Imagine your design team working seamlessly with your construction team through the design and construction phases of your project. Imagine minimizing or eliminating changes to the project budget and schedule. Imagine no finger pointing amongst the design and construction teams when problems arise. Instead, imagine everyone working collaboratively to address problems quickly and efficiently while the project remains on track. A dream? No, a growing reality. Are you interested?
An increasing number of private construction projects throughout the country are utilizing collaborative project delivery methods, such as Design Assist or some form of Integrated Project Delivery (IPD). These project delivery methods bring all project participants together at the earliest stages of project conception and require the participants to collaborate, work as a “team” during design and construction. The “team” approach represents a significant change from the traditional, design-bid-build approach (which unavoidably places the participants in an adversarial relationship) in both the legal relationships and risk allocation between and amongst the project participants. Owners and developers should understand both the benefits and risks associated with the various methods and be aware of options for structuring the legal relationships between the parties and the substantially different contract terms. This article identifies the significant differences between IPD and traditional methods of project delivery, the types of legal relationships that may exist for IPD, and the unique risks that should be addressed in the contract documents.
What is IPD?
The term “Integrated Project Delivery” or simply “IPD” is commonly used to refer to any method of project delivery based on a collaborative, cooperative, team-based approach. However, the specific collaborative process used under the heading IPD can vary greatly. IPD brings the owner, design professional, and contractors together at the earliest stage of project conceptualization to form a project “team.” The team members exchange data and information during the design process and work together to identify conflicts, plan costs, and establish the project schedule. Typically, IPD aligns the participants’ financial interests by linking compensation to the project’s overall success, which in most cases is not merely shared savings. Certain forms of IPD require the parties to waive liability between the key IPD team members in order to contractually eliminate the finger pointing that occurs during problems that arise during projects and continue to maintain the team’s focus on project budget, quality, and completion. The team-work mentality and aligned financial interests allow the team members to jointly make informed decisions early in the project, where the most value can be created. Overall, IPD seeks to reduce waste, increase efficiency, and maximize value to the owner by identifying problems early and minimizing the need for costly changes during construction.
Significant Differences Between IPD and Traditional Project Delivery
In the traditional design-bid-build model, the roles, responsibilities, risks, and rewards for each project participant are separate and distinct. You hire an architect or design team who designs the project for you. You then put it out to bid to a set of reputable contractors or take the design to a contractor or construction team that you are familiar with to ultimately construct the design prepared by your design team. In this scenario, the participants focus almost exclusively on their role in the project without considering the impact to the entire construction process. If problems arise, each participant will move quickly to distance themselves from liability by blaming another party in an attempt to protect their own financial interests.
In contrast, IPD requires the owner to retain all key project participants upfront based on quality based selection (QBS) and to form a team to work together from conception through substantial completion. Unlike traditional project delivery, IPD incentivizes teamwork by linking compensation to the achievement of project goals and milestones. If the project is completed on time and under budget, the entire team shares in the project saving. Similarly, if the project meets or exceeds certain milestones defined in the contract documents, the entire team may earn additional compensation. By aligning the parties’ financial interests, the parties are incentivized to keep the aggregate project cost as low as possible. Due to the collaborative processes incorporated in this type of project delivery, it is also the best vehicle to capture the highest level of benefits of using Lean Construction principles and Building Information Modeling (BIM).
Restructuring the Contractual Relationships
IPD principles expand the traditional contractual roles in Design-Bid-Build, Design-Build, and Construction Management methods of project delivery. For this reason, IPD requires a restructuring of the parties’ contractual relationships, usually in the form of a Multi-Party Agreement (MPA) with Joinder Agreements, a Project Alliance Agreement, or the use of relational contracts. In the most extreme form of IPD, the parties may even enter into a Single Purpose Entity Agrement (SPE).
An MPA or Project Alliance Agreement requires multiple parties to execute a single agreement that governs the rights, duties, and responsibilities of each team member. These arrangements allocate compensation, risk sharing, and decision making jointly between the owner, design professional, and contractor. Consultants or subcontractors holding key roles in the project may be added to the Project Alliance or MPA by executing a Joinder Agreement, which makes the consultant or subcontractor part of the project team and subject to the terms of the underlying agreement. Members of the team typically waive liability between each other and are usually jointly liable to third parties for injuries or damages. Project Alliances and MPA’s accommodate owners who want a collaborative multi-party agreement but are reluctant to form separate companies with contractors and design professionals, as is required by the SPE option.
In instances where the owner desires to maintain the traditional owner/architect agreement and owner/contractor agreement, IPD may still be utilized through “relational contracts.” Relational contracts implement the collaborative approach of IPD by allocating compensation, risk sharing, and decision making to project participants in separate contracts. Although decisions are developed by the team, the owner usually retains the right to make final decisions where there is no consensus amongst the parties. Parties may agree to limit their liability to each other but typically do not waive liability against each other, as in an MPA or SPE. This form of IPD is commonly referred to as “IPD Light,” as it normally carries less risk, but also carries less reward.
