Comparing Different Construction Delivery Methods

August 2014

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Agenda

Types of Contract Delivery Methods Lump Sum / General Contractor

Guaranteed Maximum Price / Construction Manager Lump Sum vs. GMP

Design – Build Equity Developers

Lean (including Integrated Project Delivery) Summary Appendix

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Contract Delivery Methods

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Some Project Delivery Methods

• Lump Sum / General Contractor (GC) • GMP-at-Risk / Construction Manager (CM)

- Cost of the Work - CM Agency

• Design-Build • Equity Developer • Lean Delivery

- Integrated Project Delivery History of healthcare project delivery in New York State:

• Lump Sum / General Contractor (GC) • Guaranteed Maximum Price (GMP) / Construction Manager (CM) • Design Assist / Trade Manager • The next logical step is….???

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Typical Construction Arrangement • Implies two separate relationships which are transactional • Can be an adversarial relationship • Presumes that the most the Owner will receive is the minimum the contractor and

designers can get away with

Owner

Contractor Architect/

Engineer

Parties act against each others interests

This relationship has become increasingly

ambiguous

Reinforced by provisions of AIA and

AGC “Standard” contracts

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Conventional Incentives

• Conventional contracting systems and management styles provoke counterproductive behavior

• Conventional contracts create silos and provoke territorial behavior

• Parties are often afraid to make decisions • Every man for himself – no incentive for

trades to work collaboratively in the execution of the project

• Cooperation can reduce profit, due to the way traditional contracts are written

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Conventional Contracts can lock in waste

• Lack of mutual obligation can lead to conflicts and inevitable inefficiency • Bidders anticipate inefficiency by:

- Degrading productivity assumptions - Including contingencies - Including additional overhead to cover delays

• If things go wrong (as anticipated) – the contingency funds get spent on waste

• If things do go right, the bidder gets to keep the reserve funds as additional profit

From an Owner’s perspective, what’s wrong with this picture?

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Lump Sum / General Contractor

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Lump Sum / General Contractor T.O.

Thanks to Gilbane

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Lump Sum / General Contractor – Pros & Cons Advantages Lowest first cost delivery method Owner carries minimal risk (if documents well

defined); contractor carries most of the risk Works well with known conditions and/or

defined project scope Cost is anticipated Well-suited for small, straightforward or single

trade projects Simple, traditional approach Clarity of fiduciary A/E and non-fiduciary GC roles Owner controls contingency

Disadvantages Not well-suited for large projects; cannot fast track with

incomplete documents (like GMP) Lowest first cost lowest final cost Contractor may make more profit if it takes less

manpower and materials to complete; not open book accounting Contractor does not provide pre-construction consulting

services (estimating, scheduling, logistics) during design Price uncertain until bids // Could delay project or require

additional funding if not on budget Slowest project delivery No control over subcontractor selection Adversarial relationship Prone to cost growth via changes and claims High incidence of litigation Current trend in A/E for incomplete documents is not

conducive to LS - especially existing conditions in renovation

You only get “plans and specs” (whatever is shown on the documents)

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Guaranteed Maximum Price / Construction Manager

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Construction Manager GMP-at-Risk

Thanks to Gilbane

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GMP-at-Risk Pros & Cons Advantages: Financial cost guarantee up front // if costs go over budget

(not due to scope growth) it is CM’s responsibility to correct and stay on schedule)

Get to market faster than Lump sum (schedule) Lending agencies accept max anticipated cost Risk spread evenly between owner & contractor Contingency carried by contractor // no extras CM provides pre-construction services Best suited for large new construction, complicated

logistics & phasing, aged building renovation projects and infrastructure-intensive projects

Open book access to all bids through controlled purchasing; owner and A/E have the power to accept competitive subcontractor bids based on their own criteria of quality & risk management

Single point of responsibility for construction Team concept; check & balance working together Change flexibility Balances advocacy with risk assumption Not just “plans & specs”, but fills in the blanks.

Disadvantages: GMP contingency vs. risk tradeoff Not well suited for smaller projects or

highly change-oriented projects Potential for increased adversarial

relationship with A/E GMP protection may compromise CM

advocacy If not managed properly, Qualifications &

Assumptions can be the source of hidden extras

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CM Defines Bid Packages to Speed Construction

Thanks to Gilbane

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Lack of Competition for CM GMP?

• Typical argument against a CM-GMP arrangement is the perceived lack of competition by awarding a GMP to a CM without bidding.

• Reality = - The overwhelming majority of costs are in the trade work (80-90%) - CM-GMP process will still include multiple subcontractors bidding each trade - Thereby still provides competition. - Actually, CM can yield low bids across all trades and possibly gain better

savings (SEE LATER) • The differences among various CM’s in their costs at worst is insignificant

compared to the trade costs.

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But first, two things…

1. Cost Plus (or “cost-of-the-work”) 2. CM Agency (“Not-at-Risk”)

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What about Cost Plus?

The cost of the work

Is

The cost of the work

… but so is a GMP 16

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GMP at Risk vs. Cost of the Work GMP-at-Risk: • Get to market faster than Lump sum • Contingency carried by contractor • Lending agencies accept maximum

anticipated cost • CM provides pre-construction estimating • Risk spread evenly between owner and

contractor • Open book access to all bids; owner and

A/E have the power to accept subcontractor bids based on their own criteria of quality and risk management

• New construction and complicated renovation projects often work well

Cost of the Work (aka Cost Plus): No cap on costs Owner accepts the risk Scope of the work and all change orders

are performed at pre-negotiated hourly rates and markups Works well when there are many unknown

conditions Contingency carried by owner, not

contractor

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C.M. – Agency

• Construction manager is an agent of the owner (“CM-Agency”) • CM-Agent helps owner manage/make critical decisions about a project

- Does not commit to delivering project on-time or on-budget - Does not enter into subcontracts with trade contractors

• CM-Agency is a method for managing a construction project, while CM At-Risk is a project delivery system - Competing with other methods such as single prime, multi-prime, design-build, etc. - Apples and oranges

• CM-Agency and CM At-Risk is not an either-or proposition.

Construction Manager Not – At – Risk

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CM Not-At-Risk Not a Delivery Method

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• CM “Not At-Risk” is not a project delivery method

• CM “Not At-Risk” is a project management method o A method of managing design

and construction services. • CM Agency or “Not At-Risk” could be

used in conjunction with any project delivery method including: o Design-Bid-Build o Multiple Prime o Design-Build o CM At-Risk

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CM Agency vs. Program Manager Construction Manager as Agent (CMA) • Owner is responsible for procuring and holding all trade contracts • The construction manager acts as owner’s agent • CM is responsible exclusively to the owner • Acts in the owner's interests at every stage of the project. • During preconstruction, CM provides critical input to the design

team and owner regarding: - Cost estimates - Scheduling - Constructability - Value engineering - General technical assistance.

• During construction, the CM: - Oversees subcontractors on behalf of the owner - Manages overall progress, quality & flow of information.

