Title

Gain/pain share and relational strategies to enhance value in target cost and GMP contracts

Author(s)

Mahesh, Gangadhar.

Citation

Issue Date

2009

URL

http://hdl.handle.net/10722/128694

Rights

The author retains all proprietary rights, (such as patent rights) and the right to use in future works.

Gain / Pain Share and Relational Strategies to Enhance Value in Target Cost and GMP Contracts

By

Gangadhar Mahesh

B.Arch., Malnad College of Engineering, University of Mysore, India M.Eng. (Infrastructure Engineering), Asian Institute of Technology, Thailand

A Thesis submitted in partial fulfillment of the requirements for the Degree of Doctor of Philosophy at The University of Hong Kong, Hong Kong

May 2009

Abstract of thesis entitled

Gain / Pain Share and Relational Strategies to Enhance Value in Target Cost and GMP Contracts

Submitted by

Gangadhar MAHESH For the degree of Doctor of Philosophy at The University of Hong Kong in May 2009

The last decade of the twentieth century saw the construction industry shift focus from cost to value following several high profile reviews. The revamping strategies of the industry in its quest for value were: (1) strategies for value and (2) strategies for integration. However, recent reviews of effectiveness of these strategies in achieving targeted step changes in value, indicate that these goals are still elusive. Shortfalls have been attributed to difficulties in implementation and in changing industry culture; and to improvements and rewards being not all inclusive, e.g. value gains not percolating to contractor side of supply chain. In this context, the core concepts of value, value creation and value capture (sharing of value gains) were explored. Value creation and capture were reviewed in the context of construction industry needs and expectations. Thereafter, value capture was defined as a bargaining problem and game theory was used to explain the structure of value creation and capture processes in a project setting through a three stage negotiations / decisions model. It was demonstrated that the structure of these processes could and often does lead to suboptimal outcomes of value capture. However, notwithstanding demonstrated mutual benefits from cooperation, target cost / guaranteed maximum price (TC / GMP) approaches have not been widely used, arguably due to unfamiliarity with the concepts and their possibilities in the industry. In this context, TC / GMP approaches were chosen as the focus for further investigation to understand their strengths, weaknesses and potential to address above shortfalls.

Having examined various options and possibilities, a decision support and management framework was developed to capture and structure the required knowledge; and to empower professionals to make more appropriate and informed decisions. In achieving the above, the significance of a gain / pain share arrangement that is inherent in TC / GMP approaches in terms of value and cooperation was established with respect to the developed three stage negotiations structure. The importance of selecting an appropriate sharing ratio, selecting it at the right point of the project timeline, employing appropriate relational, and dispute management and resolution strategies for improved value and relationships were also demonstrated. Further, the factors influencing the selection of an appropriate sharing ratio, contractor and sharing ratio selection modes, and best practices in employing relational strategies and managing dispute resolution and management processes were also investigated through case studies and surveys. The findings were integrated and fed into developing the above mentioned framework for crafting and administering TC / GMP approaches in ways that could achieve desired outcomes. A model which provides pointers for selection of an appropriate sharing ratio and for identifying the stage at which it should be selected, was also developed within the framework. The above contributions to knowledge and applications are expected to assist in developing appropriate TC / GMP contracts for scenarios where they could add much value to procurement processes, thereby aiding industrys quest for higher value and deeper sustainable relationships by empowering value creation and capture through genuine cooperation.

DECLARATION
I declare that this thesis represents my own work, except where due acknowledgement is made, and that it has not been previously included in a thesis, dissertation or report submitted to this University or any other institution for a degree, diploma or other qualification

Signed -------------------------------------------------------------------------------------------Gangadhar Mahesh

ACKNOWLEDGEMENTS
I would like to express my profound gratitude to my Supervisor, Professor Mohan M. Kumaraswamy for his guidance and help in this research work and for his support and advice throughout my stay at The University of Hong Kong. I would also like to convey my sincere thanks to Dr Thomas Ng, Dr O O Ogwuu, Dr. Ekambaram Palaneeswaran and other faculty members for their evaluation and advice from time to time.

I am thankful to HongKong Land (Hong Kong), Housing Authority (Hong Kong), MTRC (Hong Kong), Gammon Construction Ltd (Hong Kong), Shui On Construction and Materials Limited (Hong Kong) as organizations, their staff, all other respondents of the questionnaires and expert members that were interviewed for extending their support for facilitating information collection for this research.

Completion of this research report is an important milestone in my career and life, credit of which goes to my family and friends, because of whom I envision; to my supervisor Professor Mohan M Kumaraswamy because of whom I could achieve what I envisaged; and to the almighty, by whose grace I got the opportunity to achieve. As a token of appreciation this thesis is dedicated to them.

II

TABLE OF CONTENTS
DECLARATION.........................................................................................................I ACKNOWLEDGEMENTS...................................................................................... II TABLE OF CONTENTS.........................................................................................III LIST OF FIGURES ..............................................................................................VIII LIST OF TABLES .................................................................................................... X CHAPTER 1:
1.1 1.2 1.2.1

INTRODUCTION.......................................................................... 1

Background ............................................................................................................................ 1 TC / GMP Contracts.............................................................................................................. 2 Selecting Sharing Ratio in TC / GMP Contracts................................................................. 3

1.3 Research Gap.................................................................................................................................. 3 1.3.1 1.3.2 1.3.3 1.3.4 1.4 1.5 1.6 1.7 Affinity towards Risk, Risk Perceptions and Resulting Strategies...................................... 4 Information Asymmetry and Information Flow .................................................................. 5 Managing Relational Risks and Providing Sufficient Motivation....................................... 6 Research Focus ................................................................................................................... 6 Research Objectives............................................................................................................... 7 Significance of the Research.................................................................................................. 8 Research Scope....................................................................................................................... 9 Overview of the Thesis........................................................................................................... 9

CHAPTER 2:
2.1 2.2.1 2.2.2 2.2.3 2.2.4 2.3 2.3.1 2.3.2 2.3.3 2.4

RESEARCH METHODOLOGY ............................................... 13

Research Methodology ........................................................................................................ 13 Literature Review.............................................................................................................. 14 Case Study ........................................................................................................................ 16 Interview ........................................................................................................................... 16 Survey ............................................................................................................................... 16 Selecting Appropriate Methods for This Research........................................................... 17 Research Initiation and Finalization of Research Topic.................................................... 18 Research Methods in Relation to Objectives .................................................................... 18 Research Methods Utilized ............................................................................................... 20 Chapter Summary ............................................................................................................... 22

CHAPTER 3:

VALUE,

RELATIONSHIPS

AND

PROJECT

NEGOTIATIONS .................................................................................................... 23
3.1 3.2 3.2.1 3.2.2 3.2.3 Chapter Introduction........................................................................................................... 23 Concepts of value, Value Creation and Value Capture .................................................... 23 Value ................................................................................................................................. 24 Value Creation .................................................................................................................. 26 Value Capture and its Significance for Value Creation and Relationships ....................... 26

III

3.3 3.4 3.5 3.6 3.6.1 3.6.2 3.7 3.8 3.8.1 3.8.2 3.9

Value Creation in the Construction Industry.................................................................... 27 Capturing Value in Construction Contracts ..................................................................... 30 Understanding Value Capture............................................................................................ 34 Influencing Negotiations...................................................................................................... 35 Influencing Negotiations for Desired Outcomes............................................................... 35 Influencing Negotiations for Better Relationships ............................................................ 40 Three Stage Model for Construction Project Negotiations .............................................. 41 Survey on Post-Tender Pre-Contract Negotiations........................................................... 42 Distribution of Questionnaire, Respondents and Response profile ................................... 43 Survey Results and Analysis ............................................................................................. 43 Chapter Summary ............................................................................................................... 51

CHAPTER 4:
4.1 4.2 4.2.1 4.2.2 4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.4 4.4.1 4.4.2 4.4.3 4.5 4.5.1 4.5.2 4.5.3 4.5.4 4.6 4.6.1 4.6.2 4.6.3 4.7 4.7.1 4.7.2 4.8 4.8.1

FOCUSING ON TC / GMP APPROACH ................................. 53

Chapter Introduction........................................................................................................... 53 Introduction to TC / GMP Contracts................................................................................. 53 Definition Target Cost Contract..................................................................................... 54 Definition Guaranteed Maximum Price Contract........................................................... 54 Distinctive Features of TC / GMP Approach .................................................................... 55 Sharing Ratios ................................................................................................................... 55 TC / GMP Adjustment mechanism ................................................................................... 55 Avenue for Alternate Proposals ........................................................................................ 56 Joint Risk Management..................................................................................................... 57 Open-book Accounting ..................................................................................................... 57 Implications of Distinctive Features ................................................................................... 58 Implications in terms of Value .......................................................................................... 58 Implications in terms of Cooperation and Relationships................................................... 59 Implications in terms of Risk Management ...................................................................... 60 Benefits of TC / GMP Contracts......................................................................................... 60 Perceived Benefits - Costs ................................................................................................ 60 Perceived Benefits - Time ................................................................................................. 61 Perceived Benefits - Quality ............................................................................................. 61 Perceived Benefits - Relationships.................................................................................... 62 Potential Pitfalls of TC / GMP Approach .......................................................................... 62 Associated Risks ............................................................................................................... 62 Requirement of Enhanced Interaction and Commitment .................................................. 63 Unfamiliarity with TC / GMP Approach and Methodology ............................................. 63 Rationalizing the Choice of GMP Contracts as the Main Focus of this Study ............... 64 Why TC / GMP Contracts? ............................................................................................... 64 Significance of Sharing Ratio ........................................................................................... 65 Selection of Sharing Ratio ................................................................................................... 68 Factors Influencing Selection of an Appropriate Sharing Ratio........................................ 69

IV

4.8.2 4.8.3 4.8.4 4.9 4.9.1 4.9.2 4.9.3 4.10

Selection Mode ................................................................................................................. 74 Selection Timeline ............................................................................................................ 75 Effects of Information Flow Timeline on Efficiency of Selected Sharing Ratio .............. 76 Value Flow via Negotiations in GMP Contracts ............................................................... 76 Negotiations / Decisions for Value in Stage 1 (pre-tender stage) ..................................... 77 Negotiations / Decisions for Value in Stage 2 (from tender to contract stage) ................. 78 Negotiations / Decisions for Value in Stage 3 (from contract to final accounts stage) ..... 78 Relational Strategies and TC / GMP Approach................................................................ 79 Value through Relational Strategies ............................................................................. 79 Dispute Resolution and Management........................................................................... 80

4.10.1 4.10.2 4.11

Chapter Summary ............................................................................................................... 81

CHAPTER 5:
5.1 5.2 5.2.1 5.2.2 5.2.3 5.2.4 5.2.5 5.2.6 5.2.7 5.3 5.3.1 5.3.2 5.3.3 5.3.4 5.3.5 5.3.6 5.3.7 5.4 5.4.1 5.4.2 5.4.3 5.4.4 5.4.5 5.5 5.6

CASE STUDIES ........................................................................... 82

Chapter Introduction........................................................................................................... 82 Case Study 1 ......................................................................................................................... 82 Data Collection Methods................................................................................................... 82 Procurement Strategies...................................................................................................... 83 Three Stage Model as Applied to the Case ....................................................................... 85 Overall Outcomes ............................................................................................................. 90 Risk Management ............................................................................................................. 91 Partnering at Work as a Relational Strategy ..................................................................... 92 Key Observations from Case Study 1 ............................................................................... 93 Case Study 2 ......................................................................................................................... 93 Data Collection Methods................................................................................................... 94 Procurement Strategies...................................................................................................... 94 Three Stage Model as Applied to the Case ....................................................................... 95 Overall Outcome ............................................................................................................. 101 Risk Management ........................................................................................................... 102 Partnering as a Relational Strategy ................................................................................. 102 Key Observations from Case Study 2 ............................................................................. 103 Case Study 3 ....................................................................................................................... 103 Data Collection Methods................................................................................................. 104 Meeting with HKCA Members ....................................................................................... 104 In-house Workshops........................................................................................................ 105 Meeting with Overseas Advisors of Client ..................................................................... 106 Key Observations from Case Study 3 ............................................................................. 107 Collective Observations from Case Studies ..................................................................... 107 Chapter Summary ............................................................................................................. 108

CHAPTER 6:
6.1 6.2

SURVEY RESULTS AND ANALYSIS ................................... 109

Chapter Introduction......................................................................................................... 109 Survey on Sharing Ratio; and Origin and Resolution of Disputes in GMP.................. 109

6.2.1 6.2.2 6.2.3 6.2.4 6.2.5 6.3 6.3.1 6.3.2 6.3.3 6.4

Survey Design and Administration ................................................................................. 109 Sample Selection............................................................................................................. 110 Survey and Interview Protocol........................................................................................ 111 Results and Analysis ....................................................................................................... 111 Summary and Implications of Results............................................................................. 124 Survey on Joint Risk Management................................................................................... 125 Survey Design ................................................................................................................. 126 Results and Analysis ....................................................................................................... 127 Implications of Results and Limitations.......................................................................... 128 Chapter Summary ............................................................................................................. 129

CHAPTER 7:

DECISION

SUPPORT

AND

MANAGEMENT

FRAMEWORK FOR PROMOTING DESIRED OUTCOMES AND MODEL FOR SELECTING APPROPRIATE SHARING RATIO ................................. 131
7.1 7.2 7.2.1 Chapter Introduction......................................................................................................... 131 Decision Support and Management Framework ............................................................ 131 Identify Project and Client Characteristics, and Value Creation and Capture Opportunities 134 7.2.2 7.2.3 7.2.4 7.2.5 7.3 7.4 7.5 Contractor Selection Strategy.......................................................................................... 134 Sharing Ratio Selection Strategy..................................................................................... 135 Effective and Efficient Dispute Management and Resolution Strategy .......................... 136 Relational Strategies and JRM ........................................................................................ 136 Model for Selection of an Appropriate Sharing Ratio.................................................... 137 Framework and Model Validation ................................................................................... 139 Chapter Summary ............................................................................................................. 140

CHAPTER 8:
8.1 8.2 8.2.1 8.2.2 8.2.3 8.2.4 8.2.5 8.3 8.4 8.5 8.6

CONCLUSIONS AND RECOMMENDATIONS................... 142

Chapter Introduction......................................................................................................... 142 Conclusions & Recommendations .................................................................................... 142 Research Methodology and Methods .............................................................................. 143 Value Creation and Value Capture.................................................................................. 143 TC / GMP Approach and Appropriate Sharing Ratio Selection...................................... 144 Relational Strategies........................................................................................................ 144 Dispute Resolution and Management ............................................................................. 145 Generalising Conclusions for Procurement..................................................................... 145 Limitations.......................................................................................................................... 146 Scope for Further Studies ................................................................................................. 146 Contribution to Knowledge............................................................................................... 147

REFERENCES....................................................................................................... 149 APPENDIX A ......................................................................................................... 163 APPENDIX B ......................................................................................................... 167 VI

APPENDIX C ......................................................................................................... 172

VII

LIST OF FIGURES
Figure 2.1: Methodology............................................................................................ 15 Figure 3.1: Positive Differential Zone ....................................................................... 25 Figure 3.2: Mutual Benefits Gained from the Exchange ........................................... 25 Figure 3.3: Value Addition as Translated to Value Differential Zone....................... 26 Figure 3.4: Transactional Forces in a Traditional Project Set Up.............................. 28 Figure 3.5: Performance of Relational and Transactional Integration Measures....... 30 Figure 3.6: Relational and Transactional Forces Map for Commonly used Combination of Integration Measures................................................................ 31 Figure 3.7: Decision Making Model in Negotiations (Watkins 1998)....................... 38 Figure 3.8: Proposed Three Stage Model................................................................... 42 Figure 4.1: Target Cost Contract with 50:50 Share Profile (adapted from Broome and Perry 2002)......................................................................................................... 70 Figure 4.2: Share Profile with Capped Employer Commitment (adapted from Broome and Perry 2002) .................................................................................... 70 Figure 4.3: Share profile with Capped Employer Commitment and Any Saving Reinvested In (adapted from Broome and Perry 2002).......................................... 71 Figure 4.4: Share Profile with Progressive Cap (adapted from Broome and Perry 2002) .................................................................................................................. 71 Figure 4.5: Share Profile for Medium Risk Project and Financially Strong Client (adapted from Broome and Perry 2002) ............................................................ 72 Figure 4.6: Share Profile for Risky project, Financially Strong client and Risk-Averse Contractor (adapted from Broome and Perry 2002) .......................................... 72 Figure 4.7: Share Profile with Neutral Band (adapted from Broome and Perry 2002) ............................................................................................................................ 73 Figure 4.8: Share Profile for Multi-contract Project (adapted from Broome and Perry 2002) .................................................................................................................. 73 Figure 4.9: Main Thread of Negotiations in TC / GMP............................................. 77 VIII

Figure 7.1: Decision Support and Management Framework for Value in TC / GMP approach ........................................................................................................... 133 Figure 7.2: Indicative Model for Sharing Ratio Selection given Project Characteristics and Stakeholder Profile ........................................................... 138

IX

LIST OF TABLES
Table 3.1: Dimensions of 3-D Negotiations (adapted from Lax and Sebenius 2006)35 Table 3.2: Survey results Duration of P-T P-C negotiations (organization type)... 44 Table 3.3: Survey Results Duration of P-T P-C Negotiations (client type and project type) ....................................................................................................... 45 Table 3.4: Survey Results Frequency of Use of Negotiation Strategies and Tools (organization type) ............................................................................................. 46 Table 3.5: Survey Results Frequency of Use of Negotiation Strategies and Tools (client and project type) ..................................................................................... 46 Table 3.6: Survey Results Significance of P-T P-C Negotiations for Relationships (organization type) ............................................................................................. 48 Table 3.7: Survey Results Significance of P-T P-C Negotiations for Relationships (client and project type) ..................................................................................... 48 Table 3.8: Causes of Delay (organization type)......................................................... 49 Table 3.9: Spearmans Rank Correlation Test between Groups of Respondents for Causes of Delay ................................................................................................. 50 Table 3.10: Issues Discussed / Negotiated in P-T P-C Negotiations with respect to Different Procurement Strategies....................................................................... 50 Table 3.11: Spearmans Rank Correlation Test between Groups of Respondents for Issues Discussed / Negotiated with respect to Different Procurement Strategies ............................................................................................................................ 51 Table 5.1: Breakdown of GMP Amount in Case Study 1.......................................... 86 Table 5.2: Negotiation Behavior and Residual Feeling in Case Study 1 ................... 90 Table 5.3: Breakdown of GMP Amount in Case Study 2.......................................... 98 Table 5.4: Negotiation Behavior and Residual Feeling in Case Study 2 ................. 100 Table 5.5: Frequency and Efficiency of Negotiation Tactics Type in Case Study 2101 Table 6.1: Survey Results - Efficiency of Outcomes for Contractor Selection Method and Price Type ................................................................................................. 112 X

Table 6.2: Survey Results - Efficiency of Outcomes for Sharing Ratio Selection Mode ................................................................................................................ 114 Table 6.3: Survey Results - Efficiency of Outcomes for Types of Sharing Ratios . 116 Table 6.4: Survey Results Influencing Factors for Sharing Ratio Selection......... 118 Table 6.5: Survey Results Origin of Savings from TC / GMP Approach ............ 119 Table 6.6: Survey Results Interplay between Sharing Ratio and Influencing Factors .......................................................................................................................... 121 Table 6.7: Survey Results Dispute types, Reduction causes and Influencing Factors .......................................................................................................................... 122 Table 6.8: Contribution Matrix ................................................................................ 127 Table 6.9: Frequency - Risk Management with respect to Each Stage.................... 128 Table 7.1: Validation Results................................................................................... 140

XI

CHAPTER 1: INTRODUCTION
This chapter introduces the background of the research topic, points out the research gap, identifies the aims and objectives of the research, emphasizes its significance, demarcates its scope and provides an overview of the rest of the chapters.

1.1

BACKGROUND

The construction industry is known to operate in an adversarial environment which gives rise to non-productive disputes and disrupted relationships between the stakeholders resulting in calls to revamp industry practices for better performance and relationships (Latham 1994; Egan 1998, 2002). The revamping strategies of the industry which were mainly channeled towards mitigating this adversarial environment can be classified generally into two broad categories, namely:

(a) Strategies for Value: strategies with aims to create value (such as value management, lean construction, joint risk management through partnering etc) and also to distribute value between the stakeholders (such as through gain / pain share arrangements, other incentivisation measures, alliancing, framework agreements etc) in targeting better performance; and

(b) Strategies for Integration: strategies with an aim to integrate stakeholders both structurally and relationally (such as JVs, partnering, alliancing, relational management stakeholder management etc) for achieving improved cooperation, and evidently evoking overlaps with the foregoing strategies for value.

However, as Langford (2007) noted, the results of Industrys efforts still remain elusive due to shortfalls in implementation and the improvements being not all inclusive. This has resulted in rewards being lower than expected, and also limited to big clients and contractors at the top of the supply chain. For example, Sze et al. (2003) confirmed the exclusive nature of non-contractual partnering that tended to exclude consultants and subcontractors in Hong Kong.

In addition to these strategies, various procurements methods such as design-build, 1

GMP / target cost, PPPs which are also strategies aimed at achieving value and integration, and aid in implementation of the above mentioned strategies have been in use in the construction industry for many years. However, the desired significant breakthrough has failed to materialize even with these initiatives, and the search for a suite of improved procurement approaches that can uplift the industry still continues (Kumaraswamy 1998, Dissanayaka and Kumaraswamy 1999).

In this context, of particular interest are cases that indicate the success of the guaranteed maximum price (GMP) and target cost contracting (TCC) procurement approaches with a gain-share / pain-share arrangement as an incentive mechanism. These approaches to procurement have been intensely promoted and implemented in the United Kingdom and Australia and their relative success has been widely reported. The Report of the Construction Industry Review Committee (CIRC 2001) in the Hong Kong Special Administrative Region also recommended the use of GMP and TC contracts for complex and high-risk construction projects.

1.2

TC / GMP CONTRACTS

TC / GMP contracts are incentive-based procurement strategies which reward the contractor for any savings made against the TC / GMP and penalize him when this sum is exceeded as a result of his mismanagement according to a pre-agreed share ratio (Masterman 2002, Bresnen and Marshall, 2000). TC / GMP contracts are also generally accompanied by relational strategies such as partnering, alliancing to foster trust which is seen as a requirement by many studies for effective and efficient management of such contracts. These strategies have been shown to achieve considerable mutual benefits to all of the parties involved, provided they are properly structured, implemented and managed (Trench, 1991; Walker et al., 2000).

The mutual benefits are generally perceived to stem from the pain / gain share (incentivisation) strategy which has been shown to promote joint risk management. These mutual benefits are believed to be enhanced by accompanying relational strategies which many studies report as improving cooperation. In this context, it can be safely assumed that the selection of appropriate gain / pain share arrangement is an important aspect of procuring through TC / GMP contracts.

1.2.1

Selecting Sharing Ratio in TC / GMP Contracts

In a TC / GMP contract, there are three negotiable terms: (a) target cost, (b) target profit and (c) a sharing ratio (Gandhi, 1979). Although Perry and Barnes (2000) have shown that the sharing ratio, the target cost and target fees are interrelated, there have been few studies focusing on the negotiation of a TC / GMP contract in the context of the construction industry and on the factors that influence the selection and negotiation of pain / gain share ratios. Broome and Perry (2002) have indicated the need for an in depth study on how to select a sharing ratio in a TC / GMP contract.

Badenfelt (2008) indicates that there is lack of clear preferences regarding sharing ratios in the industry. From an extensive review of literature he summarizes the following key factors as important in negotiating a sharing ratio in a TC / GMP contract: (a) the clients and contractors perceived level of risk, (b) their attitudes towards risk, with risk-averse contractors arguing for a low sharing ratio when the uncertainty level is high, (c) the desire to influence the contractors motivation, with the size of the sharing ratio affecting the contractors motivation to keep costs down, (d) the contracting parties initial perception of the accuracy of the negotiated target cost, (e) the size of the target profit, with a large profit encouraging the contractor to choose a higher sharing ratio and (f) the contractors desire to increase the chances for profit in the longer term. He concludes that there should be more study of the interaction of risk and the selection of a sharing ratio and stresses the importance of dealing with asymmetric information risks while designing the contract. He also mentions the need for accounting of relational risks while selecting a sharing ratio.

