There is another important difference: most construction contracts are performance-based-that is, they outline specific performance requirements and associated penalties if the parties fail to achieve them. The IFOA states performance requirements, but it also states behaviors that are associated with Lean project delivery. For example, the agreement with Palo Alto Medical Foundation states that the IPD team will promote project efforts to achieve the objectives of Lean project delivery. These efforts include strengthening relationships among team members, collaborating, planning and managing the project as a network of commitments, optimizing the project as a whole, and promoting continuous improvement throughout the life of the project. The contract calls for the team members to promote mutual trust, respect, tolerance, open communication, collaboration, and reliability. In short, every effort is made for the benefit of the project, not for individual members' self interests.
Another important difference for the IFOA: the three parties sign the agreement before design begins. The team begins design according to the owner's stated budget, and a price is set after design is sufficiently complete to ensure accuracy. The objective is a coordinated set of construction documents that meet or come in under the total budget, without the necessity for time-consuming and costly redesigns.
Because of the substantial nature of the Palo Alto Medical Foundation project, the CM allocated the owner's budget across “cluster groups” of systems (structure, MEP, site, interior, and so forth), and the architect and respective engineers are now expected to use a “target value design” approach to meet each budget. Target value design is designing to a detailed estimate rather than estimating a detailed design. In addition, the IPD team is using three-dimensional building information modeling (BIM) to save time and costs by resolving design issues and spatial conflicts among building systems before breaking ground. In this way, the team is leveraging the subcontractors' detailing efforts into the construction documents.
Moreover, in the IPD method of Lean construction, the CM and architect are jointly responsible for completeness of design-that is, the contract states that unless the owner adds scope or specific elements to the project, there is no provision for traditional change orders once the price is set. Instead, the owner, architect, and CM negotiate a nonsiloed IPD team contingency representing a percentage of the total price to cover potential construction and design-completion contingencies.
Minimizing pricing contingencies
Ideally, the contract sets an EMP rather than a Guaranteed Maximum Price (GMP), which is a pain-sharing/gain-sharing model and increases the owner's potential to elicit the desired behaviors from the architect, CM, and key IPD subcontractors (i.e., site, structural, MEP, drywall, fire and life safety), and to avoid or minimize stated and unstated contingencies in their pricing. The EMP model is essentially cost plus a fixed fee, except that in order to keep some “skin in the game,” a portion of the designer, contractor, and key IPD subcontractor profits (exclusive of overhead and G&A expenses) is held in a profit pool to cover downside overages in the EMP amount (pain share). The profit pool is an aggregate amount so that if there are EMP upside overages, all participants share equally up to the total amount of the pool. With this limitation on total cost overruns, IPD team members don't have to bet the company on a project's performance.
At the same time, IPD delivery and, more specifically, the EMP model offers greater potential than traditional delivery methods for development of a shared-savings incentive program for the greater IPD team: designers, subconsultants, CM, and major system subcontractors. In this case, Sutter Health encouraged development of a shared-savings incentive plan, which will benefit team members if they generate savings at any point in the project-for example, an EMP that comes in below the owner's original expected price and/or a completion cost below the EMP.