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By Katie Kuehner-Hebert

Only a handful of U.S. construction projects have been built under a true Integrated Project Delivery model where owners, designers and contractors share equally in many of the risks and potential rewards, if projects go right.

Although there are no off-the-shelf insurance products that cover the entire IPD team for professional liability, practitioners and carriers say that policies can be manuscripted to handle most liability exposure and protect each member of the IPD team.

Modern projects have become so complex that parties are now participating in both the design and construction, said Will Lichtig, vice president, business and process development at The Boldt Co., headquartered in Appleton, Wis.

"IPDs recognize this reality and have a different kind of contract to support this notion of shared responsibility for project success," Lichtig said. IDPs have what he called a "relational contract as opposed to a transactional contract," where the parties have a relationship in achieving a common goal.

"You can't really describe today how you are going to solve problems, but you can decide how you're going to work together to solve problems, design and construct the project, and resolve conflict -- it's like a marriage vow," he said.

So far, IPD models have been used mainly for the construction of hospitals such as the St. Clare Health Center in Fenton, Mo., university facilities such as the Walter Cronkite School of Journalism and Mass Communication at Arizona State University, government office buildings such as The Edith Green-Wendell Wyatt Federal Building in Portland, Ore., and some high-tech campuses for firms such as Apple Inc., in Cupertino, Calif., and Google Inc., in Mountain View, Calif.

Experts speculate that IPD works especially well for these types of projects, because the owners of these facilities generally have been working with the same stable of architects, engineers and contractors.

As such, the teams have a level of experience, expertise and trust early in the design and pre-planning phases, and throughout theconstruction phase. Their interests are aligned because they all have put money into a "risk/reward" contingency pool that is tapped whenever the design or construction process needs to be modified. If there is money left over in the pool after a project is completed, then the team shares in the profits.

There have been a good deal more "IPD-lite" projects, such as design-build. In this model, contractors typically form joint ventures with either architects or engineers, and the joint ventures take on both the risks and rewards of a project. If things go wrong in either the design or construction phase, however, owners typically do not share in the liability.

Lichtig, based in Sacramento, Calif., said that parties entering IPD agreements must first address how the project's organizational structure and operating system are going to be shaped before determining how each party is going to be paid and how risk will be allocated.

For example, on traditional design-bid-build projects, architects and engineers produce designs, but then contractors typically set those aside and produce their own shop drawings, thereby creating waste, he said.

On IPD projects by contrast, multiple parties collaborate on the design using building information modeling, or BIM. The contract's commercial terms have to be crafted so that the designers still make money and the contractors get paid to help make the designs, and the risks are allocated accordingly.

For example, if the parties agree that the engineer would make a 10 percent profit from the original $100,000 quoted for the cost of the design, then an IPD contract would convert that $10,000 to a fixed fee, Lichtig said. If the team then takes $20,000 in waste out of the project, the engineer still receives his or her $10,000 profit.

"You are lubricating the elimination of waste by assuring that no one is punished economically for allowing work to be done by the party best suited to do the work on this project," Lichtig said. "No one is resisting because they are still making money."

Since all parties on IPD projects share in the risk, everyone becomes more directly involved in avoiding mistakes, Lichtig said. "When you also link the architect's profit with the contractor's profit, they become much more interested with issues of constructability."

Sutter Health in Sacramento, Calif, is using an IPD model in the construction of its Sutter Eden Medical Center in Castro Valley, Calif., said Digby Christian, the firm's program manager for facility and planning development.

Using a model where all parties have input from the start uncovers design issues before the project actually breaks ground, Christian said.

"By working together, experts can, early on, spot conflicts that require major construction changes such as moving ceilings, concrete floors or steel beams," he said. "Solving these conflicts when construction is under way -- after concrete floors have been poured or steel beams have been welded in place -- becomes increasingly costly and detrimental to a project's schedule, goals, vision and scope."

AN APPROACH RETHOUGHT

James Evans, a principal consultant at Albert Risk Management Consultants in Needham, Mass., said most owners need to rethink how to approach risk within a construction project.

"Owners get advice from their capital planning folks or procurement folks, where there's a lot of reliance on the default mode -- let's always have a situation where if things don't go right, let's still have a mechanism that allows us to go after someone," Evans said. "So it's a fault-based, litigation-focused and heavy insurance-based mindset."

However, any owner truly concerned with reducing waste in the construction process should see the value of IPD, he said.