1.3 RESEARCH GAP

Various studies, as for example cited above, acknowledge that different sharing ratios can lead to different levels of project performance and call for research towards determining the parameters of selecting an appropriate sharing ratio. Selecting an appropriate sharing ratio for achieving value for all stakeholders is a decision making problem involving judgment calls on several factors as in Section 1.1 above and as also indicated by case studies undertaken as a part of this research. These factors are: (a) stakeholders affinity towards risk (b) perceived risks of 3

stakeholders, (c) managing information asymmetry and accounting for information flow (d) managing relational risks (e) providing sufficient motivation for the contractor to keep the costs down (f) providing sufficient motivation for the contractor to innovate and for the client to accept innovations.

These factors are analyzed in related groups in the following sub-sections to unveil the decision making problems they evoke when striving for selection of an appropriate sharing ratio. A substantiated research gap is identified in the absence of an integrated model for selection of an appropriate sharing ratio when given project characteristics and relevant data. The research focus is then directed to developing a decision support framework which assists through a sequence of required key decision nodes, in selecting an appropriate sharing ratio for sets of given project characteristics.

1.3.1

Affinity towards Risk, Risk Perceptions and Resulting Strategies

Risk is a key criterion while pricing any contract and more so with respect to TC / GMP contracts because of the unique elements of risk sharing arising out of pain / gain share mechanism that accompany these contracts. Many studies have explored the relationship between degree of affinity towards risk and the selection of sharing ratio (Scherer 1964, Bernhard 1988, Broome and Perry 2002, Al-Harbi 1998). However, they do not venture into the realms of the perceived risk of stakeholders for a given sharing ratio influencing the target price and the stakeholders resorting to opportunism if their perceived risks are high which can be detrimental to project outcome. The roots for possible opportunistic behavior are in the definition of the contingencies allowed for in design development which enable adjustments of TC / GMP.

Unclear definitions of design development contingencies have been identified as a potential pitfall in implementing these contracts. This is because too little scope for design development diminishes the attractiveness of gain share arrangement and too high scope for design development increases the associated risks. Also, the tendency of a contractor is to view all variations as scope changes that would increase the TC / GMP higher whereas a client would want to keep as many changes as possible

under design development to minimize cost increases and reap the benefits of potential cost savings. Hence, unclear definitions generally lead to disputes over whether client instructions in construction phase are TC / GMP scope change variations (TC / GMP price to be adjusted) or are part of design development (hence part of contractors risk), thereby diminishing value and cooperation, and hurting relationships.

1.3.2

Information Asymmetry and Information Flow

Information differences among negotiators lead to inefficient outcomes as shown by Cramton (1984) and information is the key to selecting an appropriate savings ratio as it provides significant insights to the opportunities, challenges and risks inherent in the project. Information asymmetry is common in the construction industry. For instance, a clients information about the construction industry market is generally less than that of the contractor and a contractors interpretation of the scope of the project can be significantly different from that of the clients. Minimizing

information asymmetry requires information exchange which generally occurs in the form of tender documents and tender submissions in case of competitive bidding and through discussions in case of negotiated contracts. In this respect, negotiated contracts have been seen to lead to better information exchange and thus better outcomes as compared to competitively bid contracts (Rothkopf 1969, Obrien et. al. 1995, Briscoe et. al. 2003).

However, the mode of selection has a significant impact on the selection of sharing ratio and the project outcome in a TC / GMP contract. This is both due to the collaborative nature of the contract and also due to opportunities and risks for maximizing value to both the stakeholders by means of adjusting TC / GMP. Additionally, the degree of information completeness in a construction project is very much dependant on level of detail and accuracy of scope, design and other relevant documents at the point of opting for tendering / negotiation. This makes it imperative to balance the need of project acceleration against the necessities of having adequate information for arriving at an efficient outcome.

1.3.3

Managing Relational Risks and Providing Sufficient Motivation

Relational risk depends on the level of cooperation between the contracting partners and deals with the probability that an agent may demonstrate opportunistic behavior (Das and Teng 2001, Elmuti and Kathawala 2001, Ireland et al. 2002). The choice of a sharing ratio, being an upstream event of a project timeline, can have effects on cooperation during downstream events of a project timeline. In a collaborative arrangement such as a TC / GMP contract a displeased partner may blame the partnering company, and thus increase the perceived relational risk (Elmuti and Kathawala, 2001). An increase in perceived relational risk can cause disastrous consequences as described in Section 1.3.1.

Perry and Barnes (2000) suggest that a sharing ratio with a higher share of savings for the contractor increases the contractors motivation to renegotiate the target cost for new events that occur during the course of the contract. However, they also argue that the client should avoid setting the contractors share at less than 50 per cent, for a low share decreases the contractors motivation to reduce the actual cost. This dichotomy extends to what is the appropriate sharing ratio which motivates the contractor to innovate for value. A higher share of savings to the contractor arising out of innovation can result in the client viewing it as a cost cutting ploy and rejecting it without a fair evaluation while a lower share may not provide the contractor sufficient motivation to innovate. Also, the type of strategies implemented to manage relationships on the project can affect both the management of relational risks and the motivational levels of stakeholders.

1.3.4

Research Focus

Selection of an appropriate sharing ratio for a given project involves interacting factors as shown above and is a sequential decision problem requiring answers to the following questions:

(a) What should be the scope for design development? (b) What should be the definition of design development? (c) What should be the mode of contractor selection? (d) What should be the point of contractor involvement? 6

(e) When should the savings ratio be fixed? (f) When should the tendering / negotiation take place? (h) What relational strategies are appropriate?

Depending on the answers to the above questions and based on the requirements of the project, a project manager is further required to make a judgment call as to maintaining the right balance between the requirements of managing relational risks and providing sufficient motivational incentives to stakeholders. However, no framework exists at present to assist and guide a project manager in the process of making these decisions. The aims and objectives as set out in the succeeding section were formulated to address this problem.

1.4

RESEARCH OBJECTIVES

The aim of this research was crystallized in the context of the above mentioned research gaps, to provide significant and original contributions to the knowledgebase on TC / GMP contracts. Specifically, the aim of this research is to provide a framework for improving the utilization of pain / gain share arrangement and associated relational strategies to provide enhanced value (project performance) for all stakeholders involved from project conception to project delivery. In achieving the above aim, the proposed research has the following objectives:

To develop an integrated model for decision making towards selection of appropriate pain / gain share arrangement depending on project requirements and characteristics, and stakeholders profiles to improve project value.

To identify relational strategies that foster integrative value sharing and thus improve cooperation between stakeholders

To integrate the proposed relational strategies with the developed decision making model into an overarching framework for TC / GMP contract management for minimizing disputes, improving cooperation and enhancing value

To provide a set of guidelines towards administering the framework

To identify applicable strategies from above that may be beneficially implemented in other procurement (non TC/GMP) approaches through further research.

1.5

SIGNIFICANCE OF THE RESEARCH

Procurement through GMP / TC is associated with a cost premium as compared to traditional procurement methods (Mills and Harris, 1995). The costs generally stem from the longer time required to draft and tender a TC / GMP contract and the higher level of commitment and supervision required from the management. Unfamiliarity of stakeholders with TC / GMP contracts and its mechanisms have also been cited as a potential pitfall in successful procurement through them (Sadler 2004). In this context, a case study client conveyed that they were wary of pursuing a TC / GMP in too many work packages / contracts at the same time given the limited number of contractors who could perform well in this environment at present.

The absence of widely accepted and localized standard forms of TC / GMP contracts also exacerbates the difficulties for project managers in drafting and managing them. Gander and Hemsley (1997) point out the possibilities of drafting errors and misunderstanding of liabilities between the parties when unfamiliar with the concepts. Tendering a TC / GMP contract is longer and complex. Tay et al. (2000) suggest that it is difficult to evaluate the revised contract price when an alternative design is proposed by the contractor and it takes time to reassess the cost implication. Most of these difficulties can be minimized (if not eliminated) by providing a better overall understanding of the complexities of TC / GMP contracts.

The proposed framework that is to be developed will harness the latent knowledge of practitioners experienced in drafting, tendering and administering a TC / GMP contract and set it in a generalized contextual perspective of project characteristics and conditions. The framework and model will unravel the complexities of TC / GMP mechanisms and provide a better understanding of the consequences of available options and decisions taken.

A better holistic understanding is expected to lead to appropriate decisions and thereby improve value for the stakeholders. Guidelines provided on decision making when given a set of projects characteristics and conditions are expected to aid the project manager in the decision making process, thereby cutting down the time required for decisions and easing the difficulties in arriving at them. These potential benefits are expected to aid in propagating the use of TC / GMP contracts for procurement and this should assist in the industrys quest for higher value and deeper relationships (true integration) thereby fostering value addition and genuine cooperation.

1.6

RESEARCH SCOPE

This research focuses on two key areas value and relationships, briefly in relation to procurement in general, and in more detail and depth in the specific context of TC / GMP contracts. The research also explores wide ranging and relevant issues

concerning construction project management which are strongly intertwined with value and relationships in a project such as:

Risk management Contracts management Negotiations management (through game theory in this research) Perceptions of value and value management Selection of contractors Concepts of cooperation and relationship management Dispute Management and Resolution Supply chain management (limited to aspects of value and relationships)

1.7

OVERVIEW OF THE THESIS

The main body of this thesis consists of eight chapters. The background of the research topic, the research gap, its aims and objectives along with its significance and scope are discussed in the preceding sections of this chapter (Chapter One). Chapter Two introduces and reviews various methodologies generally utilized in construction management research, assesses their potential against the requirements

of this research topic, spells out the choices made for the study and provides justifications for the selection. Chapter Three in a traditional thesis outline generally involves literature review. However, in the context of multiple concepts utilized in this thesis, it is felt that providing a collective literature review will hinder ease of reference and confuse the reader. Hence, the literature review is spread out in this thesis and is presented as and when the relevant concepts appear first in use.

Chapter Three explores the concepts of value and defines value, value creation and value capture (sharing of added value) in the context of this research. The significance of value capture perceived value in fostering value creation and improving risk management, relationships and cooperation is brought out. Value capture is linked to negotiation outcomes. Value creation and value capture processes in the construction industry from project conception to project delivery are reviewed and negotiations in a life cycle of a construction project are analyzed and classified from game theory perspective. A three stage model based on the presented analysis and classifications is developed to explain the complex inter-linkages of negotiations of individual issues influencing the overall outcome and relationships. Diverse strategies and tools for influencing negotiation outcomes and improving relationships are unraveled from the literature and outlined.

Chapter Four explores TC / GMP contracts in detail to provide an understanding of their characteristics, benefits and associated risks. General distinctive features of TC / GMP contracts such as incentivasation and accompanying relational strategies like open book accounting, partnering and so on are described and analyzed to provide understanding on their implications for value, negotiations, dispute resolution and management, cooperation and risk management. Further, justifications for the selection of TC / GMP contracts for the research are provided and the three stage model of negotiations is applied to delineate the structure of negotiations in a TC / GMP contract. The significance of selecting an appropriate sharing ratio at the right point of the project timeline for achieving improved value and relationships is revealed.

Chapter Five presents three case studies (two on GMP contracts and one on a TC contract) undertaken as part of this research. A description of each project and the 10

research methods used for data mining in the case are provided. The rationale of the stakeholders in choosing TC / GMP contract as the procurement option and the key risks associated with the projects are explained. Distinctive contract conditions and management strategies in each project are brought out and analyzed in terms of their implications for value, negotiations, cooperation and risk management. Key observations from document review and participating in stakeholder meetings along with key perceptions generated from analysis of semi-structured interviews and questionnaire surveys of stakeholders are described. The format of semi-structured interviews and mini-questionnaires used are provided in Appendix A at the end of the thesis. The findings are seen to generally buttress the significance of selecting an appropriate sharing ratio at the right point of the timeline in achieving improved value and relationships. Additionally, they are found to support the utilization of relational strategies to improve project outcome and cooperation.

Chapter 6 presents the major questionnaire survey of this thesis and discusses the findings from this survey. The survey itself is an interview based survey on different types of gain / pain share ratios, their implications on value and cooperation along with dispute resolution and management in TC / GMP contracts. The survey methodology is described and the interview format and the questionnaire itself are provided in Appendix B. Despite the lack of preference towards particular gain / pain share ratios in the industry as seen in the literature, the findings indicate significant correlations between project characteristics and the perceived appropriate sharing ratio that will produce an efficient and effective outcome. The findings also strengthen the need for relational strategies to enhance cooperation. This is considered to validate the hypothesis of this study that different project characteristics require different sharing ratios to produce efficient project outcomes.

Chapter Seven integrates the findings from the case studies and the survey presented in Chapter Six with strategies and tools for influencing negotiation outcomes and improving relationships described in Chapter Three to develop a model for selecting appropriate gain / pain share ratios when given project characteristics and stakeholders risk affinities. The model validation process is described and validation results are presented. The developed models usage is contingent upon (a) having a firm contractor selection strategy, (b) mapping project information flow and (c) 11

identifying value generation opportunities and associated risks. Therefore, best practices harvested from the case studies and literature reviews are used to formulate guidelines to make the appropriate choices and to derive the details required. The guidelines together with the model form the framework for improving the choice and utilization of pain / gain share arrangement and associated relational strategies to provide enhanced value for all stakeholders in accordance with the aim of this thesis.

Chapter Eight summarizes the main conclusions and recommendations, while outlining the limitations of this research. The findings are generalized for adaptation in traditional procurement if and where possible, while areas and scope for further studies are identified. Chapter Eight is followed by references and next by an Appendix section providing a list of publications arising from this research, as well as presenting other relevant items contributing to the research itself.

12

CHAPTER 2: RESEARCH METHODOLOGY

This chapter presents a brief overview of research methodologies employed in construction management research and discusses their appropriateness in the given context of this thesis and its objectives. The chapter also provides the rationale behind the research method choices made along with an insight into the research journey towards achieving the objectives. However, it does not delve into details of the specific design aspects within the methodological choices made as they are discussed at appropriate points in the thesis as and when they are mobilized, so as to frame them in a more specific and relevant context.

2.1

RESEARCH METHODOLOGY

Value enhancement in construction projects employing TC / GMP contracting approached is the aim of this research. Value enhancement as defined in Chapter 3 subsequently, is considered to consist of two distinct processes: (1) value creation and (2) value capture or appropriation. Equitable value appropriation is brought out as the critical requirement for value enhancement and value appropriation is demonstrated to be a bargaining problem and analyzed within the concepts of game theory. The underlying assumption in game theory is of bounded rationality. Since the assumption of bounded rationality is a prerequisite to analyze a bargaining problem in the context of associated uncertainties, the analysis in the research is confined to the limitations arising from this assumption.

Within the realms of game theory, research questions as outlined in Subsection 1.3.4 of Chapter 1 suggest a sequential decision making problem involving single party decisions and at times negotiations. Understanding the structure of the sequence of decisions / negotiations is explorative research whereas modeling it to influence the outcomes is interpretive research. Also, the research comprised of an applications part wherein well established knowledge from decisions / negotiations research needed to be transplanted into the realms of construction contracts.

In developing the methodology, the research aim was considered as consisting of 3 parts which are (1) developing a structure for sequential decisions /negotiations in 13

construction contracts (2) applying the developed structure on TC / GMP and conducting an in-depth exploration of inter-linkages between decisions / negotiations (3) identifying factors that influence the outcomes of the decisions / negotiations and understanding the interplay between them. The research methods were carefully reviewed for their suitability for addressing above requirements and a research strategy involving four types of research method was formulated.

For developing a structure for sequential decisions / negotiations in construction contracts and understanding the interlinkages, knowledgebase from game theory literature was utilized. The choice was based on the primary question that game theory answers which is to identify the conditions that will make it possible for two rational opponents to cooperate in achieving an efficient, Pareto-optimal, outcome which in essence is the purpose of this research in the context of construction contracts. In addition, a three pronged approach of case studies, questionnaire surveys, and interviews was used to flesh the gaps between the skeleton provided by applying game theory. The rationale behind the selection of these methods is discussed subsequently. A methodology map of the approach taken by this research is illustrated in Figure 2.1.

2.2

REVIEW OF RESEARCH METHODS IN CM RESEARCH

Generally, researchers in construction management employ a spectrum of research methods which can be broadly classified into four categories namely: literature review, case studies, interviews and surveys.

2.2.1

Literature Review

Literature review is a critical appraisal of the existing body of scholarly knowledge on the concerned topic. According to Cooper (1988) a literature review seeks to describe, summarize, evaluate, clarify and/or integrate the content of reports of primary or original scholarship. Apart from establishing the authors grasp on the subject, literature reviews are meant to identify the gaps in the current knowledge base, establish the need and significance for undertaking research to fill the gaps identified and formulate research objectives and methodology for undertaking the

14

research.
Explore concepts of value, value creation and value capture

Literature Review

Develop a structure (model) for sequential decisions / negotiations in construction contracts

Explore TC / GMP approaches for improving value creation & capture, and relationships

Literature Review Game theory

Three Stage Model of negotiations in Construction Contracts

Questionnaire survey on three stage model

Consolidate Literature review

Identify primary threads of negotiations / decision making which has significant impact on value

Significance of gain / pain share arrangements

Explore and identify factors influencing gain / pain share arrangements, relational strategies, dispute management and resolution

2 longitudinal case studies + 1 mini case study + 1 interview based Survey on TC / GMP approach + 1 mini survey

Integrated findings in developing a decision support and management framework + model for selection of an appropriate sharing ratio

Validated framework and model

Final Output Intermediate output Figure 2.1: Methodology 15

Purpose Research Method

2.2.2

Case Study

A case study is defined an intensive study of a single group, incident, or community (Shepard and Greene 2003) which in the context of construction management can be termed as a study of a work package(s) or a project(s). Case studies provide an avenue for investigating issues in detail in a specific context and the data collected can vary from first hand (primary data) involvement of the researcher in the concerned project to second hand (secondary) data sourced through other research methods inbuilt into the designed case study methodology such as document reviews, interviews, surveys and so on.

Often considered to be narrow and deep in scope (Fellows and Liu 1997) because of the specific context, case studies yield both quantitative and qualitative data and are of two types: (1) transverse a snapshot of the case at a given point of time and (2) longitudinal a complete follow through of the case from initiation of the project to completion. Selecting the appropriate approach from these two is generally dependant on the requirements of the issue researched into, and external factors like accessibility, confidentiality and the available timeframe as against the required timeframe.

2.2.3

Interview

An interview is a qualitative research method aimed at gathering in-depth information by harnessing facts and opinions on a particular issue as experienced by a specialist/expert. As described by Fellows and Liu (1997) interviews can be classified into three categories: (1) structured: rigid order with same questions (2) semi-structured: same questions, but with a flexibility to follow tangential issues and seek clarifications and (3) unstructured could be same questions but free flowing. Selecting the appropriate method of the three has to address the requirements of the issue being researched and the skills of the interviewer.

2.2.4

Survey

A survey is a standardized form of data collection from selected samples of a population and is used to generate statistical inferences which can be generalized to

16

the whole population. They are the most commonly used research method in CM research with many advantages as summarized in Mangione (1995). However, they are seen to be broader and shallow in scope as the data collected generally tends to be standalone in the absence of contextual data.

Moreover, they have to be very carefully designed to benefit from the advantages, as they are not open to the flexibility of adaptation as the study progresses (Delphi method and longitudinal/sequential surveys are exceptions), which is possible in case studies and interviews. Also, care needs to be taken while designing a questionnaire to avoid ambiguity and redundancy and the reliability of the data collected depends on the sampling choice.

2.3

SELECTING

APPROPRIATE

METHODS

FOR

THIS

RESEARCH
This research aims to achieve multiple objectives (as in Section 1.4, Chapter 1) by relying on multiple concepts (as in Section 1.6 of Chapter 1). According to Fellows and Liu (1997), the selection of an appropriate research method is dependant on the scope and depth required for the given research topic. In addition, Robson (1993) suggests that results obtained by relying on a single research method cannot be reliable as they would be limited by the restrictive aspects of the research method used.

Moreover, there has been a raging debate as to whether qualitative or quantitative research methods are the most appropriate choice for CM research and consensus is that triangulated approaches should be used (Jick 1979, Blackwood et al. 1997, Love et al. 2002). Black (1993) defines triangulation as the use of multiple research methods and/or measures of a phenomenon to avoid the problems of bias and validity. In addition to the requirements of appropriateness and reliability, the selection of research methods used in this thesis was guided by one other factor: the genesis, evolution and crystallization of the research focus and objectives over the timeline of the research project, which also injected time constraints that curtailed the options available. These are discussed in detail in subsequent sections.

17

2.3.1

Research Initiation and Finalization of Research Topic

This research was initially initiated with the purpose of understanding negotiations in construction contracts with an aim of improving efficiencies of their outcomes and optimizing the distribution of perceived value between stakeholders; thereby fostering relationships and enhancing cooperation between stakeholders. However, feedback from expert academics suggested that the scope was too broad and the industry would be better served with reliable outputs if the research focus was narrowed down in terms of the contract type.

It is in this context, target price / GMP contracts were chosen as the focus area. Extensive literature reviews identified the selection of the appropriate sharing ratio for the project in target price / GMP contracts as the trigger which has significant influence on value creation and distribution; and thereby on relationships and cooperation (as discussed in detail in Chapter 4).

The evolution of this research along the timeline as delineated above in terms of narrowing scope and refinement in research objectives placed certain constraints on research methods utilized which are: (1) data collected and research methods initiated before the change in scope and objectives had to be utilized in the changed context and (2) research methods had to be tailored to fit into the available time frame. Nevertheless, the range of data and methodological tools available, provided for achieving the planned objectives.

2.3.2

Research Methods in Relation to Objectives

The primary aim of this research was to develop an integrated model for decision making for selecting appropriate pain / gain share arrangement depending on project requirements and characteristics, and stakeholders profiles to improve project value and foster relationships. Value in the context of fostering relationships and for the purpose of this research was defined as a negotiated outcome between stakeholders, the concepts of which are described in detail in Chapter 3.

18

Hence, it was imperative for the research to understand the negotiations involved in target price / GMP contracts and develop a generic model for the same. Developing a process model for negotiations involved in target price / GMP contracts entailed tracking a project from initiation to completion. The most suitable method in achieving this as discussed before is a case study, since surveys and interviews do not generally provide the contextual insights necessary to build a complete process model. Also, the negotiation set up is different in public sector and private sector projects which required at least two case studies. In addition, GMP contracts and target price contracts differ in certain characteristics which are dealt with in Chapter 4 which suggested at least four case studies to cover the spectrum of possible negotiation processes.

However, due to the fact that target price / GMP contracts are limited in use in Hong Kong and also due to project accessibility and time constraints, the research project settled for two longitudinal case studies on projects employing GMP contracts; one each from the public sector and the private sector, along with a mini case study on a project employing a target price contract. It was believed that the two longitudinal case studies on GMP contracts would provide the rich sources of material for the basic model, and the mini case study would provide necessary insights to tweak the model to reflect the target price contract characteristics when required.

In building the model to select appropriate sharing ratio given project conditions, the it was necessary to identify project and stakeholder specific factors which influence value creation through value sharing and thereby project outcomes. This required harvesting knowledge from a broader base of experts; i.e. a bigger sample size. Hence, case studies were deemed inappropriate and use of surveys was suggested. However, it was important to understand specific contexts notwithstanding the requirement of a broader base. Hence, an interview based questionnaire survey was considered appropriate to harvest this knowledge as this provided both the opportunity to consider a broader sample size while maintaining the flexibility to investigate tangential and contextual issues influencing the effectiveness of a given sharing ratio.

19

The secondary objective of this research was to investigate the role of relational strategies in value optimization and enhancing cooperation and better relationships and to identify appropriate strategies that foster integrative value sharing and thus improve cooperation between stakeholders. This required both a broader sample size and deeper understanding which suggested a combination of case studies and surveys to be the appropriate research approach.

With the above constraints in mind the research zeroed in on 2 fully fledged longitudinal case studies, one mini case study and one interview based survey as primary research methods for collection of required data. Two other surveys which were initiated before the change in research scope and objectives have been partially utilized to form the launching pad for the primary methods. Both the primary and secondary research methods are explained briefly in the following sub-section.

