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Working Paper Proceedings Engineering Project Organization Conference Devil s Thumb Ranch, Colorado July 9-11, 2013 The Impact Of Relational Contracting On Flexibility In Health Care Projects Lena E. Bygballe, Norwegian Business School, Norway Geert Dewulf, University of Twente, The Netherlands Ray Levitt, Stanford University, California Proceedings Editors Patricia Carrillo, Loughborough University and Paul Chinowsky, University of Colorado Copyright belongs to the authors. All rights reserved. Please contact authors for citation details.

The impact of relational contracting on flexibility in health care projects Lena E. Bygballe*, Geert Dewulf** and Ray Levitt *** *Centre for the construction industry, Department of Strategy and Logistics, Norwegian Business School, Oslo, Norway. Email: lena.bygballe@bi.no, Telephone (+47)46410459 **Department of Construction Management and Engineering, University of Twente, Email: g.p.m.r.dewulf@utwente.nl, Telephone (+31)534894254 ***Centre for Global Projects, Stanford University, Email: rel@stanford.edu, Telephone (+1)6507234447 Conference paper submitted to EPOC 2013 1

The impact of relational contracting on flexibility in health care projects Abstract This paper examines the use of formal and informal mechanisms for coping with flexibility needs in health care projects. More specifically the study focuses on how integrated project delivery (IPD) models deal with changes and problems that occur during the contract period, particularly related to future needs and constraints of the health care facility. We believe that new delivery models based on collaborative interaction, such as the IPD, represent an interesting empirical context to study the simultaneous use of formal contracts and relational means, including personal relationships, trust, etc. Furthermore, we believe that health care projects are interesting because they often require the involved parties to cope with a high degree of uncertainty and complexities, due to among others, changing demands. We use a relational contracting perspective to examine four case studies of IPD projects in health care projects in Norway and the US and how they make use of formal and informal means to deal with flexibility needs. The preliminary results show that these projects rely heavily on the formal contracts and structures aimed at stimulating collaboration between the project team members and problem solving. Furthermore, these formal mechanisms are important to facilitate the building of trust and personal relationships. Thus, IPD models involve interplay between formal and informal mechanisms that engender commitment resulting in joint problem solving and responsibility throughout the construction process. However, our findings also indicate that even if the dynamic context and future uncertainties in health care are taken into account, dealing with these issues is not at the core of the current IPD model. Introduction Designing and constructing health care facilities require a variety of disciplines in order to develop an integrated service. It is increasingly acknowledged that traditional design-bid-construct contracts are inappropriate in delivering such complex projects. Instead, project delivery models based on a more collaborative approach are seen as the panacea to handle such projects, including Public Private Partnership (PPP), Integrated Project Delivery (IPD), project alliancing, and partnering. Lahdenperä (2012) noted that IPD, project alliancing, and project partnering are often used interchangeably, and even if they have their differences, early involvement of key parties, transparent financials, shared risk and reward, joint decision-making, and a collaborative multi-party agreement are some of the features incorporated in all the arrangements to a varying degree (p. 57). Thus, these models are often based on relational contracting principles (Rahman and Kumaraswamy, 2004), incorporating both the formal contract and the relational mechanism for enhancing the collaboration. In this paper, the concept of IPD is used to refer to delivery models that incorporate such features, and which are aimed at integrating the design and construction process to safeguard the variety of requirements and providing incentives for collaboration to create value for the client. A basic assumption underpinning the paper is that IPD models include an interesting interplay between formal mechanisms, such as the written contract, and more informal and relational mechanisms of interaction between project parties. Many previous studies have focused on the formal contracts that guide inter-organizational transactions (Kamminga, 2008), and the enforceability of such contracts has been a common theme in the general literature on inter-organizational exchange (Williamson, 1975). It is increasingly recognized, however, that more relational mechanisms such as trust play an important role in governing the exchange between parties (Williamson, 1979). Similarly, 2

there has been a steadily increase in studies within the construction literature focusing on informal contracts (Dewulf and Kadefors, 2012), joint risk management (Rahman and Kumaraswamy, 2004), learning and routines (Bygballe, 2013), and trust (Laan et al. 2011). Common to these studies is an interest in studying these aspects impact on the collaboration within the project. For example, it is acknowledged that different strategies are needed to attain and sustain the structures associated with relational mechanims to achieve expected benefits (Henisz, et al., 2012). Cicmil and Marshall (2005) warn, however, about believing that structures, such as collaborative procurement methods automatically facilitate collaboration and improved construction performance. The processes of project organizing, goal setting, accomplishment of action and operations of power and interaction among project parties also play an important part in achieving the expected benefits from collaboration in terms of improved project delivery (Cicmil and Marshall, 2005). Thus, based on the literature we may assume that formal and informal mechanisms are not substitutes, but complements to each other (Carson et al., 2006). Furthermore, it is also likely that this interplay impacts on the outcome of the collaboration. The aim of