Benefits of CM as Agent: • Provides design and construction expertise without conflict of

interest • Qualification-based CM selection • Improved schedule delivery options allowing fast project delivery • Early budget input/control • Maximum advocacy for owner

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Program Manager (PM) • Developing programmatic solutions that extend beyond a single project. • Great efficiencies, construction and design fee savings, control of quality

and scheduling, and fiduciary responsibilities to the owner. • Functions as an agent of the owner and establishes for an owner’s

concurrent building programs: - Budgets - Schedules - Procedures and policies

• Services can include: - Early program consultation - Designer selection guidance - Program development - Program budgets - Infrastructure management - Post-occupancy functional review

Benefits of a Program Manager: • Consistency of management controls • Leveraged purchasing • Economies of scale • Full advocacy for owner • Flexible and broad scope of services • Acts as an extension of the owner’s staff

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Lump Sum vs. GMP

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Phased Project Delivery (Fast Track Design & Construction)

Thanks to Gilbane

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CM – GMP vs. GC – Lump Sum

CM-GMP

GC-Lump Sum

Drawing Completeness CD’s @ 80% Final Drawings

Prices Breakdown One

Owner Knowledge Open Book Approach Not Transparent

Owner Relationship More Trusting More Adversarial

Opportunities for Cost Savings

Opportunity @ each Trade No Opportunity

Thanks to Lend Lease

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Lump Sum vs. GMP-at-Risk – Empirical Data (One CM)

Lump Sum GMP-at-Risk Project #1 First Cost * $100

Project #2 First Cost * $110

Non-Owner Change Orders 5-7 % +$0

Buy-Out savings -$3 Return Unused Contingency -$1 to $4 Total Actual Cost $105 - 107 ** $104 - 108 **

Footnotes: * Assumes 2 identical projects with no owner scope change orders. ** Allows for cost certainty early on and not having to go back to ask for additional costs

Thanks to Cauldwell Wingate

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Lump Sum Bid Approach to “Low” Bid

Thanks to Gilbane

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CM Yield “Low Bids on All Packages

Thanks to Gilbane

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Contractors recommend GMP vs. Lump Sum

Contractor #1: • Transparency through open book. Owner sees exactly how THEIR money is being spent.

- With Lump sum, GC is under no obligation to share additional cost information with the owner. - Example- If there is an add of piping, GC gives them one number and that is it, they are required to

justify to them the number is what it is. • In a GMP, a CM is your partner helping you watch your money. In lump sum you get what is on

the drawings and that is it. • A GMP is much more of a partnership. Contractor #2: A CM-GMP arrangement creates a much more transparent and valued relationship between the

contractor and the owner than a lump-sum bid. - In a lump sum bid the competitive nature of multiple GC’s bidding often causes each GC to focus on

exactly what is on the documents – nothing more or less. - May result in lower initial costs, changes during the course of the project erodes these perceived initial

savings - In a CM-GMP the motivation of the CM is to be as comprehensive as possible and yet to keep costs down

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More Contractors recommend GMP vs. Lump Sum

Contractor #3: • As a CM, we strive to provide a complete number, day one. A number that fills in all the

blanks, as the design is developed. - CM services include applying lessons learned to the “next” project. - CM services include presenting a number at the earliest stage and working to keep the design, program

and project, within that budget. - I don’t believe the same can be said going the other way.

Contractor #4: • I think every GC would prefer Lump Sum (buyout savings, less paper work and it is

cleaner/simpler) over GMP (auditable/everything is questioned, more paperwork, backup for everything etc… and for the most part no savings participation).

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Design - Build

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Design Build

• Combines both the design and construction services into a single source of responsibility.

• Either contractor with in-house design capacity or teams up with architect/engineers to provide a GMP to fulfill the Owner’s program.

• Works best when the Owner is experienced and has: - Well-articulated and clearly defined program - Basis of Design including standards

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Design Build Pros & Cons

• Advantages - One stop shopping / sole source of

responsibility - Lower cost / cost efficiencies of

contractor & designer working together

- Can be quicker than conventional - Minimal (non-owner scope) change

orders

• Disadvantages - No / minimal control over quality of

finished product - Coordinating schedule of non-design

build responsibilities (medical equip’t) - Obtaining financing or multiple agency

approvals - Non-iconic design - Ambiguity about substantial completion - Need 3rd parties to review A/E

documents & payment applications - Need enhanced special inspections - Need additional PM support

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Design Build: Top Challenges

• Finalizing a Design-Build contract prior to designs and documentation

• Managing the labor mix of local, MWBE, and union participation

• Controlling the subcontractor selection

• Maintaining the owner’s protection through the construction administration process

• Incorporating scope to meet program needs beyond base building codes

• Minimizing cost and schedule implications caused by infrastructure upgrades which are not code specified items

• Placing aesthetics as a priority with a Design-Builder who is driven by cost and schedule

• Incorporating owner’s medical equipment infrastructure into the schedule

• Obtaining financing for an unconventional contract

• Affording the owner the protection of professional resources

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See Appendix

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Design- Build Best Practices

• Should require open book approach to change orders - Encourage a GMP

• Should establish a “standard of care” defined in the contract (performance spec) • On DB projects, owner / rep teams may benefit from additional staff

- Architectural / space planning experience - In field observing progress and addressing QC issues and commissioning

- Concern about long term operation and maintenance of the facility • Clearly defined substantial completion date

- Remember the architect (who sets the date) is the builder - Is it simply “Certificate of Occupancy”?

• Tools / best practices: - Cost monitoring document / control - Schedule – complete tracking document - Monthly reporting - Ongoing / open dialogue with client and constituents

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Equity Developers

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Structure Dependent Balance Sheet Treatment Off Balance Sheet On Balance Sheet

BTS to Own (Corporate Funds)

Synthetic Lease (Taxable) Joint Venture Build-to-Suit

to Lease

Long-Term Sale Leaseback

Own w/ Tax Exempt Financing

Synthetic Lease (Tax exempt)

Own w/ Mortgage Debt

OWN LEASE

More Less

Ease of Completion, Control & Flexibility More Less

Cash Proceeds , Cost of Capital

Healthcare real estate financing options

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CAPITAL STRUCTURE OPTIONS STRUCTURE TYPE STRENGTHS WEAKNESSES

OWN WITH MORTGAGE DEBT

Simple structure and approach Cost of capital commensurate with obligor risk Well known source of capital Greatest control over asset

On balance sheet transaction Lowest level of proceeds Will require substantial equity Will reduce future debt capacity

BUILD TO SUIT TO OWN (CORPORATE FUNDS)

Simple to arrange Straight forward documentation Well known source of capital No day to day responsibility for development Solid control over asset

On balance sheet transaction Will require substantial equity Will reduce future debt capacity Construction financing slightly higher cost

OWN WITH TAX EXEMPT FINANCING

Low cost of capital Well known source of capital Straight forward documentation Solid control over asset

On Balance Sheet transaction Tax exempt entity / qualified projects only Several layers of additional documentation Will require substantial equity Will reduce future debt capacity

CTL / SYNTHETIC LEASE (TRADITIONAL)

Off balance sheet transaction 100% financing Solid control over asset Lower cost than developer lease or sale-leaseback

More complex documentation May require credit enhancement Slight premium to corporate debt costs

Financing options

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CTL / SYNTHETIC LEASE (TAX EXEMPT)

Off balance sheet transaction 100% financing Lowest cost of lease financing Solid control over asset No FIN 46 issues for healthcare

Complex documentation May require credit enhancement Margin premium compared to normal tax exempt debt costs

PARTNERSHIP / JOINT VENTURE

Beneficial arrangement between 2 or more parties with an interest in project Can be tailored to fit financial objectives and wherewithal Usually provides 100% of project capital Possibly accounted for under Equity Method

Multiple levels of documentation Partnership could end up on balance sheet as a consolidated liability Equity costs of partnership are priced above usual debt margins Control of asset is a negotiated event

LONG TERM SALE LEASEBACK

100% of capital structure Long term fixed financing upon commencement Absolute control over asset during construction Reasonable control over asset during lease

Little to no exit flexibility until end of lease Significant but simple documentation High cost of occupancy Will be on Balance Sheet during construction period

BUILD TO SUIT TO LEASE

Funds 100% of real property capital requirements Will be off Balance Sheet at all times Long term fixed financing upon commencement Reasonable control over asset

Third party developer involvement Complex arrangements and documentation Highest cost of occupancy

Financing options (continued) CAPITAL STRUCTURE OPTIONS

STRUCTURE TYPE STRENGTHS WEAKNESSES

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Lean Delivery (including Integrated Project Delivery)

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Lean Delivery • Alternate form of delivery that reduces / eliminates inefficiencies & waste

- Maximize value, minimize waste - Waste isn’t just money to the client, but it’s time to people - Waste can be RFI’s, re-drafting shop drawings, milestone estimate reconciliation/VE

• Understand value from the customer’s perspective and take only those actions that deliver value - Everybody is a customer to somebody

• Must be a long-term philosophy, not just a process • Team-centric approach that focuses on

