2 Research Paper Assignments: PAPER – Construction Management & Small Business

THE INTEGRATED PROJECT DELIVERY (IPD) METHOD

Samir, Digby Christian, and Lincoln H. Forbes*

This chapter introduces applications of the integrated project delivery (IPD) concept, starting with early examples and continuing with more recent developments within the Sutter Health organization. It devotes a major section to a description of the conditions and methods that are needed for IPD to be implemented and managed successfully. Much of the narrative presented reflects developments in IPD based on lessons learned from the Sutter Health projects. Readers are encouraged to review these conditions carefully in order to have a reliable foundation for embarking on IPD.

IPD was developed to improve innovation by moving money across boundaries (Alarcon et al. 2013). The Lean Construction Institute (LCI) defines IPD as a project delivery approach that integrates people, systems, business structures and practices into a process that collaboratively harnesses the talents and insights of all participants to reduce waste and optimize efficiency through all phases of the project from early design through project handover. The three contractual components of IPD include Organization structure, Lean Operating Systems and Commercial Terms.

The IPD concept has proven to be highly successful since its development in the early 2000s. The Westbrook Air Conditioning and Plumbing project in Orlando is described as an early example of the IPD method, based on the creative modification of a small design-build project and resulting in significant time and cost savings. The project is described in detail in Section B of the chapter from a historical perspective. As CEO of Westbrook, Owen Matthews wished to utilize a relational contract approach with his project team, that was separate and apart from the design-build contract with the owner. The general contractor (Westbrook) the designer, and several subcontractors were designated as primary team members (PTMs) and were bound together legally in a relational contract that apportioned risk equitably. This temporary organization was established for the duration of the project, and was based on a commitment to implementing lean practices. The project was completed early, and cost savings of 10% were derived on a project cost of $6 million. The savings were shared by a pre-arranged formula between the PTMs and the owner. This successful project is recognized by the Lean Construction Institute as a pioneer example of the IPD process.

The Sutter Health organization in particular took a leap of faith by adopting lean construction to deliver a major construction program with an aggressive schedule mandated by the State of California. Lean construction was a promising, yet not guaranteed, methodology at that time, but the urgency for action propelled Sutter’s executive management towards adopting lean as a calculated risk. Out of those early forays into lean construction practices emerged an evolving model of IPD that has been highly successful over many years since that time. The capital projects program has been highly successful and

was delivered under budget, ahead of schedule, and without compromising any of the projects’ operational objectives as evidenced by the outcomes of:

• 20 projects completed ($4.39 billion in total), • Just 1 failure (slightly over budget), and • 95% success rate compared to an industry average of 28%.

Sutter Health attributes many of these successes to the implementation of lean construction, particularly the IPD method. They are all the more significant because the method of project delivery was new to Sutter, and in fact new to the construction industry. There is good reason to believe that they would not have been achieved with traditional project delivery.

Origins of IPD The IPD contracting method has been steadily gaining traction in the construction industry as the need for supply chain collaboration continues to increase. IPD provides a contracting framework that encourages teamwork and overcomes arbitrarily placed barriers between owners, designers, and builders. It allows project participants to collaborate and innovate by identifying new ways to organize themselves, manage workflow, and accelerate the design-to-construction cycle.

IPD contracts recognize that projects are complex and dynamic. They are designed to promote harmonious relations between the parties and reward positive and collaborative team behaviors that deliver projects in ways that meet their original goals. Early successes resulted in the gradual improvements to the approach and its adoption in the United States and Canada by various professional groups and owners, both private and public. It continues to gain popularity, and several studies show that it is resulting in less risk and more reliable outcomes when compared to other delivery methods.

Relational vs. transactional contracts In contrast with IPD contracts, the most common contracting methods in the AEC industry have been transactional in nature and are usually established between two parties, in which one party owes a deliverable to the other (a.k.a. the transaction). Examples are provided in Chapter 1 such as Design-bid-build, design-build, CM-at Risk, and others. Those contracts require the parties to have clearly defined roles and responsibilities. They also obligate the supplying party to hold the risk of an incomplete deliverable. As such, those contracts assume perfection where perfection does not exist. For example, the owner’s agreement with the designer requires designers to deliver 100% complete contract documents (100% CDs) so that contractors can provide detailed resource- loaded schedules as the basis for their contract with the owner. The architects’ agreements with consultants as well as the general contractors’ agreements with their subcontractors would have similar expectations. Over the years, this resulted in highly developed legal and risk management strategies to mitigate the risks of this type of contracting for each of the individual parties involved. These strategies provide protection for many stakeholders, ranging from the owner to the last trade contractor or design consultant. These contracts encourage behaviors that are inwardly focused as

each party seeks to protect its interests rather than doing what is required for the overall success of a project.

Relational contracts are different. They are designed to align the interests of the parties around common goals rather than individual interests and to allow them to manage risk rather than shifting it from one party to the other. The parties gain more profits when a project is delivered in keeping with its targets, and they are at risk when the project overall fails to achieve its objectives. Relational contracts align well with lean construction principles, which advocate that projects should be managed collaboratively as production systems.

Disadvantages of traditional contracting methods Traditional construction contracts are adversarial in nature – they typically include penalties for under performance or nonperformance by each party in a project. Owners contract with a general contractor (GC) or construction manager (CM). In turn, these parties contract with subcontractors for different disciplines. In Matthews and Howell (2005), the authors point to four systemic problems with traditional contracting that can be addressed with a relational contracting approach.

