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Making The Leap To IPD

By Richard L. Peck | June 3, 2019

 

When owners ask a project team to get on board with integrated project delivery (IPD), putting profits at-risk and adopting costly technologies like building information modeling (BIM), all while forsaking professional autonomy in favor of collaboration, the challenge is obvious. Nevertheless, recent years have indeed seen growing numbers of healthcare projects adopting IPD in some form, with already impressive results in time and money saved, errors avoided, and profits made.

To be sure, IPD is not for everyone, says attorney Lisa Dal Gallo, whose firm Hanson Bridgett LLC (San Francisco), has crafted some 150 multiparty IPD contracts since 2008. “The owner is the leader in the IPD world. If the owner is not design and construction-savvy and prepared to be very involved in the day-to-day process, IPD may not be the best fit for them,” she says.

“Design-build, in which the owner contracts with the designer-builder entity who oversees the project rather than participating in the contract, may be a better collaborative choice.”

Dal Gallo adds that companies embarking on IPD also need to make sure they select the right individuals, including general contractors, architects, and engineers, for the team. “Some professionals are simply not collaborative, it’s just not in their makeup,” she says. “IPD doesn’t work for those individuals, either.”

While there are various flavors of IPD, with varying approaches to compensation, risk-sharing, and decision-making, the key, for the owner, is to convince design and construction partners to sign on to a single contract holding their profits at-risk for budget overages or performance shortfalls and to share in rewards for savings and efficiencies achieved, throughout the life of the project.

So what does it take to make such a leap from the traditional design-bid-build relationship to IPD? One case study sheds light on the process.

Inside story

For Chicago- and Milwaukee-based Advocate Aurora Health—the ninth largest not-for-profit healthcare system in the United States, with 28 hospitals and more than 500 additional care sites—an initial impetus to eliminate waste inherent in the design and construction industry coincided with the Great Recession of 2008.

“After that played out, we were still relatively well-positioned to start capital projects,” says Scott Nelson, system vice president of planning, design and construction for Advocate, “so we got a lot of attention with our plans.”

Those plans included moving in the direction of IPD. Nelson said the healthcare system interviewed prospective design and construction partners and asked them about their stance on IPD. “There was some reluctance on the part of construction about going forward” he says.

Nevertheless, in 2011 Advocate initiated three large-scale projects across the Chicagoland area in a modified IPD approach under separate traditional owner/architect and owner/contractor master agreements rather than a single multiparty agreement. As the projects progressed and were completed, Nelson says Advocate saw varying levels of success among all three teams. “But in every case we saw better outcomes in terms of schedule, budget savings, quality, and construction site safety than we had in projects of similar scale and complexity in the past,” he says.

Building on this success, in 2016, Advocate decided to move toward full IPD, engaging many of the general contractors, architects and engineers already in its Partner Program to participate in the review and development process. “Our intent was to obtain buy-in to the agreement so we weren’t negotiating the structure and terms on every individual project going forward,” Nelson says. The master IPD agreement put all parties at full profit risk, but with savings incentives that would potentially enhance their bottom lines.

The multiparty contract, prepared by Dal Gallo, went into effect in 2016 and was first executed on several ambulatory facility projects by Advocate’s ambulatory collaborative team, stripping out all profit and putting everyone at risk until target cost value had been achieved—in this case, a savings of 3 to 5 percent below the target (allowable) cost.

“The full-risk nature of the agreement created quite a bit of discomfort at first,” says Nelson. “It was quite a leap.” But, by  the end of 2017,  cost savings attained had already hit 14 percent below target cost, along with a 30 percent reduction in construction time and preventable change orders reduced to 0.27 percent of construction cost. By this time, the partners were sharing 50 percent of the savings from the shared savings threshold (the point at which savings were agreed to be shared), providing an obvious enhancement of their margins.

Nelson says the resulting budgetary freedom due to the savings achieved allowed Advocate Aurora Health’s design and construction partners to innovate. For example, the team implemented more modular construction, moving from a construction platform to a manufacturing platform for pre-fabricated mechanical racks, panelized wall systems, exterior cladding, and full exam room and toilet room pods, ready to plug in efficiently when the time came.

Making it work

The ongoing process for achieving all this relied upon that Lean mainstay, the Big Room, where all nine of the IPD contract signatories on the ambulatory team would convene regularly during project construction to review progress on all ambulatory projects underway, exchange lessons learned, and evaluate attempted innovations—as well as brainstorm solutions to pressing problems.

For example, Nelson says bad winter weather was interfering with some of the interior work on a particular project, so the design team devised a prefabricated insulated exterior wall panel that would be rapidly erected, allowing them to condition the interior space where the work needed to be done. The team also devised a modular exam room pod, manufactured off-site, which could be readily installed while other construction was underway, improving quality and saving a great deal of time.

The multiparty contract partners also collaborated on using the same technological platform for BIM. “This was a requirement for all of them, as part of their participation,” Nelson notes, adding that in the future he sees the organization moving beyond BIM into augmented and virtual reality during design development, especially for non-ambulatory projects. “It’s more suitable for these big projects because they are one-offs, and augmented reality and virtual reality can be of great help in design development.”

With ambulatory projects, on the other hand, Advocate has
developed enough of a template over time to simplify design development, so that
the partners know basically what to expect from project to project. “We’ve been
able to set a standard for the design overall, and then leverage that for
expanded use of prefabrication and modular,” he says.

With the Advocate Aurora Health ambulatory team, Nelson views the current multiparty IPD master agreement as one that will continue in perpetuity, although formally requiring it to be reviewed and renewed every five years. “We envision the partners staying on indefinitely, as long as the demand for ambulatory facilities holds out and the team continues to perform,” he says.

Dal Gallo maintains that five-year review should be required of all IPD master contracts, partly because the laws governing design and construction change but also to improve the documents by incorporating lessons learned. A major benefit of the master IPD is that it avoids the necessity of negotiating and drafting the downstream risk/reward subcontracts and consulting agreements after the owner, architect, and contractor have already executed the tri-party IPD agreement.

Similarly, the issues of insurance, liability, indemnity, and compensation are worked out upfront with the IPD master agreement, leaving only the project-specific business terms to be negotiated, which saves upfront negotiation time and legal expenditures.

The IPD approach, with its shared risk and reward among the parties, is probably most suitable for facility owners that are developing several projects or large, complicated projects sponsored by private owners, says Dal Gallo. Public agencies, banks, and other financiers can be put off by the risk that the owner will continue to pay direct costs (without profit) if the project exceeds the target cost, exhausting all the profit placed at risk.

As for the participants, it’s an adventure: “Once in it,” she says, “everyone succeeds or fails together.”

Richard L. Peck is a freelance writer based in Lakewood, Ohio. He can be reached at peck.richard117@gmail.com.

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