- Efficiency - Gaining more value by modifying the traditional process

• No tripartite contractual obligation - Playing nice in the sand-box

• Team includes Owner, Architect, Engineers, Construction Manager AND Sub-Contractors • Creates an environment that breaks down silos and fosters collaboration • New York today isn’t ready for full IPD

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Benefits of Lean Delivery

• Alignment with the owner’s vision by determining Conditions of Satisfaction

• More cost certainty early on

• Compression of overall schedule / Get to market faster

• Quality of contract documents

- Early shop drawings / submittals

- Less conflicts, more coordination

- Less Requests For Information (RFI’s)

• Minimize / eliminate change orders (non-scope)

• Reduce contingency, holds and allowances

- Lower overall cost / more value

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80% of the Cost is Brought in Late

Leads to

Construction Waste

Correction/Re-Work Performing Work out of Sequence Waiting for Design Review Comments Inefficient Construction Methods Moving Materials on site Redundant Design/Construction Processes Lack of Just-In-Time (JIT) Construction Practices Lack of Teamwork/Communication Slowdown/Stoppages of Work Processes

Construction Waste from Owner’s Perspective:

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Results in a better process

Traditional Delivery

Design Phase

Construction Phase

Design Phase

Construction Phase

Integrated Delivery

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How far do you go? Degrees of Lean Collaboration “Classic”

Collaboration “Non-Multi Party”

IPD IPD as a Delivery Method IPD as a Delivery Method

Level of Collaboration Lower Higher

Philosophy or Delivery Method? Lean Philosophy IPD Philosophy IPD as a Delivery Method IPD as a Delivery Method

Nicknames Lean Delivery

Non Multi-Party IPD; IPD “Lite”; Technology

Enhanced Collaboration IPDish

Multi-Party Contracting; “Pure” IPD; Relational Contracting; Alliancing;

Lean Project Delivery

Multi-Party Contracting; “Pure” IPD; Relational Contracting; Alliancing; Lean

Project Delivery

Delivery Approaches:

CM at-Risk or Design-Build CM at-Risk or Design-Build IPD IPD

Typical Selection Process:

Qualifications Based Selection of all team

members or Best Value Proposal

Qualifications Based Selection of all team members

Qualifications Based Selection of all team members

Qualifications Based Selection of all team members

Nature of Agreement: Transactional ? Relational Relational

IPD Principles & Practices:

• Minimal contract language requiring collaboration • Limited team risk sharing • CM or DB share in savings TBD •Trade Managers 7 Co-Location

• Contract language requiring collaboration • Some team risk sharing • All parties compensation tied to project success • Co-location of team

• Owner-Designer-Contractor (& possibly other key team members) all sign one contract for collaboration • Team risk sharing • Team decision making • Optimizing the Project • Pain/Gain Sharing • Limits on litigation • Co-location of team

• Owner-Designer-Contractor (& possibly other key team members) all sign one contract for collaboration • Team risk sharing • Team decision making • Optimizing the Project • Pain/Gain Sharing • Limits on litigation • Co-location of team

Typ. Basis of Reimbursement GMP GMP GMP No GMP

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In Conclusion

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Summary

• Many different delivery types for different needs - Lump Sum - GMP at Risk (and/or Cost Plus) - Design Build - Equity Developer - Lean Delivery

• Integrated Project Delivery

• Decision should consider: - Type of project and time frame - Self awareness:

• Experience of owner team • Are you a good candidate for the delivery?

- Financing requirements - Time frame - Project complexity / size / age of building

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Lump Sum: • May provide lowest first cost, but may not provide best value for:

- A highly complicated project - A project where you need to start early and you can start early

• Best when documents are well defined & with known conditions; contractor carries most of the risk

• Well-suited for small or single trade projects • Does not have open book accounting = more GC profit CM GMP: • Provides pre-construction consulting services (estimating, scheduling, logistics) during design • Gets to market faster • Well-suited for larger and complicated projects • Provides all savings to the owner Design Build: • One stop shopping / sole source of responsibility • Lower cost • No / minimal control over quality of finished product • Owner coordinates schedule of non-design build responsibilities • Financing not an issue

Different forms of delivery for different situations

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Equity Developer: • Financial / investment = zero cost / funding obligations • No operational responsibilities re-business ownership • Relinquish all or most control over project Lean Delivery: • Reduces waste and eliminates inefficiency • Fosters collaboration and team work • Gets to market even faster • Provides more cost certainty / predictable outcomes • Results in better quality documents

Different forms of delivery for different situations (cont’d)

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Thank You

DISCUSSION

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Appendix

Key Contract Provisions Components of a GMP

Examples of GMP Components Level of Documentation for Milestone Estimates

Design – Build Challenges IPD Glossary

IPD Contract Language Lean Case study

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Appendix A - 10 Key Contract Provisions

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Introduction

An effective and comprehensive contract is the foundation of any successful construction project. • Familiar with "standard" construction contract language and provisions?

- The industry is continually evolving. - Changes in building methodologies impact the way contract provisions must be drafted.

• Review all provisions with a critical and knowledgeable eye to ensure that a contract does the following: - Allocates risks and responsibilities, - Anticipates and prevents ambiguities - Provides mechanisms to avoid disputes arising from contract performance.

• Identify potential problems in the contract and negotiate solutions - Yields dividends and can produce significant cost savings over the life of a project.

Thanks to Zetlin & DiChiara

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Scope of Work

• Contract must fully define the scope of the project and obligate the contractors to deliver it. • Owners must identify all of the key issues that need to be addressed in the contract. • The contract must do the following:

- Obligate the contractor to confirm its familiarity with the project site and that its observations of the site correlate with the contents of the documents.

- Affirm that it has carefully reviewed the contract documents and that these documents provide all of the required information for construction.

- Establish a mechanism for identifying and resolving •gaps“ in the documents - Mandate the appropriate performance standards for the project.

• Identify the external requirements that may affect the project, such as: - Obtaining all required public approvals for construction. - Specific conditions that must be addressed, such as accommodating a major utility installation or transit

facilities or remediating hazardous materials. - Specify the contractor's role in addressing these types of issues. If the project is slated for LEED

certification, the contractor's responsibility for satisfying this requirement must also be outlined. - Delineate third party requirements such as the terms of a zoning lot development agreement, protections

for adjacent properties and the requirements of lenders providing project financing. - Address any critical points raised by the project's insurers.

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Compliance with Schedule

• Provisions of contract should deal directly with the time allocated to the construction manager (typically at risk) or the general contractor to get the job done.

• Include initial project schedule along with all the necessary milestone dates needed to finish the project. • Provide clauses that do the following:

- Obligate the contractors to establish and commit to an agreed-upon project schedule. - Allow the owner to properly gauge how well the project is moving towards completion.

- Address scheduling dates that are significant to the owner and the consequences if those dates are not met.

- Incentives to motivate the construction manager or general contractor to meet or beat the agreed-upon schedule or target dates for the project.

• Consider including: - Delays and extensions of time - Excusable delays - Delay deadbands - Acceleration - No-damage for owner-generated delays

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Meeting Target Budget

• Include sufficient clauses that protect the owner's economic interests and the monetary limits allocated for construction.

• The entire contract is in place to state the financials of the deal and to set the performance standards to be achieved

• Protect the owner's budgetary interests with clauses that cover: - Compensation - Overall cost of the work - Specific costs of certain elements of the project - Labor and material costs - Shared savings - Responsibility for cost overruns - Methods of procurement - Timing of payments - Change orders - Retentions - Subcontracting - Fees - General conditions - Insurance - Other soft costs, among others.

• Assure proper mechanisms are in place to monitor costs throughout the project: - Owner can assess how the actual costs are comparing with projected budget.

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Contingency

• Construction contingency must be distinguished from a project's design contingency - Design Contingency used by owner for:

- Rectifying Design errors or omissions - Design changes

• Construction contingency often established as a percentage of the Work, - Subject to enhancement through savings on trade buys.

