- IPD Update - Financial Incentives: Money Motivates
- January 10, 2014
- Law Firm: Dressman Benzinger LaVelle psc - Crestview Hills Office
- Obtaining the highest quality for the lowest cost is the goal of every owner. One tool an owner can use for this is the use of financial incentives. The incentives are usually established in the form of a combined design-construction fund. Participants in traditional projects typically spend these contingencies. Under IPD, the team becomes entitled to up to one-half of contingency funds that are saved, or not otherwise spent. The other half, of course, is returned to the owner. Offering these incentives provides additional motivation for the project team to eliminate waste. Typically, those combined contingencies are 8%-10% of the total project and budget. To insure their preservation, it is not uncommon for IPD teams to achieve aggregate project savings of 20%. Most of this accrues to the benefit of the owner.
The other side of the coin is that the profit of each team member is at risk. Their respective profits are reduced or wholly absorbed to the extent that the target cost established at the beginning of the project is exceeded. This acts as a powerful motivation for the team to collaborate and eliminate project risk. It is fitting that the team which benefits through incentives if the project goes well would be at risk to the extent that the project goes awry. And the owner is not left to bear the burden alone.