December 5, 2018 by David Bowcott
In recent years there has been a resurgence of the Integrated Project Delivery model in the North American construction marketplace.
This method traces its origins to the heyday of North Sea oil exploration, when owners, design firms and contractors created a delivery model known as Project Alliancing as a way to improve outcomes. In this model, the owner guarantees the direct costs of design firms and contractors, but their profits, overheads and bonuses depend on the project’s outcome. By forcing all parties to operate collaboratively, the model steers projects toward a shared result.
Creating such a collaborative alignment is very difficult under the traditional Design-Bid-Build model used by the construction industry for decades.
The Integrated Project Delivery (IPD) method eventually evolved out of the Project Alliancing model. Keeping the core aspects of its predecessor in place, IPD adopted solutions from other collaborative models like the Special Purpose Entity model and Relational Contracting model.
At their heart, all of these models attempt to align key project stakeholders around project outcomes, and thus, encourage improved collaboration.
As the construction and asset management sector of the economy gets its act together around data collection and collaboration, we may soon be able to start comparing all delivery models and one day determine which model delivers the best results. We may very well find that the ideal model depends on the nature and attributes of the project it’s being applied to.
For now, we’re forced to use anecdotal experience and hypothesize what makes certain delivery models more effective than others. To that end, when looking at the IPD model, it clearly creates an environment for collaboration.
Many of the risks that inevitably manifest on a construction project – both during construction and into the operation of the asset – are the result of misaligned interests and poor communication. When profit, overhead and incentive compensation are combined and shared by all parties and delivered to each collaborator only if desired project outcomes are achieved, you can understand why this model creates a team environment and highly incentivizes all-party communication.
At this point, it makes sense to look at this delivery model from the perspective of the insurance industry, which can be a great source of feedback to all industries experimenting with new solutions.
In the case of IPD, the model contains what is probably one of golden rules of risk management: alignment of interests via skin in the game.
Several of the insurance industry’s greatest risk finance solutions are founded on this principal. The insured is incentivized to manage risk due to the exposure they face if risk isn’t properly managed. The insurance sector has long integrated this principal through simple solutions like a deductible on insurance policies. In this case, there is some pain if you suffer a loss, but the benefit of insurance is that that pain is not catastrophic for the insured. It is, however, aligning.
Some insurance solutions are starting to use funded deductibles, also known as retentions, which create a “carrot” rather than the “stick” of an unfunded deductible. When you look at the structure of the IPD model, the parties are aligned through the owner’s exposure to the project costs and the non-owner’s exposure to non-payment of overhead, profit and bonus. Models or policies that align the interests of all involved parties and encourage collaboration and communication have always been profitable for the insurance sector. Thus, the insurance sector should encourage this model to grow.
Perhaps the sector should incent such growth by creating a platinum risk management solution for such models? Given the aligning power of IPD and its potential to create more certainty around construction phase outcomes, such a model could improve certainty around the entire life of an asset.
Design firms, contractors, subcontractors and suppliers are invaluable partners in an asset’s lifecycle, and it’s reasonable to assume their involvement at all stages could significantly improve the total cost of ownership. When considering that roughly 10 to 15 per cent of an asset’s present value cost is made up of construction costs, with operating costs accounting for the remaining 85 to 90 per cent, a model that combines IPD alignment and whole-life asset planning might just be the answer all asset owners have been looking for.
Given the growing interest in collaborative models and the increasing integration of technology, the birth of an Integrated Asset Delivery model in the coming years is certainly not out of the realm of possibility.
David Bowcott is Global Director – Growth, Innovation & Insight, Global Construction and Infrastructure Group at Aon Risk Solutions. Please send comments to firstname.lastname@example.org.
This column originally appeared in the December 2018 issue of On-Site. You can read through the complete issue here.