• Provides a financial cushion to deal with errors or miscalculations in the construction manager's estimates of time or cost. - Owners must consider how much leeway to allow in contractually describing use of contingency - Owners must consider whether to require:

- Advance permission for utilization of contingency (perhaps above a negotiated threshold) - Require prior notice of utilization and subsequent documentation.

• Construction contingency may be a source of shared savings - Negotiation of the use of these savings may be key to incentivizing CM to be a careful steward of project

resources. - Consider establishing separate contingencies for discrete categories of potential difficulties and to

calculate the division of the savings balance separately as to the respective earmarked contingencies.

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Changes in the Work

• Most common way to resolve the impact of a mutually agreed to change is through a change order for contractors. - Address the issue directly in construction contracts

• Include sufficient notice provisions placed on the party seeking the change - Prompt, written notice so as not to otherwise delay the project - Consequences if proper notice is not furnished - Prompt notification of a potential claim based upon a change permits owners to:

1. Review the applicable project records and speak with the pertinent parties before memories invariably begin to fade 2. Document contemporaneously the costs of the work Involved in the claim 3. Explore other less costly solutions for performing the work 4. Negotiate a prompt resolution of the claim.

• Approval of a change should be contingent upon the justification and substantiation of the change itself. - Approval should be conclusive rather than simply authorizing the work to proceed - All direct and indirect costs and schedule impacts should be addressed in the change order. - Not all changes can be, nor should be, treated equally.

- Provide some frame of reference for the context of the changes to the specific project.

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Allocation of Risk (Indemnification)

• Owners face enormous risk of liability for work performed by the construction team on a project. • Appropriately address risk allocation

- Indemnification is one of the most effective tools for accomplishing this. • Obtaining appropriate indemnification protection from the CM / GC

- Confirm that this obligation is also embraced by the subcontractors. • Contractors will seek to limit their indemnity obligation to claims for personal injury and property damage,

- Such limited indemnity leaves the owner exposed to substantial risk. - Some indemnity clauses exclude protection for property damage to the work itself, assuming that such

damage is covered by insurance. - Limited indemnity provisions ignore that a contractor's breach of its agreement:

- May cause substantial damages that are not covered by insurance - Cause the owner to sustain substantial out of pocket losses.

- If the contractor's indemnity extends to damages incurred by the owner as a result of its breach of contract - Contractor is responsible for those damages - Contractor must defend the owner against additional claims which are likely to arise.

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Allocation of Risk (Indemnification) - Continued

• Owner may need to obtain indemnity protection that includes third parties, such as: - Investors - Affiliated companies - Lenders - Other parties with properties in the vicinity of the project site.

• Provide appropriate protection for the owner against statutory liabilities, such as: - Duties imposed on owners and contractors for state and federally mandated site safety procedures. - Obligate its construction team to implement an effective safety program

- Assume full responsibility for job site accidents and injuries. - Contractors must be obligated to indemnify the owner against potential worker claims.

• Contractors often seek limitation of their total liability and their obligations to provide indemnity protection to the owner.

• These limitations can take the form of: - Exclusions from the indemnity itself - Waivers of consequential damages - Specific dollar amounts

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Insurance

• Work with a broker who is intimately familiar with the construction industry. • Consider different insurance options to include in construction agreements. • On larger projects, typically over $100 Million, an owner will want to consider

- Owner Controlled Insurance Program (OCIP") - Offers more control over the quality of insurers and the terms of insurance - Remains intact even if the Contractor is terminated - Savings are returned to the owner.

- Contractor Controlled Insurance Program ("CCIP"). - CCIP first costs seem more cost effective, - Any savings will need to be negotiated as part of the upfront deal - Define the fees to be charged for the CCIP.

• Ensure that additional insureds are included in policies as needed. • Include the right to review actual policies, not just certificates. • Confirm that the contractor's insurance, and the policies of the trades, are primary and non-contributor

- Any dispute about coverage between or among carriers is avoided. • If performance and payment bonds are required, review the language of the bonds.

- Confirm ownership is identified as a co-obligee providing direct rights vis-a-vis the bonding company in the event of a contractor default.

- Consider Subcontractor Default Insurance, which replaces the P&P bonds of subcontractors

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Dispute Resolution

• Alternative dispute resolution ("ADR") can be an economical option for litigation • ADR can be either a full substitute (binding arbitration) or an interim step (mediation) that may obviate

litigation. • ADR to be considered during contractual negotiation, not when a dispute occurs. • Factors that determine appropriateness of ADR include:

- The project may be within a state or municipality with local courts that have a bias against out-of-state entities.

- The law in the project state may be disadvantageous to owners, developers, and/or design professionals. - Ensure the application of laws from jurisdictions favorable to the interests involved.

• Ensure that the ADR procedure encompasses all relevant parties. - Uniformity in the drafting of various construction contracts will bind all parties to the ADR process. - Provisions allowing for the unfettered consolidation or joinder of parties to the ADR will prevent the process

from being unduly limited. • Consideration must also be given to whether the prevailing party will recover all attorneys' fees • If binding arbitration is impractical for multiple parties, consider

- Non-binding mediation as an interim method of resolving disputes with the aid of an experienced mediator.

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General Conditions

• General Conditions (GC’s) are furnished directly by the contractor. • Identify at the outset what items are included in General Conditions, as an exhibit to the contract documents.

- Project management Information technology and site labor generally fall within General Conditions. - Legal services (compensated under the fee) are generally not included - Project accounting services may be the subject of negotiation - Insurance is often compensated separately from General Conditions.

• Specify the basis on which GC’s will be paid. - Actual, demonstrated cost is the most transparent basis - Sometimes calculated as an agreed-upon percentage of the trade cost or agreed upon rates.

- Straight-time and overtime labor rates can be negotiated - Owners may be apprehensive that some profit may be calculated into those rates. - Project administration personnel may be compensated at a rate based on their salary with a negotiated multiplier

• Owners should be vigilant that they are not asked to fund paid-time-off separately during the course of the project. • Endeavor to secure a cap on General Conditions at the outset of a project.

- That cap may be increased only in limited circumstances. - In the event of an excusable delay, increases in GC costs demonstrably attributable to the delay may be compensated

• The increased General Conditions should serve as the sole remedy for such delay. - General Conditions costs may also be increased due to changes in the scope of the work. - If GC’s are charged as a percentage of the trade cost of changed work, then owners may consider negotiating a

threshold dollar amount of changes below which additional GC’ss will not be charged-a so-called “deadband:'

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Subcontract Issues

• Review and verify subcontractor agreements and add specific provisions as may be required. • Examples:

- Verify subcontractors' insurance limits and indemnity obligations - Assuring Owner is named an additional insured on the policy and the indemnity obligation

- In the event of termination of the contractor, the contract with the trade Is assignable to the owner or the owner's new contractor.

- Where it might be difficult to commence an action directly against the subcontractor - A provision might be considered pursuant to which an owner may be a third-party beneficiary of the

contractor - subcontractor agreement, • Enabling the owner to bring an action directly against the subcontractor in the event of a default or breach by that

subcontractor.

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Appendix B - Process & Components of GMP

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Process

• Construction Manager hired BEFORE design begins - Regular Meetings with Entire Design Team Including Construction Manager

• Estimates & Schedule - Conceptual = Target Budget and Time Line

- Variance Report (Line Item Budget) - Schematic Design (See Appendix for Level of Documentation) - Design Development (See Appendix for Level of Documentation)

• 80% Contract Documents used for Guaranteed Maximum Price - Documentation continues as Construction Manager prices

- A/E must be held accountable for scope adds - Detailed review of all components of GMP

How to Manage a Construction Management / GMP Project

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Milestone Estimate and Schedule Deliverables

• Conceptual / Feasibility = Target Budget and Time Line - Variance Report (Line Item Budget)

• Schematic Design (See Appendix for Level of Documentation) - Milestone Estimate and Schedule

- Trade Costs by Systems - Identify Timeline, Qualifications, Allowances and Logistics

- Detailed Review and Reconciliation with Entire Team - Proceed at Risk On Design Development

• Design Development (See Appendix for Level of Documentation) - Milestone Estimate and Schedule

- Detailed Line by Line Estimate by Trade - Identify Timeline, Qualifications, Allowances and Logistics

- Detailed Review and Reconciliation with Entire Team - Proceed at Risk On Construction Documents

At Each Milestone Verify Scope Meets Project Goals

- CM and AE Agree on Defined scope including program and Square Footage

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Components of GMP

• Construction Cost And All Mark-ups - Construction Cost includes contingency - General Conditions - General Requirements, Minimize (these cost should be rolled into GCs) - Mark-ups include

- Fee - Insurance (or CCIP) - P&P Bond - Sub-Contractor Default Insurance if trade bonds not provided

• Construction Schedule • Site Logistics

- Include ICRA and ILSM Plans • Alternates (if any) • Allowances • Qualifications and Assumptions • List of Construction Documentation • Other Things to Consider:

- Holds - Buy-out savings - Use of Contingency - Participating in Sub-Contractor Buyouts

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What are Allowances within a GMP?