Design Ideas often Lack Field Input: Designers are focused on the form of the finished product such as a pipe section, a room, or a control system, and not so much on the method of how it gets produced. Constructability reviews during the late phases of design seek to address that problem, but with limited success because of the difficulty in making changes at that stage.

Cooperation and Innovation are Inhibited: The traditional contract structure inhibits coordination, discourages cooperation and innovation, often rewarding some of the parties for optimizing their performance at the expense of others. For example, communications and electrical subcontractors must complete their installation of raceways and outlet boxes before a drywall contractor installs the drywall that covers and surrounds them. If the drywall is installed first, then expensive corrective work is needed. Drywall installers are focused on meeting a schedule that is the foundation for their progress payments, and may actually be unaware of the schedules of other disciplines.

Planning Systems are Not Coordinated: Subcontractors in traditional contracts have a legal obligation to the GC or CM, but often no clear-cut responsibility to the other subcontractors. Consequently, their planning is guided by the master schedule, with little consideration of each other’s schedules. The GC/CM often is not concerned with the detailed planning of its subcontractors, resulting in many unexpected events as field conditions change.

Self-Preservation Is the Subcontractors’ Mantra: There are many examples of subcontractors being tied to a fixed price contract with the prime contractor, with little protection against unknown site conditions and rising material prices. Subcontractors may try to optimize their performance with little concern for the overall project, which they see as the prime contractor’s responsibility.

Overview of relational contracting An understanding of relational contracting principles is essential for a successful deployment of lean construction methods, including IPD. It is a contracting mechanism that apportions the responsibilities and benefits of the contract fairly and transparently, based on trust and partnership between the parties. Relational contracting provides a more efficient and effective system for construction delivery in projects that require close collaboration for execution. The relationship

between the parties in that situation transcends the exchange of goods and services and displays the attributes of a community with shared values and trust-based interaction.

Relational contracting enables the parties to work together for mutual benefit, and reduce risk instead of shifting it to others. A successful outcome benefits all stakeholders, especially the client, and minimizes the need for troubled participants to improve their financial position by reducing quality and cost. Working relationships between the stakeholders are improved, resulting in more efficient work processes and less conflict. A spirit of teamwork leads to better project outcomes, including relatively higher financial returns. Consequently, the most significant factors that underlie relational contracting are cooperation and dependency between the parties for mutual benefit.

Benefits of relational contracting

• The ability to work on a face-to-face basis. The collaborative approach eliminates the need to formally document everything. Direct discussion leads to faster decision making. Job satisfaction is higher due to a more pleasant working environment.

• More innovative solutions become possible, and quality is improved as more people come together to discuss problem issues.

• An elevated level of trust in the contractor’s competence and trustworthiness relieves inspectors and others of the chore of being on the spot at all times to see every detail of the work. When such a situation arises, quality costs are reduced as the contractor can be trusted to carry out the job correctly; that is, “do it right the first time.”

• Better, faster solutions are possible that lead to savings for the contractor as well as the owner/client.

• More harmonious relations free up the parties to focus on work issues and not contractual issues. • The shared use of Information and Communications Technology (ICT), avoids duplication by

project team members and significantly reduces information costs while improving response time.

• There is an atmosphere of goodwill that helps to resolve situations where one party fails. • Disputes are resolved early.

Characteristics of IPD agreements For consistency, the term integrated project delivery agreement (IPDA) will be used throughout unless a more specific term is needed when discussing the evolution of the IPD concept. IPDAs are forms of contracts that govern the relations among the parties involved with the design and delivery of a project including as a minimum the owner, the designer, and the builder; hence the term 3-party agreements was used initially. Additionally, IPDAs can involve several other parties (such as engineering consultants and trade contractors) as it will be illustrated later in the chapter.

There are certain commonalities between all versions of IPDAs. Those will be discussed first as they are the foundation for defining the relations among the parties involved in project delivery in the construction industry.

1. Multiple signatories to a single agreement An IPDA is a multi-party agreement with a shared risk/reward mechanism for the non-owner signatories. As a minimum, the signatories to this single agreement are the owner, the designer, and the builder. It can include more signatories such as other trade contractors and design and specialty consultants. Regardless of the number of its parties, the IPDA must contain a mechanism that rewards the non-owner signatories for meeting the project objectives and punishes them for failing to meet the overall objectives. In contrast, under most other contract types the signatories are rewarded or punished based on how well they execute their company’s particular contracted scope. Signatories of non-IPDA contracts may also be allowed compensation due to the errors of other parties. The classic example of this is the builder being able to submit a change order to the owner for errors in the drawings provided by the designer. IPDAs are different. The signatories collectively own the risk associated with such errors, and they are rewarded collectively for their ability to make an overall project successful.

Depending on the project type, the owner may select the designer and then the general contractor in collaboration with the designer. In other cases, the owner may choose the general contractor first and then choose the designer collaboratively with the contractor. Alternatively, the designer and the general contractor may self-organize as a response to a request for qualifications from the owner. In all those cases, the selection is value-based where “value” does not mean “cost”. Once a team is identified, representatives from the owner, designer, and general contractor jointly and collaboratively manage the project. They select the remaining members of the team including engineers, technical consultants, key subcontractors, and suppliers based on the specific needs of the project. The additional IPD team members may also be included in the IPDA as risk-reward members either directly under the main agreement or they may sign a sub-agreement with the general contractor or the designer. In those cases, their sub-agreement terms would include pass- through provisions to ensure alignment with the overall language of the IPDA.