this paper is to examine the use of formal and informal mechanisms for coping with flexibility needs in health care projects. More specifically the study focuses on how integrated project delivery (IPD) models deal with changes and problems that occur during the contract period, particularly related to future needs and constraints of the health care facility. Despite the growing interest in IPD, Kent and Becerik-Gerber (2010) argued that the current adoption status by the UK construction industry is still unknown. Furthermore, in their study of Private Financing in health care in the UK, Barlow and Köberle-Gaiser (2009) concluded that this delivery model still needs to be much improved before it meets the expectations of enhancing adaptability, innovation and more collaborative ways of working. Evaluation of IPD models has been limited to normative assessments or evaluation of client satisfaction. For instance, PFI in care has been widely discussed in UK papers, but evaluations are done through surveys focusing on the perceived performance of clients or contractors (see, for an important exception, Barlow and Köberle-Gaiser, 2009). The current paper reports of a qualitative case study of four IPD health care projects in US and Norway respectively. Based on the findings, we discuss the performance of IPD models in coping with flexibility and see this in relation to the interplay between formal and relational mechanisms. We believe that flexibility is a key success factor in health care. Health care projects are characterized by a highly dynamic and uncertain context, and coping with uncertainty in relation to changing patterns of demand is a core challenge (Barlow and Köberle-Gaiser, 2009). Due to the high degree of changes in technology, demography, policies and medicine there is a strong need for flexibility in the construction and operation of health care facilities. Furthermore, flexibility is seen in relation to the construction parties ability to adopt solutions to obviate unexpected problems during the design and construction process (Walker and Shen, 2002). The structure of the paper is as follows. The next section presents the theoretical basis of the paper and the research conducted. Then, findings from the case studies are presented and discussed in relation to the theoretical framework. The paper concludes with key implications for practice and future research. Theoretical background Integrated project delivery and related concepts: lessons from previous research It is commonly held that that the construction industry needs to move away from the traditional adversarial behavior toward more collaborative and integrated approaches to deliver more predictable results to clients and improve project performance (Egan, 1998; Dossick et al., forthcoming). Not surprisingly, there has been a huge interest in concepts such as project partnering, project alliancing, and IPD (Lahdenperä, 2012). IPD, for example, is generally seen as a project delivery system that encompasses strong team cooperation, early involvement of subcontractors, risk and benefit sharing models, and joint responsibility for the success of the project (Kent and Becerik-Gerber, 2010), and where the aim is to integrate all the necessary knowledge and expert in the design and construction stage (Matthews and Howell, 2005). The different concepts share a common aim of integrating design 3

and construction (and sometimes maintenance) teams and fostering collaborations in order to deliver more value to the client. They are particularly seen as appropriate in complex, lengthy, and evolving transactions, as seen in construction projects, where the underlying contractual scenario may change considerably over time (Rahman and Kumaraswamy, 2004, 148). However, they also have different roots and meanings (for a clear overview, see Lahdenperä, 2012). The increasing interest in these collaborative approaches in practice is also reflected in a growing number of papers being published in recent years in the construction literature. Many of the papers address the impact of closer coordination, integration and collaboration on cost, quality and time effectiveness, or what Jha and Iyer (2007) term the iron triangle. Evaluations of partnering contracts and closer collaboration have demonstrated a large reduction in costs and waste (Walker et al., 2002), and closer integration and improved collaboration are seen as necessary conditions for fostering innovations (Rutten et al., 1999). Partnering and associated concepts has been considered the most significant development to date as a means of improving project performance (Wood and Ellis, 2005, 317). Various studies have emphasized that establishing and maintaining collaboration between project team members are very complex processes and that contractual arrangements and attitudes of individuals interact (Kadefors, 2004; Laan et al. 2011). Behavioral studies have shown that extrinsic rewards and punishments may act to undermine or crowd out intrinsic motivation (Deci et al., 1999; Frey and Jegen, 2011). In IPD contracts, various financial incentives are common including target costs and forms of painshare/gainshare or risk/reward arrangements. Besides the formal contract structure, several other arrangements might be introduced to stimulate collaboration or team cooperation. Technologies such as BIM and Lean Construction approaches are seen to enhance cooperation (e.g. Matthews and Howell, 2005). Other collaborative arrangements to improve the cooperation are colocation of team members and the use of shared administrative systems. Furthermore, Dewulf and Kadefors (2012) showed that the formal (IPD) contract and the informal relationship, such as trust interact. After signing the contract, a process starts where partners jointly and gradually make sense of what the relationship implies in both contractual and behavioral terms. This finding confirms Cicmil and Marshall s (2005) argument that structural intervention, such as contractual arrangements, is not sufficient to deal with the inherent paradox of the relationship between project performance and control on the one hand and the processes of cooperation, collaboration and learning on the other, and the complexity of construction projects. Similarly, Bresnen and Marshall (2002) noted that partnering depends on the interplay between