• An allowance establishes an assumed “placeholder” value in a GMP for a still-undefined bid-package trade scope (e.g. lobby granite).

• When scope is defined and the package is bid, the difference between actual and allowance adjusts the GMP

• Example: Lobby Granite Example #1 Example #2 Allowance $550,000 Allowance $550,000 Actual Bid $490,000 Actual Bid $600,000 Difference $60,000 Difference ($50,000) Reduced GMP Over-run • Pro: allows earlier GMP with undefined scope. • Con: risk belongs to owner. Recommendation: Minimize allowances to control risk; Requires A/E documentation & Owner decision-making

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Allowances

The proposed GMP shall not include Allowances except with the Owner’s prior approval. • An "Allowance" is an amount included in the GMP for a Trade Work item that requires further scope

definition by the Architect or Owner. • In the event that the actual Trade Work Costs for Trade Work covered by an Allowance are greater or less

than the Allowance, a Change Order will be issued adjusting the GMP by the amount of such difference, plus percentages to cover payment and performance bonds, and other Construction Manager insurance, but without markup for General Conditions Work Costs or Construction Fee.

• Use of Allowances will require the Owner's prior written approval. Unused Allowance amounts will not be available to cover other Costs of the Work.

Recommendation: Minimize allowances to control risk, otherwise →

Legal Definition

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Qualifications & Assumptions

• Define Qualifications and Assumptions (Q&A) - Goal of CM Q&A = Transfer of Risk from CM to Owner

• Minimize or Eliminate Q&A - Complete Detailed Line by Line Review of Each Item with the Entire Team - If it is not in the contract documents then Q&A not necessary

• Drive the missing information from the Q&A into a trade Cost - A&E to Incorporate into Contract Documents

• Verify Scope Meets Project Goals - CM and AE Agree on Defined scope including Square Footage

• Repeat Process until the GMP is Satisfactory - Transfer of Risk from Owner to CM

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Alternates

• Alternate Definition: Amount stated in the bid or GMP proposal to be added or deducted from the base bid amount proposed for alternate materials and/or methods of construction.

• Use of Alternates can be a strategy to manage challenged budgets in an effort to fully utilize the budget available and maximize the amount of work awarded within a project budget. - Add Alternates – Items you cannot afford in budget but would like to consider if buy-out is favorable and

falls within the budget. - May include adding length or additional quantity to a project of similar type work or adding enhancements of different type work.

- Deduct Alternates – Items you require in the project that may have been added in late or that you want the ability to control

• Examples of add alternates (from the Attached Chiller 7 GMP) include: - Furnish and Install Double Doors per Detail E-1, S-202. - Provide three 16” Strainers on existing chillers per drawing M-304.

• Make sure these costs are fully marked up.

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List of Documentation

• Include detail list of every component of Contract Document in GMP. • Includes:

- Drawings - Specs - RFI - Addenda - Schedule - Owner installed equipment - Agreement and General Conditions - Due Diligence Documents - Safety, PCRA, and ICRA Policies and Procedures - Building Rules and Regulations - Builders Risk Policy - Phasing Plan - Any other documentation or correspondence that has an impact on Scope (Budget and Schedule)

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Use of Contingency

GMP Contingency - Contractor’s Contingency to use with the owner’s permission (Award Letter) - Fills the gaps between the CM’s estimated costs and the guaranteed price - Does not cover:

- Errors in contract documents - Unforeseen conditions (DISCUSS) - Owner changes - Non-conforming work or the repair or correction of non-conforming work

- Unused contingency returns to the owner (All Savings Back to the Owner) - Must be reviewed with the same due diligence as a change order

- Most commonly abused and misunderstood budget line item Owner’s Contingency

- Consider this ‘Project’ Contingency, not only ‘Construction’ Contingency - Can be used to fund short line items for the balance of the budget - Used for GMP Change Orders

- Minimum Recommendation by NYS-DOH (10% Renovation, 5% New Construction.) - Percentage could be affected by phasing, logistics, age of building, etc…

- Could be in GMP or outside GMP (DISCUSS) - Used for:

- Owner Scope Changes - Unforeseen Conditions

- Due diligence required shall include A/E review and sign off A/E must take ownership for use of Contingency as a reflection of documentation and programming

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Buy-out Process and Savings

• Buy-out savings = Difference between the GMP estimated trade cost versus the actual award amount - Participation of Owner in Sub-Contractor Buyouts

- To prepare to participate the PM responsibility includes understanding drawings, buy out sheet, leveling sheet - CM purchasing must be fully transparent and in line with organization’s procurement requirements (Fully Auditable) - Ensure that CM buy-out sheet is complete, accurate, and documents the agreements discussed in meeting - As a result of this process, Holds and Allowances can be developed, clarified, and reduced

• CM to maintain a log of buy out savings by trade • Buy-out savings is for the CM’s use, to guarantee the overall price

- CM does not owe meeting each line item of the GMP, they owe bottom line - CM to advise owner of use of buy-out savings and can release to owner for use - Cannot be used for General Conditions shortfall without Owner’s permission

• CM can release buy-out savings at key milestones, owner’s request, or CM’s discretion

- Not recommended at early milestones • Holds are included in the GMP but are Identified in the Award Letter

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Holds

Legal Definition The proposed GMP shall not include Holds except with the Owner’s prior approval. • A "Hold" is an amount for a Trade Work item that has not yet been incorporated into a Subcontract scope. • A "Hold" is not an Allowance, and the GMP will not be adjusted on account of costs that overrun or

underrun a Hold. • Use of Holds requires the Owner's prior written approval.

Assure that CM is not using a “Hold” to hide buy out savings Three common holds are overtime, phasing, and logistics Examples • GMP Electrical Value is $450,000; Construction Manager (CM) Negotiates buyout to $430,000. CM believes more overtime is required which is not listed in the contract documents. CM Holds $20,000 in reserve for additional Potential Expense. • GMP Millwork Value is $375,000; CM Negotiates buyout to 350,000. CM believe phasing is required which is NOT listed

in the contract documents. CM believes the added cost to be $10,000. The CM Holds $10,000 and moves the balance of $15,000 into savings.

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General Conditions & Fee

• Fee for services = percentage (%) of construction costs - Converted into lump sum, fixed fee at the time GMP is submitted

• CM fee for construction phase services (Part B) shall include the following: - Home Office Expenses - Profit and Overhead - Recruitment costs for home office job site personnel. - Professional fees for consultation, legal, labor relations, accounting, and bookkeeping expenses.