2. Early engagement of an integrated team The selection of teams under IPDA is fundamentally different from other forms of contract. As this delivery model requires a different set of skills, typically, one or more of the signatories will already be experienced with this way of working, or will have a strong reputation for their experience, creativity, willingness to collaborate, and demonstrated the application of lean principles.

Teams are selected sooner than with other contract models to ensure they are able to maximize their ability to influence positive project outcomes. Specifically, major trade companies as well as the general contractor are typically brought on board during the early phases of design to help with constructability and feasibility analysis. At the latest, they must be selected before the final overall project budget is set so that they can participate actively in the discussions that lead to finalizing it.

3. Team alignment on the project’s goals

Though the exact methodology and timing can vary in different IPDAs most of the signatories are brought on board during what is termed the validation phase of the project. They are brought on with the understanding that once the validation is complete, and if the project is then funded and authorized to proceed, they will be selected to deliver the project. They will then be expected to design and build the project in accordance with the scope, budget, and schedule developed during the validation phase.

The most important part of validation is the creation of a clearly stated project definition and associated conditions of satisfaction that are produced as by the collaboration between the owner and the selected team. Typically those will include:

• A description of the operational purpose of the building. • A space program required to deliver on that operational purpose. • A proposed budget to design, build and open the facility to house that program. • A proposed schedule to design, build and open the facility to house that program. • Any other key performance metrics that are to be met by the facility. • Any potential risks, and whether the budget and schedule do or do not include provisions for

those risks. Where they do not, some assessment of the likely cost and schedule impacts is provided as a risk that the owner would manage outside of the IPDA.

It is worth noting that goals should be measurable within the duration of the IPDA. Owners often have longer term operational goals that can only be measured years after a facility opens. In those cases, a proxy goal is written into the IPDA. For example if the facility is being built to increase production capacity by 25%, and the owner believes that the space program that is set for the IPDA would achieve that long-term goal, then the team is at risk for building the space program and not for the ability of the owner to increase production capacity by 25% after the building opens.

As the non-owner signatories are part of the process that establishes the goals for the project this creates transparency across the team as to what the goals are, and creates buy-in and accountability to deliver on these goals.

4. Shared risk/reward mechanism The IPDA signatories’ risk and reward is tied to their collective ability to deliver all project goals as stated in the project definition and the conditions of satisfaction. There are many ways to achieve this, but typical characteristics across IPDAs are:

• 1) The signatories are transparent about their costs (actual costs, overhead, and expected profit) and review and challenge each other on those costs. Owners typically have the right to verify this information through a third party audit of the signatories’ financial data.

• 2) Generally, the total cost of work, absent of profit, is guaranteed to be paid by the owner. Some more recent IPDAs have required partial payment of the overhead at risk.

• 3) The total cost of work usually contains a contingency amount that the team carries to offset the risk of the project and to fund opportunities that will help in meeting their goals. Various IPDAs handle contingency allocation differently, and it is generally contextual based on the needs of the project. Typically the team will receive a share of unused contingency at the end of a project.

• 4) The non-owner signatories of the IPDA allocate a substantial percentage (often 100%) of their profit at risk.

• 5) Overhead is handled in many different ways. Sometimes it is guaranteed, sometimes it is fixed as a lump sum at project commencement. In some instances a portion of it is also put at risk.

• 6) The owner has the risk of paying the non-signatories’ costs when the at-risk portions of the budget are consumed until the project is completed.

• 5. The distributed governance model • IPDAs describe a governance model wherein (in return for putting their profit at risk),

companies get to be represented on the project leadership team which also includes representatives of the owner. This leadership team has different names in different IPDAs but some examples are core group, core team and project leadership team (PLT). This team has the primary responsibility for most strategic decisions on a project. Typically the IPDA requires decisions to be unanimous, though there are exceptions to the rule and those would be defined in the documentation of the IPDA.

• 6. Limited grounds for change orders • It is highly beneficial if the team has been together since early in the design phase as they

collectively hold the responsibility for ensuring that the design meets the goals of the owner and that it can be built for the agreed budget and within the agreed schedule. Consequently, very few change orders are permitted under the IPDA. The team bears responsibility for several critical activities, i.e., errors or omissions in the design or coordination; errors or omissions in the estimate; errors or omissions in legal compliance, constructability, and the “inspectability” of the installation. Change orders are typically limited to those caused by the owner’s changing requirements, by changes in the law, or by external events. These events must be reasonably considered to be outside the team’s control, but within the contingency that is controlled by the owner, outside the scope of the IPD. Whenever such unforeseen conditions occur, the owner can modify the IPD scope accordingly from the owner-controlled contingency.

Sutter Health’s IPD approach History

Sutter Health is a not-for-profit community-focused service-oriented healthcare network that operates in Northern California. Their vision is to lead the transformation of healthcare to achieve the highest levels of quality, access and affordability. The network has 50,000 employees, 5,000 physicians, 30 hospitals, and over a hundred general and specialty clinics and laboratories. It serves a patient population of approximately 3.5 million that is one of the most demographically diverse in the United States. In support of this it spends an average of $500 million annually on capital projects.

While several factors, organizations, and individuals influenced the development of IPD concepts, Sutter Health in California played a foundational role as it sought to improve its methods

for securing the design and construction work for its healthcare facilities, reduce project cost overruns, and improve schedule reliability.

