We reviewed the nuances between Integrated Project Delivery (IPD) and Single Purpose Entities (SPE). I even correlated SPE agreements in the United States with Alliance Agreements in the United Kingdom
This week, I wanted to share with you some of the contract terms these agreements require you to accept in order to implement the model.
Contract Costs
The first thing we must address when we consider collaborative delivery is how contract costs are established.
Unlike traditional contract models, in collaborative delivery the contract costs, for both the design and construction, remain largely unknown until the job is completed.
The parties come together near the beginning of the project to collectively establish Target Costs. These Target Costs are developed by the Contractor and the Architect. They are presented to the Owner as a Target Criteria Proposal. The Owner may reject the proposal causing the Architect and the Contractor to go back and revise the proposal. This goes on until the proposal is accepted by the Owner. The contract is then amended to incorporate the targets into the agreement.
These values are however nothing more than targets which the parties agree to work towards.
The cost of work and any labor provided by either the Architect or the Contractor are paid for at cost as a form of reimbursement.
The work continues in this manner until the project is completed at which time profits and incentives are distributed.
Incentives and Profits
The AIA contract templates leave the terms for incentives and profits up to the parties to define, but the way it typically works is that each party has a base level of profit they are entitled to receive. Each party gets their profit if they meet the Target Costs for the project.
If the parties do better than the target costs they are eligible to receive additional compensation as an incentive. If they fail to meet the Target Costs, their profit is placed at risk. Additional criteria, such as schedule and safety targets, can be added as performance metrics to further modify the amount of incentive received.
The percentages are determined through negotiations of the parties up front and should be commensurate with the amount of labor each party contributed to the project.
Insurance
Under traditional contracting models, the parties are required to carry their own project specified insurances. Under collaborative delivery the owner is expected to secure all of the insurance necessary for the project.
This is not completely without precedence.
Even under more traditional AIA contracts the concept of an Owner Controlled Insurance Programs (OCIP) can be found.
In my experience I have only ever encountered one Owner who had an OCIP, so I would say these are rare, but not unprecedented.
To be clear each party retains the responsibility for maintaining their professional and statutory insurances, but any of the insurances that are specifically for the project belong with the Owner.
Waivers and Indemnification
The fundamental principle in collaborative delivery is that the parties shift from an adversarial relationship to a collaborative relationship. In order to establish this shift, these agreements require each party to agree to a number of waivers.
Insurance Waiver
With the exception of willful misconduct or any other form of breach of contract, the parties to a collaborative agreement agree to waive all insurance claims against each other.
This makes the OCIP the only form of insurance for any sort of insurance claim.
The statutory limits for insurance on workers compensation and general liability are typically very low, so if an insurable event does occur, the OCIP will be the only coverage available.
Waiver on Consequential Damages
This may not be a deal breaker since even in a conventional agreement most parties will require a waiver for consequential damages. Nonetheless, the clause for consequential damages is a required clause in both IPD and SPE agreements.
Waiver of Subrogation
The waiver of subrogation is more relevant in the IPD form of agreement since each of the parties retain the responsibility of sub-contracting vendors. In an SPE, the subcontractors are contracted directly to the SPE.
This clause waives all rights of the parties to make claims against each other and their subcontractors which effectively leaves only the OCIP for any claims.
Indemnification for Property and Bodily Injury
The final waiver I found in these agreements reads:
“A Party shall indemnify and hold harmless the other Parties…against claims, damages, losses, and expenses…resulting from performance of such Party’s portion of the Work…attributable to bodily injury, sickness, disease, or death…”
Once again a very definitive clause that leave nothing more than the limits of the OCIP in case something happens.
Closing
I’m sure I don’t need to tell you that you should consult with an attorney and/or your insurance provider about the impact each of these clauses could have on you.
I’ve selected these clauses to demonstrate that when you decide to use one of these contracts, there is an inherent shift in the fundamental tenets of your contractual relationships.
For me these waivers open up a ton of questions and explain why the industry is so enamored with these agreements, but it begs the question every Owner must ask. Are these concessions worth the risk?
Next week, I will share some of the feedback and case studies I have found directly from the AIA and I will share some anecdotal feedback I have received from colleagues who have completed projects using collaborative delivery models.
What about you? Do you think these waivers are deal breakers? Do you see enough value in these agreements to waive your rights? Tell me your stories.
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