In September 2001, the Department of Defense instituted a new design-build business model based on collaboration. It includes contract incentives that more closely align the interests of the parties. The business model had been tested on two $70 million projects, and was to be implemented next on a $700 million renovation contract.
Under this program, which incorporates many of the core principles of lean project delivery, the parties negotiate a target cost. In addition, there is a sharing arrangement when costs come in below or above the target cost. This is termed a cost incentive. The contract also establishes an award fee pool valued at 10% of the target cost, which is termed a performance incentive. The contract allows the design-builder to collect shared savings only if performance levels are rated very good or excellent by the owner.
The purpose of this new model is to incentivize behaviors critical to the project’s success. It depends on early, regular, clear and consistent communication of the owner’s expectations. The offered rewards, two times the going profit rate, are substantial enough to motivate superior performance. The bedrock principle of the model is that the project team succeeds or fails together. It has worked very well at the Pentagon where to date the component projects have been completed on schedule and under budget.« Back to news