The Northridge earthquake in January 1994 caused significant damage to several hospitals, and the California legislature passed Senate Bill 1953 that same year requiring all healthcare providers in that state to upgrade or replace their acute-care facilities (e.g., hospitals) so that they would withstand major earthquakes and remain operational afterwards. In 1994 the deadline for compliance with the new law was extended to 2008; subsequently the deadline was extended to 2013 and tiers of compliance were introduced later with deadlines of 2020 and 2030. In the mid- 1990s Sutter Health estimated that it was going to need to spend $5.5Billion over several years to comply with this legislation. Sutter Health engaged the firm of Lean Project Consulting Inc. to guide the adoption of lean construction. McDonough Holland & Allen PC, Attorneys at Law, provided legal services especially with developing an early version of the Integrated Form of Agreement (IFOA) that was an essential framework for its projects.

Prior to the use of the IFOA, the first two major projects in the replacement program did not go well, and both were ultimately delivered over budget and late. Sutter knew that if this pattern repeated itself over the whole replacement program, it would create a significant risk to the organization as a whole. It began to investigate how to mitigate the risk and found that there were alternative approaches to design and construction that were said to outperform the conventional delivery model.

Among the early influences on Sutter’s approach were the efforts of the Lean Construction Institute’s (LCI) founders Greg Howell and Glenn Ballard as they explored how production management, lean thinking, and supply chain collaboration could improve project delivery by reducing variation. These principles were embodied in the Last Planner System and the Lean Project Delivery System (Ballard 2000). At the time Sutter started its exploration LCI advocated improving collaboration through the formation of cross-functional teams, with the use of concurrent engineering including the involvement of specialty contractors during the design phase.

In March 2004, Sutter organized a Lean Summit for its design and construction partners in Concord, CA in which they shared their vision of collaborative project delivery. The summit concluded with the development of what came to be known as The Five Big Ideas, namely:

• Increase relatedness, • Collaborate, really collaborate, • Optimize the whole, • Tightly couple action with learning, and • Projects as networks of commitments.

In the projects that followed, the participating partners and Sutter Health signed the Five Big Ideas document declaring their intent to use these concepts in project delivery.

Projects began to be implemented with this vision in mind, but no change was introduced in the contracting method. The results were mixed, but certainly not transformative. At regular progress meetings, the message back to Sutter was mainly: “You are asking us to change our behaviors, but the contracts themselves do not align with that request.”

Because of this, in 2004, William (Will) A. Lichtig took on the challenge and came up with a modified GMP contract that included much of the intent around the Five Big Ideas. At that time, Will was a construction attorney with McDonough, Holland & Allen, P.C. and he acted as Sutter Health’s external legal counsel for design and construction contracts.

However, again the results of using the modified GMP contracts were still not transformative. Therefore, in 2005, Will wrote the first version of Sutter’s IPDA, known as the integrated form of agreement or IFOA. (Lichtig, 2005, 2008) It was a tri-party agreement that was signed by Sutter Health, the architect and the builder. The agreement described the goals clearly, regarding the clinical program, the opening date, and the budget, but it did not contain a risk/reward mechanism. It was not until the Sutter Medical Center Castro Valley project (SMCCV) began in 2007 that Sutter fully developed their IFOA contract.

Characteristics of Sutter’s IFOA contract (current procedures)

Multiple signatories The Castro Valley IFOA started with three signatories and quickly expanded to include 11 direct signatories. On subsequent Sutter IFOA projects, there have been anywhere between 3 and 17 at- risk signatories, but most have been three-party agreements in which additional at-risk partners worked through the architect or the general contractor. In such cases, Sutter requires that the language of the agreement signed by the architect and the builder with Sutter is passed through into the contracts they (the architect and builder) sign with the other at-risk team member companies.

1. Early engagement of an integrated team Before Sutter Health funds a project that it knows will cost more than $10 million, it funds a validation effort to confirm the goals, scope, budget and risks of a project, and then puts that before the board for funding approval. To initiate the validation effort, Sutter assembles an integrated team of designers and builders. Sutter retains the right to not use members of this team for the approved project, but usually the team is retained and awarded the project once it is approved. Across the 23 Sutter Health IFOA projects (at the time of this writing), only in rare cases have team members involved in the validation study not been retained for the full project.

2. Team alignment on the project goals Any project in excess of $10 Million must have a Validation Study. This study turns Sutter’s goals for a proposed project into a functional narrative that describes how different spaces will be used, and a space program that shows how much of each clinical function is required to meet the operational goals. It includes a proposed budget and schedule. It also lists all the assumptions that the validation effort has made and the risks to the scope, budget, and schedule.

Sutter selects an architect and builder as an integrated team to carry out the validation study. Typically the cost of such studies has been in the region of 0.5 to 2% of the total project budget. The team also includes specialty design, consultant and trade partners where justified by project complexity and risk warrant such.

Typical consulting and preconstruction services contracts are used for the Validation Study, and teams earn their expected overhead and profits. However, a mandatory condition of being selected to be on the validation team is the company’s agreement to the terms and conditions of the Sutter IFOA without exception, so if the project is approved, and the EMP is then finalized, they would have already agreed to sign the IFOA.

Having the team involved in the process that creates the Validation Study for the project, creates transparency and prepares the project for future success.

3. Shared risk/reward mechanism The Sutter IFOA states that the requested program, along with any other listed built-environment goals must be built for the Estimated Maximum Price (EMP) and to have 100% of the proposed space ready for use by the date specified in the agreement. The IFOA does not offer a goal by goal option for earning incentives. It requires that all goals be fully realized before the team can earn incentives.

