Integrated Project Insurance (IPI) is one of the new models of procurement being trialled by the Government; the new models are aimed at achieving up to 20% savings in Government construction spend. The IPI model has been developed by the Integrated Project Initiatives Ltd in conjunction with insurance brokers Griffiths and Armour. Draft guidance explaining the model has now been published.
How IPI works
Under the IPI model a virtual company is created. Each organisation taking part in the project nominates a staff to take a seat at the Alliance Board, the Board collectively appoints the Alliance Manager. All staff from the various firms and companies that will work on the project are seconded to form an Integrated Project Team (IPT) which will report to the Alliance Manager and Board. The Alliance Manager and Board are supported by an Independent Facilitator (IF). Also appointed to assist the Alliance is the Technical Independent Risk Assuror (TIRA) and the Financial Independent Risk Assurer (FIRA), these two roles will be novated to the insurer when the IPI is in place. The various steps in the IPI process as set out in the guide are discussed below:
The first step is for the Client to determine why a construction project is required by its organisation, the major internal stakeholders for the proposed construction project and their objectives as well as the funds available for the project. Even at this early stage, it is important that the Client engages in realistic budgeting of the costs of the project.
Working with the IF, the Client creates a high level brief of the case for the construction project, identifying key success criteria; the IF also helps the Client put together the appropriate criteria and process for selecting the Alliance Team members.
At the select step, the Client sets up an advisory team to help it award the Alliance contract to various organisations. The team is made of the Client (this should include internal departments that will be impacted by the project i.e. procurement, cost management/project management) and the IF. The Technical Independent Risk Assuror (TIRA) and the Financial Independent Risk Assurer (FIRA) may also be included in the advisory team. If any external resource is required, they are appointed for the selection process only.
The Advisory team assists the Client to develop a strategic brief of the project (a high level description of the need to be met) and a priority list of the success criteria from different stakeholders. This process is critical to the IPI model, because this information is required by those tendering for the project to enable them proffer solutions.
The advisory team helps the Client to assemble and send out the procurement documentation. Selection into the Alliance is based on capabilities, specific proposals for achieving the strategic brief; proposal for collaboration and cost efficiency. The cost information obtained at this stage may be used later when open book accounting is adopted for the project.
If the EU OJEU process is to be used, the basis for the award will follow the Most Economically Advantageous Tender criteria.
This process is critical to the IPI model, because this information is required by those tendering for the project to enable them proffer solutions ...
Organisations successful at the select step along with the Client form an Alliance team. It is expected that the team will include contractors, specialists, and suppliers/ manufacturers. The Alliance considers the strategic brief, generates questions/ clarifications and obtains a final sign off on the baseline requirements.
Based on the baseline requirements, the Alliance suggests various solutions and also sets a challenging target cost on the basis that the benchmark cost used during the tender process allowed for inefficiencies. The Alliance develops a top down cost plan, working on an elemental basis, making allowances for opportunities and risks. The Alliance also prepares a phase one Project Execution Plan (phase one PEP) to be used in the next step. The Alliance is supported through the evaluation phase by the IF, TIRA, FIRA.
At the prepare step, the Alliance evaluates the various solutions proffered to arrive at the solution that represents a 'best project outcome'. The evaluation process is done on a collaborative open book basis and Alliance members are only paid for actual work done. The extent of work is limited to what is required to make a business decision at the end of this step.
The preferred solution is developed further on the same open book basis and the Alliance consults with regulators and others to bring the preferred solution to the stage where a business decision can be made.
The evaluation process also identifies the core of the Integrated Project Team (IPT) that will deliver the project and determines the role each Alliance member would play at the delivery stage. Subsequently, it is expected that Alliance members not forming part of the core IPT will leave the Alliance.
The IF works with the Alliance board to ensure that collaboration is established and the TIRA and FIRA provide independent advice on risks management and opportunity maximisation.
At the end of this step the Alliance reconfirms the strategic brief and the prioritisation of success criteria, develops a Phase 2 PEP which will be used at the delivery step, the Alliance also agrees on the commercial model and sign off on it – setting out the gain share/ pain share and the insurers cap.
If satisfied with the preferred solution, the IF, TIRA and FIRA provide a report to the Client and prospective insurers supporting it.
After the necessary regulatory approvals have been obtained and the IPI insurance policy is in place, the Alliance and the IPT will commence further development of the preferred solution along with physical delivery of the solution in accordance with the Phase 2 PEP. As the works progresses, members of second tier supply chain are appointed by the Alliance Board. All through this step the strategic brief and the success criteria are used as reference to guide the team. The TIRA and the FIRA (now novated to the insurers) are expected to maintain regular reports to both the Client and the insurers on the resolution of risks that occur during this step of the process. The IF works with Alliance to continually challenge traditional methods and seek ways to improve the quality of the project and save costs.
... through this step the strategic brief and the success criteria are used as reference to guide the team
All members of the Alliance work on the basis of a single integrated programme. This is expected to allow for opportunities to add value and generate savings. Also with the use of a project bank account, transparency in costs and payment is established. All parties will have visibility of progress on the project and will be notified of any likely adverse event affecting the project.
