The shortcomings of traditional project delivery methods are well known to construction professionals. The cost and risk-shifting strategies of project owners, contractors and design firms are intended to address which entities are exposed to loss. These strategies frequently result in dysfunctional relationships between the team members, with defensive thinking and behavior delaying effective problem solving by the team.
The design firms and contractors may also be focused on optimizing their particular project scopes, rather than the project as a whole. The challenges of coordinating the efforts of these firms in a conventionally delivered project are not helped by the limited communication between firms responsible for different scopes prior to and during construction.
Unplanned project costs that result from design issues requiring changes to the project lead consequently to change-order billings by the general contractor and additional costs to accelerate delayed project schedules.
Integrated project delivery has proven to be particularly effective at addressing these issues. The result is projects that are more likely to be delivered to full scope, on schedule and on budget.
According to the Lean Construction Institute, “70% of projects are over budget and delivered late.” This is attributed to the various parties involved in construction projects—architects, engineers, general contractors and specialty providers—operating independently instead of working in cohesion, unison and sync in most situations, LCI says. The result, LCI notes, is that significant waste has been introduced into the project delivery system.
IPD is a principle of lean construction that aims to manage construction projects more efficiently by bringing “key parties involved in the design, fabrication and construction aspects of a project” into one agreement, LCI says. According to LCI, having a single agreement that includes the various parties “allows for ongoing communication and collaboration through the project’s phases, which decreases waste while increasing efficiency, respect for team members and project outcomes including profits.”
A NEW APPROACH
The IPD method is becoming more popular in the construction industry as project owners and contractors try to navigate economic challenges and avoid extra project costs. The change to the project paradigm, starting in preconstruction by collaborating to establish the target project scope and validate the target cost and schedule, and to optimize the project as a whole instead of each firm optimizing their own scope, is key to the improved results.
With an IPD approach, the project stakeholders—owners, contractors and designers—agree to a multi-party contract led by an IPD team who is responsible for collaborating throughout the project. The contract outlines the target cost and risk of the project and establishes a reward incentive structure that each party benefits from when the project is completed to scope. This is typically referred to as the at-risk profit pool.
The IPD team must work together to deliver the project’s priorities and manage the risks for the financial incentives to be realized. In other words, the risks and the opportunity are shared, and the IPD team collaboratively engages in managing both.
This approach avoids the zero-sum game of cost- and risk-shifting that comes with traditional project delivery methods, and greatly reduces conflict and friction between the various parties.
IS IPD RIGHT FOR YOUR PROJECT?
Although the IPD approach can reduce construction risk and improve financial outcomes, it may not be the best solution for every project.
There are also important insurance coverage considerations for IPD versus traditional project delivery methods. For starters, the typical contractors professional and protective indemnity policy offered by several carriers may bar coverage for professional liability claims against contractors on true IPD projects. In addition, these professional liability policies may not address potential losses to the profit pool.
Here’s what to know when evaluating whether IPD is the best method for your construction projects:
Understand what IPD is and how it works—Contractors and project owners must be educated on lean construction and IPD before using the method on projects. The Lean Construction Institute offers a variety of resources, including webinars, white papers and in-person workshops or events to help construction professionals learn more about IPD and other project delivery methods.
Determine whether the project characteristics make sense for IPD—Hospitals, healthcare and several other types of construction projects that require a great deal of coordination between the consultants, general and subcontractors generally benefit the most from the IPD approach.
Get on the same page with all stakeholders—Everyone involved in the project should be educated on the IPD method and have a firm understanding of how it works, as well as what their role on the IPD team entails, and how profits will be distributed.
Be sure the right insurance coverage is in place—Ask your insurance advisor to help you evaluate your professional liability exposure if you’re taking on an IPD project, and what coverage you need to protect you from claims.
The goal of IPD is to enhance construction project outcomes, decrease individual risk and address coverage exclusions found in other policies. Talk to your insurance agent, broker or carrier today so you can reduce your liability in the ever-changing construction industry.
The remarks in this piece are Mr. Pacifici’s and do not necessarily represent the views of Berkley Construction Professional or W. R. Berkley Corporation.