2.3.3

Research Methods Utilized

In addition to literature review which was continuous through the research process this research relies on the data collected by the following research methods:

2.3.3.1 Surveys Three questionnaire surveys were conducted as a part of this study and are briefly explained below:

(1) Email based questionnaire survey on construction contract negotiations (only relevant parts of the results are used): This survey addressed issues related to efficiencies of negotiations leading to the formation of the contract and was initiated before the change in scope and objectives of the research. However, the results are utilized in this thesis to form the basic model of negotiations in the construction industry and buttress the results from the main survey and case studies.

(2) Email based questionnaire survey on Joint Risk Management (only relevant parts of the results are used): This survey was completed before the narrowing of scope and objectives of the research, and was aimed at (1) identifying who is better able to manage some specified risks in construction projects (Owner or Contractor, or

20

Either one of them, or Jointly) at each stage of risk management cycle and to (2) evaluate the percentage contribution of various stages of the risk management cycle in achieving an ideal risk controlled environment. The results of this survey are utilized in understanding and refining risk management in target price / GMP contracts as there is greater emphasis on joint risk management in these contracts and many researchers have identified that JRM is a critical factor in achieving desirable outcomes in target price / GMP contracts.

(3) Interview based survey on sharing ratios, and origin and resolution of disputes in GMP contracts: This survey was targeted at managerial level professionals with experience in one or more projects employing target price / GMP contracts and was conducted during the interviews explained in Section 2.3.3.3. This survey addresses different types of sharing ratio with respect to their outcomes, key factors and selection processes influencing the selection of an appropriate sharing ratio for given project conditions, origin of savings and origin of disputes, and their management and resolution within the specific context of target price / GMP contracts.

2.3.3.2 Case Studies (1) Longitudinal case study on a private sector office cum commercial complex project employing GMP contract: This case tracked the project from beginning to end and addressed issues such as contract management, negotiations management, risk management, origin of disputes, their resolution and management, cooperation and relationships. The data from this project was drawn from multiple sources: notes from observations at meetings, meeting minutes, interviews, and embedded mini questionnaire surveys from time to time along with an extensive study of project documents.

(2) Longitudinal case study on a public sector housing complex project employing GMP contract: This case study was conducted along similar lines to that of the first longitudinal case study mentioned above.

(5) Mini case study on a quasi government infrastructure project employing a target price contract: This case addressed understanding the rationale behind the conditions of contract in a target price contract as its main concern, and was focused on the 21

early stages of contract delineation and refinement. The data from this project mainly took the form of notes from observations at meetings, workshops and interviews, and a few additional supporting documents supplied by the client.

2.3.3.3 Interviews Semi-structured interviews were conducted with managerial level professionals with experience in one or more projects employing target price / GMP contracts. The structure for the interviews was guided by the interview based questionnaire explained above. Tangential and related questions influencing the issues dealt with in the survey were explored in greater depth through these interviews.

2.4

CHAPTER SUMMARY

Selection of appropriate research methods is important in extracting and synthesizing reliable results. This chapter has rationalized the utilized research methods in the context of the research scope and objectives, and explained / answered why the particular methods were chosen in order to justify the reliability of the research outputs. As indicated, more information and relevant details on specific methods are embedded in relevant sections of the following chapters.

22

CHAPTER 3: VALUE, RELATIONSHIPS AND PROJECT NEGOTIATIONS

3.1 CHAPTER INTRODUCTION

In terms of value, until the more recent series of high profile reviews (Latham 1994, Egan 1998, CIRC 2001, Fairclough, 2002), the construction industry was dominated by the term cost and the buildings designed down to a budget by consultants and then tendered for by contractors, where the lowest cost tender usually won. This approach enabled clients to maximize profits with little consideration for the concept of value (Brady et. al. 2005). Following the reviews, a new mission for the industry to add value for customers and society by shaping and delivering the built environment to meet their needs (Saxon, 2003) was formulated.

However, as Langford (2007) noted, the results of Industrys integration efforts still remain elusive due to shortfalls in implementation and the improvements being not all inclusive. Further, the CIB initiative on Revaluing Construction (Barrett 2005) goes further in articulating the need for not only defining and pursuing (maximizing / creating) the value created by the construction industry stakeholders, but also the need for the equitable distribution of the resulting rewards or value. In this context, this chapter explores the concept of value, value creation and value capture (sharing of added value). Value creation and value capture in the construction industry is reviewed. The significance of value capture in fostering value creation is also brought out. Value capture is defined as a bargaining problem and game theory is used to explain the structure of value creation and value capture processes in a project setting by means of a three stage model. Questionnaire survey results that focus on stage two of the proposed three stage model are presented.

3.2

CONCEPTS OF VALUE, VALUE CREATION AND VALUE

CAPTURE
Maximizing value is a ubiquitous concept in the world of business strategy. However, firms often do not know how to define value or even to measure it 23

(Anderson and Narus, 1998). This section explores the concept of value in a business setting to identify what organizations mean when they are searching for value.

3.2.1

Value

Miles (1961) identified and differentiated four types of value of an item: (1) use, (2) esteem, (3) cost and (4) exchange and defined use value as the properties and qualities that accomplish a use, work or service; esteem value as the properties, features or attractiveness that cause a want to own it; cost value as the sum of labor, material and various other costs required to produce it; and exchange value as its properties or qualities that enable it to be exchanged for something else that is wanted. Integrating the concepts of these 4 types of value, he defined value as the minimum amount that must be expended in purchasing or manufacturing a product to create the appropriate use and esteem factors.

The above definition, on closer investigation reveals that it is not a single measure, but is different for the purchaser and for the manufacturer, i.e. it is subjective leading to a subjective theory of value in the realms of economics. Subjective theory of value relies on exchange value or price as fixed by the market or market value and assumes that all voluntary trade is mutually beneficial. In this regard, Anderson and Narus (1998) define market value as the worth in monetary terms of the technical, economic, service and social benefits a customer company receives in exchange for the price it pays for a product offering.

However, market value should not be confused with the perceived value, as the value of the product or service as individually perceived by the buyer and the seller are different. Market value is just the exchange value of the product / service as agreed between the buyer and the seller. An agreed value leads to an inference (on the assumption that all trade is mutually beneficial) that the buyers perceived value of the product / service is higher than that of the seller, and that the sellers perceived value of the service/product is less than that of the buyer.

Furthermore, because of the informational asymmetry that exists during an exchange, perceived value is generally not an absolute value but a range. Thus, price is the

24

negotiated outcome of perceived value differentials between the buyer and the seller when a positive value differential (bargaining) zone exists and results in a contract as illustrated in Figure 3.1. Benefits gained from the exchange (contract) can be represented as shown in Figure 3.2 where sellers benefit and buyers benefit are the perceived value gains for the seller and buyer respectively and their sum is the net value gain from the transaction.

Sellers Value Range

Positive Value Differential Zone

Buyers Value Range

$50

$100

$150

$200 ST, Sellers Target Value Point

BR, Buyers Reservation Value Point SR, Sellers Reservation Value Point BT, Buyers Target Value Point

Figure 3.1: Positive Differential Zone

Sellers Bargaining Range Net Value gain/ Benefit Sellers Benefit Buyers Benefit

SR
Buyers Bargaining Range

BR

$100 Agreed Price

$150

Figure 3.2: Mutual Benefits Gained from the Exchange

Although the net value is a constant measure for a given set of conditions, the measure of benefits for either side is dependent on their bargaining skills. From bargaining theories, it is generally assumed that each sides objective in a bargaining problem is to maximise its benefits. Hence, when the net value gain is constant, it 25

results in a zero-sum game (associated with a competition approach) where a gain to a party results in a loss to the other. An alternative approach to maximizing benefits is to increase the net value gain range by creating additional value (cooperative game) and sharing the enhanced value such that it results in enhanced benefits for both sides (win-win strategy).

3.2.2

Value Creation

Wikstrom and Normann (1994) state that the companys search for efficient value addition processes primarily occur in two dimensions: (1) cost efficiency and (2) market efficiency. Cost efficiency being self explanatory, market efficiency means trying to develop just those offerings that inject high value into the customers own value-creating processes. Similarly, Porter (1985) describes that a firm creates value that justifies a premium price (or preference at an equal price) through two mechanisms either by reducing seller costs or by increasing buyer performance. Value addition, translated to value as defined in Sub-Section 3.2.1 is an effort to enhance the positive value differential zone as illustrated in Figure 3.3.

Fewer Resources to increase the value differential zone

Sellers Value Range

Greater Satisfaction - to increase the value differential Buyers Value Range zone

$50

$100

$150

$200 ST, Sellers Target Value Point

BR, Buyers Reservation Value Point SR, Sellers Reservation Value Point BT, Buyers Target Value Point

Figure 3.3: Value Addition as Translated to Value Differential Zone

3.2.3

Value Capture and its Significance for Value Creation and Relationships

Value capture is to determine the share of value each party gets for contributing in the value creation process and is a bargaining problem. However, Brandenburger and Harborne (1996) identify that a party should not capture an amount of value which is greater than that of its added value and define a players added value as value 26

created by all the players in the supply chain minus the value created by all the supply chain members except the one in question.

This upper bound on a players gain is explained by the fact that if a players gain exceeds his added value, then the value remaining for the other players to capture will be less than what they would have got if he /she had not participated in the value creation process removing the incentive for them to cooperate with him / her on either value creation or relationship building.

However, they point out that since markets are imperfect, there can be situations like a new entrant being treated differently to an incumbent, high bargaining power differences, high information asymmetry and so on, where a player can capture more than its added value. Further, if firms were to believe that they are not getting their fair share of value added, it can result in confrontation with the aggrieved party. Moreover, in a case of repeated exchanges, trust between the parties would evaporate and can result in opportunistic behavior. These effects are not conducive for either creation of value or cooperation between parties and hence it is imperative to promote fair value capture for all the parties.

3.3

VALUE CREATION IN THE CONSTRUCTION INDUSTRY

As indicated section 3.2.3 there are two modes of value creation: (1) cost efficiency and (2) market efficiency. Depending on the mode of value enhancement that researchers subscribe to, they have developed large streams of knowledge reservoirs base in themselves such as in value engineering / value management, value networks, lean construction, and so on.

While, value engineering / value management looks at maximising value for used resources for a clear purpose, lean construction takes the view that waste reduction is the primary route to value enhancement. Value from a networks perspective or value networks are more recent developments, and are expected to enhance value through changed perception of problem situations and by mobilising collective action to implement change (Allee 2003, CICID 2007 and 2008)

27

Although differing in modes of value enhancement, the concept of value used in all these streams is the same and is defined as the relationship between the satisfaction of many differing needs and the resources used in doing so. The fewer the resources used or the greater the satisfaction of needs, the greater the value (IVM, 2009). This definition acknowledges that stakeholders may all hold differing views of what represents value and suggests that improving value is to reconcile these differences and enable an organization to achieve the greatest progress towards its stated goals with the use of minimum resources. From a construction projects view, these goals can be termed as agreed (negotiated) project performance attributes.

The key word in the above paragraph is reconcile. The need for reconcilement of adversarial value needs in a traditional project network with classical / arms length contracts can be explained by repulsive transactional forces that arise due to the winlose (zero-sum game) nature of the typical adversarial contracts as shown in Figure 3.4.

Consultant 1

Consultant 2

Client

Project Outcome

Contractor

Subcontractor 1

Subcontractor 2

Transactional Repulsive forces

Figure 3.4: Transactional Forces in a Traditional Project Set Up The main contract which binds the client and the contractor specifies the performance targets for the project to be achieved for a fixed lump-sum consideration. The consideration is subject to downside in case of failure to meet these targets. However, there is no upside for a better performance unless specific incentive structures are in place.

28

The other contracts such as between client-consultant and contractor-subcontractor specify the required performances from the consultant / subcontractor for given considerations. The considerations in these contracts are generally fixed as lump sums and are not linked to the project outcome. From a project networks point of view, this means there are no potential benefits to be accrued in future that can preclude a stakeholder from exhibiting opportunism. Also, it is of note that there are no transactional forces between different consultants and different subcontractors. However, experience shows that their co-operation is as essential as the co-operation between the client and the contractor for value creation.

Recognizing the incomplete nature of construction contracts and constraints arising from classical contracts in achieving improved integration of stakeholders (Rahman and Kumaraswamy 2002, Palaneeswaran et. al. 2002), the construction industry undertook a two-pronged approach to overcome the shortcomings in terms of
reconciliation strategies.

These strategies generally take the form of either structural integration or relational integration and foster reconciliation (1) by strengthening relational bonding forces (e.g. partnering, alliancing relational) and (2) by strengthening transactional binding forces (e.g. target price contracts, joint ventures, PPPs moving from classical to neoclassical contracting). Relational bonding forces emphasize trust and commitment (Morgan and Hunt 1994) to enhance understanding of true nature of economic relations that lie beneath the social fabric of a collaborative venture (Casson 1992) while transactional binding forces emphasize transaction-specific incentives in reference to goals and objectives.

The reported performance of both relational and transactional measures in achieving desired objectives by various researchers is cautiously optimistic. A graphical representation of the perceived relative success of these measures in terms of integrating stakeholders (and reducing fragmentation) in the industry, creating value and the basis for sharing the created additional value, is developed as in Figure 3.5.

29

Relational Integration Strengthening relational bonding forces Value Loss Partnering Contractual Partnering Value Creation Fragmentation Alliancing

Transactional Integration Strengthening transactional binding forces PPP Value Loss Traditional Target Price Value Creation Joint Ventures

Fragmentation

Figure 3.5: Performance of Relational and Transactional Integration Measures

Figure 3.6 integrates conceptualizations from Figures 3.4 and 3.5 in visualizing the relational and transactional force-fields during commonly used combinations of these integration measures. Enhanced value creation as the transactional binding forces increase and become more and more inclusive is notable. The more the value created, the more is the value available to share. The more the value is shared, the less attractive is opportunism.

3.4

CAPTURING VALUE IN CONSTRUCTION CONTRACTS

Construction contracts are unique in nature because the value exchange takes place in the future (Campbell, 2001; Macneil, 1980). Value capture or price-setting happens prior to the actual value exchange. This is achieved by contracts written to capture the requirements that the product has to satisfy when delivered along with specified guidelines to handle all eventualities and risks. However, since construction projects are complex and full of uncertainties, it is difficult to capture all eventualities and risks in black and white in contract documents which means incomplete information. 30

Consultant 1

Consultant 2

Consultant 1

Consultant 2

Client

Client

Project Outcome

Project Outcome

Contractor

Contractor

Subcontractor 1

Subcontractor 2

Subcontractor 1

Subcontractor 2

Traditional Contract + Partnering

Consultant 1 Consultant 2

Target Price Contract + Partnering

Client

Transactional Repulsive Force Transactional Binding Force

Project Outcome

Relational bonding Force

Contractor

Subcontractor 1

Subcontractor 2

Traditional Contract + Joint Venture + Partnering Figure 3.6: Relational and Transactional Forces Map for Commonly used Combination of Integration Measures Incomplete contracts coupled with information asymmetry can often lead to suboptimal bargaining outcome or inefficient value capture. Further, the

procurement choice made and the mode of contractor selection can have impact on how value is captured. For example, the inefficiencies with respect to an open 31

competition approach to tendering were highlighted by Sir Harold Banwell as far as back as the early 60s (Murray and Langford 2003) whereas a target price / GMP contract is seen to promote a relatively efficient outcome (Dyer and Kagel 1996). Furthermore, suboptimal value capture can also result in situations such as market distortions, demand supply distortions, high bargaining power differences and new market entrants.

Incomplete information at the time of contracting also means a requirement for the parties to adjust both their obligations and expectations through agreed contractual means written down in the original contract documents. This creates an opportunity to alter the dynamics of value captured during the exchange (construction stage). Hence value capture in a construction projects is a two stage process wherein, stage two creates an opening for parties involved to readjust their priorities (to be opportunistic or cooperative) based upon new information available, materialized risks and so on, in case they are not satisfied with the original value they had captured. This leads to disputes in the construction stage.

According to Vorster (1993) the basic factors (Similar to the basic factors proposed by Mitropoulos and Howell, 2001) that drive the development of disputes are (1) project uncertainty, which causes change beyond the expectations of the parties; (2) process problems, including imperfect contracts, and unrealistic performance expectations; and (3) people issues, including problems due to poor communication, poor interpersonal skills, and opportunistic behavior. Project uncertainties are usually managed through providing contingencies. Decisions as to the amount of contingency allocated are generally taken prior to contracting. Contractual clauses which are ambiguous enough to generate different interpretations and uncertainties for which contingencies are not spelled out in the contract are generally the causes of disputes in the construction phase.

Moreover, the two staged structure for capturing value as evidenced in the construction industry can result in structural inefficiencies. Saxby (2004)

demonstrated that there can be a prisoners dilemma at the heart of the clientcontractor bargain in conventional contractor selection methods, which induces dishonest bidding (extremely low bids to win jobs). Dishonest bidding in turn, 32

sometimes leads to winners curse phenomenon which is bidding more than what the item turns out to be worth, encouraging opportunism in the long run as there are no routes in classical contracts to claw back their over optimistic tender prices.

However, the construction industry has devised mechanisms through which it can positively correct itself for a winners curse phenomenon. These mechanisms structure the contracts between stakeholders such that players co-operate to create additional value for the benefit of all stakeholders. Sharing this added value which is in addition to the contract considerations, is expected to counter opportunism (Dyer and Kagel 1996). This is further substantiated by Axelrod (1984) who says that the value of the future relationship is the critical variable which governs the emergence of co-operative behavior in a situation defined by prisoners dilemma and if there is no prospect of future work, outcomes are likely to be highly inefficient. This view has been validated in various case studies on strategic partnering that are shown to produce cooperation and more efficient project outcomes (Bennet and Jayes 1995, 1998; Barlow et al 1997).

However, as seen in Figure 3.6, shared additional value is seen only (1) between the client and the contractor (refer target price contract + partnering in Figure 3.6) top of the hierarchy and (2) joint venture or alliance partners (refer joint venture + traditional contract + partnering in Figure 3.6) only on the side of the contractors or the client, and not both. In this regard, it is safe to conclude that present project network arrangements have failed to share the additional value among all stakeholders as demonstrated in the preceding section, and indeed to some extent, tend to perpetuate the win-lose / zero-sum game culture in the industry. This is both due to industry culture and also due to the absence of all inclusive transactional binding forces that necessitate the sharing of these additional benefits.

The above illustrations indicate that in many cases, suboptimal outcomes / inappropriate value capture can occur in construction negotiations. It has been showed the inappropriate value capture can become a barrier to value creation and have a negative effect on relationships and cooperation. In this regard, it is essential to develop an integrated understanding of negotiations in construction contracts to identify in order to restructure them to promote optimal value capture. 33

3.5

UNDERSTANDING VALUE CAPTURE

Value capture is a bargaining / negotiations problem. Oliver (1996) defines negotiations as negotiators jointly searching a multi dimensional space and then agreeing to a single point in space. Various theories such as behavioral theory, game theory, processual theory, integrative theory and utility theory have been deployed to understand the process of negotiations. Behavioral theory concentrates on personalities, processual theory on processes and integrative theory on approaches to resolution whereas game theory treats it as a bargaining process where participants will choose between possible agreements, following the conduct predicted by the rational choice mode.

Macmillan (1992) defines game theory as the study of rational behaviors in situations involving interdependence. It provides an important insight into the participants strategies and tactics in choosing among alternative options to maximize their respective payoffs assuming they are rational. Rational behavior here means

choosing the best means to gain a predetermined set of ends. It is an evaluation of the consistency of choices and not of the thought process of implementation of fixed goals and not the morality of these goals.

Initially, game theory concentrated on non co-operative zero-sum games. However, with time it has developed to encompass co-operative and strategic games and is a time tested approach to understanding bargaining and decision-making. Strategically, according to John Harsanyi (1977), one of the main questions that game theory answers is what are the conditions that will make it possible for two rational opponents to cooperate in achieving an efficient, Pareto-optimal, outcome? Answering this question is essentially the purpose of understanding value capture for this research. Hence, game theory provided the theoretical underpinning in understanding value capture. Literature on influencing negotiations for desired outcomes and better relationships was reviewed and drawn upon to model construction negotiations for promoting optimal value capture strategies.

34

3.6

INFLUENCING NEGOTIATIONS

Research concerning negotiations in various sectors, especially involving international relations, have shown that there are ways to influence the process towards desired outcomes and realize the desired outcomes. Lax and Sebenius (2006) identify three dimensions of influencing negotiation outcomes: (1) Tactics, Processes and People (2) Deal Design (3) Setup; as illustrated in Table 3.1.

Table 3.1: Dimensions of 3-D Negotiations (adapted from Lax and Sebenius 2006) Dimension Focus Where
First Tactics At the table

Focus
People, Process

Sample Strategies
Improve communication, build trust, counter hardball ploys, bride cross cultural divides

Second

Deal Design

On the drawing Board Away from the Table

Value, Substance, Outcomes Architecture

Invent and structure agreements and create value, meet objectives better Ensure most favorable scope, sequence and basic process choices

Third

Setup

The first dimension focuses on face to face and tactical aspects of a negotiation. The second dimension, deal design, stresses upon targeting outcomes that promote mutual benefits, i.e. in other words focuses on promoting win-win solutions. The third dimension, setup, involves structuring the process to promote the most efficient outcomes to be achieved and is considered to be the most potent in achieving desired results. The following section reviews some common strategies used in influencing outcomes in the context of these three dimensions.

3.6.1

Influencing Negotiations for Desired Outcomes

In terms of setup, negotiations are structured as games in game theory. A "game" in game theory has fully explicit structure (with rules) within which players act strategically to maximize personal utility. It represents outcome as a result of a complete set of strategic selections by all players in a game. According to game theory there are three fundamental types of games, namely:

35

(1) Games of skill: Single player who has complete control over outcome (2) Games of chance: One player games against nature involving risk or uncertainty (3) Games of strategy: Two or more players

Games of strategy are further classified into three types: (1) Non-cooperative (2) Cooperative (3) Mixed Motive. In the context of value, creation can be classified as a cooperative game and capturing can be classified as a mixed motive game in ideal circumstances. However, literature on negotiations suggests that depending on the setup, a cooperative game can turn into a non-cooperative game and vice-versa. As illustrated in Sub-section 3.3.2 under some circumstances, value creation and value capture in the construction industry can turn into a non-cooperative game. This can be corrected by identifying and rectifying the problems in the setup to achieve desired outcomes.

In the context of the construction industry, game theory has been often applied (as games of strategy) in dispute resolution (Cheung et. al. 2006, Kassab et. al. 2006), claims management (Ren et. al. 2001, 2003) and to some extent in procurement (Ahadzi and Bowles 2004, Saxby 2004). Most of these studies have approached the problem either as an isolated game or as two linked games. However, viewing a construction projects timeline through the prism of game theory with respect to involvement of parties and the negotiations that transpire to create or capture value, reveal three distinct phases as illustrated below:

Phase 1 - Project Conceptualization to Contractor Selection: Decisions are taken by the client based on his requirements and consultant inputs. Since consultants are by extension representatives of the client himself, these are single party decisions in an effort to deal with the project variables / uncertainties (games of chance). However, they can also be classified as games of skill as the party has a high degree of control over outcome.

Phase 2 - Post-Tender Pre-Contract: Once the tender documents are issued bidders are introduced into the game. The decisions are reached through consensus / agreement. Absence of contract provides an informal flexible environment at this stage (games of strategy with informal rules). Note: In case of early involvement of 36

contractor this phase can extend into phase-1 wherein it becomes a combination of games of chance and games of strategy.

Phase 3 - Post Contract: Parties are tightly bound together by the contract and their decisions are almost captive to the rigid contractual environment. In the absence of agreement, issues turn into disputes (games of strategy with explicit and rigid rules derived from the contract and its legal implications). Construction and where applicable, operation and decommissioning periods are included in this phase and not treated separately as the nature of negotiation is quite similar although the issues may be different.

From the above game based structure of construction negotiations, the games can be termed to be sequential in nature. Also, it can be inferred that they are interlinked from illustrations in Section 3.3 since outcomes in one stage have an impact on the other. As shown by Watkins and Passow (1996) negotiations are connected to other
negotiations in a larger linked system and can be classified into three types namely,

sequential, competitive and reciprocal.

