Payments and work changes in Integrated Project Delivery

20 février 2020 | Antonio Iacovelli, Jonathan Martin

( Disponible en anglais seulement )

This series continues our overview of the CCDC 30 Integrated Project Delivery (“IPD”) Contract. The first article explained the unique tools that Integrated Project Delivery contracts provide for realizing the full potential of Building Information Modeling (“BIM”) and other similar types of advanced project modeling. The second article explained the waiver and release provisions of IPD-type contracts like CCDC 30 and how they differ from those of traditional contracts. This article will examine two other key areas where IPD-type contracts break from their traditional counterparts.

Payments

There are significant differences between the traditional contract model and an IPD type contract in terms of the right of a party to payments. The traditional model defines the right to payment in accordance with whether or not a party has fulfilled its obligations, regardless of the overall completion of the underlying project. Usually, the payment of the cost of the work is made periodically following the assessment of the client of the state of progress of the work. Payment then easily becomes a duel between two parties with usually opposite objectives.

For an IPD-type contract, payment provisions represent an attempt to create collective participation in the success of the project. The idea is that if the parties have a material interest in ensuring that the project meets its schedule and that it is carried out below the established budget, they will undoubtedly collaborate in order to meet their common objectives. The Project Management Team (PMT), composed of representatives of each party, including the client, and the consultant, oversees all aspects of payment and there is full sharing of information between all parties when payment is made. Decisions must be made unanimously and a Senior Management Team (SMT), made up of senior executive representatives of each party, can intervene to help resolve impasses.

The Payment provisions of the CCDC 30 contract are found at Part 6. The payment provisions have two components: Reimbursable Costs and the Risk Pool. Reimbursable Costs represent the actual costs, supported by receipts and invoices, that the parties incur in carrying out the project. Although there is an “overhead” component to reimbursable costs, with a formula to be followed, the contract specifically provides that it shall not include any profits for the parties. On the other hand, the Risk Pool represents the sum of the profit distribution to the parties. Its distribution is pre-established by the PMT and set forth in a schedule to the contract. Although often distributed at various milestones throughout the project, the Risk Pool is deemed not to have been earned until final payment and all adjustments to the Risk Pool have been made at the end of the warranty period.

The IPD-type contract payment process therefore strives to create group incentives to increase collaboration and project efficiency. Over the course of negotiations, the parties will collaborate to determine how the Risk Pool will be structured to ensure that every member is properly incentivized and held responsible for their part of the work. Provisions that allow for additions to the Risk Pool and updates to its distribution allocation and schedule ensure that the incentives remain responsive to the situation on the ground and the reasonable expectations of all parties to the contract.

There are also several similarities between the payment processes for IPD-type contracts and traditional contracts. For example, in an IPD-type contract, applications for payment to the PMT must still be made in accordance with the terms of the contract. The PMT can deduct amounts from payment applications in the event of shortcomings, unpaid suppliers or workers, damage caused by the applicant, or failure of the applicant to perform the work as required by the contract. If the client refuses to make payments approved by the PMT, the applicants will then be entitled to stop working. There is also, in an IPD-type contract, a final payment process similar to that of traditional CCDC contracts. Lastly, the final inspection of the premises and the submission of various documents such as receipts and insurance certificates, before final payment is released, are similar in both types of contracts.

Changes

Changes due to unforeseen events, inadequate conceptualization or changing terrain conditions, have always been a major source of inefficiency in construction projects. The informational compartmentalization that takes place under a traditional contract model often contributes to the problem. The conceptualization of the project is carried out by an advisor linked to the client by a separate contract. Later, after the signing of the works contract, the contractor has the contractual obligation to reveal to the client the conceptual gaps and problems. The parties are never inclined to freely and promptly exchange the information they hold and there is no incentive to encourage them to do so. The interest of the parties is effectively to minimize their liability and maximize their profit margin. Although BIM technology can help alleviate this, it cannot, on its own, overcome the common gaps in information sharing under a traditional contract model.

An IPD-type contract, on the other hand, represents a process based on collaboration at the project development stage. The deep involvement of all parties at the conceptualization stage allows to optimize the potential of BIM technology and to eliminate conceptual conflicts that can appear at the vertical level. Since BIM technology allows the pre-construction of the project in a three-dimensional virtual universe, it has the potential to significantly reduce the need for modifications to the structure after the work has begun. The consideration of available and relevant information is carried out before the start of the work, thus reducing conceptual conflicts before they interrupt the execution of the work.

That said, it’s still impossible to anticipate all field conditions, even with BIM technology. Indeed, the vagaries of the site can occur at any time. The client may also want to make modifications to the project. IPD-type contracts take these possibilities into account and provide for a modification process during the project. CCDC 30 foresees three categories of changes at Part 7: the “Contract Amendment”, the “Owner Directive” and “Unforeseen Conditions and Events”.

All three categories follow a collaborative approach. A Contract Amendment must, for example, be approved unanimously by the PMT. An Owner Directive must be acted upon immediately, but there must subsequently be an agreement between the Design/Construction team and the owner on the corresponding adjustment to the Base Target Cost (target project cost minus the Risk Pool), Estimate Final Target Cost (target project cost including the Risk Pool), Milestone Schedule, and Risk Pool. Unforeseen Conditions and Events must be investigated by the PMT and the PMT must unanimously agree to all adjustments and changes necessary, including changes to the Base Target Cost, Final Target Cost, Milestone Schedule, and Risk Pool.

RECAP

In light of these notions, we are able to note the resemblances and differences between the more traditional unit-price, fixed-price or costs-plus type CCDC contracts and an IPD-type contract. As one would expect, the basic methodologies for properly verifying applications for payments and requests for changes are quite similar in both types of contracts. Payments must still be applied for and approved. Changes must still be investigated, priced and also approved.  Parties continue to have a duty to look after their own interests to some extent and have mechanisms at their disposal, such as payment applications and work stoppages. The 2 key distinguishing features are:

  1. Payment incentives that put the collective interest of completing the project at the top of each party’s concerns; and
  2. Nearly all decisions regarding payments and changes, with a few exceptions, made collaboratively and unanimously by the PMT, composed of representatives from each party.

Both of these points represent considerable changes in the way most are used to doing business and legal advice should be sought before entering into such an agreement. Our experienced lawyers are able to advise your company on a spectrum of collaborative approaches to contracting and project management which may be right for you.

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