Integrated project insurance: A non-confrontational approach

L-r: Steve Johnson of Dudley College, Rob Kennedy of MDA, Metz Architects’ Nick Allen, and Gregg Matthews of Derry Building Services outside Advance I

Dudley College’s Advance II block is the UK’s first to use integrated project insurance. Elaine Knutt meets the team that is pioneering a non-confrontational approach.

Meet the team delivering what is likely to be the most radical construction project underway in this country – the £12m Advance II teaching block for Dudley College, west midlands. It’s the official government trial project for integrated project insurance (IPI), one of three alternative procurement models outlined in the Government Construction Strategy 2011-15. Although several previous projects had aspirations to adopt IPI, Dudley will be the first to realise a long-held industry ambition. 

So client, consultants, main contractor and specialists have walked away from traditional procurement, abandoned traditional contracts and their legal relationships, and instead created a project Alliance – a “virtual company” acting with a single goal, and a single profit and loss account. The entire project is wrapped in the integrated project insurance policy, protecting the client’s investment and the team’s liabilities.

With the policy in place, pooling risk proportionately and removing individual liability, conventional mindsets about protecting each firm’s interests and deflecting future claims are erased. To support the innovative new strategy and provide reassurance to the insurers, there are a trio of new members of the team: the Alliance manager, the TIRA (technical independent risk assurer) and FIRA (financial independent risk assurer).

At Dudley, where Advance II is joining its sister building Dudley Advance, the aim is to shave 30% off the construction programme, and deliver a capital cost saving of up to 20%, achieved by giving all parties “ownership” of design decisions and input into balancing risk and resources.

Specialist subcontractors for the envelope and M&E installation have been on board from day one, developing architect Metz’s design through collaborative workshops. So instead of the zig-zag of the architect’s design being reworked by a contractor, sent to bidders for pricing and modification, then returned to the contractors for further modification, IPI follows an efficient straight line.

The centre features The Hangar, a four-storey “internal building site”

And rather than a “pain/gain share” mechanism, a feature of many collaborative projects, the returns are calculated upfront – giving each member of the Alliance team a guaranteed profit plus contribution to overheads, based on their average performance on similar projects. Again, the aim is to short-circuit the conventional attitudes to budget increases and align the client and the commercial self-interest of the project team.

So when Construction Manager dropped in a design development meeting and asked the assembled team members how it feels to walk the high wire of construction innovation, the responses, not surprisingly, split according to individuals’ attitude to change.

Mike Murray, a consultant for Fulcro Engineering Services, perhaps spoke for the cautious, risk-conscious personality types of this world when he said: “It’s exciting, but it’s also scary not being able to rely on the contractual mechanisms you’re used to relying on. It’s actually quite daunting.”

But his colleague Sarah Hawkins, regional director of Fulcro, feels liberated. “It’s a massive relief. We all see the hidden waste in the industry that’s difficult to get rid of, when designs get batted back and forth two or three times. But here we’re cutting out waste and cutting out confrontation, and I find it really exciting.” 

And there are enthusiastic endorsements from all round the table. Steve Beck, contracts manager at Speller Metcalfe, also finds it refreshing. “What attracted us was the opportunity to interact with the client,” he says, describing an early design change in favour of a steel-framed lift shaft that benefited the programme. “There’s just no confrontation, no backside-covering.”

Gregg Matthews, from M&E contractor Derry Building Services, said he was enjoying the process: “I don’t dread coming to these meetings. In some projects you do because you know you’re in for a hard time defending your corner. I think it’ll get even better when we get on site.”

Advance II will sit alongside the first Advance building, housing engineering and manufacturing training facilities

The Advance II project has already cleared several significant milestones. After the Alliance team was put together in a competitive process following the college’s OJEU advert, it signed the 35-page Alliance contract and developed an indicative design. Once that had been approved by the clients and insurers, the policy was incepted, relieving the team of individual liability, and leaving them free to concentrate on the next possible outcome. Phase 2 – design development and project delivery – is currently underway.