formal and informal aspects. An interesting question is how this interplay unfolds over time. The Need for Flexibility in health care projects Increasingly, health care clients are committed to the IPD concept (see e.g. Kim and Dossick, 2011). Health care projects are, however, confronted with many uncertainties (Barlow and Köberle-Gaiser, 2009). Changes in demography, technology and policy require that contract arrangements are flexible. The demand volume, for instance, is very sensitive to demographic developments causing variations in the hospital s catchment population. Patterns of hospital activity change over time due to the developments of novel medical technology. Another major uncertainty is public policy. The impact of the Sequestration, for instance, is hard to predict. However, how IPD contracts incorporate abilities to respond to future contingencies is still unknown, as is the way construction parties use both formal and relational governance mechanisms to cope with changes and needs for flexibility and adaptability throughout the design and construction process. Relational contracting and collaboration can enhance the capabilities to cope with conflicts and find solutions for unforeseen events. Lessons from alliance contracting revealed improved problem solving and a collaborative culture that enhanced dealing with future risks and uncertainties (Turner and Simister, 2001; Jaafari, 2001). Although these studies do not focus on IPDs, we could argue that successful uncertainty management is a key success factor for IPDs. But, another lesson is that the early post-contractual phase is important for how the project team deals with uncertainties. Based on three large alliance projects, Dewulf and Kadefors (2012) revealed that how project teams handle unforeseen circumstances, decides how the relationship between the partners will develop. Still, little 4

is known on how integrated project teams are dealing with unforeseen events and how they deal with changing demands. Research design and empirical context To study the impact of relational contracting and the interplay between formal and informal mechanisms on flexibility and construction parties ability to adapt and cope with changes and problems, we have conducted a multiple case study. Cases were selected with a variety of project time and scale horizon. Many have argued that collaboration and relational contracting develop over time. Collaboration evolves as routines are established and learned by the construction parties (Bygballe, 2013). We chose different forms of IPDs both in time and scale and level of integration to be able to study how the context of a project affects the relational contracting and, hence, the ability to cope with unforeseen events. Our initial proposition is that short term IPD contracts can be characterized as routine-based and more formal contracts. Long term contracts, however, do need more emphasis on relationship governance or informal mechanisms to be able to cope with unforeseen events. Table 1 shows an overview of the case projects. Table 1. Overview of case projects Case Type of project Size Construction period The Seattle Children Hospital (expansion), US New Surgery Center 40 million USD and 75,000 sq ft Approx. 1 year Virginia Mason Hospital, US Sutter Health Castro Valley Hospital, US St. Olav s Hospital in Trondheim, Norway Public client Building of tenant spaces New hospital 320 million $ Refurbishment and new buildings 24.500 sq ft 8 months 230,000 sq ft 12,5 billion NOK (2,1 billion US $) and ca. 2,4 million sq ft 2009-2013 2002-2014 The case projects were delivered recently, which enabled us to reconstruct the construction process retrospectively. For the US cases, interviews were done with representatives from the client and the main contractor. The Norwegian case is part of a larger case study of collaboration and learning, where several actors were interviewed including client, building contractor, technical contractors and consultants (40 interviews). A common question we addressed in the interviews was how the parties have dealt with critical events and hazards in the construction process. We asked about the a) regulative framework: formal contracts and procedures; b) the informal mechanisms (level of trust and learning) and finally c) how they dealt with unexpected events (requiring flexibility and adaptability), and how this was influenced by the formal and informal governance mechanisms respectively. A qualitative case study design allows for in-depth investigation of how these issues evolve over time during the construction process and why they evolve the way they do. This, in turn, enables theory building (Eisenhardt, 1989; Dubois and Gadde, 2002) of how relational contracting is reflected in IPD health care projects and how formal and informal mechanisms over time influence upon flexibility and performance. The cases were theoretically sampled, which means that they were perceived as suitable for illustrating and extending relationships and logic among constructs and together contributing to the building of theory (Eisenhardt and Graebner, 2007). 5

Research findings The Seattle Children s Hospital Children s hospital and Regional Medical Center is a private hospital. The hospital launched one of the first IPD contracts in the Pacific Northwest of the US to build a new Surgery Center. The construction started early 2009 and was completed in 2010. The IPD contract is a tripartite contract between the owner representative, the architectural firm and a general contractor. The project is a 75,000 square-foot Ambulatory Surgery Center and is a 40 million $ contract. The architect and the contractor were selected separately. The selection was based on negotiation which is a stark contrast with Design-Bid-Build contracts. According to the general contractor, the selection of the partners and the contract were established on the premise of trust. Shortly after the contract was signed, the budget was reduced with 5 million $. In the spirit of the IPD contract, the three parties discussed this jointly how to solve. The contractor acknowledges that the bad economic situation at the contract moment and the importance of Children s hospital as a client motivated the contracting partners to agree with the IPD terms. The role of formal mechanisms to govern the relationships