The Expected Maximum Price is calculated as follows:

• EMP = Team’s Actual Costs + Team’s Overhead + Team’s Profit + Team’s Contingency

The final number is also supported by historic data as well as by market analysis of similar and comparable projects.

Actual costs For at-risk trade partners, these costs include the agreed hourly rates, excluding overhead and profit for every person on the project as determined by an external audit of each company’s financial records. For at-risk design partners, the situation is the same except that overhead is considered part of the designers’ actual cost and as such is included in their hourly rates. This is because design companies have an entirely different business model from builders wherein overhead pays for a substantial part of their overall cost structure. In the healthcare design and construction market in which Sutter operates; overhead rates for designers are in the range of 10 to 20 times that of trades.

Actual costs also include the costs of materials reimbursable expenses, rental rates, and sub- contract buy-outs as verified by back-up paperwork. The IFOA guarantees that Sutter Health will reimburse the actual costs incurred by at-risk signatories. This means that if the total project cost during execution exceeds the EMP, then Sutter continues to pay the at-risk partners’ actual costs. The downside for the team is that in this scenario they will have eroded their contingency and profit and so will not make any money.

Overhead This is the agreed level of overhead for each company for non-project specific costs required to support the project as determined by an external audit of each company’s financial records,

typically going back over the previous two to three years. As noted above, for at-risk design partners this audited calculation is included in their hourly rates. For the at-risk trade partners their expected overhead is then fixed as a lump sum at the time of setting the EMP. The at-risk trade partner team members are then paid their lump-sum overhead on a pro-rata basis through the life of the project.

While the audit typically sets the overhead if there is disagreement over whether certain categories of cost are considered overhead such issues are resolved on a case-by-case basis.

Profit Profit is what each at-risk team member company expects to make if the project is delivered exactly per the formula that establishes the EMP. The profit amount is proposed by each team member and typically would align with industry benchmark data or is based on historical data. The total amount of profit establishes the profit pool for the project and 100% of this total is considered to be at risk. In the event, the actual costs rise so high that they entirely erode the Contingency they next will start to erode the profit.

When the EMP is set, each partner’s fixed profit expectation is converted to a percentage of the total profit pool. Thus they can only make more profit by increasing the size of the total profit pool, and they can only do so by collaborating to reduce overhead, actual costs, or both without compromising the project goals. For example if there were just an architect and a general contractor and the architect’s profit amount in the EMP figure was $300,000 and the builder’s profit was $700,000 these would be converted to 30% and 70% respectively of a total profit pool of $1,000,000. From that point on the architect has a contractual entitlement to 30% of the total profit, and the builder has 70%.

Contingency The contingency is a sum of money controlled by the team to manage risks and fund opportunities. It varies by project type and context as agreed between the team and the owner. It has varied between approximately 3 and 7% on the 23 IFOAs used so far at Sutter Health. An IFOA contract for a low-complexity new clinic would be at the lower end, while one for a replacement hospital would be at the higher end.

When the EMP is set, the contingency is converted to a dollar figure. Typically, it appears as a line item within the builder’s estimate but is money available to the full team of signatories.

The contract allows the team to share in a portion of any unused contingency at project completion.

The risk/reward deal As previously mentioned, Sutter’s projects are managed against the EMP using the formula previously mentioned. The team’s risk starts after the contingency is exhausted. Once the contingency is exhausted, the team’s profit pool is used to pay for the overrun. Sutter’s risk starts after both the team’s contingency and the team’s profit pool are exhausted. At that point, Sutter pays the team’s actual costs, without limit, until the project is complete. Note, this actual cost

overrun that Sutter guarantees does not include overhead for the at-risk trade-partners as that remains at its original lump sum value.

Rewards are available based on meeting overall project goals and conditions of satisfaction. The team must achieve all the goals. For example, the project must open on time. This is important, as the team is not allowed to compromise the goals, and thus protect their profits by failing to respond to a project projecting to finish late. The team is required to track progress against the goals and report regularly and visually on the trends to achieving those goals. If after meeting all the goals there is some contingency left, a share of that is added to the team’s profit pool. Additionally, if after achieving all the goals the team’s actual costs are less than in the EMP calculation (above) then a share of that savings is added to the team’s profit pool. At the end of the project, each team member company receives it’s agreed on the percentage share of the remaining profit pool.

The sharing of savings between the owner and the team varies from one IFOA to the next. The sharing is based on how aggressive Sutter feels the EMP number is. Less aggressive EMP numbers have a lower share of the savings for the non-Sutter team members, while more aggressive numbers have a higher share. Sometimes tiers are established whereby as more savings are achieved the percentage that goes to the team increases or decreases. There is always a cap, wherein, once that level of savings is achieved 100% of additional savings reverts to Sutter. This cap is still a substantial figure, and to date, no project has exceeded such a cap. Where an EMP is thought to be exceptionally conservative, there may be an initial tier where all the savings go to Sutter.

An important note about behavior under this risk/reward deal

Even though it was discussed previously in the IPDA section, it is important enough to repeat here how the team behaviors change under an IFOA as compared to transactional agreements through an example. Under the IFOA model, the designer can increase their profit by lowering the builder’s costs, and the builder can improve their profit by reducing the designer’s costs. This is a transformatively different incentive environment for participating companies. It typically takes players new to this contract some time to adjust their behaviors and to take advantage of the opportunity. So much of the team behavior in the industry is driven by local optimization of one’s own costs of performing one’s own scope of work.