• The above are not reimbursable as General Conditions

• Other costs not included in General Conditions: - The cost of any item not specifically and expressly included in the items in Costs to be Reimbursed. - Costs in excess of the Guaranteed Maximum Cost. - Incentive compensation, bonuses or other benefits over and above the normal wages to be reimbursed. - Non-conforming work or the repair or correction of non-conforming work

Construction Manager’s (CM’s) Fee for Construction Phase (Part B) Services

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General Conditions

• GC’s shall be estimated based upon the construction schedule; the following may be reimbursed as GC costs - Salaries of CM’s personnel stationed at the Field Office

- Cost of contributions, assessments or taxes for such items as unemployment compensation and F.I.C.A. based on wages - Cost of repairs and preventive maintenance to equipment. - Reasonable travel expenses connected with the Work with prior written consent of Owner. - Temporary heat, water, electricity, telephone and toilets. - Temporary construction barriers and infection control measures - Temporary fence, sidewalk, bridges, roadways and elevators. - Final cleaning - Field office and its related costs, equipment, IT requirements and furnishings. - Safety barricades, construction signs and watchmen. - Messenger service. - First aid station. - Cost of premiums for all bonds and insurance - Fees for building permits required the Work. - Minor expenses such as petty cash items connected with the Work. - Cost of removal of all debris.

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Tracking General Conditions

• General Conditions is typically a not-to-exceed amount (not lump sum) • Invoiced monthly as costs are incurred

- Track costs as actual versus budgeted on a monthly basis - Detailed summary of expenses with attached documentations

• General Conditions Allowance can be increased for the following reasons: - Increase in Scope of Work - Increase in Duration - Unforeseen logistics requiring additional staffing

• General Conditions expenses are still incurred if project is placed on hold or delayed • Ensure the CM is responsible for maintaining personnel

on the Project, both in quality and quantity of staff. • CM to provide a log of personnel if resources are shared over multiple projects.

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Take-Aways

• GMP is appropriate for large, complicated or early-to-market projects

• Regular Meetings with Entire Design Team Including Construction Manager

• At each milestone, Detailed Review and Reconciliation with Entire Team

• Minimize allowances to control risk

• Minimize or eliminate qualifications and assumptions to transfer risk from Owner to CM

• A/E must take ownership for use of Contingency as a reflection of documentation and programming

• Assure that CM is not using a “Hold” to hide buy out savings

• CM’s contingency should not be used for non-conforming work or the repair or correction of non-conforming work

What you should remember when managing a GMP

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Appendix C – Examples of GMP Components

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GMP Example Table of Contents

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GMP Example GMP Summary

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GMP Example Qualifications & Assumptions

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GMP Example Alternates

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GMP Example Allowances

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GMP Example General Conditions Summary

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GMP Example Schedule

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GMP Example Site Logistics

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GMP Example Document List

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GMP Example Holds

Example #1 GMP Electrical Value is $450,000; Construction Manager (CM) Negotiates buyout to $430,000. CM believes more overtime is required which is not listed in the contract documents. CM Holds $20,000 in reserve for additional Potential Expense. Example #2 GMP Millwork Value is $375,000; CM Negotiates buyout to $350,000. CM believe phasing is required which is NOT listed in the contract documents. CM believes the added cost to be $10,000. The CM Holds $10,000 and moves the balance of $15,000 into savings.

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Appendix D – Level of Documentation for Milestone Estimates

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GMP Level of Documentation

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GMP Level of Documentation (continued)

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GMP Level of Documentation (continued)

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GMP Level of Documentation (continued)

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GMP Level of Documentation (continued)

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GMP Level of Documentation (continued)

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GMP Level of Documentation (continued)

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GMP Level of Documentation (continued)

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GMP Level of Documentation (continued)

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Appendix E - Design – Build Challenges

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Design Build: Top Challenges

• Finalizing a Design-Build contract prior to designs and documentation

• Managing the labor mix of local, MWBE, and union participation

• Controlling the subcontractor selection

• Maintaining the owner’s protection through the construction administration process

• Incorporating scope to meet program needs beyond base building codes

• Minimizing cost and schedule implications caused by infrastructure upgrades which are not code specified items

• Placing aesthetics as a priority with a Design-Builder who is driven by cost and schedule

• Incorporating owner’s medical equipment infrastructure into the schedule

• Obtaining financing for an unconventional contract

• Affording the owner the protection of professional resources

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Analysis of Recent Design-Build Challenges

Obtain the desired scope for the project

Finalizing the Design-Build contract prior to the designs and plans

Outline the scope based on the hospital’s specific needs

Work with the hospital to capture the totality of the designed scope and incorporate it into an early contract

Ensure inclusion of the desired scope to avoid cost increases and schedule extensions

Encapsulated the contract language, drawings, specifications, user group comments, textual documentation, and scope matrices to clearly define scope

Maintain good community relations

Controlling the labor mix of local, MWBE, and union participation

Incorporate language into the contract that addresses these categories of labor mix

Assist the hospital in a public relations and legislative relations campaign that fosters collaboration between all stakeholders

Provide a favorable contract and proactive community-focused implementation plan

Developed fair and equitable contract awards throughout the buy-out period through consistent communication

Goal Issue Feature Benefit Proof

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Analysis of Recent Design-Build Challenges

Goal Issue Feature Benefit Proof Deliver a facility that meets quality expectations

Having control over the sub-contractor selection

Include contractual language during contract negotiations which requires owner approvals of all subcontractors Perform background checks and interviews on all subcontractors during buy-out

Ensure that the subcontractors selected for the work have proven track-records of delivering quality in similar projects

Investigated framing and drywall subcontractor due to strong and well negotiated terms in the contract which led to the owner’s rejection of the subcontractor

Adhere to the construction documents and specifications

Compromising the owner’s protection through the construction administration process because the design team works for the contractor

Administer the contract and the construction documents to the level of intent as expected by the owner through the use of One View, Atlas SOPs and best practices

Ensure the delivery of a product which conforms with the owner’s purchase

Identified through our site inspections that 3% of the fireproofing was not installed in accordance with the specifications and that light gauge metal framing was not welded as required

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Analysis of Recent Design-Build Challenges

Goal Issue Feature Benefit Proof Create a design that meets program requirements

Designing documents to program needs because Design-Builders design to code

Set clear and specific guidelines to be included in the project by setting goals with the owner prior to hiring the Design-Builder

Ensure the delivery of a building that goes beyond code and reflects the culture and programmatic needs of the organization

Ensured the inclusion of the healing garden and entry lobby environment that reflects the atmosphere of hospitality which supports the philosophical approach of the organization Ensured the inclusion of specialty programs such as NICU and Bariatric Units which were not required by code, but were future opportunities for growth and expansion

Construct a hospital with functionality that goes beyond the basic code

Negative cost and schedule implications caused by necessary upgrades which are not code specified items

Early involvement in the design process to ensure that the hospital’s functionality requirements are met Coordinate and guide peer review of the project using expertise in current healthcare trends and common market practices

Identify and uphold the standards upon which the design is based and the project is built

Identified the need for lightning protection and bypass isolation transfer switches which were not required by code

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Analysis of Recent Design-Build Challenges

Goal Issue Feature Benefit Proof Have an aesthetically pleasing facility which promotes healing

Placing aesthetics as a priority because Design-Builder is driven by cost and schedule

Manage interior finish review committees and drive the user-group process to ensure aesthetic sensitivity in the plans through a deep understanding of hospital’s need for a healing environment Guarantee compliance with the hospital’s visions through constant submittal review and site inspection

Ensure the hospital will achieve an aesthetically pleasing environment that promotes healing, in spite of an insensitive design process

Validated and managed the hospital committee to make the proper color and material selections for all spaces throughout the building Ensured that during construction, light, air and unobstructed views were maintained

Have the proper infrastructure in place to support the latest technology and medical equipment

Incorporating flexibility into the schedule to select medical equipment that affects the infrastructure at an appropriate date because Design-Builder profit is substantially driven by schedule

Build and track stringent contract and schedule requirements for the contractor Identify allowances in the project budget for late coordination for equipment

Provide an infrastructure that will support the latest technology and medical equipment

Coordinated the owner’s medical equipment planner with the construction team to identify the areas of risk early in the process Carried allowances outside the construction budget for fit-out when the suite-specific medical equipment is selected

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Analysis of Recent Design-Build Challenges

Goal Issue Feature Benefit Proof Secure public funding from institutions for Design-Build projects

Reluctance to provide funding and financing due to a lack of familiarity with Design-Build

Reinforce the advantages of Design-Build over conventional contracting methodology through constant meetings, presentations, and industry examples with financing agencies and potential investors

Support the owner in securing funding from numerous sources

Received the most Federal hospital-related funding in the State Received State-bonded financing for the only new Design-Build hospital project in the State

Protect the hospital through checks and balances

Affording the owner the protection of professional resources

Lead a collaborative team as the single point of coordination with the best interests of the hospital as the primary objective Coordinate the peer review of the architect/engineer/builder Coordinate the construction-related QA/QC inspections Coordinate the systems commissioning

Assure the owner the same level of security as they would have with an independent architect/engineer/ builder in terms of design, cost, schedule and quality

Identified on the peer review over 500 errors or omissions that were excluded from the documents of the proposed plan Managed a team of over one dozen QA/QC inspectors on site daily Managed the oversight of the installation, start-up, testing & balancing by the contractor Managed the commissioning of all systems by an independent authority

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Appendix F – Lean / IPD Glossary Terms

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Glossary • Big Room- A term derived from the Japanese “obeya”. In the Toyota Product Development

System, the obeya is a location in which interdisciplinary team members meet to brainstorm and resolve issues on the spot.

