PDG - Risk, Incentives, and Planning

3.1.6 Project Risk/Incentives

The current state of the construction industry is an environment of risk shifting. Owners and architects try to shift risk to general contractors and general contractors try to shift it onto trade partners and suppliers. Traditional economics presupposes that risk will be assumed by the party most capable of mitigating it. In construction, risk cannot be mitigated by only one party -- the entire team must work together to minimize risk. A Program goal is to develop strategies for collective risk management that minimize risk to each party and maximize the chance for Program-wide success.

The incentive program will be funded with project savings from contingency preservation and reduction in Costs of the Work. These savings create the "incentive pool" paid based on evaluation against performance criteria in areas including: quality, safety, planning, system reliability and innovative processes.

Key Principles of the Financial Incentives Plan

• Address Risks in Project Planning: Project Risk Assessment identifies risks, probability, and magnitude. Risk Mitigation Plan details how team members collectively address identified risks.
• Align Commercial Interests: The Owner offers performance incentives so that doing what is best for the project is not in conflict with what is best for individual stakeholders.
• Incentives Geared to Motivate Behavior Addressing Significant Risks: Only those aspects of performance needing additional motivation should be included.
• Incentivize Both Cost and Non-Cost Performance Factors: Combining incentives that drive down costs with incentives for superior non-cost performance avoids unintended consequences.
• Incentivize Group Behavior: Without participation of the entire team, cultural change essential to success will not be achieved.
• Include Key Trade Partners in Risk Sharing: Including key trades improves project-wide performance and team morale.
• Periodic and Timely Performance Evaluations: Evaluations need to be communicated frequently. Team members should evaluate their own performance as a precursor to the Owner's evaluation.
• Flexibility: Plans must adjust to changing circumstances.

Contract Deliverables

• Financial Incentives Plan (FIP): Attached to the IPD Agreement with performance evaluation criteria
• Project Risk Assessment: Comprehensive assessment identifying project-specific risks
• Risk Mitigation Plan: How the team will collectively address identified risks
• Final Pricing/Risk Allocation Plan (FP/RAP): Basic strategy for contracting all work
• Risk Sharing Method (RSM): How CPR and IPD Team share risk for each Construction Package

3.1.7 Site Specific Pricing and Financial Management

A hallmark of the IPD Agreement is a high level of financial transparency. In the BIM environment, cost estimating is done "real-time." The ability to input data early allows set-based design, enhanced TVD, and cost extraction at any point.

Site-based Financial Management: IPD Teams and site-based PM staff fully manage site specific payments, accounting and financial reporting according to Lean Principles to reduce waste. Core Group responsibilities include:

• Payment (Pencil Draw process, Lean Supply Chain integration)
• Controls (thorough accountability)
• Reporting (monthly, quarterly, annual -- all highly transparent)

3.1.8 Planning and Scheduling

The IPD Agreement calls for planning based on collaborative pull planning using the Last Planner System. At minimum: milestone schedule, collaboratively created phase schedules, "make-ready" look-ahead plans, weekly work plans, and a method for measuring planning reliability.

The Weekly Look Ahead Planning Meeting addresses constraint identification and removal. The Weekly Work Planning Meeting addresses reliable promises from last planners of what constraint-free work will be completed each day and by week's end.

The Core Group shall monitor:

• Milestone schedule maintenance
• Collaboratively created phase schedules
• Master pull schedule incorporating work structuring, planning, sourcing, logistics, quality, safety
• Last Planner participation in weekly meetings
• First Run Studies embedded in the system
• Quality focus on completing tasks correctly the first time
• Trade partner performance dashboard metrics (Red-Yellow-Green)

3.1.9 Functional Operations Plan

The FOP consists of seven steps:

1. Collect all similar tasks and functions into job descriptions
2. Create organization chart without names
3. Review activities and FTEs for one site
4. Time phase the FTEs
5. Refine the organization chart collaboratively
6. Budget each per job-function and multiply by volumizing
7. Add appropriate names and companies

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