Although this was the first IPD type of contract the client implemented, Children s hospital has been using various lean principles in their business to improve efficiency of the hospital. The IPD construction contract can then be seen as a continuation of that experience. The contract comprised several incentives to collaborate. The contract eliminates or strictly limits the ability to sue and mandates joint decision making. The budget was set fist and then the hospital was designed according to this budget. Besides, the general contractor was involved on early in the design process which meant a larger initial investment with the intention to make larger savings in the end. The principle of the contract is that it shares profit and losses. The target price contract includes a shared risk and award system. Cost overruns of more than 3% of the target budget are entirely for contractor or owner. On the other hand, savings of more than 3% are entirely for the owner. Within the 3% margin, costs or overruns are shared equally by the three parties involved. The architectural firm shares the 3% with subcontractors, the contractor not. The role of informal mechanisms to govern the relationships It is important to mention that the architect, contractor and client had a experience with each other and this is seen as a major precondition to develop trust in order to make this IPD successful. Besides, early involvement of the contractor and architect are perceived as key to the success. Or, as the vice president for facilities at Children s, clearly stated at the start of the project in the Daily Journal of Commerce (12-18-2009): The theory is by having everyone at the same table and allowing the contracting team to be a bigger part of design, you get a more efficient building and a faster and cheaper construction process. The Client paid for that early involvement. The contractor mentioned that the atmosphere of the contract is very important. Lawyers have to be out of the room. Lawyers like traditional contracts. Besides, we had challenges with the insurances about the risks we took. Past experience seems to be very important. The client had 12 years of experience with Lean. However, he did not have experience with the Integrated Form of Agreement (IFOA). Not only did the 6

Client had in-house knowledge of the lean principle, the architectural firm had previous IPD experience as well. The contractor characterized the process as learning by doing. The formal IPD contract had a major impact on the mindset of the various team members. This is also confirmed in an in-depth study of this case by Kim and Dossick (2011) which showed the importance of the IPD contract on communication and team cooperation. The team members the authors interviewed emphasized that decisions were made as a team and everyone was equal. Virginia Mason Hospital The VM Hospital, a private entity is known for its lean management (Dossick et al., forthcoming). The case described is an IPD contract for the building of 24,500 sq ft. tenant spaces in a new realized building. Compared to the other cases, this is a relatively small project with a construction period of 8 months. A team of Architect and Contractor was selected for the addition of one level to house three medical departments. The team was selected out of 4 teams. The 4 teams were invited to present their understanding of the vision of the project. The Request for Proposals was very brief and included only the major requirements. Being able to meet the time and budget goals as well as engaging all stakeholders were key elements in the selection process. It is important to note that the team members did not work previously together as a team. All three contract partners had previous experience with IPD but were new to each other. This was a deliberate choice of the hospital (client) who was looking for innovative ideas. To develop a joint proposal the architect and contractor worked together during approximately 10 weeks. The team was further able to present convincingly how BIM could support this project. The role of formal mechanisms to govern the relationships The contract is a target price contract. The Design and construction fee is 1% of the total construction costs. The risks for not achieving the estimated max price are split between the three parties: 23 % for the architect, 48% for the construction firm and the rest for the client. Before the target budget was set, several design iterations took place and, as a result, the target price was continuously updated. By both the client and contractor it was stressed that implementing the Lean principle had a major impact on the construction time and hence on the success of the IPD contract. We could construct in a very short term. The contractor stressed that changes could not be made after the final designs. When asked about how they dealt with changes, both the client and the contractor mentioned that demand changes are affecting the equipment but not the spaces. Or as the contractor stated: Their space is right here. Moreover, this interviewee mentioned that the introduction of Lean resulted in very predictable outcomes and a very fast construction process. He further compared this Lean process to industrial engineering and stressed the importance of work simplification. As a result, the entire construction process could be planned accurately. The role of informal mechanisms to govern the relationships The client mentioned that strong commitment is essential. Remarkably, the client works in a similar collaborative way in another project with another contractor, although that contract is not an IPD contract. Moreover, the client mentioned that working IPDish is a mentality issue, and even without a formal IPD contract you can work according to the principles. Despite the fact that the team members were new to each other, they developed rapidly a joint collaborative culture. The contractor mentioned that the intensiveness of working together with the architectural firm to develop a proposal created a joint team culture. Once the contract was signed, a kick-off meeting was organized between the three team members. In a study on how the collaboration 7

