By Justin L. Weisberg, K&L Gates, Chicago
The text of this article first appeared in the December 2016 issue of SubStance, a publication by the Illinois Mechanical & Specialty Contractors Association.
Over the last year we have witnessed a successful Congress in Chicago by the Lean Construction Institute, a growing number of projects adopting Lean Construction Processes (“LCP”), in Illinois, and the recognition of the completion of at least one significant project in Illinois, which utilized Integrated Project Delivery (“IPD”). Nevertheless, I have perceived that there is confusion in the industry relative to LCP and IPD based upon comments made at presentations given by practitioners in the construction industry, who have not been involved with, or studied Lean Construction. The following article provides a brief overview and a comparison of LCP and IPD to address the myths created by some of these comments.
The first and easiest myth to dispel is the myth that LCP and IPD are one and the same. LCP and IPD are clearly not the same. There are many more projects currently using LCP than projects utilizing IPD. Therefore, there is no question that a Lean Construction Project can exist even where the parties are working under a traditional construction contract.
Lean Construction is a process that aims to, for example, increase efficiency, improve quality control and align the expectations of the Owner with the vision of the Designer and the goals of the Builder. The development of Lean Construction has roots in manufacturing. Certain LCP concepts reflect methods derived from manufacturing processes such as those described in Workplace Management, Authored by Taiichi Ohno, Translated by Jon Miller, Gemba Press (2007). These processes focus on the elimination of waste, improving workflow and continuous improvement. Considering concepts originally derived from the assembly line, probably the most demonstrable reflection of a process developed for Lean Construction is Pull Planning.
Looking from the outside in, Pull Planning illustrates a process where work is planned and scheduled from the bottom up rather than from the top down. The Pull Planning sessions involve participation of trade contractors, the general contractor and design professionals as well as, in many instances, the Owner. Project participants would plan a given project by activities which would be identified on sticky notes placed on a wall. More recently, technology has been developed to allow the sticky notes to be virtually placed on large computer screens. The schedules are updated at sessions that occur on a periodic basis and the parties work toward scheduling activities to begin only when needed, in order to insure a continuous work flow. For example, instead of storing materials for months on site, the parties strive to limit deliveries of materials to a few days at most before they are incorporated into the Project.
LCP allow for vertical integration of responsibility, involving for example, foreman of subcontractors in the planning and scheduling process, instead of requiring those individuals to comply with schedules that they had no input in creating. The collaboration and empowerment of project participants can also have an impact on the motivation of the individuals responsible for completing the work in field. The Pull Planning process also provides a platform for communication of the project participants directly from the field to project managers, designers, and even representatives of the ownership team.
Unlike LCP, IPD is not a process, but a project delivery method with a basis in contract. One recognized IPD contract form is identified as, the ConsensusDocs 300, Standard Multi-Party Project Delivery (IPD) Agreement. It has been proven that IPD is not a necessary delivery system for LCP to be used, although the forms were developed at least in part to facilitate collaboration and support LCP, and both forms have provisions which assist in the implementation of LCP.
Given that Pull Planning is a significant element of an LCP project, the contract must provide for compensation of the contractor and key subcontractors beginning with the early design stage of the Project. Under the IPD forms, the Architect, Contractor and Owner are parties to the same agreement, facilitating the use of the Contractor’s services from the early stages of design. However, the use of a more traditional Construction Manager at Risk (“CMAR”) form of delivery would also provide contractor services during the design phase of the Project. Notably, a project utilizing LCP would require the Contractor to engage primary trade contractors during the design stage of the Project, although there is nothing that would limit the engagement of primary trade contractors in other construction forms including, Construction Manager Advisor (“CMA”), CMAR or a Design Build (“DB”). Moreover, a DB form of agreement is also an integrated agreement from the perspective that the design and construction is under one agreement with the Owner.
One factor identified by LCP practitioners supporting a preference for IPD as compared to traditional delivery has been the engagement of the Owner in the LCP. It is noted that IPD form agreements do incorporate certain LCP such as Pull Planning, Collaboration and BIM. However, many terms targeted to involve the Owner in LCP can be easily inserted into traditional contracts. Therefore, the question presented is whether there is any provision unique to IPD that facilitates LCP. Form IPD agreements attempt to facilitate collaboration through the use of a management by committee model based upon a Core Group with a representative of the Owner, Contractor and Designer. Provisions including Target Value, Profit Pool and Incentive Compensation are IPD provisions that at least in theory, shift the position of the Owner into a closer alignment with the other Project participants relative to compensation, performance and risk.
