Why Target Value Design And Integrated Project Delivery? A Tale Of Two Cities

Two sister cities, Rosencrantz and Guildenstern, have both decided to each build a new library for their citizens. Both cities have roughly the same budget (100 million coins) and a schedule of 3 years (for both design and construction). They want to complete the project before their centennial celebration. As rival cities they are in competition with each other to get the most value out of their projects. As public entities, they have received a fixed amount of money from their citizens and are held accountable to deliver the project within schedule, budget, and quality. There is no difference in the capabilities of the architects, contractors, consulting engineers, and builders available to the two cities. The only difference is in their project delivery system. As the story unfolds, although the two cities have the same requirements for their projects and the same level of skilled labor available, the difference in their project delivery system results in different outcomes.

Rosencrantz

After obtaining a budget and land grant for the library, the project manager of Rosencrantz set forth to hire an architect. The architect was selected solely based on their qualifications and was paid an hourly rate to develop drawings for the new library. The owner communicated with the architect about the scope of the project (a two-story library which can house 10,000 tomes, 2 public reading rooms, and at least 10 private reading rooms), their financial constraints of 100 million coins, and their schedule constraint of 3 years. After 9 months of design, the architect completes a finished set of documents with an internal cost estimate of around 98 million coins with all the scope requirements that the owner had asked for. The city authorities then displayed the set of drawings in the town hall and invited all qualified contractors to submit a proposal.

Four contractors (A, B, C, D) each submitted bids for 115 million, 130 million, 132 million, and 140 million coins respectively. Since the owner believed that all the contractors should be equally qualified, they awarded the contract to the lowest bidder (Contractor A). Unfortunately, the estimate of even the lowest contractor (115 million coins) was still higher than the project’s budget. The project manager from Rosencrantz then asked the architect to “redesign” the project to “eliminate” unnecessary scope so that the project can be within budget. The architect is furious because by making changes to the project, they would lose some of their design intent. In the end, some value-added scope (i.e., 3 private reading rooms) had to be eliminated from the design. Due to the tight constraint of time, the architect did not have time to readjust the design of the corridors to match the reduction of the private reading rooms. As a result, there is extra space in the corridors, which does not serve any meaningful function.

For the last couple of years, Contractor A’s company has been in financial trouble. The recent recession caused by the famine has decreased the demand for new construction projects and almost every contractor in town is on the brink of bankruptcy. Contractor A decided to bid the Rosencrantz library project for 0 profit and planned to eventually make money through change orders. While reviewing the drawings, the contractor noticed that the architect forgot to include shelving for the tomes on the second floor. It was strange that such an important component of the project was missing but nevertheless the contractor was instructed to bid on what was documented in the drawings. They also laughed at the architect’s detail for the exterior stones. The architect had specified one monolithic piece of stone for the side of the library. Based on the contractor’s experience, it is not possible to cut such a large piece from the quarry nor was it possible to transport it to the construction site. Contractor A also saw an opportunity to use Corinthian marble instead of the more expensive Florentine marble specified by the architect. If they can get these changes approved, they should be able to make a profit on the project.

During the construction phase, Contractor A had several questions about the design. The design documents from the architect could be interpreted in a number of different ways. In order to clear up the confusion, the contractor sent a pigeon with a letter requesting for information. About 2 weeks later, the pigeon returned with a reply from the architect. Hundreds of pigeons were passed throughout the project, each returning 1 to 2 weeks later. Sometimes pigeons were unnecessarily sent back and forth to document information to protect the parties in case of a trial. While the contractor was waiting for the information, he could not proceed further and some work was halted. At the same time, the large number of pigeons sent in from the contractor took the architect a very long time to process. This problem was exacerbated by the fact that the architect was now focused on designing a new project (a coliseum) for a new client.

About 6 months before the centennial celebration, the project manager from Rosencrantz noticed that at the current rate of construction, the project would not be completed in time. They sent a notice to the contractor urging them to speed up the project so that they can have the library ready for the celebration. The contractor complied with the owner’s request and hired more labours to finish up the project. Luckily, they were able to place the last stone a couple of days before the event and the library was unveiled during the city’s centennial celebration. After the celebration, the project manager from Rosencrantz re-examined the project. The final cost of the project was 125 million coins, which is 25 million more than their original budget. Some of the additional costs were due to missing details in the construction documents and others were due to claims made by the contractor (i.e., owner directed change and acceleration of the schedule). The owner was unhappy with the project because their original scope (i.e., 10 private reading rooms) was not met and the project ended up costing more than they had budgeted for. The architect was not happy because their original design intent was compromised to meet cost and they had to spend more money replying to the contractor’s questions than they had budgeted for. The contractor was not happy because after a long negotiation process only 30% of their change orders were compensated by the owner resulting in a much lower profit margin than they had anticipated.

Read the whole story at:

https://leanconstructionblog.com/Why-Target-Value-Design-And-Integrated-Project-Delivery.html

References

[1] Ballard, G., and Rybkowski, Z.K. (2009). “Overcoming the Hurdle of First Cost: Action Research in Target Costing.” 2009 Construction Research Congress, ASCE, Seattle, WA, 1038-1047.

[2] Do, D., Chen, C., Ballard, G., and Tommelein, I.D (2014). “Target Value Design as a Method for Controlling Project Cost Overrun.” Proc. 22th Annual Conference of the International Group for Lean Construction (IGLC-22), Oslo, Norway.

[3] Matthews, O., and Howell, G. A. (2005). Integrated project delivery: an example of relational contracting. Lean Construction Journal, 2(1), 46-61.

[4] Seed, W. (2014). “Integrated Project Delivery Requires A New Project Manager.” Proc. 22th Annual Conference of the International Group for Lean Construction (IGLC-22), Oslo, Norway.

[5] Zimina, D., Ballard, G., and Pasquire, C. (2012). “Target Value Design: Using Collaboration and a Lean Approach to Reduce Construction Cost.” Construction Management and Economics, 30(5), 383-398.