among team members evolved over time in this case, Dossick et al. (forthcoming) found that various relationship building events led to a joint collaborative norm, not only between the three team members but also with hospital stakeholders, engineers and subcontractors. For instance, these players convened to test design alternatives by using physical mock-ups. Although subcontractors and other stakeholders have not signed the IPD contract, the team was able to develop a collaborative spirit through these sessions. Sutter Health Castro Valley Hospital The new Sutter Health hospital in Castro Valley is a direct result of a new law in California that was passed after the 1994 Northridge earthquake in which several California hospitals were critically damaged. This law required that every hospital meet rigorous requirements for earthquake safety by 2013. As a result, the old Eden Medical Center required either an extensive and costly retrofit or an entirely new replacement. After careful consideration, the board of Sutter Health decided to build a new facility. The concept of medical care has changed significantly since the original hospital was built in 1954. Doctors use far more outpatient procedures, requiring fewer beds, and many hospitals have moved to a one bed per patient model. Additionally, changes in technology have changed the spatial requirements for modern hospitals. The board decided that given the cost of retrofitting the existing facility, it made more sense to invest in a state of the art medical center. By late April of 2008, the plan that had emerged involved building a new $320 million 130 bed facility of 230,000 sq ft to replace the existing 176 bed facility. The objectives of the board was to 1) ensuring that the facility is open by January 1, 2013, 2) keeping the cost at or below $320 million, and 3) delivering a world class facility. The construction phase took less than 4 years. Building fast was important to comply with the new seismic codes. The role of formal mechanisms to govern relationships Sutter Health decided to enter an IPD contract. The IPD IFOA contract was signed by 11 members: contractor, client, designer and the subcontractors. The hospital was completed with an aggressive schedule. During the construction, no compromise was made of scope, schedule of costs. The team kept 80% of their estimated profits. Sutter Health has a long history with IPD. In the same period another IPD contract was signed by Sutter: The Alma Bates Summit Medical. The client and contractor mentioned that the IPD contract stimulated people to try something new. For instance the CV saw significant cost and schedule savings by involving the steel erection and fabrication sub early on. The IFOA makes all partners vulnerable to each other s actions. Builders got focused on assisting the designers to finish the design to high standard of detail, and designers allowed the builders to help them do that because of how it lowers the risk of failure during construction. As mentioned by the project manager: The new contract was key in aligning the business interests of the 10 non-sutter signatories with Sutter s own goals. Especially important is it puts designers at risk for failure during construction, and builders at risk for failure during design. If you don t have a contract with a business deal that does this alignment you end up with a team, each of whom has to manage two potentially conflicting goals: 1) Success for the Project and 2) Success for their Company. These goals are aligned when things are going well, they conflict when the going gets tough. And on a hospital project in California the going gets tough the day you walk into the first meeting and stays tough till the building opens. The role of Informal mechanisms to govern relationships 8

Besides the formal contract, regular meetings and workshops proved to be essential to develop commitment. The IPD included a collaborative team work mentality including the willingness to help others. Since project team members were physical and organizational dispersed, a major effort was made to bring members together. The collaboration was further supported by the establishment of a Big room where the entire team co-located every two weeks for approximately three days during the design phase to discuss and update the project. Co-location enhanced rapid problem solving. Selecting the project partners carefully is seen as a major condition for success. Besides, the project shows some misalignment of interests between IFOA and non IFOA members. The performance of an IPD project depends not only on the level of team cooperation of the contract partners but on the collaborative mindset of all stakeholders in the project. The IPD contract as such does not directly guarantees flexibility. Demand changes are still expensive and it is important that the client stakeholders realize that changes have a major impact on the project budget. Moreover, as the project manager stated: I worked very hard on the relationship with the CEO and the COO at the affiliate so that they felt part of the team so that they would filter any requests coming from vendors and staff for changes in the building. (-) Got them to get as much certainty into to the project during design as they could. Internal processes support this now. Moreover, reducing uncertainty was even a fundamental and a minimum requirement in all actions undertaken in this project (Alarcon et al. 2011). The project manager even calls this the dragon of uncertainty to stress the importance of decreasing uncertainties to be able to deliver within time and control budgets. The St. Olav s Hospital in Trondheim Background and history first phase between 2002 and 2006 In the period between 2002 and 2014, the New St. Olav s Hospital is built in Trondheim, in the Middle of Norway. The hospital is a public trust, and one of several hospitals owned by the Central Norway Regional Health Authority, which in turn derives its funding from the Ministry of Health. On behalf of the owner, a project based client organization was established for the hospital development project. The project is a 12.5 billion NOK project, including 220 000 square meters in a center-based structure near downtown Trondheim. The project includes both new buildings and refurbishment of existing buildings. The construction was split in two phases; phase one (2002-2006) and phase two (2006-2014). A design team, consisting of consultants and architects won the design contract for both