But as well as delivering a ground-breaking procurement route, Advance II will create a cutting-edge Centre for Advanced Building Technologies, training the next generation for digital construction. The new 3,435 sq m centre includes specialist project areas, a carbon-friendly technology area, a digital centre for BIM and virtual environments, a fabrication and welding workshop around a four-storey “internal building site”, called The Hangar. In addition, the Level 2 BIM data for the project will be used as a teaching resource. 

Cheerleading the IPI concept

Many in the industry will have a general understanding of how IPI works, as it has been articulated in multiple articles long before it materialised in Dudley. Backed by Constructing Excellence, the Movement for Innovation and the Strategic Forum, it was proposed for a project at Stockport General Hospital in 2008, nearly got off the ground for an £8m training wing at the Royal Marines’ Lympstone base in Devon, and was considered by a care home developer for a project by contractor Stepnell.

Throughout, its main cheerleader has been Martin Davis, former chief executive of M&E contractor Drake and Scull, and now director of Integrated Project Initiatives (IP Initiatives), a consultancy that has acted as project mentor at the Dudley project, and will have a role in any future projects that wants to officially trial IPI under the government programme.

As Davis explains, the aim of this Cabinet Office clause is to ensure that a watered-down version of IPI doesn’t get taken up by the market – and dilute the potential case for it. “Take-up of IPI has been slow, but that’s partly because we didn’t want anyone else jumping on to the bandwagon. But when it’s proven, we don’t want to hang on to it,” says Davis.

As Davis and his fellow director Kevin Thomas highlight, the Dudley team are the inheritors of a generation of “exemplar” collaboration projects from the turn of the millennium. Defence Estates’ “Building Down Barriers”, Heathrow Terminal 5, the MOD’s Andover project, and Glaxo Wellcome’s FUSION – itself steered by Thomas – trialled methods of creating collaborative, integrated teams and largely enjoyed successful outcomes.

From left: Mike Murray of Fulcro, Steve Beck of Speller Metcalfe and Sarah Hawkins of Fulcro

But while the ideas they championed, such as two-stage tendering, partnering and “open book”, can achieve good results, experience has taught Davis that efforts to integrate client and supply side tend to fall down when the financial arrangements were at odds with commercial self-interest. “If you want to get the best out of human nature, you’ve got to get the money right and align people’s interests,” he says.

But don’t “pain/gain” contract terms achieve this? Not according to Thomas, who chairs the collaborative working group at Constructing Excellence: “‘Pain/gain’ is still about blame and the negative side. It’s still about stopping people doing stuff, not how do you free them up to do it differently. Lots of people think they’re working collaboratively, and probably are if it goes well, but if there’s a problem the form of contract doesn’t support that.”

The key to developing IPI was a chance meeting with an insurer, who suggested that the missing feature in collaborative projects was a simple indemnity policy that would bind teams’ together. As Thomas explains: “Instead of the policy being triggered by a mistake, you insure the outcome – it doesn’t matter who did it, it only matters that you fix it.” Plus, there’s the financial impact – according to Davis and Thomas, for every £1 made in actual claims, £5 is spent on legal and forensic costs to establish liability.

Dudley College became the trailblazer for IPI when the late David Bucknall, of Rider Levett Bucknall, raised the idea with its estates department, which was mid-way through an ambitious expansion programme. As the college’s director of estates and capital projects, Steve Johnson, says: “Our early experiences weren’t particularly good. On the first project there was not a good experience with the process or the end product, although the second was better. But we have a total £50m investment, on a fixed income, so we needed to integrate the risk.”

The Dudley project is now progressing well, and is due to open for the autumn term in 2017. Thanks to a grant from Innovate UK, the full story of the project and its achievements will be thoroughly researched by a team at the University of Reading and disseminated to the industry. But, assuming the project delivers on its aspirations, will the Dudley project advance the industry towards wider use of the IPI concept, or will it forever remain as an “exemplar” rather than a pioneer?

Davis and Thomas acknowledge that IPI is suitable for a fairly narrow band of projects: they need to be relatively complex with key subcontract packages, but with committed clients able to deliver hands-on, top-heavy management in the early stages.