In sequentially-linked negotiations, the

conclusion of one set can act to impel negotiators to begin another set, and constrain their options in the process. Two sets of negotiations are competitively linked when they occur in parallel and if agreement in one set precludes agreements in the other. Two negotiations are reciprocally linked when they take place in parallel and if agreement must be reached in both in order for agreement in either to take place.
When negotiations are deadlocked, it sometimes is possible to set up linkages (e.g., competing bids) that increase the pressure on counterparts to make concessions

(Watkins 1998). Further, Okhuysen et. al. (2003) show that increasing the time between a negotiation and when the outcome of an agreement will be implemented assists the negotiation process, making it less contentious, and ultimately increasing the efficiency of the agreements.

In terms of process, negotiations in the construction industry are non linear in the sense that they exhibit nonlinear characteristics, the dynamics of which are discussed by Gleick (1987). Watkins (1998) elucidates the importance of these nonlinear characteristics towards the flow of negotiations. According to Watkins (1998) in understanding the moment towards agreements the following nonlinear dynamics are 37

important: Sensitivity to early events - the way the negotiations are handled at the beginning can have a significant effect on everything that happens thereafter; irreversibility - actions negotiators take often have irreversible impacts that create barriers to agreement; threshold effect - a small push in some direction may have no apparent effect, but a slightly larger push may lead to very large change; feedback loops - once dynamics get going, they can become self-reinforcing and the result may be virtuous cycles that build momentum toward desired outcomes, or vicious cycles that are difficult to overcome.

The significant factors that affect successful negotiations are usually seen to arise from influence strategies and skills of the Parties, the behavioral predisposition of the parties, and the situational influence on the parties (Rubin and Brown 1975, Raifa, 1982, Ury 1992). Decision making in terms of negotiations according to Ikle (1964) is a continual three-fold choice to: (1) accept currently available terms (i.e., proposals from counterparts); or (2) continue negotiating in the hope of securing better terms; or (3) break off talks with no intention of resuming them.

Fisher et. al. (1991) assert that negotiators should choose option 1 only when doing so yields them more value than their perceived Best Alternative To a Negotiated Agreement (BATNA). Watkins (1998) takes it further as shown in Figure 3.7 and says Do the potential benefits of continuing to negotiate outweigh the potential costs? If
the answer is no, then the negotiator should compare available terms to their BATNA, make an assessment of value, and either accept the terms or break off the negotiations.

If the negotiator chooses Option 2, according to Watkins (1998) they face a subsidiary choice between (a) offering counterpart better terms or (b) waiting in hope that her counterpart will offer her better terms.

1. Accept Available Terms 2a. Sweeten Terms 2. Continue Negotiations 2b. Wait 3. Break of Negotiations

Figure 3.7: Decision Making Model in Negotiations (Watkins 1998)

38

Fisher et. al. (1991) further note that: People think of negotiating power as being determined by resources like wealth, political connections, physical strength, friends, and military might. In fact, the relative bargaining power of two parties depends on how attractive to each is the option of not reaching agreement. The traditional belief that a client holds higher bargaining power in the construction industry is strengthened by this argument.

Bargaining power difference, either too high or too low can be detrimental to outcomes of negotiations. Strong one sided bargaining is seen to lead to unacceptable conditions being put forward by the stronger party whereas equally balanced bargaining power may lead to a deadlock due to no party giving in and thereby leading to delays and encouraging opportunistic behavior in future. Effects of bargaining power differences on negotiation outcomes can be nullified by structuring negotiations linkages as explained above.

Various studies have shown that time pressure produces faster concessions and faster agreement (Pruitt and Drews 1969, Yukl 1974, Smith et. al 1982, Raiffa 1982, Roth et. al. 1988, and Cramton and Tracy 1992). This has been done by one party evoking concerns on time-related costs by either convincing their counterparts that they themselves (the former) have all the time in the world; or by raising counterparts (the latters) concerns about their own costs, with the help of action forcing events which are defined as specific breakpoints in the process and which force negotiators to consider costs (Watkins 1998). Milestones / deadlines which are generally used in other contexts of the construction industry are one such example of action forcing events.

Bhattacharya (2004) calls information as the power of the negotiating parties for a successful outcome. Information differences among negotiators lead to inefficient bargaining outcomes and deadlocked negotiations as shown by Cramton (1984). He explains that in the case of only the buyer having complete information, agreement occurs only after costly delay and when both the buyer and the seller are unsure of the others preferences, the outcome is even less efficient, due to the sellers incentive to deceive the buyer. 39

Further, Cramton (1984) states that how much information the seller reveals in each round of negotiations depends on the players costs of delay: when delay costs are high, more information is revealed in each period; whereas, when the costs of delay are small, less information is revealed. Delay costs can be structured such that information sharing is enhanced, desired outcomes are achieved and use of stalling and other tactics detrimental to negotiation outcomes are precluded. Further, Raiffa (1982) shows that the winners curse phenomenon can be induced in some cases to enhance honest information exchange.

3.6.2

Influencing Negotiations for Better Relationships

According to Ganeshan (1993) in long term relationships, each negotiation episode is one of a sequence of episodes wherein the outcomes from a specific negotiation involve not only the agreement and related consequences but also residual emotions such as satisfaction or frustration with the outcomes. Satisfaction obtained from a negotiation is based on outcomes (Churchill and Suprenant 1982, Kelley and Thibaut 1978). These emotional residues are carried onto future negotiations. Hence, effective and efficient outcomes are important in framing future relationships. When seen in conjunction with the sensitivity to early events that was discussed in the previous section draws out the significance of early negotiation outcomes towards future relationships.

Another factor that affects the satisfaction of negotiators is the extent to which the other party uses various negotiation strategies. Research in conflict resolution classifies these strategies as competing or aggressive, collaborating or problem solving, compromising, avoiding and accommodating. Aggressive and collaborating strategies seem to have the extreme effects on relationships whereas the others have various degrees of effect. Frazier and Summers (1984) who found that use of coercive strategy is likely to be viewed as exploitative and Cadotte and Stern (1979) argue that negotiators faring worse off will become rigid whereas Perdue and Summers (1991) found that co-operative orientation is usually accompanied by a problem strategy.

40

However, any given negotiation is usually a combination of these strategies under which various tactics are used. Tactics in themselves have an effect on relationships. In this regard, it is inferred from the above arguments that formulating appropriate tactics and achieving efficient and effective outcomes will go a long way in fostering co-operative relationships.

3.7

THREE

STAGE

MODEL

FOR

CONSTRUCTION

PROJECT NEGOTIATIONS
In line with the three phases of construction project negotiations with respect to involvement of parties and the negotiations that transpire to create or capture value delineated in Subsection 3.6.1, a three stage game model is proposed as shown in Figure 3.8, to understand the dynamics of intra-phase and inter-phase linkages. It is formulated such that all decisions / agreements affecting value before the tender leading and leading to tender documents in the case of tendering, or to the start of the negotiations in case of negotiated contracts, are structured as Stage 1 (ending with the entry of the contractor), followed by information sharing, clarifications, agreements and discussions, being structured as stage 2 (culminating in contract), and subsequently all decisions and negotiations in construction stage culminating in final accounts being structured as stage 3.

This basic structure of the model remains the same irrespective of the procurement choice and contractor selection mode. However, the nature of issues decided, discussed and negotiated in each stage will vary with procurement choice, e.g. design issues are predominantly dealt with in stage 1 in a traditional contract whereas, they can spill over to other stages in design build or TC / GMP approach.

Further, intra-phase linkages between negotiations and decisions can also vary with procurement choice. For example, traditional dispute resolution starts with

engineers decision and ends with arbitration / legal recourse, but use of alternative dispute resolution mechanisms like adjudication creates a lengthy sequence of possible negotiations within stage 3.

41

STAGE 1

STAGE 2

STAGE 3

I s s u e s

I s s u e s

I s s u e s

In this context, it was identified that exploring many procurement choices will be enormous in scope and dilute the applicability of the findings; hence focusing on a single procurement choice would yield better results. TC / GMP approach was chosen for further investigation based on this model and the rationale behind this is discussed in Chapter 4 along with an in depth review and analysis of the TC / GMP approach. However, prior to shifting focus to a TC / GMP approach, the following section presents some relevant results from a survey focused on the second stage (post-tender pre-contract) of negotiations in the model presented above.

Conceptualization

Figure 3.8: Proposed Three Stage Model

Contractor Selection

Contract signing

Completion

3.8

SURVEY

ON

POST-TENDER

PRE-CONTRACT

NEGOTIATIONS
Primary issues in stage one including the choose procurement choice decision, contractor selection mode and optimizing design value are well researched into and so are dispute resolution mechanisms and strategies which are primary issues in stage 3. Literature on stage two is scanty as compared to the other two stages. In this light, the survey presented in this section focuses on post-tender pre-contract negotiations 42

and was primarily designed to investigate time related issues in these negotiations. The questionnaire (attached in Appendix A) consisted of 3 sections: (1) personal information - questions in this section dealt with collecting respondent profile data, (2) section two dealt with questions regarding duration of these negotiations, significance of information to these negotiations and significance of these negotiations to relationships, along with questions regarding usage frequency of various tools and strategies in these negotiations, while (3) section 3 dealt with issues discussed in these negotiations under different procurement choices.

3.8.1

Distribution of Questionnaire, Respondents and Response profile

The questionnaire was distributed to 196 carefully selected professionals from the industry through email. The potential respondents were directors or equivalent in (1) reputed client organizations or (2) contractor and consultant organizations that were on the approved government list. This criterion was used to ensure that they had experience in contract negotiations. Non-respondents were followed up with 3 email reminders which were at an interval of 10 days.

The total number of responses received was 38. A post-qualification criteria requirement to have prior experience in negotiations - was applied to these questionnaires and two of them were not considered for analysis, on not meeting this criterion. The breakdown of the complete and acceptable responses is: (a) clients - 14, contractors - 10 and consultants - 12.

3.8.2

Survey Results and Analysis

Duration of P-T P-C negotiations The construction industry faces the pressure of shorter turn over periods as required by the clients. Ahadzi and Bowles (2001, 2004) identified the contract negotiation period as the critical stage during which delays are most prominent. Resolving ambiguous and / or contentious issues through negotiations takes time. When they are not successfully concluded before the scheduled commencement date for construction, the industry has a practice of either initiating work through letters of intent and / or memoranda of understanding rather than pushing the commencement date further.

43

This practice of initiating work without a contract creates problems by generating disputes on whether the contract is in place or not. These disputes have plagued the industry in the past and will possibly continue in the future. In order to minimize these disputes, there is a necessity to develop better systems to drive these negotiations towards successful conclusion within the short period of time available. Pushing the commencement date further means longer time to delivery and later income generation from the asset which spells loss of value to both the client and the contractor.

In order to test if elongated duration of P-T P-C negotiations is a concern for the construction industry and durations are related to contract strategies, the respondents were asked to rate their agreement to a statement on a scale of 5 (1-strongly agree, 2agree, 3-neutral, 4-disagree, 5-strongly disagree). The results are tabulated in tables 3.2 and 3.3. The results indicate that the respondents overall agree that elongated durations are a concern for the industry. However, when analyzed in terms of respondents organizations, while clients and contractors seem to indicate that it is a concern, the level of concern among consultants is lower.

Table 3.2: Survey results Duration of P-T P-C negotiations (organization type)
STATEMENT Elongated duration of P-T P-C negotiations is a concern for the construction industry P-T P-C negotiation durations are inversely proportional to the conventionality of the contract (i.e. more innovative contracts take longer to negotiate) Client n=14 1.86 Contractor n=10 1.90 Consultant n=12 2.50 Overall n=36 2.08 Standard Deviation 0.69

2.57

1.90

2.50

2.36

1.01

In relation to the duration of these negotiations with respect to contract strategies, contractors are of the opinion that they take longer in non-conventional contracts whereas both client and contractors disagree relatively. This can be explained by the fact that contractors expend or at least expect more time to understand their risks in non-conventional contracts.

44

Table 3.3: Survey Results Duration of P-T P-C Negotiations (client type and project type)
STATEMENT Public Sector n=14 1.86 Private Sector n=20 2.30 Building Works n=16 2.00 Civil Works n=14 2.07 Mechanical & Electrical n=6 2.33

Elongated duration of P-T P-C negotiations is a concern for the construction industry P-T P-C negotiation durations are inversely proportional to the conventionality of the contract (i.e. more innovative contracts take longer to negotiate)

2.14

2.65

2.88

1.71

2.5

Frequency of use of tools and strategies in P-T P-C negotiations Apart from the strategies mentioned in the section influencing negotiation outcomes, having frameworks to analyze available options and their respective outcomes and having support systems to arrive at the best strategy suited for the party helps in cutting down time of the negotiation process. In this regard, respondents in the previously mentioned survey were asked to rate how often they use certain tools and strategies to assist in their negotiations on a scale of 1 to 5 (1very often, 2-often, 3-sometimes, 4-rarely, 5-never) and the results are as presented in Tables 3.4 and 3.5.

Further, the results suggest little or no use of analysis of available options and outcomes, decision support systems and imposition of externally induced focal points. The strategies surveyed here are by no means a comprehensive list. However, they vary in degree of complexity and it is inferred from the results that simple and moderately complex strategies are being used to a certain extent whereas relatively complex strategies are not deployed.

In terms of respondent subgroups based on organization, client type and project type, there are no significant differences in the results. These results indicate the need for developing easy to use negotiation strategies and tools to promote their use in the industry towards achieving optimal outcomes.

45

Table 3.4: Survey Results Frequency of Use of Negotiation Strategies and Tools (organization type)
STATEMENT How often do you use decision trees to understand and analyze available options and outcomes of negotiations? How often do you use decision support systems to select and support the strategies you use in negotiations? How often do you use milestones and deadlines to control negotiation schedule How often do you concentrate on the issues where expectations converge while ignoring issues where expectations diverge? How often do you try to externally (artificially) create an issue where expectations converge in order to mask issues where expectations diverge? Client n=14 4.00 Contractor n=10 3.80 Consultant n=12 4.00 Overall n=36 3.94 Standard Deviation 0.71

4.14

3.20

4.50

4.00

0.82

1.71

2.20

2.17

2.00

0.58

3.42

3.00

2.83

3.11

0.89

4.00

4.00

3.00

3.67

0.89

Table 3.5: Survey Results Frequency of Use of Negotiation Strategies and Tools (client and project type)
STATEMENT Public Sector n=14 3.71 Private Sector n=20 4.10 Building Works n=16 4.50 Civil Works n=14 3.71 Mechanical & Electrical n=6 3.33

How often do you use decision trees to understand and analyze available options and outcomes of negotiations? How often do you use decision support systems to select and support the strategies you use in negotiations? How often do you use Milestones and deadlines to control negotiation schedule How often do you concentrate on the issues where expectations converge while ignoring issues where expectations diverge? How often do you try to externally (artificially) create an issue where expectations converge in order to mask issues where expectations diverge?

4.20

4.40

4.62

3.43

3.66

2.00

1.60

1.75

1.29

2.00

2.80

3.57

3.00

3.14

3.33

4.00

3.40

3.50

3.86

3.67

46

Significance of P-T P-C negotiations for relationships Trust based relationships create advantages in conducting business by improving performance (Bromiley and Cummings 1993) which as indicated in the background section 1.1 is the present quest of the construction industry. Jin and Ling (2005) observed in their case studies that relationships deepen as the project progresses. From their case studies, they show that the dominant relationship would deepen as a project progresses, i.e. the dominant relationship begins as shallow dependence in the pre-tendering stage, then develops to deep dependence at the tendering stage, to shallow interdependence at the contract stage, and finally to deep interdependence in post-contract stage. Dependence produces inefficiency as opposed to interdependence and the effects of dependence have been discussed in earlier.

Also, Jin and Ling (2005) consider that shallow interdependence is initiated at the construction stage where a loose form of reciprocity guides the relationship. This reciprocity starts much earlier i.e. once the contractor is selected and has been intimated to that extent even though a contract is yet to be signed. This is because of the quasi contract that exists once the intention to accept the offer is indicated through an action such as a letter of intent or request to commence. This binds the parties in a formal quasi legal relationship that expects reciprocity and calls for cooperation between the parties to achieve effective and efficient solutions.

In the light of these, it was hypothesized that this period plays a significant role in developing an effective and efficient relationship between the parties. The above hypothesis was tested in the aforementioned survey by asking the respondents to rate their agreement to the statements in column one of a format as in Table 3.6 on a scale of 1-5 (1-strongly agree, 2-agree, 3-neutral, 4-disagree, 5-strongly disagree). Evidence from the survey indicates that P-T P-C negotiations are indeed important for both efficient and effective relations in the later stages of the project, and is consistent across respondent subgroups as shown in Tables 3.6 and 3.7.

47

Table 3.6: Survey Results Significance of P-T P-C Negotiations for Relationships (organization type)
STATEMENT Conclusion of P-T P-C negotiations in a fair and friendly manner is a must for efficient relations between the stake holders during construction stage Conclusion of P-T P-C negotiations in a fair and friendly manner is important for effective relations between the stake holders during construction stage Inadequacy of information available significantly affects the efficiency of P-T P-C negotiation outcomes Inadequacy of information available leads to less effective outcomes in P-T P-C negotiations Client n=14 1.71 Contractor n=10 1.80 Consultant n=12 2.17 Overall n=36 1.88 SD 1.00

1.57

1.80

2.17

1.83

0.60

1.36

1.90

2.33

1.83

0.94

1.36

2.00

2.17

1.80

0.95

The role of information in achieving optimal outcomes has been discussed in Subsection 3.6.1. In this regard, Table 3.6 and 3.7 present the respondent rating as to the effects of information scarcity in P-T P-C negotiations. The results show that it is a concern and the results are consistent across respondent subgroups.

Table 3.7: Survey Results Significance of P-T P-C Negotiations for Relationships (client and project type)
STATEMENT Public Sector n=14 2.14 Private Sector n=20 1.70 Building Works n=16 1.75 Civil Works n=14 1.71 Mechanical & Electrical n=6 2.66

Conclusion of P-T P-C negotiations in a fair and friendly manner is a must for efficient relations between the stake holders during construction stage Conclusion of P-T P-C negotiations in a fair and friendly manner is important for effective relations between the stake holders during construction stage Inadequacy of information available significantly affects the efficiency of P-T P-C negotiation outcomes Inadequacy of information available leads to less effective outcomes in P-T P-C negotiations

1.71

1.90

1.75

1.71

2.33

1.43

2.15

2.13

1.43

2.00

1.50

2.05

2.00

1.50

2.00

48

Causes of delay in P-T P-C negotiations Table 3.8: Causes of Delay (organization type)
Cause of Delay Overall n=36 Mean Rank 3.56 1 Client n=14 Mean Rank 3.71 2 Contractor n=10 Mean Rank 3.8 2 Consultant n=12 Mean Rank 3.17 8

Strong one sided bargaining power leading to unacceptable conditions being put forward by the stronger party Sunk investment in tender costs coupled with industry norm of initiating work without contracts (Absence of incentive for forceful negotiations) Lack of tools to understand and analyze options available and their likely outcomes in negotiations Reluctance to perceive the other party to be fair and trustworthy leading to reluctance to commit or reveal information Lack of understanding of available strategies to streamline / drive negotiations Reluctance to reveal information by the concerned parties Lack of decision support systems to aid negotiations Lack of information (On strategies of the other negotiating party) Lack of decision making authority with first hand negotiators Delaying as a tactic to force commitments Delaying as a tactic to gather information Equally balanced bargaining power leading to no party giving in Lack of information (Insufficient preparation for negotiations)

3.44

3.71

3.4

3.17

3.50

4.00

3.00

12

3.33

3.50

3.57

3.60

3.33

3.33

3.43

3.40

3.17

3.39 3.39 3.39

5 5 5

3.29 3.71 3.29

8 2 8

3.40 4.00 3.80

7 1 2

3.50 2.50 3.17

3 13 8

3.28

3.43

3.60

2.83

12

3.28 3.22 3.17

9 11 13

3.00 2.57 2.57

10 12 12

3.40 3.2 2.8

7 11 13

3.50 4.0 4.17

4 2 1

3.22

11

2.86

11

3.60

3.33

The general causes of delays in negotiations highlighted in the section titled Influencing Negotiation Outcomes were assumed to be the probable causes of delays in P-T P-C negotiations and respondents in the survey were asked to rate them on a scale of 1 to 5 with respect to their relative importance in causing delays to P-T P-C negotiations. The mean scores from the responses along with their relative ranks are tabulated in Table 3.8. Further analysis indicates that there is no overall

49

consensus on the relative importance of delay causes amount respondent subgroups as seen from Table 3.9.

Table 3.9: Spearmans Rank Correlation Test between Groups of Respondents for Causes of Delay
Comparison Client ranking vs Contractor ranking Client ranking vs Consultant ranking rs 0.3244 -0.6535 Significance .2796 .0154 Conclusion Cannot reject H0 at 5% sig. level Can reject H0 at 5% sig. level Can reject H0 at 5% sig. level

Contractor ranking vs Consultant -0.7353 .0042 ranking H0 = No significant correlation on the rankings between two groups Ha = Significant correlation on the rankings between two groups Reject H0 if the actual significance level (p-value) is less than the allowable value of 5%

Issues negotiated in P-T P-C negotiations Table 3.10: Issues Discussed / Negotiated in P-T P-C Negotiations with respect to Different Procurement Strategies
ISSUES NEGOTIATED Bid by Invitation - Traditional Lump Sum Contract Mean Rank 3.47 3.53 2.82 3.47 3.00 2.76 3.12 3.76 3.06 3.35 3.00 3.06 3.18 3.00 3 2 13 3 10 14 7 1 8 5 10 8 6 10 Bid by Invitation GMP Contract Mean Rank 3.60 3.33 3.20 3.40 3.27 3.60 2.93 3.27 3.67 3.53 3.67 3.40 3.20 3.40 3 9 12 6 10 3 14 10 1 5 1 6 12 6

Specification qualifications Quality qualifications Methods of Measurement Resources Requirements Key Staff Requirements Payment Modalities Amendments to Contract Risk management strategies Method Statements Retention Insurance Performance bonds Incentives / Disincentives Scheduling Requirements

In section 3.7, it was observed that issues discussed and negotiated in each stage with respect to the proposed three stage model will vary with procurement choice. In this context, respondents were asked to rate a list of possible issues that can be negotiated 50

during P-T P-C negotiations in terms of how often they are negotiated across two procurement choices on a scale of 1 to 5 (5-very often, 4-often, 3-sometimes, 2rarely, 1-never). The results in terms of mean value and their relative ranks are presented in Table 3.10 and support the argument that the types of negotiated issues at a given stage of negotiations are dependent on procurement choice as seen in Table 3.11.

Table 3.11: Spearmans Rank Correlation Test between Groups of Respondents for Issues Discussed / Negotiated with respect to Different Procurement Strategies
Comparison rs Significance Conclusion

Bid by Invitation - Traditional Lump -.1406 .6316 Cannot reject H0 at Sum Contract Vs Bid by Invitation 5% sig. level GMP Contract H0 = No significant correlation on the rankings between two groups Ha = Significant correlation on the rankings between two groups Reject H0 if the actual significance level (p-value) is less than the allowable value of 5%

3.9

CHAPTER SUMMARY

This chapter defined value and explored the process of creating value and capturing it optimally for mutual benefits. Possibilities of influencing negotiations for promoting optimal outcomes are explored and the derived concepts were applied to the structuring of construction contracts in a project setting against different procurement choices and integrative measures.

It was shown that the present structure is not conducive to achieve optimal outcomes in some cases, for example in the case of price based selection though intense competition. A three stage model for understanding procurement negotiations was developed and the role of procurement choice in shaping the precise negotiation linkages within the model was explained, setting a stage for focusing on the selected contract type (TC / GMP approach) for further research.

Survey results on stage 2 (post-tender pre-contract negotiations) were presented to buttress the significance of: (1) procurement and contract choices in shaping precise inter-stage and intra-stage linkages of negotiations (2) information for promoting optimal negotiation outcomes, (3) early decisions and outcomes for promoting 51

relationships and (4) the need for tools and strategies to shape optimal negotiation outcomes. This sets the scene for exploring TC / GMP contractual approaches in terms of these issues in Chapter 4.

52

CHAPTER 4: FOCUSING ON TC / GMP APPROACH

4.1 CHAPTER INTRODUCTION

This Chapters aim is to provide a deeper understanding of the TC / GMP contractual approach in procurement, its distinctive features and implications for value and cooperation. The significance of a gain / pain arrangement in terms of value and cooperation with respect to the negotiations structure is discussed. The importance of selecting an appropriate sharing ratio and selecting it at the right point of the project timeline for achieving improved value and relationships is delineated. The factors influencing the selection of appropriate sharing ratio along with possible selection modes are discussed.