phases. As to the contractors, phase one was a traditional design-bid-build contract with many different contractors across the centers being built. Because the client organization was newly established, no prior experiences existed between the client and the various contractors. Even if the project kept its budgets and was delivered on time, due to perceived problems with the traditional design-bid-build model (i.e. coordination problems, conflicts, accidents, etc.) and an unexpected 10 percent reduction of the budgets for phase two, a different delivery model based on collaboration and partnering was chosen for the second phase. This was also encouraged by a new CEO of the client, coming from a contractor experienced in partnering. A new collaborative delivery model second phase between 2006 and 2014 Phase two was also split in two parts; part one (2006-2010) and part two (2011-2014). The first part included among others the construction of three new medical centers, of which all were completed on time, without any serious accidents and below budget. For the medical centers, design & build contracts were established with the individual contractors (building contractor, ventilation and heating contractor, electrical contractor, plumbing contractor, and technical systems integration contractor) across the three centers. It was believed that this would enable a learning curve effect and better 9

coordination and efficiency across the centers. In addition, the contract with the building contractor included a partnering agreement, with a target price, open books and a 50-50 risk and reward sharing. No such agreement was made with the technical contractors, though. None of them had any experience with partnering and the client did not trust them to be able to comply with the specific requirements that a partnering agreement would imply. However, it was clearly stated in the contracts that the project should be conducted through collaborative interaction. The collaboration was structured in two collaboration phases, where the first phase involved joint planning and discussions between the client, the design team and each of the contractors respectively, and the second phase involved all contractors to jointly plan the delivery of project. This joint collaboration period resulted in the signing of a common agreement stating a commitment to collaborate by the client, the design team, the building contractor, and the technical contractors. There was also a shared reward system, where achieving bonus for reaching specified milestones presupposed that all contractors had met the target. The second part of phase two includes the building of a new Knowledge center, and is now in its final stage. This will be a shared facility between the hospital and the local university. It is expected to finish in September 2013. The project involves parallel design & build contracts with the contractors, including one single contract for the mechanical, electrical and plumbing processes. A new bid was announced, resulting in new contractors entering the project. Different from the medical centers, this new building contract does not include a target price, open books or sharing of awards or costs between the client and the contractor. The main reason is because following up on the open books was considered too time consuming and the client also feared that contractors would not participate in the bid. However, a common agreement stating a commitment to collaborate was signed by the client, the design team, the building contractor, and the technical contractor. Representatives from the client argue that although they have always had an overall idea of how to structure and facilitate the collaboration, the collaborative model has developed and been adjusted over the years, and there has been a trial and error process. Both own experiences and insights from external sources have driven the development, such as adopting the concepts of lean construction, and, now in the Knowledge center; Building Information Modeling (BIM) and Virtual Design & Construction (VDC). The role of formal mechanisms to govern the relationships One key reason for using a new delivery model based on collaborative interaction in phase two of the St. Olav s project, was a reduction of 10 percent of the initial budget. Being dependent on public funding from the Ministries, this is not uncommon for public projects in Norway. It was perceived impossible to achieve this objective based on traditional design-construct-build contracts with multiple contractors. Encouraged by the central authority, which saw a need for more similarity across the new medical centers to be built, the client decided to go for a collaborative model based on ideas of partnering from Denmark and the UK. Design-build contracts were signed with contractors across the centers to gain economies of scale and learning effects. In compliance with the public procurement law, competition was required. However, the selection of the different contractors was based on an evaluation of the total offer, including price, competence, capacity, delivery model, solutions, etc., of which price was weighted much less than in traditional public projects. Similarly, in the competition about the Knowledge center, the building contract was not awarded to the lowest bid, but to the contractor offering the best total solution. One key element here was that the contractor was experienced in using lean principles, which had also been used in building the medical centers, and with a great success. Lean construction was considered as the operationalizing of collaboration in practice. According to the client, establishing proper contracts and structures should not be underestimated: Partnering should not be used as an excuse for not establishing a proper contract on beforehand! (Project manager, Client). It is important to spend sufficient time and resources in the beginning of the project, for both establishing a proper contract and a project plan. It is established a formalized routine for dealing with delays, for example, where joint efforts are emphasized. For 10

