Development of IPD
We knew there had to be a better way
Four Major Problems with the Traditional Approach
Problem 1: Good ideas are held back
The Mechanical, Electrical and Plumbing (MEP) contractors and other major trades are generally brought into the process by the GC once the drawings are at the Design Development (DD) stage in order to establish a competitive price. Even though the trades may be frequently consulted through the design process, there is no real commitment to or from them because a number of different companies representing the same trades are involved. As a result, each of the trade contractors saves their best ideas in hopes of gaining a competitive edge during the “bidding process.” Many times these ideas are very good. Time and the opportunity for innovation among the trades is lost as the design team attempts to revamp their designs to accommodate the best of these late arriving ideas.
Problem 2: Contracting limits cooperation and innovation
A systemic, but less obvious problem is the myriad of subcontracts that link the trades and form the framework for the relationships on the project. The prime contractor holds the contract for every consultant and subcontractor. Long and tedious subcontract agreements attempt to spell out in great detail exactly what each subcontractor is to provide (and by deduction exactly what not to provide), rules for compensation, and sometimes useful, if unrealistic, information about when work is to be performed.
The 20 to 30 page subcontracts mostly deal with remedies and penalties for noncompliance. These contracts make it difficult to innovate across trade boundaries even though the work itself is frequently interdependent. (It is hard to have a wholesome relationship with another when you have a charge of dynamite around your neck and the other holds the detonator.) Of course, horse trading always takes place anyway, but for “equal” horses. Trading a small increase in effort by one contractor for a big reduction for another, a horse for a pony is almost impossible.
Problem 3: Inability to coordinate
While some projects hold “partnering” sessions, there is no formal effort to link the planning systems of the various subcontractors, or to form any mutual commitments or expectations amongst them. Project organizations looks like 20 or more rubber balls, representing subcontractors, all tethered to a single point by long elastic bands. When the connection point jiggles, the balls jiggle in all random directions colliding with each other in unusual and unexpected ways.
Problem 4: The Pressure for local optimization
Each subcontractor fights to optimize their performance because no one else will take care of them. The subcontract agreement and the inability to coordinate drive subcontractors to defend their turf at the expense of both the client and other subcontractors. Remember that everyone on the project other than the prime contractor is a subcontractor. These subcontractors frequently, in their life outside of the subcontract, may be generous, caring and professional. However, since right or wrong is defined by the subcontract, they, more often than not, take on a very legalistic and litigious stance becoming an army where the rules of engagement are “Every man for himself.”
What if every member of the design build team shared completely the responsibility for the entire project and set about correcting deficiencies or problems wherever they popped up without regard to who caused the problem or who is going to pay for it? What if all of the construction members were friends looking out for the interest of the Client and each other, applauding the successes of each other and sharing the pain of each others failures? What if all of the design and construction entities on a project could be organized in such a way that they all functioned as if they truly were a single company with a single goal and with no competition amongst themselves for profit or recognition?
- Single source contract
- Major players known from start
- Share project & performance responsibility
- Single tier markup
- Shared Costs
- Shared Profit
- Value engineering built in from start
- No contractual trade barriers
- Mutual self-interest
- Shared resources & manpower & equipment
- Cost Transparency
- Self-perform all MEP
- LEAN Construction methods
Approaching the Solution
There are Two Types of Contracts
- Transactional where exchanges are made for goods and services.
- Relational contracts where the relationship “takes on the properties of ‘a mini-society with a vast array of norms beyond those centered on the exchange and its immediate processes.
Two Principles Govern The Team Relationship
With the IPD process, two principles define the relationships between the Team Member that holds the prime contract with the client and between that Team Member and the other Primary Team Members (PTM). First, with IPD, all PTMs are responsible for all provisions of the prime contract with the Client and secondly, the Primary Team Members share the risk and profit for total project performance.
The Prime Contract
A single contract binds the IPD Team to the client. The prime contract may be any one of a number of standard forms that are available. It spells out the commercial terms and defines the scope, schedule and cost of the project. One entity signs the prime contract.
The Team Member Agreement
Each Primary Team Member (PTM), including the one who holds the prime contract, then enters into a single “pact” with the other PTMs. They each jointly and severally bind themselves to each other and to the fulfillment of all of the terms, conditions and requirements of the prime contract. Further, PTMs agree in this “pact” to share the cost on the project and to distribute profit based upon a formula that rewards the PTMs in accordance with their participation on the project. The entity that signed the Prime Contract is simply a PTM and receives profit based on the same formula and in the same manner as the other PTMs. Key Pact provisions:
- The PTMs each agree to be bound together accepting full responsibility for all of the terms and conditions of the prime contract, sharing together in the cost and profit in accordance with a pre-established formula. Each member is reimbursed for all verifiable direct costs that he incurs. Profit is calculated at the project level at the end of the project and divided based on the formula.
- Each of the PTMs provides a certificate of insurance in the form and amounts as indicated in the prime contract.