“Some clients want the cost overspend insurance, but aren’t prepared to do the collaboration and the Alliance team,” says Louise Lado-Byrnes, also a director of IP Initiatives. Also, any project has to fit in a value band the insurance industry can cope with. “Because it’s new to the underwriters, they’re making the insurance available from their balance sheet, so we can only get £2-3m of loss cover,” explains Thomas.

Plus, there is the challenge of persuading clients to try something so radically different. “It fundamentally challenges the way organisations run, and public clients have certain procedures. The big framework operators think they’ve got a process that works fine, and it’s difficult to expect people to apply initiatives on top of their own initiatives,” says Thomas, although he suggests that if teams are doing well already, they will enjoy even more success by applying new innovations.

Nevertheless, Thomas and Davis are in upbeat mood. A private sector developer has just shown firm interest, and last month, the Government Construction Strategy 2016-20 reaffirmed a commitment to trialling IPI. It’s a major boost likely to focus attention on Dudley, as Johnson certainly believes: “Once we get one across the line, a lot of people will be looking, and I think it will generate a huge amount of interest.”

And Davis is still an indefatigable cheerleader. “It’s a change programme, and change never comes easy – it has to be hard-fought. We align ourselves with Trevor Baylis [inventor of the wind-up radio]. He spent 12 years being told there was no market for it, then it became huge.”

Forming the Alliance

Advance II kicked off when Dudley College published the OJEU procurement notice in September 2014, setting out its expectations on IPI. Shortlisted bidders then took part in team-based behavioural workshops to assess which firms would be best capable of forming an alliance, with the successful bidders appointed in February 2015.

Though the college hoped that specialist sub-contractors would respond, in the event none did: specialists usually rely on Tier 1 contractors to bring them on board. So key suppliers H&H Architectural and Derry Building Services were appointed following a separate process.  

By May 2015, the six key parties – the client, Speller Metcalfe, Metz Architects, services engineer and project coordinator Fulcro, H&H and Derry – had signed the 35-page Alliance contract, which replaces the normal contract, sub-contract and consultants’ appointment documents, and binds the Alliance into a virtual company. It was drafted by IP Initiatives with assistance from lawyers, and is apparently written “in the style of” the NEC suite.

However, not everything in the Alliance is quite consistent with the analogy of the limited company. “The insurers were quite surprised when we were unsure what the voting rights were – but we’ve never really had to vote on anything,” says Fulcro’s Sarah Hawkins. “It was incidental – the board really is operating as an alliance.”

The Dudley College project is due to open in time for the autumn term of 2017

The team members acknowledge that getting to signing stage wasn’t straightforward, with a significant amount of research and due diligence undertaken before signing the contract. Plus, there was the time chalked up in meetings. “I am conscious that we do have these big, set-piece meetings. But we’re getting to the point where they’re more efficient,” says Rob Kennedy of MDA, which acts as the Alliance manager.

Thereafter, the team progressed to an indicative design for the scheme. “It was just sufficient design to give the board confidence we can build it to suit the brief,” explains Fulcro’s Mike Murray.

After being scrutinised by the TIRA and FIRA, the integrated policy was incepted and phase 2 design development began. “Now we’re in phase 2, we’re focusing on work packages and but not doing a traditional tender pack,” Murray adds.   

Phase 2 is in fact the project delivery phase, where the team turns their outline solution first into virtual reality, and then builds it. Phase 3 commences at completion, embracing Government Soft Landings and a handover period.  

Putting the policy in place

Under IPI, the client, contractor, key sub-contractors and consultants become joint signatories of a whole-project insurance policy. The policy now in place at Dudley is unique in the UK, although it has similarities to the arrangements at Heathrow Terminal 5. It covers both the project’s technical integrity for 10 years as well as its cost outcomes, replacing client’s latent defects cover, consultants’ professional indemnity policies, and the contractor’s third party and all risks policy.

But before the policy could be put in place, the insurer needed certainty that the design is viable, and the cost risks have been controlled. The scheme’s design was scrutinised by the TIRA, a role taken by Belgian multi-disciplinary practice SECO, as the role of insurer’s technical adviser is well-established in Belgium. And the FIRA validating the budget and risks is Rider Levett Bucknall, a veteran of Building Down Barriers.