example, the progress on the Knowledge center was behind schedule at the end of 2012, and a planto-get-back-on-plan was made jointly among the parties. Building formal structures is considered by the client as a key success factor for enabling collaboration and achieving benefits in terms of better coordination, communication and overall construction process. One of the client s directors explained: Culture is something you ll achieve as a result of purposeful work, it cannot be decided. Structure can be decided, and it is the structure and the methods that over time give the culture. The role of informal mechanisms to govern the relationships The collaboration phases in the beginning of the projects (both the medical centers and the Knowledge center) enabled the development of a common understanding of the project and its requirements. When building the medical centers, problems occurred during the project in relation to delays and cost overruns, and the contract with the building contractor had to be revised. The client attributed the problems that occurred to insufficient time and resources being allocated in the beginning of the project. They realized that because of the partnering agreement they could not just refer to the contract but needed to solve the problems together with the contractor. Similar experiences have been made in the Knowledge center project, where meetings and social events have enabled the establishment of personal contacts and trust, which in turn are considered by the client as beneficial when dealing with difficult tasks. In addition, the fact that the parties have signed a common commitment to collaborate and that the involved parties have been co-located, both during the construction of the medical centers and the Knowledge center, are seen to have made it easier to communicate more informally and to solve things on a day-to-day basis, in addition to making it harder to sustain conflicts. There are, however, different opinions among the involved parties about the benefits of the more informal mechanisms when problematic contractual issues have occurred. The contractors have felt that the client interferes too much, and this way of working is perceived as very different from the usual design-build contracts. A project manager being responsible of one of the medical centers on behalf of the building contractor explained: We fight just as much as in phase 1, but the difference is that while in phase 1 there were known rules in accordance with the traditional contract regime, we lack rules in phase 2 Another project manager from one of the technical contractors concurred: they call it collaboration, but the fact is that it is complete war! Dealing with changes and demands for flexibility Similar to other complex projects both in general and in health care, the St. Olav s Hospital project has had to deal with requirements for changes. Flexibility and the opportunities for making changes in accordance with new and changing demands and medical equipment/methods were already from the beginning of the project a requirement from the central health authority. As the client points out; They were planning twenty years ahead when they started to plan the project, and now it is twenty years later and new discussions about the future St. Olav s Hospital is already taking place. In order to deal with changing demands, user involvement has been very important, and become more structured over the years in the St. Olav s project. It is acknowledged that since neither the client nor the contractors have much experience in running hospitals, they depend on the specialist to inform about needs and consequences of different choices. 11

During the construction period, changes have been treated according to the standard regulations included in the design-build contract. The client sends a change order, for example based on users input, and then the contractors consider it and report on the possibilities and consequences. What is new in the Knowledge center is that the building and the technical contractor provide a joint answer to the request, which is in accordance with the VDC concept. The contractors may also come with joint suggestions for changes. The formalized meetings are seen to provide good opportunities for discussions that might result in such suggestions. The collaboration phases in the beginning of the project has also resulted in new solutions been developed. For example, when planning the Knowledge center it was decided in the joint collaboration phase to build the center according to passive house standards. It was already a requirement that the center should be very energy effective, but now the parties decided to take it one step further. This is one example of how the collaboration has resulted in change initiatives that are likely to create value for the users. While the results of the medical centers were good in terms of overall project budget, time and quality, the results from the Knowledge center are yet to be seen. The time deadline is likely to be met, but there are more questions about the economy. It is interesting to notice that neither in the first phase or the first part of phase two, the contractors have made much money. This might as well be the result from the last part of phase two. However, as one representative from the building contractor in part one explained, it is difficult to estimate the value of all the experiences we have gained. The New St. Olav s Hospital is a project with high publicity and it is recognized as the most innovative project ever in Norway, when it comes to collaborative delivery models. Cross-case comparisons and discussion The four project cases illustrate how IPD models are used to facilitate collaborative interaction, which in turn is seen as vital to ensure desired project outcomes. The cases differ, however, in terms of the involved parties previous experiences with such collaborative delivery models. For example, Sutter Health is very experienced in using IPD, and as a private client, they have the opportunity to select suppliers based on previous experiences and long-term relationships. The client of the Seattle Child s Hospital did not have any previous experiences with integrated contracts, but had worked for a long time with the contractor and the architect, among others using lean construction. In the St. Olav s Hospital case, the client s new CEO encouraged the use of a new delivery model, based on his previous experiences of partnering and the building contractors for the medical centers and the Knowledge center were chosen