Justifications for focusing on TC / GMP contracts for this research are provided and the three stage model of negotiations from Chapter 3 is applied to delineate the structure of negotiations in a TC / GMP approach. Also, the importance of relational strategies in the context of a TC / GMP approach is discussed along with a review of frequently used relational strategies and dispute management and resolution strategies.

4.2

INTRODUCTION TO TC / GMP CONTRACTS

Many of the problems associated with traditional procurement systems have been attributed to a tendency of owners to transfer their risks to the contractor without adequate incentives. Following calls to revamp industry practices for better performance and relationships (Latham 1994, Egan 1998, 2002), the use of alternative procurement approaches has been recommended to promote performance and improve relationships.

One such procurement approach that has found relative success, has been becoming popular in use and is recommended by The Report of the Construction Industry Review Committee (CIRC 2001) for better project performance is the TC / GMP contract approach. The approach also has been the preferred choice of contract type 53

when striving for significant supply chain improvements as in ProCure 21 of NHS in UK (NHS 2007) or when embracing partnering and relational contracting strategies like alliance contracting initiatives in Australia (Walker et. al. 2002).

The TC / GMP approach as defined by Masterman (2002) is an incentive-based procurement strategy which rewards the contractor for any savings made against the agreed guaranteed price / target cost and penalizes him when this sum is exceeded as a result of his/her own mismanagement or negligence according to an pre-agreed share ratio (Masterman, 2002). TC / GMP approaches are sometimes also known as cost-plus-incentive-fee contracts (Al-Harbi 1998) or financial incentives (Bresnen and Marshall 2000). A ceiling price and a gain-share/pain-share mechanism are established in the construction contract under this agreement (Clough and Sears 1994, Patterson 1999, Cantirino and Fodor 2003). The key difference between a GMP approach and a TC approach is that the sharing arrangement is limited only to any gain in the GMP approach. Hence, Perry and Thompson (1982) consider GMP as one of the forms of TC.

4.2.1

Definition Target Cost Contract

The National Economic Development Office, UK (1982) describes a TCC as agreeing to a best estimate of the cost of the work to be carried out as the target cost for the said work. This target cost can be adjusted during the course of the work by agreement between the parties to allow for any changes to the original specification. Savings or overruns between target cost and actual cost at completion are shared between the parties to the contract. This definition of a target cost approach is subscribed to by other researchers and practitioners (Trench 1991, MTRC 2003).

4.2.2

Definition Guaranteed Maximum Price Contract

Carty (1995) describes the GMP approach as where the contractor and owner agree that the contractor will perform an agreed scope of work at a price not to exceed an agreed amount termed as the GMP. Similar to TC, a GMP can be adjusted during the course of the work by agreement between the parties to allow for any changes to the original scope of work. If the actual turnout of price is less than the GMP, the owner and contractor will share the savings based on a pre-agreed formula and if the costs

54

exceed the GMP, the contractor must solely bear the additional cost.

Boukendour and Bah (2001) rely on options pricing models and describe a GMP contract as a hybrid approach consisting of a cost reimbursement contract and a call option for a fixed price contract.

4.3

DISTINCTIVE FEATURES OF TC / GMP APPROACH

The TC / GMP approach is generally accompanied by five distinct features as compared to a traditional contract: (1) sharing ratio or pain / gain share arrangement, (2) TC / GMP adjustment mechanism (3) avenue for alternate proposals (4) joint risk management and (5) open book accounting.

4.3.1

Sharing Ratios

The pre-agreed ratio of sharing savings or cost overruns (savings only in GMP) is a risk sharing approach between owner and contractor and is termed generally as pain / gain share arrangement or sharing ratio. It is a form of contractual incentive for cost reduction (Schererl 1978).

Different types of sharing ratios as used in practice are well documented by Perry and Barnes (2000) and Broome and Perry (2002). They can vary from predominantly being constant (linear curve) to different ratios for pain and gain, different ratios for different quantum of pain and gain, and sometimes even take the form of non-linear curves. Sometimes, they are also accompanied by various types of caps (for example on employers costs or contractors savings). Different sharing ratios in practice as adopted from Broome and Perry (2002) are discussed in detail later (in Subsection 4.8.2).

4.3.2

TC / GMP Adjustment mechanism

Construction contracts as delineated in Chapter 3 are a process of value exchange in future (Campbell 2001, Macneil 1980). However, the future implies uncertainties. It is well acknowledged that construction contracts cannot capture all eventualities and risks in contract documents and hence require certain levels of flexibility to be responsive to changing risks, as well as changing needs of the client and thereby 55

scope of the project.

In order to cater to this precise requirement a TC / GMP approach is accompanied by an adjustment mechanism to the TC / GMP. As a part of this mechanism, variations are classified into two types: (1) design development variations (2) GMP / TCC variations. A definition of what constitutes a design development and what is a TC / GMP variation is provided in the contract.

A design development variation does not trigger an adjustment to the TC / GMP and is funded by a contingency sum for future design development and for any unforeseeable risks and is set aside by the contractor as part of the pre-agreed TC / GMP (Gander and Hemsley 1997). This sum is called as a TC / GMP allowance or design development contingency.

A TC / GMP variation is generally a variation which the contractor has no control of and according to Fan and Greenwood (2004) will arise in cases of: (i) changes in scope of work such as change in floor area or volume; (ii) change in function of an area; (iii) change in quality of an area; (iv) adjustment of provisional quantities or provisional sums; (v) corrected quantity errors by consultants; and (vi) unexpected additional fees or charges imposed by statutory authorities. A TC / GMP variation is valued according to the contract terms and the TC / GMP is adjusted to reflect the valued variation (Fan and Greenwood 2004, HKHA, 2006).

4.3.3

Avenue for Alternate Proposals

Fan and Greenwood (2004) consider TC / GMP approach as a hybrid of traditional design-bid-build and design-and-build contracts. This approach by virtue of early contractor involvement; and flexibility to facilitate design development by means of contingencies, allows for contractor initiated alternate proposals for consideration by the client. Facilitating alternate proposals can bring in expertise in building designs and innovations in construction methods or materials from the contractor (Masterman, 2002) and thus improve efficiency and generate innovations aimed at either cost cutting or enhancing value.

56

4.3.4

Joint Risk Management

The risk management process in a TC / GMP project is significantly different from that of a traditional project, resulting from the introduction of a gain / pain share arrangement which increases the interdependence of fortunes of both the contractor and the employer. The design development contingency described above enhances the risks taken by a contractor in TC / GMP approach as compared to those in a traditional project. Although the risks associated with design development are clearly allocated to the contractor, an overrun above the contingency allowed for design development may compel the contractor to resort to cutting corners.

In this regard, Perry and Barnes (2000) advise that employers should recognize the importance of realistic target estimates, which would include appropriate risk contingencies. From the contractors perspective, Fan and Greenwood (2004) state that contractors should understand the risks they are taking on, be aware of undescribed work, and be clear of what design development entails and ensure that their subcontractor bids reflect the risks that they will be taking on.

Further, an adjust mechanism for the TC / GMP, by means of allowing for scope changes gives the flexibility for the employer to make changes. However, frequent changes can unearth a bone of contention as to whether the variation is a TC / GMP variation or a design development variation leading to disputes. The contractor is generally expected to be in a better position to identify these early and convey it to the client and the client is expected to handle the identified issues in a fair manner.

Both these clearly indicate that risk management in the TC / GMP approach is more interactive as compared to a traditional project. Joint Risk Management, though a recent strategy is being employed more and more to manage these issues and is seen as an essential element to the success of a TC / GMP approach (Rahman 2003). In this regard, maintaining risk registers to communicate and control risks has been found to be quite effective.

4.3.5

Open-book Accounting

The TC / GMP approach being a cost plus fee approach requires the details of the 57

contractors tender pricing for subcontract works packages to be made fully available to the client. To cater to this requirement, a TC / GMP approach is generally accompanied by an open-book accounting arrangement between the client and the contractor wherein the contractors accounts are open to scrutiny by the client. The use of open-book accounting has been documented to enable better accountability and quantification of the costs of risk (NEDO, 1982) and also to enhance trust and co-operation.

4.4

IMPLICATIONS OF DISTINCTIVE FEATURES

Distinct features of TC / GMP approach, cited above have significant impact on value, relationships and risk management as compared to traditional procurement approaches. This section evaluates their impact of these features for their significance in the perceived success of this procurement approach.

4.4.1

Implications in terms of Value

As discussed in Chapter 3, a traditional construction contract is an exchange of value in the future where consideration for the exchange of value is agreed at the outset. However, a construction project is usually full of opportunities to enhance value of the project by both creating value and improving efficiencies during the course of the project.

Creating value during the course of the project can be achieved by continued improvement initiatives as part of design development opportunities, or by exploiting positive risks which materialize during the contract, or by improved management and mitigation of negative risks; whereas improved efficiency can be targeted by exploiting the contractors expertise or by encouraging innovations. But, traditional procurement approaches are not designed to exploit these value generation possibilities after signing the contract since consideration is generally fixed at the outset and there is no scope for redistribution of value.

In the absence of opportunities for redistribution of value, there is no motivation for the contractor as his payoffs are not going to be effected by the outcome of the project. However, distinctive features of a TC / GMP approach are perceived to be 58

designed to precisely exploit these opportunities and thus have an effect on value by means of (1) providing motivation to add value and (2) the means to redistribute the value thus created.

Sharing ratios provide a modality for redistribution of any value created through the course of the project, and thus provide motivation to create value. Different sharing ratios can generate different types and levels of motivation and the factors affecting appropriate choice for optimum outcomes are discussed later in this Chapter. TC / GMP adjustment mechanisms, by providing contingencies for risks which become part of savings if better managed, motivate the client and the contractor to manage and mitigate the risks and foster the environment for joint risk management. The avenue for alternate proposals is designed to provide a means to exploit the expertise of contractor or encourage innovations in the search for efficiencies.

4.4.2

Implications in terms of Cooperation and Relationships

Distinctive features of a TC / GMP approach create a positive impact on cooperation and relationships because they facilitate: (1) reconciliation of value dimensions (2) improvement of trust and (3) increased interaction.

Reconciliation of value dimensions is achieved by providing incentives or rewards in lieu of sacrifices (costs) involved, in adjustment by means of gain / pain share arrangement. Trust is considered vital for achieving cooperation and better relationships (Gambetta 1998, Kramer 1999, Wicks et. al. 1999). Also, open book accounting has been shown to contribute to building trust in inter-organizational relationships (Dekker 2003, Seal et. al. 1999).

Furthermore, a TC / GMP approach facilitates early contractor involvement, providing increased time to develop relationships. The approach also requires enhanced involvement and commitment of stakeholders (Tang and Lam 2003) which increases interaction and enhances information flow. Information symmetry generally enhances trust (Eisenhardt 1989). Further, by means of joint risk management, the TC / GMP approach encourages joint decision making and keeps

59

the stakeholders aware of the implications of decisions. This gives a sense of procedural justice which again is seen to enhance trust (Anvuur 2008).

4.4.3

Implications in terms of Risk Management

Risk allocation in a TC / GMP approach is slightly different as compared to traditional procurement approaches as ambiguous risks are generally priced into contingencies and become part of potential savings, which necessitates joint risk management. Although this brings clarity to risk allocation, the pricing of these risks is complicated and hence makes tender evaluation complex. Also, risk identification becomes paramount and needs to be done in the early stages of the project.

Further, joint risk management (JRM) necessitates structured exchange of information on risks. Risk registers have been used as tools for structured exchange of information and have been found to be effective in facilitating JRM. JRM also entails consensual decision making as to the best possible strategies to manage risks, and results in increased interactions between stakeholders.

4.5

BENEFITS OF TC / GMP CONTRACTS

The TC / GMP approach to procurement has been documented to improve performance and increase mutual benefits to all of the parties involved (Trench 1991, Walker et al., 2000). These benefits are discussed below.

4.5.1

Perceived Benefits - Costs

The benefits of using a TC / GMP approach to procurement are two pronged.

In terms of cost savings: The accompanying gain / pain share mechanism in a TC / GMP approach is geared to offer strong incentives to the contractor to motivate efficiency and to achieve cost savings (Fan and Greenwood 2004, Boukendour and Bah, 2001) and has been demonstrated to do so. Also, as described by Tang and Lam (2003) the client and contractor are expected to be more motivated to co-operate and achieve cost minimization in a TC / GMP approach because both parties will benefit from the cost savings. Further, Perry and Barnes (2000) show that contractors are motivated to secure certainty of yield on target cost contracts by increasing their 60

share of the savings.

In terms of accuracy of estimates: The TC / GMP procurement strategy is generally believed and to a large extent demonstrated to provide a relatively accurate target cost for the project thereby enhancing cost certainty to the client (Patterson, 1999, Perry and Barnes 2000, Lewis 1999), as compared to the uncertainties arising from cost overruns in a traditional approach.

4.5.2

Perceived Benefits - Time

By means of an adjustment mechanism to TC / GMP which facilitates adaptation to scope changes, a TC / GMP approach makes it possible to the commence construction activities before the design is fully completed (Frampton, 2003). This overlapping of design with construction facilitates compresses the duration required for overall project development. Additionally, with the greater involvement of the client in problem solving when compared with the traditional contracts, the decision for any changes can be made more efficiently (Tang and Lam, 2003). The

GMP/TCC approach may therefore speed up the problem solving process (Trench, 1991).

4.5.3

Perceived Benefits - Quality

In contrast to conventional procurement approaches which rely on price and sacrifice quality (Cheng 2004), a TC / GMP approach relies heavily on setting an accurate target price for success. A reasonable target price offers no reasons for a contractor to cut corners and thereby ensures quality. Also, a TC / GMP approach facilitates the tendering of the domestic subcontractors works packages on an open basis ensuring that the employer receives competitively priced tenders from approved subcontractors and specialists (Tay et al., 2000), thereby enhancing quality and cutting hidden layers of subcontracts.

Further, quality is also improved by means of facilitating early involvement of a contractor and providing avenues for his inputs to be given adequate consideration through contractor initiated alternate proposals in a TC / GMP approach. Additionally, the requirement of greater involvement of the employer in a TC / GMP approach 61

provides an employer with better control over quality.

4.5.4

Perceived Benefits - Relationships

Bower et al. (2002) stated that the GMP/TCC contracting approach can be an effective means of motivating contractors to achieve better value and project performance by aligning their own financial objectives with the overall objectives of the project. Chan et al. (2004) documented that the GMP approach has been effective in fostering a co-operative working atmosphere. In addition, the GMP/TCC form of contract has been demonstrated to facilitate the use of relational strategies such as partnering, alliancing (Tang and Lam, 2003; HKHA, 2006).

4.6

POTENTIAL PITFALLS OF TC / GMP APPROACH

The benefits of a TC / GMP approach have found to be contingent upon the approach being properly structured, implemented and managed (Trench, 1991; Walker et al., 2000). In this regard, this section reviews the documented potential pitfalls that professionals face while procuring with this approach.

4.6.1

Associated Risks

TC / GMP approach is generally accompanied by a cost premium due to the costs associated with the procurement approach itself and due to the contractors having to take additional risks as compared to traditional approaches by means of design development contingencies (Fan and Greenwood 2004, Lewis 2002, Stuckhart 1984). Lewis (2002) found that contractors tend to simply pass these risks down the line to the subcontractors. This results in either inflated tender prices to cover these risks or subcontractors being unable to perform satisfactorily. Mills and Harris (1995) found that tenders for GMP contracts may tend to be 1% to 3% higher than equivalent tenders sought under a JCT 80 standard form of contract where the contract sum is the guaranteed maximum price (Mills and Harris, 1995).

Moreover, Uebergang et al. (2004) emphasized that a TC / GMP is definitely not a guaranteed price ceiling, as it will be adjusted in the event of unforeseen changes that occur as part of the construction work which means the client faces the financial risk

62

of paying over the agreed TC / GMP in case of a scope change. Further, in a TC approach the client has to share the pain in case the costs go over the target price. Also, the client carries the risk of paying variations more than under the traditional procurement method because the contractor may attempt to inflate the estimated costs of work during the negotiation process in order to gain the maximum advantage where prospective savings can be achieved (Gander and Hemsley 1997, Baldwin and McCaffer, 1991).

Another source of risk in a TC / GMP approach is the unclear definition of scope of change. It has been identified as a major problem in implementing a TC / GMP approach (Gander and Hamsley 1997, Tay et. al.). Fan and Greenwood (2004) identified this as a potential cause for disputes as to what constitutes a TC / GMP variation (Fan and Greenwood, 2004). It was observed that the tendency of the contractor is to view variations as a scope change to maximize his chance of getting extra payment whereas the client wants to classify as many changes as possible under design development to minimize cost increase along with cost savings. In this regard, HKHA (2006) states that if an inexperienced or claim-conscious contractor is appointed, there is a potential danger for the contracting parties to become confrontational.

4.6.2

Requirement of Enhanced Interaction and Commitment

A TC / GMP approach requires a greater level of commitment and involvement by all project parties. This is necessitated by the need for better control during the design development period and by the need for joint risk management over the entire project cycle. HKHA (2006) regards these additional administrative requirements might result in the relevant parties having to commit more personnel to the project, together with the potential higher fees to be incurred by design consultants in evaluating tenders for domestic subcontracts after the award of main contract.

4.6.3

Unfamiliarity with TC / GMP Approach and Methodology

A TC / GMP approach is complex both in terms of pricing a contract and in terms of managing the contract. This often leads to difficulties in setting an agreed TC / GMP,

63

determining the sharing ratio (Badenfelt 2008), setting allowances for design development and unexpected risks (Perry and Barnes 2000) and monitoring the TC / GMP during the project (Chan et. al. 2007). This was often exacerbated by the absence of a standard form of TC / GMP contract (Gander and Hamsley 1997). However, with the release of new standard forms such as NEC option C and / or D, PPC 2000 and others, these difficulties have been mitigated to a certain extent.

In terms of managing the contract, Gander and Hemsley (1997) suggest that selection of an experienced project team is critical to the success of a TC / GMP. Further NEDO (1982) believes that the success of the TC / GMP approach is dependent on the managerial efforts of stakeholders. Moreover, it has been found that project stakeholders unfamiliar with a TC / GMP approach may easily get into disputes (Cheng, 2004).

4.7

RATIONALIZING THE CHOICE OF GMP CONTRACTS

AS THE MAIN FOCUS OF THIS STUDY

This section presents the rationale behind the focusing on TC / GMP approach for value enhancement in this research.

4.7.1

Why TC / GMP Contracts?

A TC / GMP approach has been demonstrated to generate significant mutual benefits and enhance cooperation in the construction industry. The reasonable success of this contract approach in matured markets has made it emerge as a viable alternative to traditional contracting methods that are still preferred in many countries. However, potential difficulties in implementing this approach have also been brought out by various studies, of which appropriate structuring, implementation and management is demonstrated to be the key to reap the associated benefits.

Further, a TC / GMP approach by virtue of incorporating three negotiable terms is demonstrated to require more negotiations. Also, initial decisions, as shown by the three stage model described in Chapter 3 are seen to significantly impact implementation and management affecting both value and relationships. Moreover, inappropriate decisions in the initial stages of the project are perceived to be the 64

cause of an increased number of disputes, necessitating further negotiations in the implementation stage.

The dynamics of these interlinks between initial decisions and their impacts further downstream; and the impact of risk sharing (which is an innovative and important aspect of TC / GMP contracts) on negotiations have not been explored substantially to achieve effective outcomes. Increase in negotiations in an adversarial environment by itself can be detrimental to project performance since such contentious negotiations tend towards zero-sum (non-cooperative) games. However, mitigating the adversarial environment is dependent on relationships, while relationships in turn are seen to be influenced by negotiation outcomes. I In this regard, it is important to make the right choices in the initial stages of the project. However, it has been shown that there is an absence of familiarity with TC / GMP mechanisms among most professionals and this is for long seen as a barrier to wider use of TC / GMP approaches. This means for a TC / GMP approach to have a wider reach and prevalence, familiarity of associated mechanisms among professionals has to be improved to empower them to make appropriate decisions as required. However, in a catch-22 type scenario, it seems that there are not enough projects opting for TC / GMP approaches to boost such experience levels.

An alternative approach is to harness the latent knowledge of experienced professionals in TC / GMP and transform the knowledge to frameworks to familiarize potential users with the mechanisms, guidelines and decision support tools to assist them to make appropriate decisions. In this regard, it was strongly believed that exploring TC / GMP approaches for what makes them effective in terms of value and relationships would yield useful knowledge towards developing the required guidelines and decision support tools.

4.7.2

Significance of Sharing Ratio

A large proportion of the unfamiliarity with TC / GMP contracts can be attributed to the complexity involved in pricing a TC / GMP contract. The common formula for a target cost contract used in various studies is as below:

65

F(x) = b + pc (Xo - x) Where, F(x) = the contractor's new fee; Xo = the target cost; x = the actual cost; b = the target profit; pc = the contractor's sharing ratio, 0 < pc < 1, Gandhi (1979) identifies three negotiable terms in the above formula: target cost Xo, target profit b and the sharing ratio pc. It has to be noted that out of the three negotiable terms, two, i.e. target cost and the target profit are fixed at the contract stage and the room for maneuverability of these terms is nonexistent except for variations in terms of scope changes. Also, an inappropriate sharing ratio can sometimes lead to contractors striving for upward adjustment of TC / GMP as described in the following section. Thus the maximum impact on the final price will be from the selected sharing ratio.

4.7.2.1 Significance in terms of Value Construction contracts are as described earlier an exchange of value in the future. However, the consideration for the contract is generally fixed before the exchange takes place. In performing the exchange, i.e. construction of the project, the contractor faces significant risks (both positive and negative) and uncertainties. In a traditional procurement approach there is neither a provision to reward a contractor for a better than expected performance in the face of negative risks, nor scope for savings to the client in case of positive risks. A TC / GMP approach, specifically through the sharing ratio is designed to precisely address this issue.

The impact of a sharing ratio on value is two pronged. Being motivational in nature, the sharing ratios create an environment for value creation, both through efficiency and innovation. At the same time it provides an avenue to distribute the value between the parties. However, the absence of an appropriate sharing ratio can create suboptimal outcomes. Perry and Barnes (2000) analyzed the interplay between these negotiable terms with respect to final price in TC approach and found that there is scope for manipulation of tenders and that suboptimal methods of tender evaluation 66

are in use. They concluded that contractors are motivated to secure certainty of yield on target cost contracts by increasing the value of the fee and decreasing the value of the target when the contractors share is low. They also stated that a low contractors share decreases the motivation for the contractor to put efforts in reducing the actual cost and recommended avoiding contractors share being less than 50%.

Further, Broome and Perry (2002) suggest that contractors may be willing to accept lower rewards in exchange for increased certainty of profit in the longer term (Broome and Perry, 2002). Weitzmen (1980) and Bernhard (1998) also state that a higher sharing ratio creates a stronger incentive to reduce costs, but at the same time makes the contractor bear more risk. Also, Barnes (2000) believes that a high sharing ratio increases the contractors motivation to renegotiate the target cost for new events that occur during the course of the contract.

4.7.3.1 Significance in terms of Relationships The relation between value and relationships has been dealt with in Chapter 3. Suffice to say here that sharing ratios by means of fostering creation of value and facilitating distribution of value can foster better relationships. However, the effects of selecting an inappropriate sharing ratio on relationships need to be discussed.

TC / GMP approaches use sharing ratio as a risk sharing tool. According to Elmuti andf Kathawala (2001) a displeased partner in an explicit collaborative arrangement using a risk sharing tool may blame the partnering company and hence increase perceived relational risk. Thus, negative effects on relationships triggered by an inappropriate sharing ratio stem from the possible leeway for a displeased partner to exhibit opportunistic behavior which fosters disputes and confrontational attitudes.

As stated earlier there is an interplay between fee, target, share and price and there is scope for manipulation of tenders based on this interplay. A TC / GMP approach is seen as the construction industrys strategy to correct for the winners curse phenomenon observed in competitive bidding (Dyer and Kagel 1996, Rothkopf 1969) and also as a means to mitigate the effects of information asymmetry seen at the contracting stage by means of adjusting the price against realized risks. An

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inappropriate sharing ratio precluding this correction may lead to disputes in search for upward adjustment of TC / GMP by means of scope variations.

