This article continues the Wicked Series begun in September 2012 with the Wicked Primer. Last month we looked at Wicked Procurement Programs and this month we explore Wicked Financial Solutions for Infrastructure. Projects are financed in myriad ways, but room remains for improvement. Innovation related financing, insuring, and bonding infrastructure projects present opportunities for improvement and, as with other innovations, those who seize the day will find success.
Finance, insurance, and bonding represent three large pieces of the financial puzzle the BUILT industry needs to leverage more effectively. Project finance, dominated by traditional commercial lending offices in big banks, represents the most visible piece of the financial puzzle on any project. Without financing, no project moves forward. Accordingly, convincing the lender the project is poised for success ought to be a priority for the entire team. After all, if financing fails, the project typically fails. Few self-finance, but those who do should seriously consider integrated project delivery (IPD), the use of building information modeling (BIM) and the use of lean business processes that support the use of those innovative tools. Likewise, commercial lenders should consider use of these tools on the projects they finance.
Insurance is the next most visible piece of the puzzle. More and more insurance carriers recognize the need to accommodate the BIM-enabled professionals they insure, but very few of those carriers know, or even care, why those BUILT industry professionals need accommodation and fewer still actively investigate the creation of new-generation insurance products to serve BUILT industry owners and professionals who procure and deliver BIM-enabled infrastructure. New products and a new mindset loom on the horizon. Those who prepare for success will have success.
The bonding of projects, from bid bonds to performance and payment bonds, deserves attention as well. Entities that write surety bonds typically join the project party too late to demand an IPD and BIM-enabled process, but if they see value in reducing risks related to default by those they bond, IPD and BIM solutions should top their list of priorities.
Traditional IPD contemplates the crafting, negotiation and implementation of a multi-party agreement with the owner, contractor, and designer as members of the core team. A robust and effective IPD Procurement Program—of the kind discussed in my article appearing in the March 2012 issue of AUGIWorld—entails a substantive and early conversation with the financial stakeholders as well. Next month we will explore the mechanisms for involving suppliers, specialty designers, and trade contractors in the conversation early, but this article focuses on the need to engage lenders, insurers, and sureties early.
New provisions in commercial lending instruments rewarding the use of IPD and BIM solutions would trigger widespread adoption of IPD and BIM solutions. Smart lenders, who already pay millions of dollars to watchers hired to watch watchers on complex commercial projects, can quickly leverage BIM to receive real-time, high-quality reports of project progress. Typically, lenders hire a third-party architect to track project progress, receiving cumbersome written reports after mistakes have been made. Sometimes the mistakes are highlighted, sometimes they are not. Too often, the reports are filed away, unread, until the lawyers demand them during a full-blown construction dispute. BIM-enabled construction progress reports would be cheaper and better.
If lenders recognize the value of BIM-enabled construction progress reports, why wait until construction starts? Why not demand—or at least reward—an IPD and BIM-enabled process from the outset?
Again, smart lenders see value in financing BIM-enabled projects. As the value of “Googlizing Infrastructure” becomes more clear more lending institutions, real estate investment trusts (REITs), and similar entities will demand IPD and BIM solutions earlier and earlier.
Lenders, and the lawyers that represent them, are notoriously risk averse. Accordingly, motivating the decision makers within those organizations to request and draft new lending instruments that support, enable, and reward the use of IPD and BIM solutions represents a challenge. The first step is to educate these stakeholders regarding the value of IPD and BIM to their bottom line.
Owners, developers, and other BUILT industry professionals with contacts in the financial industry need to engage decision makers in a substantive conversation regarding the use of IPD and BIM to reduce and mitigate risks associated with complex infrastructure projects. The best forum in which to discuss the merits of these innovative solutions is a collaborative workshop where key decision makers learn more about the use of IPD and BIM and wrestle with the real-world application of those tools in a small group environment.
Collaborative Construction advocates the use of Collaboratively Controlled Insurance Programs. Insurance carriers are ignoring enormous market opportunities by clinging to the traditional pieces of the pie. Bold steps are need and will be rewarded.
Planners, designers, and to a lesser extent constructors and trade contractors, need BIM riders for traditional insurance policies that clarify the scope and nature of the coverage available to BUILT industry professionals under traditional insurance policies when those BUILT industry professionals are asked to deliver BIM services. Owners, demanding BIM deliverables, likewise need the protection of a BIM rider on their traditional policies. The quality, scope, and nature of these BIM riders need to be hammered out through consultation with those seeking protection under these new products.
Engaging the BUILT industry in a substantive and intelligent conversation about what a BIM rider ought to cover and why provides insurance carriers with a perfect enter mechanism into this new market. Carriers that recognize and exploit this opportunity will gain market share. Those that do not will lose market share.