• Building Information Modeling- A Building Information Model, or BIM, utilizes cutting edge digital technology to establish a computable representation of all the physical and functional characteristics of a facility and its related project/life-cycle information, and is intended to be a repository of information for the facility owner/operator to use and maintain throughout the life-cycle of a facility.

• Buyout- Buyout is the process of obtaining price commitments for all work packages in a project. There are several methods by which this can be accomplished, ranging from sealed bids to direct negotiations with pre-selected or shortlisted subcontractors or suppliers. In the IPD approach, most of the price commitments are developed through a continuous effort, with many of the subcontractors and suppliers participating in the design and refining their prices along the way. Here the explicit Buyout phase is limited to obtaining price commitments from the remaining subs and suppliers – those who weren’t involved during the design phases.

• Collaboration- The process or mind-set by which all integrated parties involved in a project are willingly doing whatever it takes to work together in concert to, design, construct, and make decisions solely for the good of the project.

Thanks to Zetlin & DiChiara

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Glossary • Construction Management at Risk- In this delivery method, the CM is hired at the

beginning of the design phase to act as the project coordinator- (not at risk) and general contractor (at risk). At the time the construction manager serves as constructor the construction manager assumes all of the liability and responsibility of a general contractor. Construction Managers are hired in various capacities by owners seeking continuous management of the project delivery process.

• Core Team- A team that collaboratively manages IPD projects from inception to completion and with equal representation of, at a minimum, the owner, the architect, the construction manager and MEP engineers.

• Cost Structure- A breakdown of the construction and project budget into detailed “cost targets”. The construction budget is developed in both a detailed component(s) based format and a CSI based format based on the project’s goals, detailed program and performance requirements. The cost targets are developed collaboratively by the Integrated team prior to commencing the conceptualization phase of the project process. The structure provides the benchmark for the team to support continuous cost management as the project progresses to ensure that it will be completed within the targeted budget.

• Design-Build- A delivery method that offers the owner the ability to contract with a single entity to provide both design and construction services. It is characterized by a single contract with the owner and the overlapping of design and construction services.

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Glossary • Executive Management Steering Team- A group of senior level executives from all parties

including the Owner, Architect, Contractor and Engineer assembled as a key decision making body on the project. Typically they meet on a monthly basis.

• GMP- Guaranteed Maximum Price • Guiding Behaviors- A list of ideals that each Team member must embrace during the

project delivery process. Each Team member is required to sign the final charter in agreement with the guidelines set forth for the process.

• Governing Structure- The strategy developed by an Executive Management Steering Team to provide direction, oversight and advice to the Core Group; guide the Team behaviors; and define the dispute resolution process.

• Integrated Form of Agreement (IFOA)- A “relational” contract between the Core Team members that creates a system of shared risk and reward with the goal of reducing overall project risk rather than shifting it between parties.

• Integration- The coming together of all key participants, at the beginning of a project, for the purpose of designing and constructing the project together, as a team.

• Joining Agreement- A contractual amendment used to add a new party to an existing IFOA and include them within the risk sharing terms of the IFOA. For example, a joining agreement could be used to append key subcontractors to an IFOA previously executed by the owner, designed and the contractor.

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Glossary • Launch Gap Analysis- A thorough data and information analysis conducted by the IPD

Team to identify steps that must be addressed prior to beginning the project. The outcome of this process is a Project Implementation Plan, or road map, for bridging the gaps.

• Lean (planning, design, construction and operations)- A production practice that considers the expenditure of resources for any goal other than the creation of value for the end customer to be wasteful, thus a target for elimination. Lean principles are being applied to the redefining of operational processes, and the planning, design and construction of healthcare facilities.

• Liability Waivers- Contractual provisions in the IFOA that eliminates, or significantly reduces, the ability of the IPD parties to sue each other for losses related to the project. The level and comprehensiveness of liability waivers is negotiated among the Core Team members during the Project Initiation Phase.

• Project Initiation Process- A phase during the launching of a project in which the owner establishes the governing structure for the project, selects the project team, and confirms that they want to use an IPD approach. It can last from 3-9 months depending on project size and scope.

• RFIT- Request for integrated team • Target Cost- An estimate of the cost of the project that is established collaboratively by the

Core Team before design is started based upon historical and benchmark data.

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Glossary

• Team Alignment Workshop- A workshop held to develop the guiding behaviors as well a dispute resolution process.

• Value Proposition- An analysis and quantified review of the institution’s strategic mission and identification of the purpose and fit of the new facility within that mission. The benefits, costs and value that the organization’s new facility can deliver to customers and other constituent groups within and outside of the organization should be considered.

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Appendix G – IPD Contract Language

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§ 1.1 Integrated Project Delivery

§ 1.1.1 The Parties intend that the Project shall be delivered in a collaborative environment and shall endeavor to align individual interests with those of the Project.

The Parties agree to contribute their knowledge, skill and services during all phases of the Project and to bring to bear their expertise for the benefit of the Project. . . .

§ 1.1.4 The Parties agree, where practicable, to employ collaborative technologies such as Building Information Modeling (BIM) and digital collaboration tools. The Project Leadership Team may choose to augment Models with additional materials including, but not limited to, physical models, renderings, sketches, drawings, reports, or specifications.

Thanks to Zetlin & DiChiara

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§ 1.2 Integrated Project Delivery Phasing

Integrated Project Delivery Phasing The Parties shall deliver the Project in the following phases: Conceptualization, Criteria Design, Detailed Design, Implementation Documents, Agency Review, Buyout, Construction, and Closeout.

The descriptions of these phases and the Parties’ respective responsibilities during each phase are more fully set forth in the General Conditions, attached hereto as Exhibit A.

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ARTICLE A.2 PARTIES’ RESPONSIBILITIES

§ A.2.1 Collaborative Performance It is anticipated that the Parties will complete Total Output Criteria Amendment, Exhibit DD: Integrated Scope of Services, to allocate duties and responsibilities among the individual Parties and key Project participants.

If a duty or responsibility is not specifically assigned in the Contract, the Project Leadership Team or the Executive Leadership Team shall delegate the responsibility to a particular Party. . . .

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§ 1.1 Integrated Project Delivery

§ 1.1.2 The Parties intend to establish a Total Output Cost for the Project and to amend this Agreement to incorporate the Total Output Cost (the “Contract TOC”).

To the extent that the Actual Cost (or “Final TOC”) is less than the Contract TOC, the Parties shall share in any savings realized in accordance with Section 4.4.1 of this Agreement.

To the extent the Parties have agreed to KPIs, they shall be set forth in and the Parties shall be compensated for achieving such KPIs as specified in Section 4.5 of this Agreement.