among others based on their respective experiences in partnering and lean construction. Another key difference is that in all the US cases, the IPD model includes a formal contract between at least three parties. In the St. Olav s case, on the other hand, the collaborative agreement can be seen as the sum of various two-party contracts. These contracts were the result of a public procurement process. What is similar across the cases is that the parties were selected based on other criteria commonly used in traditional lowest price competitions. In the Seattle Child s Hospital, negotiations were applied, while in the Virginia Mason Hospital teams were invited. In the St. Olav s case, there was a competition due to the public procurement regulations, but the bids were evaluated based on several criteria, of which price was but one. In accordance with IPD principles, all cases also show how the different parties were involved early in the project, making it possible to utilize their competences and to coordinate among the parties. When it comes to dealing with changes, the Virginia Mason Hospital and the Castro Valley Hospital were constructed under strict regimes, not allowing changes after the design phase. The St. Olav s case is somewhat different. In this case, changes follow the traditional contract regimes. In general, it is emphasized that changes are difficult no matter what type of project and type of delivery model. Nevertheless, in all cases changes (either they were confined to the design phase or during construction) were discussed jointly and there was a shared responsibility and respect for the mutual 12

dependence and impact of changes on time and budget. The joint reply by the contractors in the St. Olav s case illustrates this shared responsibility. Project managers are anticipating changes and tough times and changes do occur in these types of projects, especially in the larger projects such as the Castro Valley Hospital and St. Olav s Hospital. In both cases, the IPD model is believed to facilitate a collaborative atmosphere making it easier to cope with these challenges. In all cases, the importance of the formal contract is emphasized, as well as other formal structures. It is believed that proper contracts reduce conflicts during the construction phase and establishing formal structures, such as formal meetings and incentive systems are seen as key means to facilitate communication and create a feeling of shared responsibility. All respondents stress that trust is an important element in IPD relationships. Lawyers tend to overemphasize the importance of formal contracts as a way to mitigate risks. Furthermore, co-location is considered important for building of personal relationships and trust, which in turn enable quick problem solving. How to deal with contingencies cannot be solved by formal contracts. There must be a willingness to be vulnerable since not all possible risks can be foreseen. However, building formal structures may ease coping with the contingencies. Conclusions and implications The contribution of the paper lies in the discussion on the performance of IPD in relation to the changing context in which most of the health care projects take place. It looks at how the interplay between formal and informal mechanisms impacts upon the project participants ability to react to and handle unforeseen events and changes that require problem solving during the construction process. Establishing a relationship between formal and informal mechanisms, flexibility and performance is likely to add knowledge to our current theoretical understanding of relational contracting in general and in IPDs in particular. Most of the IPD literature focuses on the importance of team building and aspects of congruent engineering, but little attention is paid to how the contracts deal with future contingencies. The cases studied the importance of relationship contracting to cope with possible risks. Shared understanding and trust are about looking forward and about the willingness to bear risks in the future. This is in line with findings in trust literature (Smyth et al., 2010). However, health care policies, demographics, medical insights and technologies are changing fast. For short term IPD projects, as for instance the VM hospital case and Children s case, demand changes can be neglected. The risks involved are then primarily construction related risks. For long term IPD contracts, changes demand volume or service demand will occur during design and construction. IPD enhances rapid prototyping and shortens the construction period. Moreover, the cases also revealed that due to the collaborative mindset design alterations were more easily made. However, major changes in requirements were not allowed during construction. Furthermore, the target of the contracts discussed was to build on time and within budget, not to enhance operational flexibility in the long run. Project partners are not responsible for the performance of the assets in the long run. The cases clearly showed that IPD contracts have some major merits. Due to the risk sharing models team members are committed to the project goals but commitment ends when construction finishes. Health care is changing rapidly and demands accordingly. Still, the IPD literature is lacking studies on how to cope with these dynamics. This paper made a first contribution to analyze the role of various mechanisms incorporated in the IPD model to be able to deal with contingencies occurring in the design, construction and operation of the health care facilities. In line with previous studies (see, for example, Dewulf and Kadefors, 2012; Cicmil and Marshall, 2005; Bresnen and Marshall, 2002), the case studies presented in the current paper show that formal and informal mechanisms interact. Formal structures such as the contract, incentive systems and communication systems are established, but through practice they are negotiated and adjusted as the partners jointly and gradually make sense of the work and the relationships. The cases indicate various development patterns for this interplay, depending on the characteristics of the projects, including time horizon, budgets, experiences, and nature of the relationships. This would be an interesting avenue for future research. 13

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