Similarly, a need for project insurance exists. An insurance product that provides coverage to an integrated team engaged to deliver BIM-enabled infrastructure, while complex, represents a tremendous opportunity for carriers willing to provide such a product. Carriers typically balk at the idea of offering new products, preferring instead to rely on language vetted in the court system and complaining there is no claims history associated with IPD and little associated with BIM. The lack of precedence in the court system and lack of claims history present challenges, but those challenges must be viewed as opportunities and not barriers.
Swiss Re, Zurich, Lexington, and other carriers have experience insuring projects completed under novel delivery models, including Design-Build, Construction Manager at Risk, and Public Private Partnerships (P3). Extending the protection offered under such project policies to IPD and BIM-enabled projects is simply not that complex. Taking the coverage to the next level and creating a Collaboratively Controlled Insurance Program will require more effort, but the rewards far exceed the risks.
Finally, existing insurance products may need to be adjusted over time as BIM deliverables are mainstreamed. The BIM riders mentioned above may serve as precursors to such revisions in existing policies. Professional liability policies, general commercial liability policies, property and casualty policies, and builder’s risk policies all likely need adjustments.
Advocates of IPD and BIM solutions need to engage the risk management professionals inside and outside their firms in a conversation related to insuring IPD and BIM-enabled projects, drafting BIM riders and adjusting existing policies as necessary. Again, a collaborative workshop setting likely provides the most productive forum in which to discuss these issues.
Sureties need to step up their game as well.
Bond provisions rewarding the use of IPD and BIM solutions would motivate every entity in the construction bond market to learn more about IPD and BIM. Sureties invest most of their time and energy in vetting the financial health of the entities to which they issue bonds. This is because most sureties have little interest in paying on the bond and instead expect the entity that purchases the bond to be capable, in most instances, of stepping to the plate. A business model that looks over the horizon, and leverages the value of IPD and BIM processes, will allow certain sureties to capture more market share without incurring additional risk.
Sureties typically issue three types of bonds on large infrastructure projects, bid bonds, performance bonds, and payment bonds. A bid bond ensures entities will honor bids and sign all necessary contracts if awarded the project. If an entity operating under such a bond fails to comply with the bid terms surety may be responsible for the costs of choosing a new contractor. Of course, the entity will seek indemnity from the bidder. A modified version of this process could support the delivery of bids on IPD and BIM-enabled projects from integrated teams.
A performance bond assures the company offering the project the bonded entity will complete the job in accordance with specifications of the contract, including, generally, the stated price, schedule, and other specific terms. If an entity fails to complete the project in accordance with such these terms, the surety is responsible for hiring another contractor to finish the job. Again, the surety will seek indemnity from the bonded entity. The cost of bringing a new contractor on board because an entity responsible for some portion of the project fails to deliver (and this happens on the best projects from time to time for various reasons) will be reduced if the project is an IPD and BIM-enabled project.
Payment bonds, put in place to protect suppliers and subcontractors from non-payment, are very similar to performance bonds. The risks associated with such bonds can be reduced by increasing the potential of success for the overall project by deploying IPD and BIM-enabled processes early. Integrated teams operating in an IPD and BIM-enabled environment enjoy success at greater rates than adversarial teams on traditional projects and sureties who bond work for such teams will experience lower failure rates than those who issue bonds on traditional projects.
Financing, insurance, and bonding are critical to every project. Stakeholders in the financial sector with an interest in your project should be invited to join the conversation early and substantively. Reach out to the lenders, insurers, insurance agents, sureties, and others you know in the financial industry and invite them to attend a collaborative workshop with you. Leveraging IPD and BIM solutions requires input from all quarters, and the stakeholders in those three quarters are particularly important.
The challenge of extending IPD and BIM-enabled processes to non-core stakeholders will be the topic of next month’s BUILT – BIM to FM article. We will explore Wicked Joining Mechanisms in that article, including joining agreements, flow through provisions, strategic supply chain agreements, and strategic alliance agreements generally.
Characteristics of a Wicked Problem
1. Evolving definitions. The definition of a wicked problem evolves, triggering solutions which, in turn, change the definition of the problem.
2. Continuous solution cycle. Because the definition of the problem continues to evolve, solutions emerge continuously, concluding when problem solvers run out of time, energy, money, or some other limiting resource.
3. Perfect solutions prove elusive. Objective solutions elude wicked problem solvers with most ranging from best to worst or acceptable to unacceptable.
4. “One off” problems. No two projects are alike and, thus, no two wicked problems are the same.
5. One-shot solutions. Wicked problems feature one-shot solutions as every solution impacts the problem and everything the problem touches.
6. Creativity and judgment drive solutions. Pursuit and implementation of wicked solutions depends on the creativity and judgment of the stakeholders.