Under the IFOA, if a partner Company A “innovates” in a silo in a way that reduces their own costs, but this increases the costs of its fellow partners by more than that then the total cost of the project has increased, which decreases the size of the team’s profit pool, which decreases the dollar value of Company A’s share of that team profit pool. I.e. Company A reduced its cost but in doing so reduced its profits.

Conversely, if partner Company A innovates in a collaborative, team-focused way that actually increases Company A’s costs, but by doing this they lower the costs of its partners by more than that, then the total cost of the project has decreased, which increases the size of the team’s profit pool, which increases the dollar value of Company A’s share of that team profit pool. Therefore, Company A increased its cost but in doing so also increased its profits.

It can take a long time for individual players to understand this fully, as it flies in the face of decades of ingrained behavior driven by contracting models that are based on self- interest.

5. Distributed governance model The governing body in the IFOA is the core group as shown in the generalized representation above. The membership of the core group varies from one IFOA to the next, but the general intent is that a member of the core group represents each at-risk partner. In projects with an extraordinarily large number of at-risk signatories, decision-making can become unwieldy; the preferred arrangement is to have Sutter Health, the architect, the general contractor, one trade partner who represents all the at-risk trade partners, and one design partner who represents all the at-risk design partners. Sutter typically has two members on the core group. One member is the Sutter Health project manager, and the other is an operational manager or representative thereof from the part of Sutter Health for whom the project is being built. The core group members must each be able to make decisions on behalf of the organization they represent.

The IFOA requires all core group decisions to be unanimous. There are very few cases where this is not the case. One of which is, and for obvious reasons, the decision to remove a company from the project – this decision requires a majority decision with Sutter being a member of the majority.

The core group makes the decisions with regard to the sub-contracts that are issued and all strategic issues that affect the overall processes and direction of the project. The core group meetings are run by Sutter’s project manager. The larger projects also require a Senior Executive Team (SET) that meets quarterly to oversee the performance of the project and the core group. The executive team makes final decisions in the event that the core group has been unable to achieve the required unanimity which is extremely rare.

6. Limited grounds for change orders The IFOA only allows change orders for

• 1) Owner changes. • 2) Changes in the law that could not reasonably have been anticipated. • 3) Decisions by the authorities having jurisdiction that are unreasonable and could not

reasonably have been anticipated. • 4) Discovered conditions that could not reasonably have been anticipated. • 5) Nothing Else.

Note: Errors and omissions in the work of the design team is not an allowed grounds for a change order. This eliminates, by number, nearly every change order under traditional contract approaches. The purpose of this is to incentivize the team to ensure the work of the design team is fully complete before the project proceeds into the construction phase. It has been Sutter’s experience that this has transformed the quality of the work during the design phase of its IFOA projects.

7. Dispute resolution The integrated form of agreement requires the core group to resolve disputes rather than the architect. If the group is unsuccessful, the senior management executives from the group try to resolve the dispute in question. If their efforts are unsuccessful, an independent expert may be brought in to have closure in an unbiased manner and without animosity.

8. Everything else that is different in Sutter’s IPD approach When Sutter changed its contract to that described above, it did so to allow its project teams to behave in a way that supports overall project success. What Sutter did not anticipate is that over the next eleven years almost everything else on its projects would change. This resulted in a transition from siloed (or self-interested) contracting with contradictory and misaligned goals to an integrated contract with a single set of goals that all key participants needed to achieve in order to be successful.

Specific requirements are described below that are common to all Sutter IFOA-contracted projects; they create the environment for integrated teams to be successful. The IFOA simply sets the framework for collaboration to happen but it does not by itself create the success. A project with an IFOA but without these processes is very likely to still fail. In particular, reference Validation: See “3. Team Alignment on the Project Goals” in section “2. Characteristics of Sutter’s IFOA”

• Big Room Co-Location: All Sutter projects are required to use some form of co-location where the owner, designers, and contractors share a common space to collaborate on the design, planning, and management of the project. On the larger projects, several hundreds of team members would leave their home office and co-locate for an extended period of time (years), and on others, they may collocate for 1 day a week or perhaps 2 days every 2 weeks.

• The Last Planner® System (LPS): which embodies the management by commitment concept from the 5 Big Ideas. LPS is used through all phases of the work from entitlements through to commissioning, fit-up, and move-in. It is a highly effective framework that allows an integrated team to organize its work effectively and reliably.

• Target Value Design (TVD): During Validation and in the early phase of the project post- approval this process uses the budget as an input to design, instead of having it as an output of design. A satisfactory design is one that delivers Sutter’s operational goals and is informed by the integrated ability to innovate in ways that allow the project to be designed, built, and opened for the agreed level of funding in the agreed upon period.

• BIM for Risk Management. Sutter focuses its teams on aligning on what the BIM is for, what it will include, when to include it, and at what level of detail. Then it has its teams use LPS to create the workflows to create and manage that content. Within these workflows, there is a subset of tasks that describe all the decisions that Sutter needs to provide to the team.

• Design for Fabrication: this is to reinforce the concept of design definition being more than design intent. Many project teams new to the IFOA enter the process thinking the primary purpose of design is to create a paper (or a 3D model) package to be signed and approved by the Authority Having Jurisdiction (AHJ) and represents the designer’s intent. They then feel it is the responsibility of the contractors to translate that intent into reality. Sutter has its teams primarily think of design as a deliverable to a complex web of downstream trade customers who

will use it to procure, fabricate, install and build the design. Sutter gets its project teams to think of what goes to the AHJ as a point-in-time extraction from this “design for fabrication” workflow.

