IPD Finances Explained
VJ Tocci offers a laymen’s explanation of Integrated Project Delivery finances.
Too often construction projects are in a three-way tug of war between the Owner, the Architect, and the Builder. Each one feels a need to own legal protection from the others – whether they ultimately need it or not. It’s like taking an anti-acid tablet after every meal. Maybe you won’t need it, but maybe you will. At least you took the necessary precaution. And you may get heartburn anyway.
The building industry needs to change.
Welcome to IPD. Each party (starting with Owner, Architect, and Builder but often extending to key trade and engineering partners) joins together as if they are a single company.
Yes, a single company. You can’t sue yourself; you can’t file a claim for extended general conditions against your own company. And many teams use only one lawyer to share as a combined representative. The lawyer confirms that all joined parties walk into the relationship with their eyes wide open and structures the necessary protections for the system against non-IPD partners (AKA the “extended family”).
I’ve heard that IPD has a different profit-sharing structure. What is that?
Okay, you’re now asking 2nd-level questions. Good. The basic philosophy is “everybody wins or nobody wins”. Team members clearly identify their profit and combine it into a common profit pool. This is their “skin in the game”. The Owner commits to pay all direct costs (overhead, labor, and material), regardless of how far over budget the project goes. However, the profit pool is the first line of defense; the Owner doesn’t pay a dime extra until it is used up.
This creates an interesting dynamic. For example, if the electrician is losing money, everyone stands to lose money. If the drywall subcontractor is making money, everyone is making money – unless he is making money at the expense of another partner.
Individual companies can make more money by increasing project efficiency even if it costs these companies some efficiency. This incentivizes team players to think and act efficiently and cooperatively throughout the project. The spirit is to increase that “combined profit pool” and everyone benefits.
“Wait, so if the plumber or the electrician screws up their quote, I’m at risk?”
Oh yeah. No glossing over it. In this contract, you are “your brother’s keeper”. During the first phase of the project, the full team examines and approves individual budgets and scope of work – and the capability of each partner. Once the individual pieces and overall budget are collectively approved, only three things should stand in the way of success:
- Production inefficiencies (due to him or by others impacting him)
- Unforeseen impacts
- Scope changes.
If the issue is the 2nd or 3rd condition, equitable adjustment to the budget will occur. However, efficiencies related to production are not change orders. It is up to individual team members to communicate issues, but the full team regularly scrutinizes each other’s costs, staffing, and progress to prevent or resolve inefficiencies.
Wait, change orders? I thought IPD didn’t have change orders. So, who determines if there is a clear and legitimate change order?
Ahhh, glad you asked that. The first level of defense against change orders is within the project team – the Project Implementation Team (PIT). Something like 90% of issues can (and should) be settled here. Each day and week, situations arise that the superintendents, designers, engineers, trade detailers, and cost engineers can address.
The second level is the Project Management Team (PMT), generally comprised of a single representative from each the Owner, Architect, and Builder. This team makes decisions unanimously. Unlike the PIT, they can make decisions that something is added scope or has an unforeseen impact. If the PMT cannot decide unanimously, it gets “kick up” to the Senior Management Team (SMT), who can decide on items as “majority rules”. At times, the team’s shared legal representative helps them sort out issues.
There is a great deal more to IPD: early-engagement trade partners, collaborative BIM (Building Information Modeling), colocation of the full team, and no hidden issues. But the foundation of IPD is described above – that risk is universally shared by each member. “Don’t you dare blame that Architect, you missed it too!” Hey, we’ve always been in a foxhole. But with IPD we’re in the same foxhole. We’re focused on the same target, a successful project – and not on each other. Welcome to the good fight.