Andy Almond of Pick Everard with Speller Metcalfe’s pre-construction director Tony Shaw

One of the selling points of the IPI approach is that the premiums paid for the integrated policy are less than the combined premiums normally paid by the various parties. According to Martin Davis, the premiums are roughly half what they would otherwise be, and the rest was used to pay for the TIRA and FIRA’s facilitation: “If you include latent defects, it’s cost neutral.”  

However, it seems there was acknowledgement that the financial benefit could have been more overt.  According to Andy Almond, partner with Pick Everard: “The details of the insurance are not what we expected at the outset. Each business in the Alliance would expect a reduced premium, but it was difficult to abstract this project from all the others in a portfolio, and therefore pay a reduced premium [on the rest of their projects]. But in the fullness of time, I would expect a 30-40% decrease.”

However, Mike Murray of Fulcro points out that the prospect of reduced premiums is only one component of what an IPI policy has to offer: “Having PII insurance covered by the IP insurance means I don’t waste my time putting up evidence of what my decisions are based on. It’s not the cost of the claim, it’s the man-hours cost of defending the claim.

Margins and profits

The college’s budget, channelled through a Project Bank Account, covers the direct salary costs of each member of the Alliance, plus a profit margin and contribution to overheads. These “direct costs” are ring-fenced and can’t be diverted. “The basis of the Alliance is that people get paid their direct costs, which are defined in the contract,” explains Dudley College’s Steve Johnson.

“If you pay in the normal fashion, you’re paying for waste and inefficiency,” adds IP Initiatives’ Lado-Byrnes. “And because everyone stands to gain or lose, everyone acts as their own clerk of works, questioning what others are doing.”

The figures are based on the average return each member made on comparable projects in the past three years, so that the Alliance members know that each partner round the table is getting a fair price based on an objective assessment of market value. “It’s not a pricing exercise, it’s a factual exercise,” says Davis.

In fact, the process laid down by IP Initiatives does not specify that the financial details of each member’s remuneration should be made available to the rest, but the Alliance members opted for full transparency – everyone round the table knows what everyone else is worth.  

The financial outcome for the Alliance members depends on whether the not the project comes in on budget. If there’s an underspend, members would share that in proportion. In the case of an overspend, or a defect arising within 10 years of completion, the additional costs would be covered proportionately by all the Alliance members up to the £400,000 excess on the project insurance policy. Then the policy would kick in, to give an additional £2m of cover. If there is a problem costing over £2.4m, the college itself would have to dip into its own pocket.

BIM in action 

While IPI can work without BIM, the contention is that BIM won’t deliver full benefits without IPI, at least at Level 3, which implies real-time data sharing rather than sequential design development and separate roles.

“With BIM, everyone is working collaboratively, they’re not sending specs to each other. BIM and IPI are natural brothers and sisters,” says Davis. “Arguably, you can’t do BIM Level 2 in an environment with PI insurance, or at any rate you can’t get the full benefits.”

Fulcro’s Sarah Hawkins agrees. “To have Level 2 information flowing through the process isn’t possible with a traditional process [due to the changes in the team] but here we’ll achieve Level 2. And to achieve Level 3, you would need an IPI-type contract in the first place.”

Unusually, the EIRs were jointly written by the Alliance members “Clients often get the consultants to write the EIR, or they hand over the maintenance strategy to a services provider. But here the EIRs have been written together. It’s about putting in the time to unlock what the college actually wants from the building,” says Mike Murray of Fulcro.

In another example of integration, Fulcro will use the same BIM design tools as the M&E fabricator, namely CAD MEP 3, to eliminate any problems of data translation between packages. “We had a dialogue with Derry and said ‘our experience is this’ and they’re happy with that,” says Murray.

Johnson concedes that Dudley College’s developing BIM capabilities mean it will not be able to benefit from the asset management data immediately. But the BIM data will be deployed as a teaching tool. “The building will become part of the educational process, the students will be able to see what lies behind the boxing in, and use immersive technology to see it.”