• Risk and Opportunity Tracking: the integrated team meets, typically, weekly to review all the project’s risks and opportunities, assess the impact and likelihood of such, and work to eliminate, mitigate or manage the risks, and take advantage of opportunities. The aggregate financial risk is added to the teams projected costs, which incentivize the team to manage the risks and to implement the opportunities because both affect the size of the team’s profit.

• Cost-to-Complete Forecasting: Sutter has found that companies are highly variable in their competency in forecasting the cost of the work that is not yet in place. Team members share how they do it and collectively influence the weakest to get better. Under the IFOA if a team member does a poor job, the whole team feels the impact.

• Takt Planning and Location Based Management: On the more recent projects takt planning has been implemented to increase the speed of construction and create a predictable flow of work for the trade partners. The approach has proved effective at managing the overall supply chain for the project and to create clear execution strategies and production targets for all involved.

• Dash boarding and Visual Management: All project goals must be tracked, updated and reviewed by the whole team. On Sutter IFOA projects all key leaders of the integrated team companies know each week or month whether the project milestones are on track and whether the project is on budget.

Since 2006, Sutter has completed 23 IFOA contracted projects totaling over $4.1 billion. They were delivered on time, on budget, and without scope compromises with only one exception where a five year project was a few months late and a few percent over budget. Currently, Sutter has another $500 million in IFOA projects in progress and does not intend to move away from the contract model and delivery processes.

The following sections will illustrate some of the breakthrough innovations that were achieved for the first time and which are now commonly used on many Sutter projects as standard practice. They will be highlighted through case studies from various notable projects over the past several years.

Alternative Project Delivery Methods

Chapter 9 Quality Management in Construction

Total Quality Management The term quality can mean different things to different people, but needs a common definition if the people in an organization can hope to pursue it successfully. This is especially important in the construction industry where there is much variation from one project to another. Dr Joseph Juran’s definition has been interpreted as “fitness for use,” “fitness for intended use,” “conformance to requirements,” and “conformance to specifications.” Dr. Edwards Deming took the view that: “Quality is defined by the customer; the customer wants products and services that, throughout their lives, meet customers’ needs and expectations at a cost that represents value.” Deming also added that the quality of a company’s output cannot be better than the quality determined at the top (i.e., by an organization’s leaders).

Total quality management (TQM) is an approach to doing business that attempts to maximize the competitiveness of an organization through the continual improvement of the quality of its products, services, people, processes, and environments (Goetsch and Davis 2006). The principles of TQM create the foundation for developing an organization’s system for planning, controlling, and improving quality.

Chapter 9 Quality Management in Construction

Quality Management Systems The American Society For Quality, (ASQ), defines a quality management system (QMS) as a mechanism for managing and continuously improving core processes to “achieve maximum customer satisfaction at the lowest possible cost to the organization.” It applies and synthesizes standards, methods, and tools to attain strategically important goals. In the construction project environment, quality management may be defined as the process required to ensure that a project’s outcome will satisfy the needs for which it was under- taken. TQM also promotes excellence in customer satisfaction through the total involvement and dedication of each individual who is in any way a part of that product/process.

Chapter 9 Quality Management in Construction

Quality in Construction In 1992, the Construction Industry Institute (CII) published Guidelines for Implementing Total Quality Management in the Engineering and Construction Industry. Their research studies confirmed that TQM resulted in improved customer satisfaction, reduced cycle times, documented cost savings, and more satisfied and productive work forces (Burati and Oswald 1992).

Chapter 9 Quality Management in Construction

Benefits of TQM From the viewpoint of the individual company, the strategic implications of TQM include: • Survival in an increasingly competitive world • Better service to its customers • Enhancement of the organization’s “shareholder value” • Improvement of the overall quality and safety of our

facilities • Reduced project durations and costs Better utilization

of the talents of its people

Chapter 9 Quality Management in Construction

Principles of TQM 1. Leadership: Senior management must lead this effort by example, by applying the tools and language, by requiring the use of data, and by recognizing those who successfully apply the concepts of TQM. 2. Strategic planning: Senior managers may require support to bring about the change necessary to implement a quality strategy. 3. Customer and market focus 4. Information and analysis: The use of data becomes paramount in installing a qual- ity process. To set the stage for the use of data, external; customer satisfaction must be measured to determine the extent to which customers perceive that their needs are being met. 5. Human resource focus: Communications in a quality environment may need to be addressed differently in order to communicate to all employees a sincere commit- ment to change. Reward and recognition to teams and individuals who success- fully apply the quality process so that the rest of the organization will know what is expected. 6. Process management 7. Organizational results

Chapter 9 Quality Management in Construction

Deming’s 14 Points The 14 Points are summarized in the context of construction as follows: 1. Develop a program of constancy of purpose of improvement of product and service. The organization’s strategic plan should include a commitment to improving products and services. Persistence is necessary for quality initiatives to bear fruit in design or construction activities. 2. Adopt this new program and philosophy. Quality needs to be ingrained in the organization’s strategic plan—both its mission and vision. 3. Stop depending on inspection to achieve quality—build in quality from the start. Employees need to adopt a quality philosophy to produce to high standards, with- out relying on inspections. 4. Stop awarding contracts on the basis of low bids. Quality costs may be high with suppliers that have low-initial costs. Low bid awards may lead to failed inspections. low quality, and subpar performance. Suppliers should demonstrate capable quality systems.