Further, the tendency of the contractor is to seek variations as a scope change to maximise his chance of getting extra payment whereas the client wants to keep as many changes as possible under design development to minimize increase of costs and to enhance cost savings. This has been identified as the major cause of disputes in TC / GMP contracts by Tay et al. (2000). There is also a tendency of clients to view contractor initiated innovations and cost cutting proposals as quality reduction efforts and to reject them without fair consideration, which is a waste of efforts and hence costs for a contractor, actually leading to less motivation to cut costs or innovate.

Also, a client may be able to convince a risk-averse contractor to assume more contract risk by increasing the target fee or accepting a higher sharing ratio (Bernhard, 1988). However, this is fraught with danger because it can lead to disputes in the construction stage if the contractor is not able to perform. A tangential but important related issue is selection of the right contractor. Selection of an inexperienced or claim-conscious contractor is believed to lead to confrontational attitudes during construction stage (HKHA 2006).

Hence, in order to foster relationships, a sharing ratio should be high enough to motivate the contractor but at the same time should not encourage the contractor to either adjust the TC / GMP higher or resort to cutting corners in terms of quality. Also, it should be attractive and fair enough to encourage the right partner to be selected for the project.

4.8

SELECTION OF SHARING RATIO

Designing an incentive based contract has been the subject of many research works (Blyth 1969, Walker 1969, CIRIA 1982, Herten and Peeters 1986, Rosenfield and Geltner 1991). Although they provide a few basic guidelines on setting appropriate sharing ratios, they neither focus on discussing the factors that influence the selection of a sharing ratio nor provide detailed insights into the issue. The following sections

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review the literature to identify the factors that are perceived to influence the selection of a sharing ratio.

4.8.1

Factors Influencing Selection of an Appropriate Sharing Ratio

Schererl (1964) discussed the theory of contractual incentives for cost reduction in public sector projects assuming a constant value of the sharing proportion to maximize contractor and government profit and suggested focusing on risk aversion theory for further analysis of contractual incentives. Baron (1972) showed that the risk affinity of a contractor has a significant effect on bidding behavior of the contractor. Assuming that the owner and the contractor had different perceptions of risk, Carr (1997) used the utility curves to measure how much each would be willing to pay to avoid the uncertainty of the final cost of the project.

Building on these works, Al-Harbi (1998) explained how owners and contractors determine the best sharing ratio from their points of view and argued that the selection of a sharing ratio is affected mainly by stakeholders affinity to risk and perceived levels of risks by the contracting parties. He suggested that having different utility values for different sharing ratios and project situations indicated that there is a room for negotiation between the owner and the contractor to finalize the selection of a sharing ratio.

Broome and Perry (2002) review eight examples of share profiles from practice. Figure 4.1 illustrates how a constant equal share profile (50:50) works. Figure 4.2 illustrates a shared profile with capped employer commitment at target price or a profile equivalent to a GMP.

Figure 4.3 shows a share profile with capped employer commitment and any saving re-invested back to the project. The intention is that projected savings compared with the target price for the client are reinvested in the project again in the form of scope change in order to get the best possible asset for the fixed budget.

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Contractors share of over / under run Target Employers share of over / under run Total payment Actual Costs + Fee line

Constant profile line

50:50

share

by the employer

Actual Costs

Figure 4.1: Target Cost Contract with 50:50 Share Profile (adapted from Broome and Perry 2002)

However, Broome and Perry suggested that absolute caps such as in Figure 4.2 may reduce an employers motivation to work with the contractor to reduce the costs and result in contractors including excessive risk contingency, thereby pushing the target price higher. As a remedy they suggested share profiles with progressive caps such as in Figure 4.3 and 4.4

Total payment by the employer Target / under run

50:50 Contractors share of over

100:0

Contractor : Employer share ratio

Share profile line

Employers share of under run only

AC + Fee line

Actual Costs

Figure 4.2: Share Profile with Capped Employer Commitment (adapted from Broome and Perry 2002)

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Total

payment

75:25 Contractors share of over / under run

15:85

100:0

Contractor : Employer share ratio

by the employer Target

Employers share of over / under run Share profile line

Actual Costs

Figure 4.3: Share profile with Capped Employer Commitment and Any Saving Re-invested In (adapted from Broome and Perry 2002)

Total

payment

25:75 Contractor's share of over run

50:50

75:25

100:0

Contractor : Employer share ratio

by the employer Target

Employers share of over run

Actual Costs

Figure 4.4: Share Profile with Progressive Cap (adapted from Broome and Perry 2002)

They also discussed share ratios in practice for varying risk profiles of stakeholders as are illustrated in Figures 4.5 and 4.6. In Figure 4.5, the focus was on reducing financial risk to the contractor as there were concerns on his ability to take them, whereas in Figure 4.6 the focus was on motivating the contractor to minimize any overrun and at the same time achieve a competitive tender target price.

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Total

payment

25:75 Contractor's share of over run

50:50

75:25

Contractor : Employer share ratio

by the employer Target

Employers share of over run

Actual Costs

Figure 4.5: Share Profile for Medium Risk Project and Financially Strong Client (adapted from Broome and Perry 2002)

Total

payment over run Target

50:50 Contractor's share of

20:80

Contractor : Employer share ratio

by the employer

Employers share of over run

Actual Costs

Figure 4.6: Share Profile for Risky project, Financially Strong client and RiskAverse Contractor (adapted from Broome and Perry 2002)

Figure 4.7 illustrates a share profile on a low tech project with low potential for savings. The neutral band indicates the price employer expected to procure for the same project by traditional procurement and it was suggested that a neutral band can also be useful in case of parties being unable to agree on a target price wherein the neutral band covers the differences in perceptions of the target price. The sharing ratio illustrated in Figure 4.8 had similar objectives as to the one illustrated in Figure 4.6 but with additional objective of motivating the contractor towards higher savings.

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Total

payment

50:50

0:100

50:50

100:0 Contractor : Employer share ratio

by the employer

Employers share of over run Neutral Zone Target

Actual Costs

Figure 4.7: Share Profile with Neutral Band (adapted from Broome and Perry 2002)

50:50 Total payment Contractor's share of Target over run by the employer

25:75

10:90

Contractor : Employer share ratio

Employers share of over run

Actual Costs

Figure 4.8: Share Profile for Multi-contract Project (adapted from Broome and Perry 2002)

Based on the analysis of above profiles, Broome and Perry conceptualized the choice of a share profile to be the alignment of the motivations of the parties so as to maximize the likelihood of project objectives being achieved, taking account of the constraints and risks that act on the project and the strengths and weaknesses of the parties to it. The words in italics were considered to be the principal issues to be addressed while setting a sharing ratio.

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The importance of the issues identified by Broome and Perry was further stressed by Badenfelt (2008) who through their literature review identified the following factors as key while negotiating a sharing ratio: (1) the clients and contractors perceived level of risk, (2) their attitudes towards risk, (3) the desire to influence the contractors motivation, (4) the contracting partys initial perception of the accuracy of the negotiated target cost, (5) the size of the target profit and (6) the contractors desire to increase the chances for profit in the longer term.

Badenfelt (2008) further analyzed the choice of sharing ratios within the frameworks of agency theory and discussed impact of asymmetry of information and long-term relationships on the design of a target cost contract. They concluded that a sharing ratio may be selected on the basis of previous experiences of working together, indicating that long-term relations and perceived relational risk have an important impact on the size of a sharing ratio because they decrease the asymmetry of information between the contractor and client.

However, these studies have stopped short of integrating the findings to develop a decision support model for selecting an appropriate sharing ratio. Further, as identified in Chapter 3, information flow can have a significant impact on the outcome of a negotiation. Badenfelt (2008) has also suggested that asymmetry of information should be considered while selecting a sharing ratio. However, none of the studies above have analyzed the effects of information flow characteristics of the construction industry on the selection of a sharing ratio. 4.8.2 Selection Mode

The process of selecting a sharing ratio in practice differs from project to project and client to client. Depending on the preferences of the client and the requirements of the project, selection modes of sharing ratios as seen in practice from literature (Broome and Perry 2002, Badenfelt 2008, CIRIA 1982) can be classified into four categories.

(1) Fixed by the client: In this approach, the sharing ratio is fixed by the client with inputs from the consultants and there is virtually no involvement of the contractor in the process. 74

(2) Indicative ratio from the client with option for alternate proposals from contractors: An indicative ratio is suggested in the tender documents in this approach. The contractors are free to tender on the basis of the indicated ratio or choose to propose their own alternative ratio.

(3) Fixed through tendering: Contractors are free to propose a sharing ratio of their choice and tenders are evaluated by adjusting tender prices to account for the different sharing ratios proposed by different tenderers.

(4) Negotiated: The sharing ratio is fixed based on a negotiated outcome. Sometimes, this approach is used even in competitively bid projects by asking the contractors to renegotiate the tender price and sharing ratio once they have been selected through a competitive process.

However, a review of existing literature reveals that most works are generally silent about the selection of an appropriate mode to fix a sharing ratio that could generally be based on the profiles of client, contractor and project characteristics.

4.8.3

Selection Timeline

In terms of when to select a sharing ratio on a project timeline, the choices as seen in literature differ from client to client and from project to project and have been perceived to affect the outturn costs of the project. Some clients, especially the ones which give higher importance to contractor involvement in the early stages of the project prefer to fix a sharing ratio very early. Projects where overlapping of design and construction stages to compress the schedule is required, also tend to opt for fixing a sharing ratio early. The choice is also dependent on how confident the client is about the current level of detail of the design.

Each approach has been shown to have its own pros and cons. A sharing ratio fixed with a relatively sketchy design is sometimes seen to increase the risks for a contractor and hence provide him with good reasons to either push the target price higher or demand a higher share of savings or both (Chevin 1996). Contrarily, a

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sharing ratio fixed late with very detailed design has been suggested to cut down the potential for contractor to generate savings or add value (Broome and Perry 2002).

4.8.4 Ratio

Effects of Information Flow Timeline on Efficiency of Selected Sharing

As described in Chapter 3, information is generally not complete at any given point of time in a construction project but trickles down in a constant flow throughout the project. Further, there is a considerable asymmetry of information between the client and the contractor. Absence of information means a perception of higher risks and a potential for the party with information clarity to take advantage of the other leading to inefficient outcomes that can indeed also affect relationships.

In this regard, a sharing ratio fixed without symmetry of information between parties can be regarded to result in outcomes such as inappropriate risk allocation leading to higher target price or insufficient motivation to achieve project objectives and so on. Badenfelt (2008) acknowledged this fact and suggested that asymmetry of information should be considered while selecting a share ratio. However, there is no clarity in the literature as to what should be considered as a point of time where there is relative information parity between the parties.

4.9

VALUE

FLOW

VIA

NEGOTIATIONS

IN

GMP

CONTRACTS
In the light of the available choices of various possible sharing ratios, selection modes and selection timelines as described in the previous section, the three stage model developed in Chapter 3 was applied to the structure of the TC / GMP approach as found from the literature and summarized in previous sections to illustrate the inter-linkages between issues that require appropriate decisions that have been found to have maximum impact on value. The main thread of negotiations / decisions which was identified thus is as shown in Figure 4.9 and the implications of each choice at each stage are described subsequently.

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Game 1

Game 2

Game 3

Contingency amount

Design development

Fixed Sharing ratio Not Fixed DD Definition / TC / GMP variation Cost claims Scope variation

Sharing ratio

Time claims

Pre-tender

Post-tender Pre-contract

Contract to Final Accounts

Figure 4.9: Main Thread of Negotiations in TC / GMP

4.9.1

Negotiations / Decisions for Value in Stage 1 (pre-tender stage)

The pre-tender stage involves predominantly single party (clients) decisions with advisory inputs from consultants that affect the outturn costs or project outcome. However, some of the pre-decision negotiations described in stage 2 can overlap with stage one when there is involvement of the contractor in the early stages of the project. The decisions required in this stage range from design related decisions to decisions on procurement approach and mode of selection of the contractor and so on. Assuming that TC / GMP approach is the preferred approach, the client has to make two significant decisions in terms of structuring the procurement at this stage which are: (1) mode of selection of the contractor (2) mode of fixing the sharing ratio.

Mode of selection of a contractor has been researched in depth by various studies and hence is ignored in this study. In terms of selecting a sharing ratio, the client has two choices: (1) to propose a fixed sharing ratio with inputs from the consultants for tendering or (2) to leave it flexible to be decided by tendering or by negotiation with the selected contractor.

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4.9.2 stage)

Negotiations / Decisions for Value in Stage 2 (from tender to contract

Outturn costs in terms of value as described earlier, is shown to be interplay between target price and sharing ratio. An appropriate sharing ratio is dependent on the potential for the contractor to make savings or overrun the costs which is related to how he prices the contingency amount for risks associated with design development and other risks. Risks associated with design development correlate to the definitions of design development and TC / GMP variation.

In case of the choice being fixed, the contractors pricing is dependent only on the potential for savings or overruns as perceived by him in relation to design development and TC / GMP variation definitions. Inappropriate or ambiguous definitions increase risks and can be only mitigated through negotiations. If negotiation is not an option, e.g. not allowed to even to clarify or change these definitions as in competitively bid tenders, the only available choice to him is to increase the contingency amount and thereby push the target price upwards. This precludes the contractor from taking full advantage of potential value enhancement possibilities afforded by the approach. Also, the approach precludes the contractor from taking his risk profile into account while tendering.

In case of the choice being flexible, i.e. either negotiated or fixed by tender proposals, the contractor may be able to propose a better sharing ratio that takes full advantage of potential for savings. Also, this approach facilitates better exchange of information on risks, leading to enhanced understanding associated risks and thus improved risk management subsequently.

4.9.3

Negotiations / Decisions for Value in Stage 3 (from contract to final

accounts stage) Negotiations / decisions required in stage 3 stem from interpretation of design development and TC / GMP variations definitions, in the case of different interpretations by stakeholders. Scope variation differences can further lead to negotiations on associated claims on time and cost and can often take the form of 78

disputes. The conduct of these negotiations and their outcomes are hugely impacted from the appropriateness of earlier decisions and outcomes. They are also influenced by the relationships built through the course of the project and residual perceptions about previous decisions and outcomes.

In case of adversely contested issues, there need to be mitigation strategies to stop them from becoming disputes, while in case of disputes a well structured strategy of dispute management and resolution is required. The culmination of these negotiations / decisions will determine the outturn cost of the project. Relational strategies have been proven effective when used in conjunction with TC / GMP approach for building and managing relationships and mitigating adverse perceptions. Relational strategies commonly in use with TC / GMP approach are reviewed in detail in the following section along with frequently used dispute management and resolution strategies to achieve better outcomes.

4.10 RELATIONAL STRATEGIES AND TC / GMP APPROACH

TC / GMP approach being a collaborative procurement approach depends on cooperation and good relationships for achieving desired outcomes. In order to achieve the desired level of cooperation and relationships, relational strategies such as partnering and alliancing have been implemented and have been demonstrated to be effective in generating mutual benefits (Tang and Lam, 2003). In fact, the approach has been the preferred choice of procurement when striving for supply chain excellence through relational approaches (Walker et. al. 2002). This section reviews the reasons for the effectiveness of these relational strategies in terms of delivering value when implemented in conjunction with TC / GMP approach and shortfalls, if any for suggested improvements.

4.10.1 Value through Relational Strategies TC / GMP approaches generate value through incentivisation. The positive effects of enhanced value and its distribution between stakeholders on relationships and cooperation has been dealt with earlier. Relational strategies reinforce the relationships and cooperation achieved through value enhancement and distribution by creating an environment which is conducive to the development of beneficial 79

relationships thereby enhancing cooperation and transforming value impacting relationships and relationships impacting value into a virtuous cycle. The most common relational strategies that accompany a TC / GMP approach to procurement in the construction industry are: (1) Partnering and (2) Alliancing

Partnering and alliancing are strategies to promote non-adversarial culture to promote win-win working relationships between partners (Walker et. al. 2002). These are achieved by fostering cooperative and mutually beneficial relationships among project stakeholders and developing an explicit strategy of commitment and communication (Lenard et. al. 1996). The tools to achieve these states can range from workshops, review meetings to reconcile differences, to incentives for achieving targeted performance. These tools have been demonstrated to inculcate the spirit of a single team and shared goals, thereby developing conducive environment for relationships to thrive (Bayliss et. al. 2004). While benefits in terms of cost time and quality have been documented by both methods (Bennett and Jayes 1995, Larson 1997) partnering has been sometimes shown to be limited to principal stakeholders (Sze et. al.) whereas alliancing has been relatively more successful in integrating the whole supply chain (Walker et. al. 2002).

In the context of TC / GMP, the benefits of partnering and alliancing stem from better communication, more cooperation and greater responsiveness to problems resulting in achieving the increased involvement of stakeholders which is a key success factor for the approach. Although implementing at least one relational strategy is suggested in a TC / GMP approach to procurement, the strategies need to be refined to integrate the whole supply chain such that the benefits spread out to all stakeholders. A possible solution may be the concept of relational value network procurement proposed by CICID (2008) which can be taken as a refinement and extension of allaincing.

4.10.2 Dispute Resolution and Management To quote from one of the case studies presented in Chapter 5, a TC / GMP can be either spectacularly effective or doomed to fail. There is not much middle ground inbetween. The reason attributed to this quote was that a TC / GMP approach can be 80

plagued with disputes, for example arising from ambiguous design development and TC / GMP variation definitions, claims conscious contractor, improper risk allocation and so on. The nature of disputes and their causes are described in Section 4.6.1.

In this regard, early identification of issues with potential for flaring into disputes and effective dispute management and resolution are seen as keys to mitigate dispute risks and achieve desired outcomes (Chan et. al. 2007, Green and Lenard 1999). Generally, the approach to manage this problem in practice has been to adapt alternative dispute resolution mechanisms such as adjudication meetings and appointment of neutral dispute resolution advisors (Hill and wall 2008) in conjunction with relational strategies.

4.11 CHAPTER SUMMARY

This chapter presented the basic principles underlying the TC / GMP procurement approach along with its perceived benefits and associated risks. Further, it identified the key factors and issues to be considered while selecting an appropriate sharing ratio distilled from the literature. The impact of selecting different sharing ratios in different situations was reviewed. Based on the summary of potential impacts, a main thread of negotiations / decisions was built by applying the three stage model developed in Chapter 3 to illustrate their downstream effects through the interlinkages. Relational strategies and dispute management and resolution strategies that commonly accompany a TC / GMP approach were reviewed to demonstrate their significance in reinforcing and enhancing value.

This sets the scene for developing an integrated framework for selection of appropriate sharing ratio and relational strategies in TC / GMP approaches through further and deeper investigation by means of case studies and surveys to both validate the identified issues and factors, and understand their interactions.

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CHAPTER 5: CASE STUDIES

5.1 CHAPTER INTRODUCTION

Case studies were identified, as in Chapters 2 and 3 ideal research methods to explore value creation and value capture decisions and negotiations over a construction project time line. In this context, this chapter presents two longitudinal case studies of projects employing GMP contracts and one mini case study of target price contract. For each case study, the background of the project is provided and then the context and analysis of decisions and negotiations over the timeline are presented. Next, the role of relational strategies and risk management towards achieving project objectives in relation to the decisions and negotiations is presented.

5.2

CASE STUDY 1

Case Study 1 focused on the sixth phase of seven phases of a premium office and retail complex redevelopment project in the city centre of Hong Kong. The project objectives for phase 6 were to develop a mixed-use building of 25 floors consisting of a grade A office tower with additional retail space to complement the existing retail space. The building was to be developed in place of an existing seven storey building with minimal disruption to existing businesses and adjoining properties. The scope of works involved demolishing the existing office tower, supplementing the existing foundations and erecting a steel-cored superstructure tower (25 floors). This involved three separate and sequential contracts for the demolition, foundation and the superstructure works. The primary drivers for the client in all these contracts were cost and time certainty.

5.2.1

Data Collection Methods

The researcher tracked the project from December 2005 to March 2007. Data collection methods of the case study involved study of project documentation, observation of project meetings and semi-structured interviews with managerial personnel. The interviews were conducted in two phases. The first phase of

interviews were conducted during the construction phase and consisted of six project directors from the client, consultant and contractor teams, three senior project 82

managers from the main contractor and clients in-house project management teams and two subcontractors. The second phase of interviews was conducted after practical completion with one representative each from the main stake holders. The interviews also completed short structured questionnaires to measure their interdependence, fairness of decision-making procedure, processes and outcomes. The interviews were recorded and the resulting transcripts were analyzed for common themes and significant issues.

5.2.2

Procurement Strategies

As indicated earlier, the works encompassed three separate contracts; (1) Demolition negotiated, lump sum management contract (2) Foundation negotiated, lump sum traditional contract (3) superstructure negotiated, GMP, traditional-management hybrid contract with sharing of savings from value engineering. The selection process followed for all the three contracts was single source negotiations.

The owners perceived advantages in taking a negotiated approach were the main contractors reputation, the main contractor and the client belonging to the same group holding company and the main contractors commitment to cooperation and familiarity of client requirements based on prior experience in working together recently. The contractor also gained, in the sense that his investments in tendering are rewarded given the certainty of getting the project.

However, there was a concern from the consultants that by single point negotiations, the client may lose out on an opportunity to go into the market and derive cost advantages from competitiveness. This was balanced by asking the contractor to demonstrate the competitiveness of his pricing against the market and then verifying this with an independent QS firm. The rationale behind selecting the above mentioned contract strategies for the respective work packages are explained below in brief.

5.2.2.1 Demolition Contract Demolition of the existing office tower was a job fraught with risks due to its location and interfaces of service termination and diversions which called for a

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specialized contractor. The client was interested in retaining the management expertise of the main contractor while bringing in a specialized contractor to tackle the associated risks. This was achieved by the choice of negotiated, lump sum management contract with no direct works.

5.2.2.2 Foundation Works Contract The foundation works consisted of a new basement to be constructed within an existing basement with an 8m head of water. When the existing office tower was first built, the adjoining street collapsed into the site and there was a risk of history repeating itself. This called for innovative and safe construction methods with prior experience of the conditions with emphasis on total control. By choosing a negotiated, lump sum traditional contract the owner was able to emphasize on the risks associated during negotiations; transfer its knowledge of the risk and its responsibility to the contractor. The contract minimized management interfaces by not allowing any portion of work to be subcontracted out, thereby providing total control to the contractor.

5.2.2.3 Superstructure Works Contract The superstructure was of a steel core and off-centered with cantilevered floors. This was the first of its kind for the client. Owner requirements for phased finishing allowing phased occupancy meant additional milestones linked to high liquidated damages for delays. Negotiated, GMP, traditional-management hybrid contract was the chosen approach for the delivery of the superstructure.

The trade off in procuring through GMP contracts is cost certainty against lower costs when procured through competitive bidding along with opportunities to innovate and time to further develop the design. Since, cost certainty was more essential for the owner along with the quality of the project, GMP was considered to be the right choice. However, the designs were 90% complete when tendered and the main contractor was engaged throughout that process. But what it did achieve was to provide some amount of buffer time in case problems were encountered with design. In hindsight this proved to be very important in completing the project on schedule.

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The choice was also attributed to the fact that GMP contracts provide a vehicle for risk sharing and quality control on more complicated and specialized building jobs such as on this project. Except for the main superstructure, the majority of the specialized works were subcontracted and named subcontracts (client recommends the acceptable contractors without taking responsibility for their final selection and appointment) were used as a control mechanism over the quality of subcontractors employed making it a traditional-management hybrid contract.

5.2.3

Three Stage Model as Applied to the Case

This section presents the decisions and negotiations in the context of the project with respect to the main thread of negotiations in TC / GMP approach as identified in Chapter 3. The impact of the outcomes and decisions down the line is extracted while inferences that can be drawn are listed.

Games 1 & 2 GMP contract strategy was chosen as the preferred choice based on the reasons cited above and the successful use of this approach by the same client and contractor in a recent project. The contractor was involved from the project initiation phase, providing his inputs for the design team resulting in overlapping between decisions / negotiations in stage 1 and stage 2 of the model. Hence, they are analyzed together here.

Contractor selection mode: At the time of the project initiation, the construction industry market was in a trough, thereby making it a buyers market. Contractors were in search of work and the client held a higher bargaining power. The contractor was not paid for his inputs into the design phase. Both the contractor and client representatives perceived that being a single point negotiated sourcing; the certainty of getting the project in itself was enough of an incentive for the contractor to provide inputs through the design phase.