Target Value Design is based upon a team approach in which the Owner, Designer, General Contractor and primary trade contractors work together during the design process to develop a Target Value. During the design, the Project members work together to establish a design that will have a cost does not exceed the Target Value which is continuously validated throughout the design process. When the design documents are sufficiently developed, the Core Group proposes a Target Value, or Expected Maximum Price (the “Target”) to the Owner. Once accepted, the Designer, Contractor and primary trade contractors then work on cost basis placing some or all of profits at risk in a Risk Pool to defray costs that exceed the established Target. There is a contingency amount established for certain unknown costs such as escalation, but once the contingency is exhausted the profits of the Risk Pool members are applied to defray excesses above the Target. Once the Target is exhausted, the costs above the Target, contingency and Risk Pool are incurred by the Owner. Therefore, the myth that the risk of a cost overrun in an IPD project is assumed by the Owner alone is incorrect. As the IPD form of contract is relatively new, there might be a potential underwriting challenge concerning the limits of a builders risk policy based upon a Target.
In addition to amounts in the Risk Pool related to the Target, there are also funds put at risk for Goal Achievement. These funds not conditioned upon delivering the Project within the Target, but instead related to reaching certain set goals such as attendance at meetings, milestones, obtaining certain sustainability ratings or for example a successful safety record.
The IPD parties waive liability between each other removing the concept of fault from errors or defective work. The IPD contracts do attempt to preserve rights between the parties to the extent of available insurance, although there might be potential challenges by insurers concerning the impact of such waivers on coverage.
The IPD method of continuing to validate cost through design is significantly different from the traditional method of the creation of construction level drawings and then having the cost determined by bid. A CMA or CMAR arrangement would allow for construction expertise prior to completion of design, although in contrast to an IPD approach, input of recommended design alternatives would not occur until the value engineering phase after the design is relatively complete. The traditional design build model does integrate design and construction, although the validation of cost and schedule occurs at one time in cases where a GMP is established, usually by amendment at some level in the design process. Once the GMP is set, although there may be some sharing of risk between the Design Builder and Owner relative to contingency account savings, the ultimate risk for completion and cost falls on the Design Builder. This is in contrast to the sharing of risk in IPD where the initial risk of cost andPool is shouldered by the Contractor, the Designer and selected trade contractors, with the ultimate risk shouldered by the Owner once the Risk Pool is exhausted. Consequently, the motivation to reach completion of the Project within the Target is theoretically more aligned from the trade contractor level through Ownership with IPD, than other more traditional methods of Project delivery.
As with other forms of negotiated rather than hard bid contracts, IPD is based upon a cost plus open book compensation system. Unlike a system based upon a lump sum bid, an Owner managing a cost plus contract requires at least some sophistication in construction accounting in order to appropriately administrate the payment process. Given the selection of the construction team early in the design process, the competitive method of construction procurement which is available for traditional lump sum design build projects is simply not possible with IPD. This barrier to traditional competitive procurement can present a challenge to public projects, although recent statutory changes which allow alternative delivery methods, allow for competitive procurement based upon value rather than cost. It is also noted that in many cases, public agencies are relatively more sophisticated than private entities in auditing and reviewing design and construction costs, and will be in the best position to take advantage of an open book project delivery system as new statutes and regulations increase the flexibility of public project procurement.
IPD benefits of continuous cost validation and close integration of all project participants throughout the design and construction process could realize significant advantages on a complex project. This is particularly true in projects with significant programming requirements where the needs of the Owner are complex and are not fully defined prior to the design process. However, the benefits of IPD may be less apparent for a cookie cutter type of improvement which has few surprises and where relatively accurate estimation is possible based upon a schematic design. Given the cost of administrating an IPD project versus a traditional delivery method, the value of IPD might be questioned for cookie cutter projects that require little owner input. Consequently, the comparative popularity of IPD on complex healthcare facilities is not a surprise.
LCP is process oriented and can be successfully implemented to some extent regardless of the project delivery method involved. LCP can involve participants from the subcontractor’s field personnel to project executives. In contrast to LCP, IPD is a project delivery method that when weighed against other project delivery methods can provide benefits, when implemented on certain types of projects such as complex or challenging projects, procured on a negotiated basis. IPD contract forms like other construction contracts are specific to risk, obligations and compensation rather than the processes used by individuals and teams during design and construction