Chapter 9 Quality Management in Construction

Deming’s 14 Points 5. Improve continuously and forever the system of production and service. Design and construction organizations should commit to continuous improvement. 6. Institute training on the job. Employees at all levels need to be trained in the best methods for delivering construction-related services. This includes executives, managers, technicians, supervisors/foremen, and workers. 7. Institute leadership. Top management has to lead with quality endeavors and set an example for their employees. Unless top management displays commitment, others will not take quality seriously. 8. Drive out fear so everyone may work efficiently. Construction workers are unwill- ing to volunteer ideas for improvement in an atmosphere of intimidation. Without their input, inefficient processes are likely to persist. 9. Eliminate barriers between departments so that people can work as a team. Reward teamwork instead of individual accomplishments. 10. Eliminate slogans, targets, and targets for the workforce—they create adversarial relationships. 11. Eliminate quotas and management by objectives. Institute work standards that reflect quality, cost, schedule, and safety. 12. Remove barriers that rob people of pride of workmanship. Provide workers with needed supervision, information, and resources to enable them to do the best job possible. 13. Establish rigorous programs of education and self-improvement. Commit the training and support systems necessary to equip everyone to develop and con- tribute to a quality environment. 14. Make the transformation everyone’s job.

Chapter 9 Quality Management in Construction

Dr. Joseph Juran Known for several quality contributions: Three Basic Steps to Progress, Ten Steps to Quality Improvement, and The Quality Trilogy. Juran’s quality trilogy has three components: namely; (1) quality planning, (2) QC, and (3) quality improvement. This trilogy of quality processes provides a successful framework for achieving quality objectives. The processes must occur in an environment of inspirational leadership and the practices must be strongly supportive of quality. A brief description of the Juran’s quality trilogy is given below.

1. Quality planning a. Determine who the customers are b. Identify customers’ needs c. Develop products with features that respond to customer needs d. Develop systems and processes that allow the organization to produce these features Deploy the plans to operational levels 2. Quality control a. Assess actual quality performance b.Compare performance with goals c.Act on differences between performance and goals 3. Quality improvement a.Develop the infrastructure necessary to make annual quality improvements. b.Identify specific areas in need of improvement and implement improvement projects. c.Establish a project team with responsibility for completing each improvement project. d.Provide teams with what they need to be able to diagnose problems to deter- mine root causes, develop situations, and establish control that will maintain gains made

Chapter 9 Quality Management in Construction

Continuous improvement The goal of continuous improvement is common to many managerial theories; however, what differentiates TQM is that it specifies a specific step-by-step process to achieve it. The steps are as follows: 1. Identify the process 2. Organize a multidisciplinary team to study the process and recommend improvements 3. Define areas where data are needed 4. Collect data on the process 5. Analyze the collected data and brainstorm for improvement 6. Determine recommendations and methods of implementation 7. Implement the recommendations outlined in step 6 8. Collect new data on the process after the proposed changes have been implemented to verify their effectiveness 9. Circle back to step five and again analyze the data and brainstorm for further improvement

Chapter 9 Quality Management in Construction

Six Sigma Sigma management originated in the high-volume manufacturing environment with an emphasis on measuring and reducing defects. Some construction applications may involve repetitious activities that may lend themselves to this numerical target. As much of construction is nonrepetitious, it can benefit from the more general process improve- ment approach.

Six Sigma is not focused on quality although quality generally improves with its appli- cation as a result of reducing the variation in target processes. As opposed to TQM, it is not concerned with changing the culture of an enterprise, but this culture tends to change as Six Sigma thinking permeates it. It facilitates “breakthrough” business improvement as opposed to gradual or incremental improvement. Six Sigma projects typically yield process performance improvements in the vicinity of 30–60% in 6 months or less, with attendant improvements in financial and business performance.

According to the Six Sigma Academy, Black Belts save companies approximately $230,000 per project and can complete four to six projects per year. General Electric, one of the most successful companies implementing Six Sigma, has estimated benefits on the order of $10 billion during the first 5 years of implementation. In 1995, GE first began Six Sigma after Motorola and Allied Signal blazed the Six Sigma trail. Since then, many organiza- tions worldwide have discovered the far reaching benefits of Six Sigma.

Whereas Quality Management Systems such as TQM and ISO 9001:2000 generally require sustained effort for several years, this period of time is longer than a typical construction proj- ect cycle and limits application to the construction environment. Six Sigma projects have a much shorter cycle, making the approach more adaptable to the construction environment.

Chapter 9 Quality Management in Construction

Six Sigma Benefits Motorola views the Six Sigma methodology as a proven way of accomplishing transformational change within an organization. It serves as a business improvement process that aligns an organization closely with customer requirements, applying tools that seek near perfection. Organizations that have employed the Six Sigma methodology have achieved significant benefits. Typical examples are: •Better process flows • Fewer defects • Higher productivity •Greater customer satisfaction (both internal and external) •Shorter cycle time •Faster delivery time •Reduced work in process (WIP) •Lower inventory levels •Greater capacity •Less waste •Higher quality and reliability •Lower unit costs •Greater profitabily

Chapter 9 Quality Management in Construction

Six Sigma Tools Root Cause Analysis Fishbone Diagrams Prioritization Matrix Cost Analysis of Customer Complaints Pareto Charts