- Each PTM agrees to open their books pertaining to this project to the other PTMs and to the Client.
Team members are united together under the prime contract. The Team has one price, and that is the price to the Client. The Team has one scope, and that is the project scope as defined in the prime contract. There is no accounting among PTMs for who is over or who is under budget. Holding everyone solely accountable for their own scope and price would drive the project back down the road to local optimization and inhibit innovation. IPD was formed to avoid these problems. Through their association with the Lean Construction Institute, they have learned that their intuitive and practical approach rests on a principle of production system design; local optimization leads to sub-optimal project performance. Prior to forming IPD, they were working in a system that guaranteed that each participant would vigorously work to optimize his own part of the project without regard to the effect on the other parties or the over all project. Typical subcontracts confer upon the subcontractors an autonomy that always works to the detriment of the project. Instead of becoming a team working in harmony toward a common goal, they often became separate warring factions. The structure of IPD also supports innovation and improvement within each craft and between them. As a result, they may shift work and cost across traditional boundaries to reduce total expenditures and to improve total project performance.
To support this IPD process each PTM agrees to immediately disclose any condition (internal or external) that might threaten their ability to fully perform on the project. The pact automatically expires with the final fulfillment of the terms and conditions of the prime contract and the final distribution of profits to the pact members after fulfillment of all warranty obligations.
“One for all and all for the project” sounds great but there is an unavoidable implication: If one PTM makes a mistake, each PTM will pay for it. Some find this hard to accept. Cost reductions anywhere are shared among those in the Pact and with the Client. An overrun on the project will reduce the gross profit available for distribution. Under this pact, they came to think of themselves as mountain climbers roped together. If one falters the others pick up the slack; they don’t cut him loose. They are not involved in a search for the guilty. They are involved in applying all of their talents to getting the job done. They recognize that everyone makes mistakes and are willing to jointly absorb the cost for those honest mistakes. They are comfortable in this because they have chosen team members with integrity, character and competency; Team Members who are trustworthy.
The Impact of IPD on Project Delivery
On the design process
There is no incentive for team members to hold back ideas. This effect is very powerful in reducing project costs and enhancing the “value engineering” process. Value engineering takes place at the beginning of the project and throughout the project. It is “built in” as it should be and not “tacked on” at the last minute as a cost saving or profit enhancement tactic. It is amazing how quickly effective solutions can be devised when there is no concern over which entity will pay for them. This creativity always benefits the client, however, when the GMP is set too late in the process the IPD Team Members are limited in their participation in the savings brought about through this creativity.
Cooperation, Innovation and Coordination
All of the primary team members wear the same hardhats on the job with the same logo. They all work under one general superintendent who has total authority from the Primary Team Members to direct the project to achieve the most efficient and lowest overall cost delivery. Field problems are quickly resolved based on the lowest perceived overall cost and least impact principle.
The Team decides what positions such as Project Executive, Director of Design Services, Director of Construction Services, Project Manager, Project Superintendent, Project Accountant, Manager of Information Technology, and Systems Manager need to be filled for the particular project at hand. These positions are filled with the best available person from any of the
Primary Team Members. They become direct job cost and the company from which they came is reimbursed for the time they spend on the project.
Each person assigned a project leadership position works for the Team, is paid by the Team, and is responsible to the Team. In this way, their allegiance is to the Team and the project and not to their own sponsoring company. All have the traditional authority and responsibilities of the positions that they are filling.
The principals of the companies developing the IPD process meet two mornings a month for breakfast and fellowship. They discuss the IPD concept in order to refine and further develop it. Attendance at these meetings, and the involvement and “buy in” of the top stakeholders is crucial to success of the process. These meetings underpin the broader network of relationships that hold the projects together.
Each month the PTMs are reimbursed based upon their actual verifiable direct job cost. At the end of the project, gross profits are distributed to each PTM in accordance with their incurred direct cost on the project. A mutually agreed upon formula is used for determining the actual amount of gross to be distributed to each team member. The formula is weighted more highly toward direct labor than subcontracts and more highly toward material purchases than major equipment purchases. The intent is to recognize the varying overhead associated with each type of job cost.
GOVERNING THE RELATIONSHIP
The best governance is self-governance. With IPD self-governance among PTMs is facilitated and encouraged by the structure of the IPD process. From the Client’s viewpoint the IPD central accounting and monthly review of each of the PTMs billing packages is a form of governance. Since the collective interest of the PTMs is aligned with that of the Client, he can have confidence in this review process. The open book, and shared savings features are both means of governance. Governance of the project execution is vested in the people who perform the traditional roles of Project Executive, Project Manager, Superintendent, Director of Design Services, etc. These people have traditional responsibilities and authority on the project. Dispute resolution would be handled by discussion and agreement between the PTMs. They have found that most project disputes typically are rooted in the financial interests of the disputing parties. Since they have a common financial interest, disputes of the typical type do not seem to be a problem. In any case through the first four projects, there have been no disputes.