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§ 4.5 Key Performance Indicator (“KPI”) Achievement Compensation

§ 4.5.2 In the event of an Underrun, in addition to receiving its proportionate share of the Underrun, an additional payment, equal to a portion of American’s share of the Underrun (the “American KPI Contribution”), shall be due to the Design Professional and Contractor for achieving each of the agreed-upon KPIs and funded as set forth below. The KPIs shall be defined as follows: 1. Early Completion of Project Schedule, weighted at __%. 2. Successful Implementation of IPD Concepts, weighted at __%, including:

a) Participation of all parties during all phases of delivery b) Teamwork and commitment to IPD

3. Customer Experience, weighted at __% 4. Health and Safety, weighted at __% 5. Limited claims, zero litigation and zero non-AA lead changes to the initial Contract

TOC, weighted at __% 6. Etc…

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§ 2.2 Project Leadership Team (“PLT”)

§ 2.2.2 The Project Leadership Team shall consist of one representative from each Party. The Parties’ representatives shall use their knowledge, skill, and expertise to benefit the Project. . . .

§ 2.2.1 The Project Leadership Team is responsible for executing the decisions and directives of the Executive Leadership Team, or any Owner Directives issued pursuant to this Article 2. The Project Leadership Team shall be responsible for the day-to-day management of the Project, including the scheduling and coordination of the Parties’ activities required to complete the Project in a collaborative and integrated manner. . . . § 2.2.3 Decisions by the Project Leadership Team shall be unanimous.

Subject to a subsequent decision by the Executive Leadership Team and the Dispute Resolution Committee, the Parties agree to be bound by any decision rendered by the PLT.

If the team representatives are unable to reach a unanimous decision on a matter, any Party’s PLT representative may refer the matter to the Executive Leadership Team for decision.

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§ 2.1 Executive Leadership Team (“ELT”)

2.1.3 The Executive Leadership Team shall consist of one representative from each of the Parties. The Parties’ respective representatives are identified below…

2.1.1 The Executive Leadership Team shall make decisions as well as plan and manage the Project in such a manner as to allow the Parties to achieve the KPIs and successfully complete the Project. The Executive Leadership Team shall exercise its authority in the best interests of the Project. . . .

2.1.2 Decisions by the Executive Leadership Team must be unanimous. If the Executive Leadership Team is unable to reach a unanimous decision, it may submit the matter to the dispute resolution process set forth in Article 9, Dispute Resolution.

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§ 9.4 Dispute Resolution Committee

•All disputes initiated in accordance with Section 9.3 shall be referred to the Dispute Resolution Committee for resolution. The Dispute Resolution Committee shall consist of Party representatives in senior management with broad organizational responsibilities and the Project Neutral identified in this Section 9.4.

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Appendix H – Lean Case Study

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North Shore LIJ Health System Lenox Hill Hospital Center for Comprehensive Care, New York First New Free-Standing Emergency Department in New York State First Lean Delivery healthcare project in New York State 21,000 SF ED / 30,000 visits per year / 141,000 SF programmed facility Task NSLIJ’s objective is to provide healthcare services to the community that was formerly provided by St. Vincent Hospital which closed, primarily emergency services. Their goals are to:

- Build a freestanding Lenox Hill Hospital satellite Emergency Department, Ambulatory Surgical Center and Imaging Center

- Prepare the building for future Physician Practices. - Work within framework of major site redevelopment in a historic NYC Landmarks District. - Incorporate Lean delivery principles to achieve target $2.5 million savings

Challenges - Existing building is a significant Landmarks Site as are nearby buildings - Owner goal to have building placed on Historic Register - Modern hospital HVAC space and floor height requirements - Existing building has no infrastructure suitable for reuse - Existing building has a history of deferred maintenance and needs a complete envelope refurbishment - The proposed use/ service is not a direct revenue generator supporting a ROI. - Incorporating lean principles in an environment that had never seen it, with a CM who had not provided them

Solution - Bring a full design and construction team together early in the process, working in a cohabitation space - Team would include Landmarks and Historic Preservation experts and includes Environmental Impact consultants - Remove a section of one floor to provide modern headroom in the ED - Pull out appropriate SOW from GMP to a more cost effective, less fee intensive venue.

Lean Delivery Case Study- Center for Comprehensive Care

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• Reduced RFIs • Reduced change orders and field changes • Better collaboration

Cost Saving Opportunities in IPD / Lean Delivery

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LHH CCC: Reasons • Project had an expedited schedule to get to market. • Team included:

- Construction Manager (Turner) - Architect (Perkins Eastman) - Engineer (BR+A) - Owner’s Representative (Jones Lang LaSalle) - Estimator (Davis Langdon)

• Business Plan / ROI for project could not be supported by projected capital project costs identified at Schematic Design - NYS DOH approved Certificate of Need (CON) only after:

- Breaking out Core/Shell costs of areas not being fit out - Confirming CM estimates with parallel costs from outside estimator

• After extensive Value Engineering (and other cost saving measures), team could not meet target costs

• To meet schedule team continued documenting while exploring alternatives • Explored alternate CMs to validate process and pricing

- Pricing was validated by both CM’s, but… - An alternate process was suggested that would provide more cost certainty by eliminating the

need for CM contingency through a Lean Delivery (IPD – lite) process • A target value of $2.5 – 3.0 million of additional savings was identified to meet budget

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LHH CCC: Steps taken • A mission statement was created and a visioning session occurred to align team • Through the normal CM estimating process we had previously undertaken, we had done a good

job of understanding the total budget and the individual trade values. • It was agreed that the team must establish a competitive process that meets NSLIJ system

standards + DOH requirements because this was not yet a recognized or accepted method of delivery

• Turner suggested plan was to set target values (goals) by applying the target $2.5 million savings against the budgeted Design Development values for those trades. - Process - Prime trades to partner with:

- Structural steel - Structural Demolition - HVAC - Electrical - Fire protection - Plumbing - Millwork - Prefabricated metal & glass

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LHH CCC: Steps taken (continued) • Turner bid out to these trades Design Development drawings for Part A (pre-construction

services) and Part B (construction) - Cost for both parts - Understanding of process / Tools / Previous Experience as a trade manager

• After receiving bids, leveling, short listing, firms were interviewed by full project team (owner, CM, architect, engineer, owner’s rep)

• Award was based on: - Price - Qualitative Scoring

• Upon award, “collaboration meetings” began with design consultant and trade managers (subs) working together to complete the documents and enhance the quality of the documents. This included: - Early shop drawings / submittals - Goal to have less conflicts / more coordination - Exploring potential cost saving measures

• Upon receipt of a Guaranteed Maximum Price (GMP), the trades are required to meet or better the original target value they bid, and the owner has the option to re-bid.

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LHH CCC: Results (Benefits) • More cost certainty by CM early on led to lower overall costs / greater value

- Turner released all GMP design contingency before GMP = $3.8mm • Project was able to get to market faster compressing overall schedule = 4 months • Expectation is to minimize or eliminate (non-scope) Change Orders = TBD

- Current similar project ($71mm, 94,000 SF) = 453 RFIs • Expectation is also to reduce waste (materials AND time) by minimizing RFIs

- Current similar project ($71mm, 94,000 SF) = total of 210 @ $4.4mm or 6.2% • Lessons Learned:

- Positive: - Greater communication between designers & contractors, resulting in early identification & resolution

of constructability issues - Greater cost certainty, allowing CM to release design contingency before GMP was submitted

- Negative - Most trade managers did not utilize REVIT as BIM platform which was platform used by designers - Cohabitation space was not set up to be productive for team members waiting to provide input on

coordination - Do-Over

- Bring on trade managers earlier in process, before Design Development - In Cohab space, team to provide more frequent updates to recap progress of coordination conflicts - More extensive survey of existing conditions before starting

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Traditional vs. Lean Impact on Cost

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How can Lean Delivery Help you?

• By reducing schedule AND providing more cost certainty - Particularly on a large, multi-phased capital program

• Examples: - On a large program of undefined repetitive work

• FACE program - Single trade (Infrastructure) projects

• FSD project - Large Projects that may have long lead times for documentation

• No rule of thumb, but say over $100 million - Projects that might benefit from pre-fabrication

• New buildings with curtain wall, pre-cast, straight-forward structural frame • Repetitive elements such as exam rooms, toilets, apartments

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