Integrated project delivery: Hurdles to mainstream popularity

Alex King, Esq.
Associate, Beltzer
Bangert & Gunnell LLP

Integrated project delivery has a history of being touted as the logical future of design-build construction. We have seen certain health care providers and higher education institutions working out the kinks of IPD projects for over a decade, yet IPD has failed to garner mainstream popularity. Why? What is holding IPD back when the results have largely shown successful projects completed on time and under budget with greater owner satisfaction? Perhaps the simplest answer is IPD challenges the status quo of proven operating models, and companies are unwilling to risk changing their core identity.

To better understand the fundamental identity change required of companies (or at least project teams) to meaningfully participate in an IPD project, imagine the following hypothetical scenario:

There are three primary parties involved. Party one is the owner of an emerging health care network with ambitious plans to grow from two hospitals in one state, to 10 hospitals across the Western U.S. In this scenario, party one is called the Owner.

Party two is a young architecture firm with a focus on hospital design. Party two was the architect for the owner’s previous two hospitals and its only client is the Owner. Party two is called the Architect.

Party three is a general contractor with 40 years’ experience in all types of commercial construction. Party three is called the Contractor. The Contractor has hundreds of employees spread across five offices in the Western U.S. The Contractor also has dozens of repeat clients, which help the Contractor model future earnings and growth.

In this hypothetical, none of the primary parties have previously participated in an IPD project. The Owner understands that in its most simplified form, IPD is a project delivery system that aligns the primary parties (Owner, Architect and Contractor) on a core team with the overall goal of collectively delivering all phases of the project using the strengths and talents of the team through collaboration. The primary parties are bound to each other by one contract. The goal of this singular contract is to have each party share in bigger rewards of success, however that also comes along with a shared responsibility for failure.

Without getting bogged down by the intricacies of an IPD contract, the primary thrust of the agreement is for all parties to jointly share the risks and rewards of the project. From the onset, the primary parties will identify specific risk and agree upon the most efficient team member to manage such risk. The Owner sets expectations and objectives for the Architect and Contractor to complete, such as timely completion, under budget, state-of-the-art technology, future operating costs, resale value, etc. IPD incentives collaboration and efficiency because the profit for the Architect and Contractor is contingent on meeting or exceeding the Owner’s expectations and objectives. Direct costs and project specific overhead are reimbursable. If the project flourishes, the Contractor and Architect will share in the profit pool. If the project falls apart, the Contractor and Architect will earn only their direct costs and overhead. This is one of several reasons why IPD projects have not seen the popularity predicted; while the profit potential can be larger, the idea of shared failure is often a deterrent to traditional construction and design teams.

Another key reason the IPD system is not utilized more often is the lack of clearly defined scopes of work. While the Architect still designs, and the Contractor still builds, the formulaic line item scope descriptions are not included in the contract. The fundamental theory is that all parties are working toward completing the project, therefore labor should be sequenced to best complete the overall project, rather than best complete an individual scope of work.

Further, if a change is required during construction, the Architect, Owner and Contractor are all in the same room and can collaborate to implement the change. Because expensive changes will eat into the collective profit pool, each party has an incentive to find creative and efficient ways to solve problems. Additionally, each party is willing to re-sequence work after the change because it will lead to higher profits in the long run. By switching the primary parties’ mentality from “me” to “we,” the Owner has incentivized the team to collectively complete objectives, with the overall project taking priority over each parties’ individual scope of work. This is contrary to traditional construction where each party is incentivized to complete its scope of work through its own contract, even if that comes at the expense of another trade, or even the project itself.

Returning to the hypothetical, the Owner began negotiations with the Architect and the Contractor for completion of the first of the 10 planned hospitals. The Owner reasoned that if the first hospital was a success, the same team would build the next nine hospitals, and soon efficiency would be at its max. Plus, the collaborative nature of IPD would allow the Owner’s surgeons to provide input during the design and construction process, which would increase the overall functionality of each hospital. Each hospital could be customized to the needs of the local patient population, with the lessons learned from previous hospitals being implemented into building the next. The final hospital would practically build itself.

The Architect agreed to buy in, after all, the Owner was his only client. The Contractor was hesitant, and quickly laid out many of the concerns, which run counter to traditional construction.

In the eyes of the Contractor, the time commitment for senior team members would be substantial. Heavy involvement on a daily basis would be required during all phases of the project. For IPD to work, all team members have to buy in. The mistakes of one team member are felt by all team members. What happens if one team member doesn’t pull his weight? What happens if one team member quits? What happens if Contractor and Architect cannot come to an agreement? Team chemistry is not always guaranteed by a common goal, and all it takes is one team member to ruin the project for everyone.

The Contractor summed up its primary concern as, “I can perfectly complete every task assigned to me and still risk losing my profit because of a mistake by the Architect. I’ve spent my entire career focusing on completing my scope of work in strict compliance with the contract documents, and any mistake that hurts my bottom line is my own. If the mistake is not my own, I can pursue a claim against the responsible party and recover the profit I rightfully earned.”

The Contractor is not wrong. Those are all known risks associated with IPD projects. Fundamentally, it is the reliance on an entity other than itself that poses the greatest risk to the Contractor. For many this is a change to their companies’ core identity. Specialization has created trades who know the most efficient way to complete their scope of work, regardless of the impact to other trades. IPD can only work if all the primary parties buy in and forget traditional project delivery methods. IPD projects will remain on the fringes of construction until the Contractor agrees to forget 40 years of self-preservation in the industry, and agrees to rely on the collective team to complete the Owner’s objectives.

Featured in CREJ’s Oct. 22-Nov. 3, 2020, issue

Edited by the Colorado Real Estate Journal staff.