In spite of fluctuations in the economy, there is good news forthe commercial building industry. According to the ArchitectureBilling Index (ABI) released by the American Institute ofArchitects, nonresidential construction spending hit aseven-month high in September 2013 with the latest reportsexpecting a 17% increase in commercial construction throughout2014. This will be led by a considerable uptick in warehousing andhotel construction, as noted by the McGraw Hill Construction’s 2014DodgeConstruction Outlook. The same report predicts totalconstruction starts will rise by 9% this year.

However, construction costs continue to rise, with manybelieving that expenses will outpace the growth produced by therecovery. This was reinforced by a recent report from the Rider Levett Bucknall’s Construction CostIndex, which revealed a 3.6% in construction costs in 2013. Thisalso coincides with the Engineering News-Record’s (ENR) BuildingCost Index (BCI) that showed a steady increase in New York Cityconstruction costs that rose 3.55% in 2011 and 2.42% in 2010.

Everyone from contractors and designers to owners and architectsare looking for a better way to shed waste, collaborate moreeffectively and reduce the overall costs of commercial constructionprojects. For all these reasons, the American Institute ofArchitects (AIA) first introduced The Integrated Project Delivery(IPD) Guide in 2007 as a tool for creating integrated models,improving designs and streamlining construction and operationsprocesses. Since then, business cooperatives nationwide havesuccessfully combined responsibilities and expertise tosignificantly expedite project development cycles from design tocompletion.

Under such agreements, which differ greatly from traditionaldesign-bid-build methodologies, collaboratives consisting mainly ofdesign teams, project owners and construction firms work togetherto share mutually agreed-upon risks and rewards. Since all partiesare involved in the decision-making from the ground up, the systemis designed to foster a professional working environment founded onmutual respect, innovation, planning, open communication andtransparent financials. Another important ingredient entails theuse of advanced technologies such as building information modeling(BIM) tools that can help reduce waste and identify potentialchallenges through virtual simulations rendered at the developmentstage and augmented throughout every project phase.

For instance, a three-story, 70,000 square-foot medical buildingwas built in Fairfield, Calif. through a three-way “joiningagreement” consisting of the facility’s owner, builder andarchitect. Through the use of BIM and GPS measurements, hundreds ofsystem clashes were identified early in the process, creatingsignificant cost and time savings while necessitating less redesignwork. Along with coming in under budget and within schedule,participants also enjoyed the sense of partnership and goodwillthat accompanied the collaborative process.

Another example entails the construction of the 138,000square-foot expansion of a children’s hospital in the Midwest.Although the main parties switched to an IPD partnership afterdesign and development were already underway, approximately$400,000 was saved from a $1 million contingency fund, with themoney split between the owner, design team and builder. The openand transparent alliance between all the parties helped uncover andrectify serious design flaws during construction and complete theproject weeks earlier than planned.

Despite the benefits, all interested parties are cautioned toproceed slowly and methodically before engaging in such anarrangement. Due diligence is a mandate. There is no cookie-cutterapproach to defining all the parameters, which can vary onper-project basis.

Careful attention to detail must ensure that the proper balanceof risks, gains and financial rewards are in place before theproject begins. This includes recognizing the licensing, legalissues and liabilities that may not be covered under traditionalinsurance policies. The typical professional liability insurancepolicy for architects, engineers or contractors requires the filingof a third-party claim arising out of the actual or allegednegligence in the performance of professional services to triggerthe policy. However, most true IPD contracts prohibit parties frommaking a claim and asserting negligence against a participant. Thisso-called “no dispute” tenet renders the professional liabilitypolicy useless, merely providing coverage for claims coming fromparties not participating in the IPD contract.

When considered that approximately 60% of professional liabilityclaims are filed by the owner (now a party to the contract) againsteither the contractor or design professional, and another 15%result from claims between the contractor and design professional,the effectiveness of a typical professional liability policy isminimized substantially. In today’s contractors professionalliability (CPrL) world, carriers are willing to offer certaincoverages to address the intricacies of the IPD arrangement. Forexample, some carriers now offer a first-party component to theircontractors professional liability policy called rectificationcoverage or mitigation of damages coverage.

Rectification/mitigation pays for costs incurred by the namedinsured (contractor, or in cases where both contractor and designprofessional are named, insureds) to remedy design defects orerrors in professional services discovered during the course ofconstruction (and some carriers are willing to extend coveragebeyond substantial completion) that would otherwise result inprofessional liability claims if not corrected. It is also usuallyprovided as a separate coverage part and either at a sub-limit or asupplemental limit in addition to the liability limit. The downsideto this coverage includes cost as well as the fact that only aboutfive carriers offer such coverage, each providing it in a differentflavor.

As with the introduction of any new methodology, challenges arebound to arise as IPD models become more prevalent throughout theconstruction industry. While the formula provides many benefits, italso opens the door to numerous unforeseen circumstances. The keyis to proceed cautiously with the best possible advice andprofessional support. Ask questions and get the proper answers. IPDagreements offer the potential for long-term gains under a mutuallyrespectful and rewarding arrangement that can extend for years. Thekey is to get it right at the outset. There is little chance forrenegotiation once the deal is signed.