Almost all changes required to the deliver the preferred solution is undertaken as development activities covered under the target cost. This means that under this model there is no provision for the usual variation and payment for variation. The exception to this rule is if there is a change to the strategic brief and success criteria. If this is proposed, it would have to be accepted by the Alliance and it may trigger changes to the commercial arrangements i.e. the gain share/ pain share, it may also require approval from the insurers to include the change in the IPI. If the proposed change is rejected, the Client may still proceed with it as an exclusion from the IPI coverage.
This is the last step in the IPI delivery process. The monitor step commences after [practical] completion. The Alliance stays on for a 12 months period after completion to support the soft landing process. If any defects had been identified by the TIRA report before completion, which did not prevent completion, these are rectified within an agreed timescale. Also at completion, a Latent Defect Insurance comes into effect.
The IPI insurance is the main attraction for this model of procurement. However the insurance is predicated on members of the Alliance achieving a fully integrated collaborative working culture based on the spirit of mutual trust and cooperation. Effective collaboration is therefore the main driver for instituting the IPI insurance; the guide identifies some attributes of the expected collaboration to include:
- A mutual no-blame/no claim undertaking; and also a provision that the gain share taken by each Alliance member is the same as the pain share.
- All decisions are taken on a "best for project" basis.
- Independent facilitation and financial/technical independent risk assurance at all stages of the project.
- Performance of the Alliance members to be measured against agreed success criteria.
- Alliance members working on an open book basis and actively working towards reducing costs and maximising the gain-share.
- No division between design and construction elements of the project as all members will be working as a single integrated team.
What does the IPI Insurance cover?
The IPI insurance provides comprehensive cover for members of the Alliance team including the Client, consultants, specialists, manufacturers and their supply chain for the following:
- Construction All Risks (including Terrorism Extension)
- Third Party Liability (including Non-Negligent Liability)
- Delay in Completion (resulting from damage 'construction all-risks')
- Financial Loss cover
- Latent Defects cover (for 12 years) – a "no fault" commercial latent defects insurance policy.
In terms of exclusions that may apply to the cover provided under the IPI, the guide to the model states that this will be limited to 'normal industry exclusions'. For instance, for "financial loss" such exclusions would include - nuclear and war risks and sonic bang, wilful default, employer's (Client's) risks, change of law and any other specific exclusions relating to the particular circumstances of the project (e.g. MOD security issues).
Also based on the Alliance members and their supply chain waiving the right to claim against each other, the insurers would waive the right of subrogation against all the insured at every tier.
An earlier study conducted by the Office of Government Commerce had (now part of the Efficiency and Reform Group of the Cabinet Office) estimated that the cost of traditional insurance amounted to 2.5% of the project costs (based on normal risks, and excluded excesses)
To ensure that IPI does not cost more, the cost of IPI insurance has been set at 2.5% of the project cost.
The guide to the model opines that this is better than cost neutral because it also covers.
- independent facilitation and risk assurance
- cost overrun cover (instead of professional indemnity)
- latent defects cover.
The insurance cost does not cover any insurance related to pre-project planning activities. For the IPI model this would include assistance and support to the Client in selecting and appointing the members of the Alliance.
To ensure that IPI does not cost more, the cost of IPI insurance has been set at 2.5% of the project cost.
Comments and Conclusion
According to the guide, the IPI will be trialled in the construction of the specialist training wing for the Royal Marines at Lympstone, Devon. So far, an Alliance contract is proposed for the construction and the legal and commercial terms are currently being resolved.
However, the guide points to other projects that have adopted similar principles in the past, these include:
- Building Down Barriers – Defence Estates (with Tavistock Institute)
- FUSION projects – Glaxo Wellcome
- Andover North Site – MOD (with Rider Levett Bucknall)
- Heathrow Terminal 5 – BAA
It is too early to comment on whether the model will achieve the ambitious costs saving target of up to 20% savings. But beyond the costs saving target, the IPI model drives the construction industry towards true collaboration. It is noteworthy, that the gain / pain share is not triggered based on the individual performance of the organisations making up the Alliance but on the performance of the Alliance as a whole; the model, therefore builds in sufficient commercial reasons for parties to collaborate and find best solutions to risks and challenges that occur during a project.
I expect that the model will undergo further refinement after the trial project; a few areas that may require further attention include:
- Replacing the proposed no blame/ no claim undertaking with a robust dispute avoidance and resolution process. It is doubtful that a no claim undertaking would survive statutory provisions entitling parties to a construction project to refer their disputes to adjudication.
- While the guide indicates that the IPI model could be used with other contracts with necessary amendments, it seems the development of the model has favoured the creation of an Alliance contract. For wider use, it would be useful to develop suggested amendments to popular construction forms that would enable the incorporation the IPI model.
We look forward to reporting on the findings and result of the trial project. All the initial trial projects will be monitored by a cross-industry consortium with University of Reading as the academic partner.