• Integrated Project Delivery: Design-build on Steroids? How to Get Started Understanding the IPD Concept and IPD Contracts
  • June 25, 2009 | Author: Jeffrey S. Ammon
  • Law Firm: Miller Johnson - Grand Rapids Office
  • No question--Integrated Project Delivery (IPD) is the most revolutionary development to hit the construction industry since the invention of the hammer. IPD may sound crazy at first. The owner, contractor and architect agree to “share” risk, not to shift risk. Those parties agree not to sue each other (so-called “no suit” clauses). The traditional tension among the parties over contract negotiation and performance is eliminated. Is this some kooky form of “can’t we all just get along”? Was IPD cooked up by the “make love, not war” generation?

    IPD is not a kooky idea. But you cannot understand its sensible approach without first grasping the fundamental difference between IPD and the traditional construction process. Read on to learn that difference and how to understand the IPD contracts and process.

    The single fundamental difference between traditional construction delivery and IPD is the order of events. In the traditional process, the building design, cost and timing are decided before the constructors are picked. In IPD, this order is reversed: the constructors are picked before the project is designed, before the project budget is created and before the timing is decided. The traditional method uses contracts to deliver specified product. IPD, on the other hand, is a new business enterprise. One is a contract to build a building, the other is a new business venture to build a building.

    Selecting the key participants (the owner, the architect and the contractor) before the project allows you to interpret the key IPD phrase “risk sharing, not risk shifting.” In a new business venture, the participants agree to share risk and reward at the outset. The IPD business model means that the participants share all the elements of uncertainty in constructing the building that will impact the bottom line profit—a profit that the participants ultimately hope to enjoy.

    IPD is truly “design-build on steroids.” The design-build model saved the owner from guessing whether the architect or contractor was at fault. IPD takes the design build idea into a new form: the owner is now in the boat with the designer and the builder.

    The IPD model does not eliminate construction contracts. The IPD entity will make separate agreements with the owner, contractor and architect. But the profit that those parties would otherwise seek to maximize solely for themselves will now be maximized within the IPD business entity. IPD will create more contracts than the traditional construction process. Instead of two contracts among three parties (owner-architect agreement and owner-contractor agreement), the IPD model generates four contracts among those same three parties (IPD operating agreement, plus three separate contracts between the IPD and the owner, contractor and architect).

    Do not be misled into thinking that IPD works only for a project that is solely cost driven. True, most IPD models discussed today are based on models of estimated budgets, with shared profits to the extent the project is completed under budget. But IPD can be equally well suited to projects where the primary focus is the time of completion, or the quality of construction. It is all a matter of setting the project objectives and defining the risks and rewards to be shared.

    While IPD contracts can take on many forms (e.g. ConsensusDOCS 300, custom multi-party agreements), the truest IPD model creates a new legal entity, typically a limited liability company. It would typically have three owners: the owner, general contractor and architect/designer. Those entity owners would sign an operating agreement or other internal document to govern the relationship among them with respect to ownership, management and other control features of the entity.

    The American Institute of Architects (AIA) has developed a proposed entity agreement for this purpose. See AIA document C195-2008 entitled Standard Form Single Purpose Entity Agreement for Integrated Project Delivery. You will need legal counsel who has a deep understanding of LLC business entities to protect you in structuring this relationship. Experience in construction contracts isn’t enough.

    This article obviously touches only the surface of what IPD will mean to your company and how you should approach an IPD structured project.