for selection of the other key participants to the project . Large owners may develop their selection criteria

and may either select these participants from existing pools of qualified contractors or may choose to select participants from other reference projects . The initial discussions will start after a confidentiality or non-disclosure agreement has been established among the key participants, and financial health checks have confirmed their respective economic viability .

It is desirable but not mandatory that the architect and the construction company have a history of working together . Therefore, it is typical that by selecting the architect/engineer the owner will by default be selecting the constructor or vice versa . When selected, the participants then establish a tripartite primary agreement wherein the project objectives, risk and reward are addressed . The first key deliverables under the primary agreement during the project conception stage are: • High level scope and deliverables • Budget and estimates • Due diligence investigations • Site selection • Facility programming • Facility performance criteria • Project schedule .

6. Negotiating Primary Agreements:

Negotiating an IPD agreement requires a fresh perspective, unencumbered by traditional contracting concepts . In many instances the contract negotiator must “unlearn” rules that have served him or her well (under traditional project delivery strategies), but are not functional or relevant to an integrated project (Ashcraft, 2012) .

Howard W Ashcraft, Jr . outlines the key negotiation considerations when negotiating IPD contracts as follows: • 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 • Finding the common interests and getting the deal right is the first step in negotiation • Consider starting negotiations with a negotiation workshop to develop a common understanding of what IPD is, why it works and how it differs from traditional project delivery approaches • Deal first, contract language second • Negotiation is not about contract language • Start with the desired outcomes, then the processes and behaviours needed to achieve the outcomes and then the structures needed to support the processes and behaviours • Define the principle elements of the commercial terms and record them in a key terms summary • The final step is to create a contract that fully expresses the agreement documented in the key terms summary .

7. IPD Contract Scope and Contractual

Liabilities: When the IPD agreement is executed, what will be designed and how it will be constructed (and which party will be responsible) is not yet known because IPD assumes that work will be performed by the best party for the task . Thus one cannot specify everything in detail although during the project configuration phase the parties will create a task matrix which identifies areas of both sole and shared responsibility . In addition most IPD agreements have some level of joint management by the principal parties . In order to achieve the owner’s goals the parties are expected to develop the most appropriate methods for completing the work thus the attitude and approach as it pertains to the scope of work must be flexibility and not specificity . Another important feature of the IPD contract are mutual liability waivers among the parties (Ashcraft, 2012) .

8. Pitfalls with Standard Construction

Agreements: Standard contracts include risks allocation provisions that are based on lessons learned from previous experiences . Contract managers must resist the urge to draw on those references as those past experiences will only serve to “clog the contract with terms that obscure the fundamental business transaction and do little to help the parties achieve success .” The IPD agreement should focus on the authority of the parties to act, rather than specifying how they should act in some future contingency . The contract drafter should delegate responsibility and empower the team to address issues, manage the project, and solve problems (Howard W . Ashcraft, 2014) .

9. Joining Agreements: Contractors and designers typically subcontract large portions of their scopes of work to sub-contractors and sub-consultants .

Figure #1 (Howard W. Ashcraft, 2014):

Develop business case Identify goals and concerns and limitations Team Selection Pre-Contract Interviews

Contract Negotiation Workshop Project Kick-off

Commence Design/ Pre-Construction

Owner’s Business Model RFP Project Business Model Summary Draft IPD Agreement Final IPD Agreement Project Manual

Contract Exhibits

If IPD seeks to energize the people actually doing the work, it must clearly engage subcontractors and consultants earlier in the process . Moreover, if IPD is to provide the owner with a sufficient buffer against cost overruns, the subcontractors and consultants, or at least the key participants, must also share in the risk/ reward structure (Ashcraft, 2012) .

Because IPD is a collaborative, trust–based delivery method, the consultants and subcontractors chosen must embrace IPD and must be able to work cooperatively with the other parties . Thus, in most IPD structures, the subcontractors and sub-consultants are jointly chosen by the owner, designer and contractor team . The team has interview and veto rights over consultant and subcontractor choices .

There are two primary methods for incorporating the key consultants and subcontractors: sub-agreements and joining agreements . In the sub-agreement approach, the key IPD elements are flowed through the prime agreement (designer or contractor) into the subagreement (consultant or subcontractor) . This includes key risk and reward terms as well as any liability limitations and waivers . The at-risk compensation of the subcontractor or consultant is a portion of the at-risk compensation of its respective prime . In almost all instances, the business structure of the sub-agreements mirrors the business structure of the IPD agreement, except that the subcontractors and consultants are less involved and have no or limited voting rights at the project management level .

In a joining agreement approach, the key subcontractors and consultants execute an agreement that amends the IPD agreement to add them as a party . The risk/reward provisions are amended with each added key subcontractor or consultant to reflect the amount of compensation the added party has placed at risk . If all parties are added to a single agreement, the IPD agreement must distinguish between types of parties when determining issues, such as joint project control .

The level of subcontractor and consultant involvement will affect the amount of profit at risk . Ideally, all subcontractors and consultants would be within the risk/reward group, but this level of participation is neither practical nor necessary .

10. Compensation Strategies Under

IPD: The typical approach in developing a budget and price for an IPD project is that the Owner, the engineer and constructor jointly agree on a target budget . The other point worth noting is that the parties to the primary agreement also agree to a target profit . While the owner pays all direct cost in the event of an over-run the target profit portion is at risk for all participants .

In a basic IPD agreement, the primary metric is whether the project is achieved within the target budget . Because the parties are using target value design, the traditional design contingency allowance is somewhat redundant . Contingencies are still important, but the focus is on their use as management tools, not as pockets of protection (Howard W . Ashcraft, 2014) .

11. Dispute Resolution: Although many claims among the IPD participants are waived, there will still be issues that need to be resolved . Moreover, specific obligations, such as the obligation to make payment or a duty to indemnify, must be enforceable despite the waivers . The parties should carefully consider what issues must be resolved at the project level and which can be elevated to senior representatives or an independent decision making process . In general, informal resolution processes should precede formal measures and the parties should have primary responsibility for resolving disputes (Ashcraft, 2012) .

12. Conclusion: Increasing shareholder’s wealth by increasing profitability and optimizing integration risk are key underlying benefits of IPD . IPD emphasises shared ownership of the project, thus making the project’s interest superior to that of the individual stakeholders . It has been reported that users of IPD can save 10–15% on capital cost as compared to say DBB delivery strategy . 10–15% savings could make a significant difference in terms of which project gets approved among the owner’s portfolio of projects, since not all projects are candidates for this delivery strategy .

This is a relatively new project delivery strategy in North America, but apparently it has deep roots and significant successes in the United Kingdom and Australia . North America and particularly Canada must therefore catch up quickly and embrace this new strategy .

About the authors

Clive Lawrence is a supply chain management professional with over twenty years of experience, 11 of which have been in the heavy oil and gas processing industries . Clive is currently a Procurement Lead for AltaGas’ Northpine fractionation and pipeline projects . In his spare time he enjoys reading and spending time with family and friends . Jerry Crawford is a Director with KGC Consulting Services Ltd . With over 35 years and international experience working in Ontario, USA, South Africa & Bermuda as a Commercial Manager/Professional Quantity Surveyor and Project Manager . He has 35 years of extensive experience in the building and civil construction industry working predominately on transportation, energy, commercial, industrial, civil & building infrastructure projects during the procurement, pre-contract, execution and post contract phases . His primary focus is construction litigation support for contract disputes and preparing delay claims .