The formation of an SPE represents a radically different approach than traditional project delivery because it requires the project participants to form a new company. The SPE usually consists of the critical project participants, including the owner, design professional and general contractor, but may include additional consultants or subcontractors. The legal structure of the company may vary, but the participants each have an equity interest in the company. Because an entirely new company is created, there may be tax, management, and regulatory issues associated with the creation of an SPE. This contractual arrangement has the greatest amount of risk, and therefore requires each party to have a high degree of trust and confidence in each member of the SPE.
Unique Risks and Legal Concerns for IPD
Contract Terms. The intent of any IPD agreement is to create a collaborative environment in which to deliver the project. Because this approach represents an ideological shift from traditional construction contracting, the terms of the underlying agreement must clearly identify the roles and responsibilities for each participant. The agreement must include, at a minimum, provisions that address scope of services, risk sharing, liability waivers, waivers of consequential damages, indemnification, shared project incentives and goals, insurance, and dispute resolution. Both the American Institute of Architects (AIA) and ConsensusDOCS offer standard form IPD agreements that may be tailored to the participants’ specific goals.
Assumption of Expanded Liability Exposure. Collaboration between the parties during design and construction raises the concern that the parties may be assuming liability for both design and construction functions. For example, contractors participating in IPD are required to provide data and information to the design professional for incorporation into the design. Contractors are also required to engage in conflict checks and compatibility reviews during the design process. Contractors may be concerned that they are taking on responsibility and liability for the design by providing such data and participating during the design phase. Although IPD does not require this type of risk shifting, the agreement must clearly identify the participants’ roles, responsibilities, and scope of services and clearly delineate the extent of liability. Owners should require the key contractors involved to carry insurance that covers their expanded roles.
Waivers of Liability/Third-Party Liability. The liability waivers typically found in IPD agreements represent a major shift in construction contracting and represent the most significant benefits and risks to the owner. The participants usually agree to waive claims against each other arising out of the performance of each team member’s duties under the contract (except for willful default). This is consistent with the “teamwork” concept and allows the parties to freely exchange data, information, and ideas without fear of liability to other team members. More importantly, it allows the parties to quickly and efficiently work through problems or issues that would otherwise create change order and delay disputes which normally result in substantial increases in the cost and completion time of the project. IPD agreements typically also establish that the entire project team is jointly liable to third parties; team members are not individually liable to third parties for injuries or damages arising out of the project unless those injuries or damages arise out of one team member’s negligence.
Project Incentives. IPD agreements typically require the participants to develop a financial incentive program that rewards the team for successfully achieving established performance goals, project expectations, and other benchmarks. The financial incentive program typically establishes that if the project is completed for less than the overall agreed-to project cost, the parties share in the cost savings. The distribution of the savings is determined by the project participants when the initial agreements are executed or at the time the overall project budget is established. The financial incentive program may also include incentives based on performance goals in the following areas: cost, quality, safety, schedule, planning system reliability, innovative design, construction processes and teamwork. The owner may also wish to allocate responsibility for the event that the project costs exceed the estimated cost or in instances where project goals or milestones are not achieved. In such circumstances, the financial incentive program must determine whether the parties lose the right to earn future profits or must return profits already earned.
Data Protocol and Copyright. Because IPD requires the free exchange of data and information, the agreement must address the use and ownership of this data and information, as well as provide protective measures for safeguarding access and distribution. Further, the agreement must address the fact that proprietary and/or confidential information will be part of the data and information exchanged between the project participants.
Dispute Resolution. The typical dispute resolution procedure in IPD agreements represents a substantial deviation from traditional methods of project delivery because it seeks to resolve all disputes in a collaborative manner, essentially allowing the parties to govern themselves. The process is structured to minimize dispute resolution costs and attorneys’ fees as well as to minimize or eliminate the delays such disputes may have on the project schedule. In certain forms of IPD, the procedures do provide for more traditional forms of dispute resolution, such as mediation, arbitration, or litigation, if the team is unable to resolve the dispute internally.
Conclusions
As the use of IPD continues to gain traction in the industry, owners and developers should be aware that the fundamental differences between IPD and traditional methods of project delivery result in rewards and risks unique to IPD. Although there are various ways to structure the legal relationships between the project participants, the underlying agreements must be carefully drafted and take into account these risks and rewards. Standard form contracts published by the AIA and ConsensusDOCS may be used as a starting point, but should be tailored to the specific goals and expectations of the parties on a project by project basis.
This article’s author, Ron Ciotti, is a partner at Hinckley Allen, the current Chair of the AGC of America’s Contract Documents Forum (the group in charge of drafting ConsensusDocs), and one of the leading construction contract attorneys in the nation. Ron has been lead counsel responsible for drafting the agreements for literally hundreds of commercial construction projects totaling billions of dollars, and has drafted several IPD agreements for some of the largest and most unique IPD projects in the country. In 2016, Ron spoke on this subject at the ICSC’s CenterBuild Conference in Phoenix, the Healthcare Design Expo in Houston, ABX 2016 in Boston, the International Group for Lean Construction in Boston at Harvard University, the Construction SuperConference in Las Vegas, and through a national webinar for Lorman Educational Services. Ron will speak on this subject at the AGC of America’s National Convention in Las Vegas on March 7, 2017.
If you have any questions relating to IPD or other construction delivery methods, construction contracting, or would like to discuss your project with Ron, contact him at [email protected].