While there are no "true IPD" insurance products, IPD teams can take advantage of a strong builder's risk program, augmented by coverage for soft costs, efficacy coverage, and contractor and/or subcontractor default insurance, Evans said. The parties can also have an owner-controlled or contractor-controlled insurance "wrap-up" program for workers' comp and general liability.

Ken Caldwell, executive vice president of the construction services group at Alliant Insurance Services in Los Angeles, said wrap-up programs typically have one set of limits and better coverage, usually with the excess liability on top, for all of the involved parties, which can include as many as 50 subcontractors on bigger projects. As such, the IPD team can generally get a better rate and cost-savings than if all the parties are splitting the premiums between carriers.

Many owners prefer to let the contractors handle the wrap-up, requiring them to include quotes in their bids in order to get the best price, said Carl Doby, vice president of construction property for Hiscox USA in Los Angeles. However, that can often lead to minimum coverages, so owners -- who typically prefer more coverage and lower deductibles -- need to weigh which approach is best.

John Tutera, senior vice president of Hiscox Specialty USA in New York, said that, even on IPD projects, designers and contractors should obtain continuity coverage to protect themselves for owner claims of lost rent and additional financing costs if projects face delays.

It's generally harder to place professional liability policies on IPD projects, because the allocation of risk is very different and can affect when insurance claims are paid, said Dan Knise, president and chief executive of Ames & Gough, a specialty insurance brokerage in McLean, Va.

The IPD contract clearly needs to spell out how design corrections will be paid, Knise said. "Do they want $15 million set aside to pay for any change order, or is it an errors and omission claim, or is it a happy medium?"

Mike Davis, director of professional liability for construction at Zurich American Insurance Co. in Schaumburg, Ill., said Zurich manuscripts specialty coverage for each IPD project, depending on how the risk is allocated between the parties and how the various risk/reward pools are structured.

"For professional liability coverage, we need to come to a reasonable agreement where we can set up a mechanism to respond to design problems during construction," Davis said. "We expect some impairment to the risk/reward pool before triggering the policy, but we do not expect the pool to be completely exhausted before we pay. We determine the trigger point when we pay on a case-by-case basis."

But manuscripted project-specific policies are typically expensive.

"The issue is that after the economic crash,many owners stopped building,and now they are asking why should they stick their necks out and risk going with an experimental delivery method, when construction costs arerelatively low in the competitive traditional delivery approaches," said David Hatem, a partner at Donovan Hatem LLP in Boston.

"The insurers' attitude is that if there are real customers out there, they'll find a way to makeIPD coverage work, but in the last four years there aren't enough customers forthe insurersto invest in an infrastructureto support" manuscripting individualized IPD policies for every new project, he said.

Evans said he expects that such policies will become less costly once carriers become more comfortable with how IPD reduces risk. "My impression is that some underwriters consider IPD 'risky' not because the exposure is greater, but rather because the law is uncertain about enforcing IPD agreements," he said.

Georges Pigault, vice president, professional liability specialty at Liberty International Underwriters in New York, said that the carrier tries to come up with a project-type professional liability solution, which becomes the primary policy that will actually be used to deal with design defects based on errors.

If there is no project professional liability policy, then designers need to ensure their own carriers are comfortable with early admission of design errors.

To determine whether a project-specific liability policy is appropriate, carriers need to know how cost overruns are going to be handled, and how issues will be resolved that might require tapping into the contingency pool, said Kevin Coen, construction infrastructure insurance director at Liberty Mutual in Boston.

When determining whether IPD contracts appropriately apportion risk, The Hartford Financial Services Group Inc. in Hartford, Conn., prefers to use industry-standard contract forms known asConsensusDocs, said Ross Fisher, vice president and general manager of The Hartford's construction group and bond.

Mike Hastings, project risk practice leader for Marsh USA's construction practice, said it's best for IPD teams to obtain first-party insurance rather than third-party insurance, because many carriers have policy conditions on third-party coverage in which the designer must never readily admit fault -- or else their claims may not get paid.

However, on first-party insurance, carriers are now providing a waiver of subrogation against designers.

"Under the new deal, everyone is sharing the risk and reward via a contingency pool, and is sharing the property insurance deductible," said. "That way, design problems get fixed early before they become bigger problems."

Chaman Aggarwal, senior vice president for U.S. property at Liberty International Underwriters in Houston, said policy conditions might be negotiable on certain IPD projects if the carrier is satisfied with the team's financial obligations to pay upon a covered loss.

"We have to take a look at the contracts to determine whether we are willing to give up such rights of recovery because it is an IPD project," Aggarwal said.

KATIE KUEHNER-HEBERT can be reached at riskletters@lrp.com.

November 1, 2012

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