GMP, gain share arrangement and fee: The breakdown of the agreed GMP amount in this project is as shown in Table 5.1. The contingency amount for design development was called the GMP allowance. This was equal to the difference

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between the GMP amount and the sum of the main contractors management fee and indirect costs, and the value of the subcontract packages; and was set aside as a design development fund. The savings arising from strategies such as procurement, value engineering, etc were to contribute to this fund and any savings at the end of the project were to be shared in the ratio of 60/40 between the client and the main contractor. A similar sharing arrangement was included in the contracts of the major specialist subcontractors.

Table 5.1: Breakdown of GMP Amount in Case Study 1

Contract item Traditional domestic subcontractors & suppliers Specialist domestic subcontractors Provisional subcontract packages GMP Allowance Management fee* *Includes risk contingency, margin and preliminaries % of GMP 21.0 40.9 16.8 1.6 19.7

The gain share arrangement selected for the project was exactly the same as from the previous projects on which the client and contractor had worked together. There was no discussion of the sharing mechanism during the negotiations. The sharing ratio adopted was a simple 60/40 ratio skewed towards the client. The clients reasoning for the skewed ratio towards him was that it involves a lot of managerial resources to evaluate contractor initiated proposals and to dissuade the contractor from putting up too many proposals.

Although the contractors representatives agreed with the justification of resources the client needs to invest, they did not agree with the ratio, asserting that the conditions in this project were not conducive to achieve savings as compared to their previous project. The reasons they attributed for less savings were: (1) the design was almost 90% complete when the price was agreed leaving less potential for design development and (2) the contractor had provided most of the value engineering inputs that he could provide before the GMP was fixed, leaving nothing on the table to be taken advantage of later.

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Scope Variation and Contingency: As in any GMP contract, the GMP was guaranteed only for the scope of works defined in the contract and a scope variation clause was part of the contract for adjustment of the GMP in cases of: (1) scope changes (2) aggregate design development cost in excess of HK$1.5 million and (3) client authorized adjustment of provisional sums.

Contingency for risks was priced into the contract and was part of the management fee for the contractor. It was not part of the GMP allowance and hence the client had no share in any savings arising from joint risk management. This theoretically should have affected the risk management, since the client has no incentive for managing the risks and most of the risks are owned by the contractor. However, this did not happen on the project. This aspect and others aspects of risk management are dealt with in detail in Section 5.2.5

Game 3: Managing Scope Variations: As identified in Chapter 3, the main sources of disputes in GMP approach are generally scope variations and time claims. Scope variation disputes arise from the definition of the scope of work as to whether a particular activity amounts to design development or a GMPV. An effective management system to identify issues before they flare up into disputes and an effective dispute resolution and management system is the remedy to manage this problem.

This project employed a system called Change Request (CR) system to address these issues. The CR system was triggered with a change request from the client and the quantity surveyor was to price the work, required under the CR with inputs from the contractor and his subcontractors if necessary, and notify the client of the cost. In addition he was to make an assessment as to whether it is a design development or GMP Variation.

The CR if and when endorsed by the client, is then issued as an Architects Instruction (AI) and the adjudication process is triggered where the QS discusses his assessment with the main contractor. If accepted by the main contractor, this assessment is then ratified in the Adjudication meeting. If no agreement is reached, 87

the issue moves up a level and the clients senior project manager takes up the issue with the main contractors senior project manager. If no agreement is reached, the matter is further debated by the clients project manager, contractors project manager and the QS in the Adjudication meeting. If no agreement is still reached, the matter is referred to the Directors Review Meeting for final settlement. AIs that are determined to be design development do not lead to an adjustment of the GMP amount and the ones deemed to be GMP variations lead to an adjustment.

Issues negotiated: There were three major issues that cropped up and were negotiated through, that had significant impact on value: (1) core re-design that followed the independent peer review of the structural design, (2) omission of joinery detail for curtain walls and (3) M & E coordination problems.

The re-design of the core was necessitated after an independent peer review of the structural design found the design to be insufficient and was initiated two months after work commenced on site. In order not to affect the schedule of the project drastically, the redesign had to be completed within eight weeks. Also, the contractor had to adjust the duration of the superstructure contract by about six weeks.

The part of the building most affected directly was the retail podium, but since most of the works involved were covered by provisional sums, they were quite easily accommodated. However, there were significant knock-on effects on cladding and, especially, building services. The extra design development costs were to be covered by the GMP allowance. However, this consumed most of the GMP allowance resulting in virtually no savings to be shared.

The other issue was omission of joinery details for curtain walls in the drawings. Due to this, there was ambiguity as to who was responsible to procure the relevant materials which were of significant cost. The contractor argued that it was the responsibility of the named steel subcontractor while the steel subcontractor argues that he had priced according to the drawings. Finally, it was resolved at the directors level that the contractor had to take up the bill as it was agreed to be part of the design development risk that contractor had priced for as GMP allowance.

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The origin of both issues cited above can be traced to the performance of consultants and one of the contractor representatives interviewed was critical and said that two opportunities to make money, through the procurement process anddesign development contingency (are) out of our controlThe worse the consultants perform, the worse the client manages the design process, the less money we makeSo, our financial return is based on the performance of others, which is not fair.

The M & E coordination problems were perceived to arise from the absence of a coordinator whose services was used in the clients previous project with the same main contractor. These problems were thought to be aggravated due to this project being the first building project for the M & E subcontractor. The M & E subcontractor was a newly acquired subsidiary of the main contractor and the role of the coordinator was removed as a cost cutting measure when negotiating the contract based on the argument that being linked sister companies, there would be no need for a dedicated coordinator. However, coordination became an issue in the construction stage and was heatedly debated with no resolution. Finally, the problem solved itself with the appointment of a new project manager and team improvements following a long learning curve.

In terms of time related issues, the contractor made a conscious and deliberate choice to not to claim on the extension of time provisions in the contract. Also, the client never relied on the provision of liquidated damages in the contract. Moreover the liquidated damages were not designed to make up for the loss arising from delays since they were estimated on the basis of overhead costs and not on the probable loss of rental income. Hence, they were never perceived as a threat by the contractor.

In terms of negotiation tactics used, the interviewees were requested to rate the behaviors of parties during negotiations and the residual feeling that they have about the outcomes of those negotiations on a scale of 1 to 5 (1 = strongly disagree, 5 = strongly agree). The results from a sample of 20 responses are as shown in Table 5.2. There was a general sense of being fairly dealt with as can be seen from the responses and is succinctly put in one of the interviewees own words: To the clients
credit,, I know they were a difficult client to work for, but they do handle situations very

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wellvery professionally. There were a couple of issuesRather than look for scapegoats and point the finger, and threaten everyone with professional indemnity claims, they just lock in, identify the problem, and work through the solutionsjust that we have to waste a lot of time looking at non-issues in the process...But it means [that] they make informed decisions.

Table 5.2: Negotiation Behavior and Residual Feeling in Case Study 1

Parties attitude / behavior Seek integrative solutions Readily make concessions on less important issues Are honest about feelings on issues Make threats commitments and positional and from Strongly disagree Nil Nil Nil 4 Nil Strongly disagree 8 11 Nil 1 Disagree 2 1 2 11 Nil Disagree 8 8 Nil Nil Neutral 4 2 5 2 3 Neutral Nil 1 8 Nil Agree 12 12 11 3 13 Agree 3 Nil 10 9 Strongly agree 2 5 2 Nil 4 Strongly agree 1 Nil 2 10

See/use fair procedures accurate information Residual Feelings Negotiation Outcomes Exploited and compromised Damaged relationships Achieved high joint benefit

Attacked the problem not the people Total No. of respondents = 20

5.2.4

Overall Outcomes

The project generally met its time schedule objectives both in terms of intermediate milestones and completion date. The out-turn cost for the project exceeded the budget by 1% but was considered to be satisfactory. There was no major issue with safety in spite of the project being located in a congested area and safety being envisaged as a major risk at the commencement. There were no serious outstanding disputes which were not resolved amicably.

There were no savings reported at the end of the project and this was attributed to the advanced stage that the design was already in, when tendered and the core re-design problem. Although the contractor did have expectations of savings which did not

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materialize, the mere existence of the savings sharing mechanism created a project culture of working together in the initial stages which is difficult to change later even after encountering losses. The contractors gain in terms of variations and change of scope attracted a pre-agreed profit margin that was above the prevailing market rates. This helped in offsetting the loss of savings. The project encountered many problems that could have affected its delivery in terms of time, cost, quality and safety, but all of them were resolved and their resolution was attributed to teamwork and a collaborative problem solving approach and hence deemed a success for all stakeholders.

In terms of value for individual stakeholders, none of the stakeholders were negative about their value from the project. Neither were they satisfied that the project had provided mutual benefits. This was accentuated by the fact that by the end of the project, the construction industry had picked up and the rentals had gone up. Other stakeholders seem to be left with a residual feeling that client walked away with all the benefits which was reflected in the following observation: we were all bludgeoned into accepting very, very low fees because the market was depressed and the client said if we dont get the cost down this project is not feasibleNow rents have doubledWhile weve got a small slice of something than nothing at all, we got none of the benefits of the subsequent improvement in price [i.e., rents]. It all goes to the client.

5.2.5

Risk Management

The approach to risk management was traditional in character in the sense that the time and cost risks were mostly transferred to the contractor who was expected to price them adequately. Although the superstructure contract allowed for a limited sharing of cost risk through the GMP clause, the risk contingencies were not part of the GMP allowance as indicated earlier. In the absence of savings incentive for the client, there was very little joint risk management. The foundation contract also provided a win/lose bonus as a schedule incentive.

Other measures of risk management employed by the client were: (1) peer reviews of critical designs to mitigate designs risks (proved valuable here in potentially

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preventing disastrous consequences, by recommending a core redesign), (2) performance bonds and liquidated damages to mitigate performance risks and insurance. Risk management by the main contractor relied on a risk register for the project, with support from a centralized company-wide risk management function. This risk register was updated on a monthly basis but was rarely shared with the client. In the absence of information sharing, risk management became mere crisis management towards the end of the project due to the time pressures involved.

5.2.6

Partnering at Work as a Relational Strategy

Partnering was used as a strategy to foster relationships with an aim to achieve objectives in this project. The entire partnering process was geared towards face to face meetings with a problem solving approach, while there was a neglect of the usual formal aspects of partnering such as workshops, champions meetings, and periodic evaluation. The emphasis was on fairness and understanding of each others objectives.

Although many participants harbored an opinion that the number, frequency and long durations of meetings were unnecessary, in the authors opinion they did help in enhancing open communications between the stakeholders in the sense that they imparted knowledge about owners micro-objectives and made the stakeholders understand them and orient their priorities if not objectives towards the owners.

In addition, objective decision making processes were achieved by open book accounting and the practice of fully pricing and agreeing to subcontract variations by the client, consultants, main and subcontractors before they were implemented. This also enhanced trust. As expressed from a stakeholder the pressure from us to claim is
less and the consultants are not trying to defend their designs or to discredit our claimsWithout these pressures, relationships are more harmonious. Yes, if we attack any member [of the project organization], we wont get any benefits. We just try to advise them find out if we can still use the same design or may be find a cheaper one, then everybody is happy.

Further, the clients sensible and fair use of its bargaining power without resorting to exploitation, and a conscious choice of not to call upon contractual safeguards such 92

as liquidated damages unless there were severe economic losses, was made known to all the parties resulting in lower pressure to claim. This developed a sense of a safety net protecting them from unfair losses. This also created a feeling of collective responsibility for project objectives within the stakeholders, and avoided claims, while fostering better relationships and trust.

5.2.7

Key Observations from Case Study 1

The key observations in terms of inefficiencies in value creation and value capture for stakeholders in this case study are: (1) market conditions were not conducive to optimal value capture and the client walked away with most of the benefits; (2) the level of detail of the contract design did not promote much scope for value engineering by the contractor; (3) consultant performance shortfalls being probably unfairly remedied through as design development wiping out some savings the contractor had achieved; and (4) risk contingency not being part of GMP allowance, did not promote joint risk management.

On the positive side, single point negotiations helped the client to achieve efficient exchange of information on risks. The efficient management of the approval process for variations identified problematic issues which assisted in managing the issues and stopping them from flaring up into disputes. The sparse use of contractual safe guards and an integrative problem solving approach helped the client maximize value creation on the project and achieve project objectives by keeping the problems from pushing the parties into adversarial posturing and consequential disputes.

5.3

CASE STUDY 2

Case Study 2 focused on fourth phase of six phases of a public rental housing project by a public sector client. The project objective was to develop 2369 flats constructed to the required rental standards, a lift tower connecting the existing housing estate and the new development, a bus stop, a neighborhood elderly centre, a drainage reserve and associated external works. It was considered to be quite a non-standard design, whereas most of the projects this client are of standard design. The works were valued at HK$ 434 million and the primary drivers for the client apart from the delivery of annual quota of affordable housing were to (1) use the project as a test 93

case for project delivery through the GMP approach and (2) to implement and showcase some in-house R&D innovations.

5.3.1

Data Collection Methods

The project was tracked from October 2006 to March 2009. Data collection methods were similar to the ones employed for Case Study 1 as described in Subsection 5.2.2 and involved study of project documentation, observations of project meetings, meeting minutes and semi-structured interviews with managerial personnel. The interviews were conducted in two phases.

The first set of interviews were conducted during the construction phase and consisted of five representatives on the client side, two from the quantity surveyor, two from the main contractor and two from the GMP subcontractors. The second set of interviews was conducted one year after the first set of interviews. The interviewees also completed short structured questionnaires in order to access their interdependence, fairness of decision-making procedure, processes and outcomes.

5.3.2

Procurement Strategies

The clients general procurement strategy on similar projects is to split the project into two work packages namely (1) substructure works and (2) superstructure works, which are awarded on the basis competitive bidding with a traditional contract. However, for the project in question, the two work packages were combined together and tendered out together.

The procurement method used was based on design-build method with a fixed price contract. Six specialist subcontracts which were part of the work package were accompanied by a GMP clause with a pain / gain share arrangement. Partnering as a relational strategy, a fluctuation clause and dispute resolution advisor for dispute resolution and management were other salient features of the procurement strategies employed.

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5.3.3

Three Stage Model as Applied to the Case

This section, similar to as in Case 1, presents the decisions and negotiations in the context of the project with respect to the main thread of negotiations in TC / GMP approach. The impact of the outcomes and decisions down the line is elicited, while the inferences are drawn and documented.

Game 1 The choice of contract strategy was based on a need to assess the value of employing GMP approach, with the client being on the look for a project with suitable attributes to pilot this approach in one of its continuous stream of projects. Being a nonstandard design housing block and the one earmarked for piloting innovations from in-house R & D initiatives, the project in question perfectly fitted the requirements. The rationale behind the choice was that the approach not only encourages contractordriven innovations motivated by the sharing of savings, but also transfers buildability risks arising from piloting new elements of design.

Selection Mode: The client being a public sector body employs competitive bidding as the selection mode for all projects. The selection is from lists of pre-qualified contractors and specialist subcontractors which are grouped into three categories (with specific project characteristics that each group can bid for) based on their performance scores from the past projects (Palaneeswaran and Kumaraswamy 2001). Tendering is generally through invitation based on a preferential tender award system which reflects past performance scores (Tam et. al. 2007).

The project in question was categorized as a special project because of perceived risks arising from: (1) client employing the GMP approach for the first time, (2) combining substructure and superstructure work packages and (3) implementation of R & D initiatives. Hence, the tender invitations were limited to the category of contractors classified as the best performing (called as premier league by the client) and two other handpicked contractors (on the basis of consistent good performance) from the next best category. Experience in GMP approach was also a prequalification criterion.

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Sharing Ratio: The shared savings ratio for GMP packages was 50/50 between the employer and the contractor, of which the contractor is entitled to only the first 15% of the contractor share of savings. The rest of the 85% of savings is to be shared with the GMP sub-contractors on a pro-rata basis of the percentage value of the cost savings attributable to the works of the contractor and GMP sub-contractors. The ratio was proposed by the QS consultant and was endorsed by the client becoming a part of the tender document.

There was no flexibility for an alternative ratio to be proposed by the contractor at the tendering stage or for it to be negotiated at a later stage. The rationale behind the ratio as explained by the QS in his interview was that the project was a low risk housing project with not much room for potential savings; hence, there was no need for a complicated ratio. Also, it was viewed that if they were to allow contractors to propose alternative ratio at the tender stage, each contractor would come up with a different ratio and it would be difficult to objectively evaluate the tender.

Further, the contract incorporated a clause which restricted contractor initiated proposals to generate savings to be put forward not later than six months from the construction initiation date. The rationale behind the clause, as conveyed by the QS was to avoid a flood of proposals at the business end of the construction stage and also to stop the contractor from cutting quality to save costs in case the contractor foresees losses and turns opportunistic. On the other hand, the contractor felt that this restricted his flexibility to manage and innovate. However, the clause was not adhered to by the client, and the contractor was allowed to initiate proposals even after six months.

Design Status: Non-GMP works were tendered out on complete designs and the level of design of GMP works when tendered out varied from package to package. While one GMP package was based on design intent, the other packages had outline designs. Tenderers were required to submit priced proposals for the packages with outline designs with alternative proposals if any; and a design with price for the base package.

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Game 2 Contractor Selection Method: As in any other project of the client, the two envelope system for tender selection was employed. However, the financial and technical score ratio for selection was changed to 70/30 (80/20 for normal projects) to reflect the complexities of the project. The technical assessment of the tenders was based on method statements, schedules and design solutions, capabilities and competencies, GMP related experience, safety plans, and corporate social responsibility attributes such as health, environment and sustainability consciousness.

As the client was concerned about management issues arising from employing a GMP approach, contractors were requested to provide the key personnel names and resumes with an undertaking that they will not be changed for the project as part of the technical proposal. Technical presentations and interviews of these key personnel were also accounted for in the assessment. There were 6 bidders for the project and all of them passed the technical assessment. The winner after considering financial scores also happened to be the lowest tender.

GMP: The breakdown of the GMP packages by percentage of the total contract value is as shown in Table 5.3.The total value of the project was HK$ 434 million with GMP packages making up 32% of the total value. This price was more than 10% below the consultants benchmark estimate. While the client benefited from this low bid, the contractors rationale to bid thus was that the client being a public sector housing provider obviously has more projects in the pipeline. Having acquired the advantage of working with the client in their new procurement approach, he expects to garner a major share of the future projects.

Game 3 Managing Scope Variations: The strategy towards managing scope variations was similar to that of Case Study 1. A project managers instruction or contractors requested GMP variation triggered an assessment of whether the change is a scope variation or covered by design development by the QS along with the time and or cost implications with inputs from the main contractor and the GMP subcontractors. The QS then forwards his recommendation to the clients project manager who conveys it to the contractor as an Architects Instruction along with a determination 97

on its GMP and time implications. The GMP is adjusted if it is determined to be scope variation, but not adjusted in case deemed a design development.

Table 5.3: Breakdown of GMP Amount in Case Study 2

Contract item GMP direct works Pre-cast construction elements Plumbing and drainage installation Specialist external works Bus Station GMP subcontract works Fire services and water pump installation Electrical Installation % of GMP 24.3% 7.5% 6.4% 5.5% 4.9% 7.1% 1.2% 5.9%

In case of disagreements on the clients project managers determination, the dispute is referred to an adjudication committee. The members of the committee are the clients contract manager, the main contractors project director and project manager, QS consultant representative and a senior construction professional nominated by the client. The adjudication committee has to resolve the issue within 28 days failing which the aggrieved party can file a formal notice of dispute with the DRAd (Dispute Resolution Advisor). The DRAd then intervenes and facilitates resolution of the dispute initially at the project level and if unresolved, takes it to the senior management level of the organizations involved. The final resort for the parties if the dispute remains unresolved at the senior level is either a short form arbitration or full arbitration proceeding.

Issues Negotiated: In terms of issues that cropped up which had potential for flaring up into disputes three are noteworthy: (1) gabion wall approval related delays (2) steel benders strike related delays and (3) quality of pre-cast elements. Gabion wall instead of sheet piling was a contractor initiated alternative design proposal and required ICU (Independent Checking Unit) approvals. The proposal was approved and resulted in cost saving of around HK$300,000. However, the process of approval took longer than the duration permitted by the contract.

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In order to mitigate the knock on effects of this delay, the contractor restructured his program of works and this involved costs. The contractor relied on the EOT clause to claim an extension of time and the associated costs. Although they were granted, the approvals for the same got stuck in the clients organizational maze. Contractually, this issue had the potential to flare up into a dispute as the contract places strict timebars for dispute resolution steps. However, the situation was averted by the client by sharing the approval process details during meetings. The same was applicable to the EOT claim arising from steel benders strike.

In the opinion of the contractor, the client identifies the issues early and ends up being fair in totality. However, the process of reaching the outcome is long drawn and does not confirm to the contractual requirements. As the contractor says, this being a pilot project where the stakes are high for both the contractor and the client, are not expected to end up in trouble. However, the same situation in any other project could have been acrimonious, especially in the case of gabion wall related delays.

The quality issues associated with pre-cast elements were a supply chain management problem for the contractor. These elements were manufactured at a subcontractors plant in Mainland China and transported to the project site. In the initial stages, the main contractors quality control strategies were not efficient and the quality of the panels was not found to be satisfactory. It was agreed between the client and the contractor by negotiations that the main contractor will have a full time quality controller at the plant to provide better quality control.

The DRAd attended many of the meetings on the request of the client and the contractor and kept himself abreast of the issues discussed as above which had a potential to flare up into disputes. He expressed concerns on the delays from time to time. However, since the client and the contractor had an understanding of the procedural issues causing the delays, DRAd did not press on their resolution according to contractual norms.

In terms of negotiation tactics used, the interviewees ratings on behavior of parties during negotiations and the residual feeling that they have about the outcomes of 99

those negotiations on a scale of 1 to 5 (1 = strongly disagree, 5 = strongly agree) as shown in Table 5.4. There was a general sense of being fairly dealt with achieving integrative solutions along with having an honest exchange. However, the subcontractors felt they were sometimes exploited and compromised although they did not provide specific instances of being done so.

Table 5.4: Negotiation Behavior and Residual Feeling in Case Study 2

Parties attitude / behavior Seek integrative solutions Readily make concessions on less important issues Are honest about feelings on issues Make threats commitments and positional Strongly disagree Nil Nil Nil 2 Nil Strongly disagree 2 4 Nil 1 Disagree Nil Nil Nil 4 Nil Disagree 2 3 1 Nil Neutral Nil 1 1 Nil Nil Neutral Nil Nil Nil Nil Agree 5 5 4 1 4 Agree 3 Nil 5 2 Strongly agree 2 1 2 Nil 3 Strongly agree Nil Nil 1 4

See/use fair procedures and accurate information Residual Feelings Negotiation Outcomes Exploited and compromised Damaged relationships Achieved high joint benefit Attacked the problem not the people Total number of respondents = 7 from

The ratings of interviewees of how often they use different types of negotiation tactics and their efficiency in achieving desired outcomes are as shown in Table 5.5. There was consensus that stakeholders generally did not avoid issues as avoiding issues leads to loss of value. However, there were instances where they thought that the other party was aggressive, especially in the initial stages of the project. As described by the clients project manager in his own words: I think thats the period that both of us were not certain about each other..... not familiar with each other.... obviously, they were quite afraid of the GMP system because it seems that they are responsible for everything that they try to contain the risk. So, I have several arguments with their project manager at some occasions and then honestly I had hurt feelings.. But, after months, now we have a much, much better working relationship. 100

Table 5.5: Frequency and Efficiency of Negotiation Tactics Type in Case Study 2
Frequency Competing (aggressive) Collaborating (problem solving) Compromising Avoiding Accommodating Efficiency Competing (aggressive) Collaborating (problem solving) Compromising Avoiding Accommodating Total number of respondents = 6 Never Nil Nil Nil 1 Nil Never Nil Nil Nil 1 Nil Very rarely Nil Nil Nil 2 Nil Very rarely 1 Nil Nil 3 Nil Rarely 2 Nil Nil 2 1 Rarely 1 Nil Nil 2 Nil Sometimes 4 4 5 Nil 4 Sometimes 3 4 6 Nil 6 Always Nil 2 1 1 1 Always 1 2 Nil Nil Nil

5.3.4

Overall Outcome

The project is closer to practical completion at the time of writing this thesis and is on target to achieve its time, cost and quality objectives. Also, intermediate milestones have been met on schedule. Although the client expected an estimated 3% savings from the GMP packages and the contractor expected to make up for his low bid through his share of savings, the reported savings are nowhere near their expectations. Apart from the savings arising from the alternative proposal related to gabion walls, there was one other saving amounting to HK$ 1.2 million achieved by the use of fiber glass railings in bathrooms as a replacement for metal railings thereby removing the need for earthing.

