Integrated project delivery (IPD) construction contracts require a closer look at professional liability insurance

Source:, October 31, 2014
By: Jeff Slivka

More projects are using IPDs to reduce errors and save money and time. But they don’t always fit with traditional professional liability insurance tools.

In spite of fluctuations in the economy, there is good news for the commercial building industry. According to the Architecture Billing Index (ABI) released by the American Institute of Architects, nonresidential construction spending hit a seven-month high in September 2013 with the latest reports expecting a 17% increase in commercial construction throughout 2014. This will be led by a considerable uptick in warehousing and hotel construction, as noted by the McGraw Hill Construction’s 2014 Dodge Construction Outlook. The same report predicts total construction starts will rise by 9% this year.
However, construction costs continue to rise, with many believing that expenses will outpace the growth produced by the recovery. This was reinforced by a recent report from the Rider Levett Bucknall’s Construction Cost Index, which revealed a 3.6% in construction costs in 2013. This also coincides with the Engineering News-Record’s (ENR) Building Cost Index (BCI) that showed a steady increase in New York City construction costs that rose 3.55% in 2011 and 2.42% in 2010.
Everyone from contractors and designers to owners and architects are looking for a better way to shed waste, collaborate more effectively and reduce the overall costs of commercial construction projects. For all these reasons, the American Institute of Architects (AIA) first introduced The Integrated Project Delivery (IPD) Guide in 2007 as a tool for creating integrated models, improving designs and streamlining construction and operations processes. Since then, business cooperatives nationwide have successfully combined responsibilities and expertise to significantly expedite project development cycles from design to completion.
Under such agreements, which differ greatly from traditional design-bid-build methodologies, collaboratives consisting mainly of design teams, project owners and construction firms work together to share mutually agreed-upon risks and rewards. Since all parties are involved in the decision-making from the ground up, the system is designed to foster a professional working environment founded on mutual respect, innovation, planning, open communication and transparent financials. Another important ingredient entails the use of advanced technologies such as building information modeling (BIM) tools that can help reduce waste and identify potential challenges through virtual simulations rendered at the development stage and augmented throughout every project phase.
For instance, a three-story, 70,000 square-foot medical building was built in Fairfield, Calif. through a three-way “joining agreement” consisting of the facility’s owner, builder and architect. Through the use of BIM and GPS measurements, hundreds of system clashes were identified early in the process, creating significant cost and time savings while necessitating less redesign work. Along with coming in under budget and within schedule, participants also enjoyed the sense of partnership and goodwill that accompanied the collaborative process.
Another example entails the construction of the 138,000 square-foot expansion of a children’s hospital in the Midwest. Although the main parties switched to an IPD partnership after design and development were already underway, approximately $400,000 was saved from a $1 million contingency fund, with the money split between the owner, design team and builder. The open and transparent alliance between all the parties helped uncover and rectify serious design flaws during construction and complete the project weeks earlier than planned.
Despite the benefits, all interested parties are cautioned to proceed slowly and methodically before engaging in such an arrangement. Due diligence is a mandate. There is no cookie-cutter approach to defining all the parameters, which can vary on per-project basis.
Careful attention to detail must ensure that the proper balance of risks, gains and financial rewards are in place before the project begins. This includes recognizing the licensing, legal issues and liabilities that may not be covered under traditional insurance policies. The typical professional liability insurance policy for architects, engineers or contractors requires the filing of a third-party claim arising out of the actual or alleged negligence in the performance of professional services to trigger the policy. However, most true IPD contracts prohibit parties from making a claim and asserting negligence against a participant. This so-called “no dispute” tenet renders the professional liability policy useless, merely providing coverage for claims coming from parties not participating in the IPD contract.
When considered that approximately 60% of professional liability claims are filed by the owner (now a party to the contract) against either the contractor or design professional, and another 15% result from claims between the contractor and design professional, the effectiveness of a typical professional liability policy is minimized substantially. In today’s contractors professional liability (CPrL) world, carriers are willing to offer certain coverages to address the intricacies of the IPD arrangement. For example, some carriers now offer a first-party component to their contractors professional liability policy called rectification coverage or mitigation of damages coverage.
Rectification/mitigation pays for costs incurred by the named insured (contractor, or in cases where both contractor and design professional are named, insureds) to remedy design defects or errors in professional services discovered during the course of construction (and some carriers are willing to extend coverage beyond substantial completion) that would otherwise result in professional liability claims if not corrected. It is also usually provided as a separate coverage part and either at a sub-limit or a supplemental limit in addition to the liability limit. The downside to this coverage includes cost as well as the fact that only about five carriers offer such coverage, each providing it in a different flavor.
As with the introduction of any new methodology, challenges are bound to arise as IPD models become more prevalent throughout the construction industry. While the formula provides many benefits, it also opens the door to numerous unforeseen circumstances. The key is to proceed cautiously with the best possible advice and professional support. Ask questions and get the proper answers. IPD agreements offer the potential for long-term gains under a mutually respectful and rewarding arrangement that can extend for years. The key is to get it right at the outset. There is little chance for renegotiation once the deal is signed.

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