Is Design-Build Obsolete?

by Joanie Hollabaugh

‘Profit + speed’ versus ‘risk + liability’

As the Construction industry is being revolutionized by 3D printing, drones, and container construction trends, one wonders – what will happen to the project delivery status quo?2014-12-02

The industry, as a whole, has turned towards the Design-Build (DB) type of team-oriented project delivery, with a single source of accountability – the DB contractor.

Proponents of this method can be summarized with three words “faster, smarter, cheaper” while detractors claim that the elimination of the bid process threatens healthy competitive silos and the lack of detailed, approved construction drawings increasing risk and liability.

There are many in the industry who feel that DB has gone by the wayside, as owners have discovered that architects and engineers don’t always have the owners’ best interest (and wallet) in mind, nor are they necessarily experts in how to execute the actual construction of a project. An article on the AIA website supports that sentiment:

Team based delivery has changed – and continues to change – the role of architects, engineers, contractors and developers. While contractors and developers have been quick to adapt to team based project delivery, taking on leadership of Design-Build (DB) many architects and engineers have “buried their heads in the sand” hoping the good old days of architect and/or engineer leadership of traditional Design-Bid-Build project delivery will return. Those days are gone forever!

“New and improved” DB – meet the IPD!

Another type of project delivery is emerging as the front-runner for adapting to economic conditions and technology trends for construction – the Integrated Project Delivery (IPD). Another team-based process, IPD “requires organization of a team sharing risks and rewards – early on in a project – to be effective.”

AIA article author, Martin Sell, AIA, goes on to describe the concept:

In its purest form, an IPD project team is assembled very early in the planning process. An IPD team may be broad and diverse, including architects, a variety of engineers including environments, soils, civil, structural, HVAC, plumbing and fire protection, as well as interior designers, lighting designers, construction managers, estimators, audio/visual specialists, acousticians, furnishing specialists, artists, financial planners, material suppliers, contractors, vendors – as well as a variety of disciplines from within an Owner’s organization. This can be a very diverse team; a team that can be very dysfunctional if not properly organized, managed and glued together.

The success of DB teaches us that integrated design and construction can provide a project less expensively, quicker, with better quality and sustainability, than projects built using the traditional process.

The AIA has published out a guide to IPD (download link here), and endorses it thusly, “Integrated Project Delivery (IPD) leverages early contributions of knowledge and expertise through the utilization of new technologies, allowing all team members to better realize their highest potentials while expanding the value they provide throughout the project lifecycle.”

Everybody in the risk pool!

This begs the question in my mind – with such a collaborative process, how do you share liability and allocate risk among all the parties? Further research led to a Construction Advisory Report, by Construction Attorney, Roland Nickels, which explains the fundamentals (our bolded text):

IPD agreements present a fundamental break from the way parties on construction projects have traditionally allocated risk. Agreements in traditional delivery systems like design-bid-build, multiple-prime contracting, construction management (in various guises), and design-build, strive to draw clear lines between the parties and their legal responsibilities, thus allocating the risks and rewards for each project participant as clearly as possible. Traditional contracting models thus make it possible to sort out who should pay the piper when projects are delayed and costs increase unexpectedly. It has been noted that this tends to naturally pit project participants against each other and that sorting out legal responsibility is expensive. When disputes do occur, matters are complicated by the fact that litigation outcomes are infamously uncertain. By contrast, IPD agreements blur responsibilities for the scope of work, and they shift the allocation of risk away from the courts to a no-fault sharing of cost overruns on a pre-determined basis.

The core of an IPD agreement is one agreement executed by the owner, the architect, and contractor. These parties are involved in the project earlier, and in the case of the owner and contractor, more actively than in traditional delivery models. The contractor and key subcontractors are actively involved during the design process. If BIM is used, they may provide input directly into the model during design development. The parties work together to establish appropriate target pricing early in the project, and this target pricing is constantly fine tuned and adjusted until such time as the architect, design consultants, contractor, key subcontractors have sufficient confidence in the pricing to put their fee or profit at risk relative to a firm target price. All, or a portion of the fee and profit from participating project participants are placed in a risk pool, which will be used to pay for any cost overruns. If the project is successfully completed for less than the agreed upon target pricing, then the agreement may provide that the risk pool may be increased. At the end of the project the risk pool (i.e. everyone’s profit and fee) is distributed according to a pre-determined percentage that each party has as its share of the risk pool. As noted, the amount in the risk pool will depend on the success of the project. However, there is no maximum price. If project overruns have exhausted the amount placed in the risk pool, then the owner bears the risk of cost overruns in excess of that amount.

C’mon in, the water’s fine!

So, it’s an all-in type of fail/success model which ultimately falls upon the owner if overruns are in excess of the shared pool. So why is IPD not more widely adopted?

The Construction Advisory Report speculates that (a) owners are satisfied with the traditional models, (b) there’s not enough buy-in about the cost savings, as profits are hard to compare project-to-project, and (c) the cost-curve is accelerated at the BEGINNING of the project, and not the end.

It will be interesting to watch as the Construction Industry, a notoriously slow adopter of new technology and practices will shift to IPD as the next project delivery system, or evolve into an entirely unexpected model based on societal demands and global best practices.

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This article is excerpted from the November 2014 Ledgerwood Associates Newsletter. If you want to receive it monthly, sign up here!