However, this being a pilot project with image / prestige issues involved in achieving success, both the client and the contractor are satisfied with the outcome of the project. Also, the contractor expects the experience in succeeding in this project to help position him better for a bigger share of the clients projects in the future making up for his perceived losses from the project. 101

5.3.5

Risk Management

The project was perceived to be a low risk, low returns venture by the contractor and the same was acknowledged by the client representatives in the interviews. Clients perceived risks arose from the learning curve associated with employing GMP contract strategy for the first time and the implementation of R & D innovation elements. Risks associated with the procurement strategy were managed by employing a contractor and consultants familiar with the approach, whereas risks associated with R & D elements was transferred to the contractor in lieu of incentives.

The contractors concern was risks associated with subcontractor performance and statutory approvals (in the form of approvals from the independent checking unit, an autonomous part of client organization). The subcontractor performance risks were managed by selecting the right partners (not relying on price alone) while the clients in-house design teams familiarity with the process and procedures of approvals was utilized by the contractor to manage the statutory approvals.

5.3.6

Partnering as a Relational Strategy

Partnering was used as a strategy to foster relationships with an aim to achieve objectives in this project. The partnering process kicked off with a day long workshop funded by the client. The workshop highlights were presentations on the benefits of partnering, and were accompanied by introducing partnering strategies such as joint risk identification. A partnering charter was signed at the end of the workshop.

Although the partnering process was continued through champions meetings, and periodic evaluation, it lacked the commitment and intensity. The observation was that it was more of going through the motions than being involved. It was evident in the initiation workshop itself, given the absence of key personalities involved in the management of the project. However, this did not end up as a hindrance to fostering relationships because of commitment levels achieved through image issues as observed before.

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5.3.7

Key Observations from Case Study 2

The relative success achieved in this project is attributed to the image issues as perceived by the client, in demonstrating the success of an alternative procurement approach and showcasing its R & D innovations which drew out total commitment from the client side. This rubbed off on the contractor as his long term goal is to garner a larger share of the clients projects. Together these generated an excellent collaborative environment.

However, it has to be noted that such commitment levels were elicited by external / special factors and cannot be duplicated in other projects. The delays experienced in resolving issues may have resulted in inefficient outcomes in any other project. The difficulty in employing alternative procurement approaches in the public sector environment, in terms of tender evaluation problems when evaluating alternate proposals, was identified as a key area of concern. The employment of DRAd for dispute resolution and management has its potential merits. However, in the absence of any disputes, the case study did not provide sufficient evidence to analyze its role in this game scenario.

5.4

CASE STUDY 3

Case study 3 is not a full fledged case study as it focuses only on contract strategy building processes of a quasi government client with respect to TC approach. The client in question was planning for a series of infrastructure projects budgeted for around HK$14.6-16.5 billion, of which some were considered high risk. Having employed TC approach previously with both successes and shortfalls on high risk projects, the client was refining the contract strategy based on lessons learnt previously.

The findings from previous projects of the client employing TC approaches are reported elsewhere (Chan et. al. 2007, 2008, Kumaraswamy and Rahman 2006, Bayliss et. al. 2004, Chan et. al. 2004). Also, the exercise included planning the entire development process, involving a number of projects where the client was planning to use a gamut of procurement strategies to suit the circumstances of each scenario. The observations presented as a case study in this section are the outcome 103

of participation in parts of this contract strategy development and hence are termed as a mini case study.

5.4.1

Data Collection Methods

The development and refinement process of the contract strategy was conducted through workshops and meetings with relevant stakeholders. The researcher along with a colleague was a non-participating observer at some of these workshops and meetings. The results presented here were distilled from the notes taken while attending these workshops and meetings. In total, 4 sessions of workshops and 2 meetings (about 18 hours in total) were attended.

Workshops were in-house in character with only client representatives in attendance whereas one meeting was with interested representatives of Hong Kong Contractors Association (HKCA) and the other with overseas advisors of the client. The number of participants in the workshop was around 5-7 including the researcher and a colleague, while the meeting with contractors was chaired by two client representatives and attended by 8 contractor representatives, the researcher and a colleague. The other meeting was attended by a clients representative, two advisors from overseas and the researcher.

5.4.2

Meeting with HKCA Members

The meeting with HKCA members focused on a list of concerns that the contractors had come up with and which they wanted the client to address in relation to the whole range of projects planned by the client and the target cost approach. Their main concerns in terms of the target cost approach were: (1) limits on works awarded to individual contractors, (2) tender invitation program and response times (3) partnering / aliancing (4) prequalification process and criteria (5) incentivisation and value engineering (6) administrative arrangements.

There were only two target cost contracts planned in the series of projects and many contractors were interested in getting a slice of the pie. They wanted to know whether both the contracts could be awarded to a single contractor. The client was of the view that the risks in awarding the both the contracts to a single contractor or 104

consortium were high and hence the one awarded the first contract will be precluded from bidding for the second. Concerns 2, 3 and 4 were related to contractors wanting to identify their preferred partners in anticipation of the works.

Incentivisation discussions focused on the pain / gain share arrangement and caps, if any involved whereas value engineering discussions veered towards providing adequate scope for contractors to gain benefits from the exercise. Shared use of resources such as office space and personnel which was one of the highlights of previous projects of the client employing TC approach were discussed as part of administrative arrangements. Although many of these discussions werent detailed enough to come up with solutions at the meeting, the client promised to address these concerns and did so, as they were discussed at in-house workshops as described in subsequent sections.

5.4.3

In-house Workshops

The first of the in-house workshops focused on redefining the components of target cost as compared to what was used in their previous project and the escalation clause which was to be part of the contract. The redefining of components of target cost was more of an accounting requirement and is perceived to have no significant repercussions on the value creation process. The commodity market was very heated when these discussions took place and an escalation clause was considered essential to shield contractors. However, there was no consensus as to the index that can be used as the base. A proposal to ask contractor bids to indicate weightings for each major material/component (e.g., steel, rebar, concrete, formwork, etc) for future adjustment was discussed and approved.

The second workshop focused on contractor selection method for short listing the two contractors with whom the final design development and negotiation is to be carried out when employing the TC approach. The assessment criteria was discussed and was decided to retain the 30 / 70 formula - 30% for Commercial (financial & project management) and 70% for Technical (construction, programming, design, operations, structural engineering, building services, and E&M). Assessment of technical proposals was to include a presentation by the contractors technical team

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members and the overall assessment of the technical component was to reflect 15:40:15 for Management/Methodology/Presentation.

The third workshop focused on the needs to familiarize the contractors with the TC approach in general and the processes and procedures employed by the client in particular, along with value engineering strategies to be employed. The discussions resulted in the acknowledgement of a need to come out with a pre-qualification booklet to explain the pre-qualification processes, assessment and selection. Initial Value Engineering was to be carried out at Design Management stage with the design team and with no tenderer involvement at this stage. The exclusion of contractors in design stage VE exercises was to ensure that the scope of the incentivisation mechanism would not be limited as experienced in the clients previous project.

The fourth workshop focused on the need to refine risk management processes and protocols from what was employed in the clients previous TC contract project. The processes and protocols were developed along the project and it was felt that the flexibility to adapt them as they developed to actual situations was a major factor in the success of the previous project. However, it was perceived that there was a need to bring those processes and protocols within the ambit of the contract clauses in order to track all risks to a timeline, clearly define and assign them, define shared risks and roles of the parties. Risks associated with temporary works were identified as a problem and a need to address this in the contract was identified.

5.4.4

Meeting with Overseas Advisors of Client

The meeting with overseas advisors focused on pain / gain share arrangements to be employed for the projects. Different ratios for different levels of savings were discussed but were not deemed recommendable from the previous experience of the client. They were seen to result in a deluge of cost saving proposals as the contractor came closer to the threshold of crossing from one ratio to another.

Caps on savings and pain share were explored. Caps on savings were considered inappropriate as there would be no incentive for collaboration and joint risk

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management once the cap was reached. However, caps for pain share were considered important from the point of view of the contractor, as the client perceived that the contractors are generally not in a position to take pain after a certain threshold. Cases of different sharing ratios for multiple primary objectives (for e.g. time, safety) from Australia were also discussed and were considered useful in promoting performance towards desired objectives.

5.4.5

Key Observations from Case Study 3

The workshop proceedings as reported above clearly indicate the clients intention to put himself in the shoes of the contractor while designing his contract strategies. Taking on board the concerns of the contractors at the early stage of the project gives him the leverage to steer the contract strategies towards achieving optimal outcomes. Also, the seeds of relationship with the top management personnel of the contractor who will finally deliver the project were probably sown at the meeting as most of the attendees seemed to be the ones who would head the project if their companies were to be awarded the project. However, the move towards etching risk management processes and protocols into contract clauses may lead to loss of flexibility and lead to disputes.

5.5

COLLECTIVE OBSERVATIONS FROM CASE STUDIES

Value was created in both the full fledged case studies. However, value capture was inefficient in both. While the stakeholders perceived that negotiations were fair and integrative when questioned in the first phase of interviews in Case Study 1, the same stakeholders had a residual feeling that the client walked away with all the benefits when interviewed towards the end of the project. Value capture was also distorted in the first case by the market distortion due to industry recession and inappropriate structure of value engineering over the time line for the contractor to reap benefits. In the second case, the contractor misjudged the savings potential in the project and bid too low in his eagerness to be awarded the project in anticipation of future gains.

The common theme in both the case studies was inappropriate estimation of potential savings and as seen in the third case study, it is important for the client to structure VE exercise such that the incentive for the contractor is not lost. Also, the case 107

studies demonstrated the significance of and imperatives for well structured processes for approval of variations such that the views of the parties as to whether the concerned variation is scope variation or design development are well known in advance. Once the potential for disputes on variations is known, the case studies also showed the effectiveness of well structured dispute resolution and management mechanisms in containing them, and avoiding acrimonious disputes.

5.6

CHAPTER SUMMARY

This chapter presented two full fledged longitudinal case studies and one mini case study in the context of decisions and negotiations over the three stage model timeline of a TC / GMP approach as identified in Chapter 4. The decisions and negotiations were analyzed in the context of respective project characteristics and relevant stakeholders. The findings corroborate the factors perceived to influence value creation and capture by means of pain / gain share arrangement in TC / GMP approach as identified in Chapter 3 and 4 and provide additional pointers on maximizing value creation and optimizing value capture in a given scenario of project objectives, priorities, characteristics and stakeholder profiles.

However, the pointers from the findings are limited to two contexts. In order to build a reliable framework for selection of appropriate sharing ratio, given different scenarios of project objectives and characteristics, a need for knowledge mining from a wider base of projects was deemed necessary. In this context, in lieu of case studies which are considered time consuming and also difficult to initiate / negotiate, an interview based survey was considered appropriate. The modalities of the survey and the interviews along with the findings are presented in the next chapter.

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CHAPTER 6: SURVEY RESULTS AND ANALYSIS

6.1 CHAPTER INTRODUCTION

In the preceding chapters, it was demonstrated that value capture or achieving mutual benefits has not been considered equitable. The three stage model as applied to the main thread of negotiations in the TC / GMP approach which was described in Chapter 4 has now extracted out the different options that a project manager could exercise when selecting an appropriate sharing ratio.

This chapter presents the findings from an interview based survey about the potential outcomes of choosing the different options available, the factors that a sharing ratio should depend on, the source of savings, the interplay of sharing ratio with the influencing factors, predominant dispute types while employing TC/ GMP approach, causes for reduction of disputes in TC / GMP approach and critical factors that can assist in the easy resolution of those disputes.

Following the observations and analysis of the interview based survey which identifies joint risk management (JRM) as a potentially important source of savings after innovation related sources; the results of a small survey conducted on JRM in relation to risk specific gain / pain share arrangement are presented.

6.2

SURVEY ON SHARING RATIO; AND ORIGIN AND

RESOLUTION OF DISPUTES IN GMP

6.2.1 Survey Design and Administration

The purpose of the survey was to mine data about the issues listed in the last sentence of the first paragraph of Section 6.1 above. The issues were clearly wide ranging and too complex to be addressed by a simple questionnaire. In this context, it was found appropriate to launch a simple questionnaire to target on the issues to be explored and conduct interviews to flesh out the gaps within the survey skeleton. The designed questionnaire contained 3 sections. It is provided in Appendix B.

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Section one was designed to collect background information of the respondent in terms of the respondents organization type, the nature of his/her job, number of projects employing TC / GMP approach that he/she has experience of having worked in, client type in the project and the type of project itself.

Section two required respondents to rate their level of agreement to given statements about outcomes of choosing the different options available, the factors that a sharing ratio should depend on, the source of savings and the interplay of sharing ratio with the influencing factors on a scale of 1 to 5 (1-strongly agree, 2-agree, 3-neutral, 4disagree, 5-strongly disagree).

Section three required similar ratings for statements about predominant dispute types while employing TC/ GMP approach, causes for reduction of disputes in TC / GMP approach and influencing factors for easy resolution of those disputes. The protocol for administering the survey and conducting the interview is in Section 6.2.2 below.

6.2.2

Sample Selection

The sample pool of professionals with experience in employing TC / GMP approach on projects is comparatively small in Hong Kong. In this context, a list of projects which have employed the approach was made and individuals at the helm of the project affairs were identified. The plan was to administer the survey on at least one representative each from client, contractor and consultant for each of the projects identified. Requests based on this target were sent out to forty four identified professionals.

However, only thirty six responded. Of the thirty six, three declined and nine filled the questionnaire but were not interviewed as they were out of Hong Kong. Hence, there were thirty three completed questionnaire responses and twenty four interviews with recordings running over 30 hours. The breakdown of the questionnaire responses is: (1) client representatives fourteen, (2) contractor representatives eleven (3) consultant representatives eight. The breakdown of interviewees is: (1) client representatives seven (2) contractor representatives nine and (3) consultant representatives eight. 110

6.2.3

Survey and Interview Protocol

The initiation of the survey started with an email to the identified respondent seeking an appointment for one and half hours. In the interview on the given day, section one of the questionnaire was completed first. For sections two and three, the questionnaire was printed such that one page dealt with one subgroup of questions on a single issue. The respondent was asked to complete each page one at a time, while after each page, additional questions based on their responses were asked to explore the context in which the responses were given and to investigate peripheral issues relevant to the topic that seemed worth pursuing.

6.2.4

Results and Analysis

The data collected from the survey was in the form of agreement ratings on the given scale described in Section 6.2.1 The data was aggregated and analyzed using simple statistical methods in terms of their mean value, significance of the mean for t-test and Spearmans rank correlation test where required. Spearmans rank correlation test was preferred over Pearsons correlation since the sample size was small and to avoid normality assumption. Statements with aggregate mean value significant for a hypothesized mean (2.5) at 95% significance were perceived to be generally true when employing TC / GMP approach.

Statements for which agreement ratings were not significant for the same hypothesized mean was perceived to mean that: (1) there was no consensus between the subgroups resulting in high standard deviation affecting the significance and/or (2) that the situational variables such as project characteristics, stakeholder profiles and market distortion played a role in determining the outcome of the statement resulting in varied opinions and/or that (3) the statements were not true.

In this context, interview recordings were reviewed for exploring the reasons behind the ratings from different subgroups and their contextual references to identify significantly common themes across the interviews and to determine the causes for high standard deviation due to any situational variables. The common situational variables identified thus are summarized as for and contra indicators for the given 111

statement. The findings thus obtained are discussed in the succeeding subsections below, with each subsection dealing with a related subgroup of questions.

6.2.4.1 Mode of contractor selection and payment type The first of the subgroups of questions in section one dealt with the mode of contractor selection and payment type. As identified from Chapter 4, there are three possible selection modes and two payment types. Respondents were asked to rate on a scale of 1 to 5 (1-strongly agree, 2-agree, 3-neutral, 4-disagree, 5-strongly disagree) as to how often these options produce better outcomes when they are employed in a TC GMP approach. The overall mean values of responses obtained along with mean values for organization subgroups are tabulated in Table 6.1. The standard deviation values were seen to be high when considering overall responses suggesting that respondents were divergent. However, the responses were seen to be relatively consistent within organization type subgroups as indicated by intra group coefficient of variation values (CV) which ranged from 11.3 % to 36.7 %, with most being under 30.0 %.

Table 6.1: Survey Results - Efficiency of Outcomes for Contractor Selection Method and Price Type
TC / GMP + savings sharing ratio most often produce better outcomes when they are: Competitively bid One Point negotiated Multi-point negotiated Cost + Fee Lumpsum Client n=14 3.36 2.14 2.50 2.36 2.79 Contractor n=11 3.37 1.66 2.64 1.91 2.36 Consultant n=8 3.36 1.63 2.88 2.13 3.13 Overall n=33 3.36 1.85 2.64 2.15 2.73 Standard Deviation 0.65 0.66 0.55 0.62 0.52

The choices in the order of how often they produce better outcomes are: (1) one point negotiated, (2) competitively bid and (3) multipoint negotiated. For payment type, cost-plus fee was preferred over lumpsum. The mean value for one point negotiated selection mode was significant at 95% significance for the hypothesized mean of 2.5, indicating that this selection generally leads to better outcomes. The same was true for cost plus fee payment type. Also, the aggregate responses were consistent across organization type subgroups indicating that the higher mean values were a resultant

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of situational variables that shape the outcome. The rationale for selecting each of these approaches as gleamed from the interviews are discussed as for and contra indicators in terms of the situational variables.

Contractor selection by competition was found appropriate only when employed for delivering a low risk project or for a project with low innovation potential such as standardized housing or simple maintenance works. For complex projects, it was believed that tender evaluation costs arising from evaluating alternate proposals can become too high and time consuming. Also, it was found that the approach is risky for the contractor when the tendering is on design intent only.

Clearly conveying project risks to the tendering contractors was seen as critical to achieve better outcomes and the competition approach was perceived to be not conducive to familiarize the contractor with the risks. Such lack of clarity was believed, especially by the consultants, to lead to inaccurate estimates resulting in either too high or too low bids.

Contractor selection by one point negotiation was perceived to lead to better outcomes by the consultants and the contractors more than the clients. All the three subgroups believed that the approach is suitable for high risk and complex projects or when the project is tendered out only on design intent whereas not appropriate when it is a low risk project. The only contradictory opinion between the subgroups was the belief of the clients that the outturn costs may turn out to be higher than from the other approaches whereas consultants and contractors believed otherwise. The caveat in employing this approach from clients was that they would not employ this approach unless they had prior satisfactory or better experiences with the contractor.

Multi-point negotiated was preferred only in case of mega projects for which either there were not enough qualified contractors (albeit more than one) to warrant tendering or where it was absolutely necessary to introduce an element of competition. Consultants perceived that it was cumbersome to manage multi point negotiations and contractors felt multipoint negotiation defeats the very purpose of opting for a negotiated approach.

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6.2.4.2 Selection Mode for Sharing Ratio This subgroup of questions focused on selection mode options for sharing ratio as identified from Chapter 4 and listed in column one of Table 6.2. The response requirements were similar to the previous one. Response aggregates obtained are as shown in Table 6.2. The selection modes in the order of how often they produce better outcomes in terms of overall results are: (1) at tendering stage by the client, (2) indicative ratio at tendering stage subject to negotiation with the winning bidder (3) contractor proposed ratios at tendering stage.

Table 6.2: Survey Results - Efficiency of Outcomes for Sharing Ratio Selection Mode
TC / GMP contracts can produce better outcomes when the mode of fixing a sharing ratio is: At tendering stage by the client Contractor proposed tendering stage ratios at Client n=14 Contractor n=11 Consultant n=8 Overall n=33 Standard Deviation

1.64 2.14 2.21

2.00 1.90 2.91

1.75 3.29 2.90

1.78 2.33 2.30

0.78 0.78 0.77

Indicative ratio at tendering stage subject to negotiation with the winning bidder

However, when considered from the point of view of organization type subgroups, there seems to be no consensus as to their relative rankings. The consultants and clients seem to prefer the selection to be at tendering stage by the client whereas the contractors seem to prefer to be able to propose their own ratios. Further, for subsequent preferences (against other options) even the consultants and clients rankings do not match. The reasons behind their choices seem to be affected by their role in the project as summarized from interviews and are discussed below. However, the responses within the subgroup options are consistent as seen by coefficient of variation values ranging from 14.24 % to 31.84 %.

The choice of the mode to select a sharing ratio from the point of view of clients is generally dependent on the consultants recommendation. However, they felt that by choosing the sharing ratio at tender stage they get to shape the outcome as needed by setting the terms of the tender/negotiations. Also, the consultants opinion as presented below held good for clients. 114

Consultants felt that allowing the contractor to propose their own ratio complicates tender evaluation process in case of competitive bidding. The argument was based on the scenario where if every contractor has alternate proposals, they need to evaluate them, price their risks and bring all the bids to a baseline for comparison. This would be very time consuming and resource demanding making it unattractive in most cases.

The same argument was put forward for using a contractor proposed ratio in conjunction with negotiated approach, i.e. every time a new ratio is proposed during negotiation they would have to evaluate the whole proposal again. As put by one of the consultants how do we compare apples to oranges there just are no reliable methods.. if something goes wrong later the client comes back to us and says well you recommended this option. However, they do not seem to mind the option of renegotiating after selection based on an indicative ratio.

Contractors were not comfortable with renegotiating the TC / GMP and sharing ratio after selection based on indicative ratio, because they believed that will lead to them making compromises. As one of the contractors put it, once I have put all my cards on the tableI have nothing to negotiate They (client) will just pressure us to give up a few things

In spite of these contradictory preferences, the interviews yielded some pointers on the suitability of these modes in different situations. Projects with buildability issues were thought to be good cases for contractor proposed ratios whereas design build projects where selection is based on conceptual designs were deemed appropriate for trying indicative ratio based selection followed by renegotiation. For risk averse clients and contractors fixed ratio at tender stage was perceived to be the best.

6.2.4.3 Selection of Sharing Ratio Type In Chapter 4, different types of sharing ratios were reviewed, including the eight examples from Broome and Perry (2002). However, some of the complex sharing ratios reviewed have not been employed in Hong Kong, and are not frequently used

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elsewhere. In this context, the subgroup of questions focusing on different types of sharing ratios was limited to the three simple types listed in column one of Table 6.3.

The rating response and scale required were similar to that used before and the overall and organization type subgroup results are tabulated in Table 6.3. The results indicate a preference for simple fixed sharing ratios overall and across subgroups. Also, they indicate a preference for a higher share for contractor irrespective of the type of sharing ratio. However, this does not mean that they are not familiar with the others or averse to them. The use of caps, and floating ratios was probed in the interviews and the common themes that emerged are discussed below.

Table 6.3: Survey Results - Efficiency of Outcomes for Types of Sharing Ratios
TC / GMP contracts can Client produce better outcomes when n=14 the sharing ratio type is: Fixed share irrespective of savings 1.79 amount Floating share ratios linked to amount of savings, with higher contractors share for higher overall savings Floating share rates linked to amount of savings, with higher clients share for higher overall savings 1.93 Contractor n=11 1.82 1.73 Consultant n=8 1.88 2.38 Overall n=33 1.82 1.96 Standard Deviation 0.64 0.68

3.21

3.75

3.19

3.33

0.74

The use of floating ratios was perceived to complicate things for both the contractor and the client. Representatives of one of the clients who had used two different ratios for different slabs of savings felt that it made the contractor put forward flimsy proposals (for value enhancing / cost savings) as he neared the threshold for changing from one ratio to another. The use of caps on the savings side was thought to be not useful except in cases of projects which are low on potential for generating savings. For these projects, it was felt that it would stop contractor from compromising on quality. If used in complex projects, caps on the saving side were perceived to act negatively leaving no incentive to collaborate.

On the pain side, caps were seen as extremely useful to cut down risks both for the contractor and the client, depending on each others risk appetites and capacities to

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withstand pain. The general consensus was that contractors are financially fragile with cash flow problems. For large projects, the project budget sometimes being larger than a contractors annual turnover, it was perceived that a contractor would become insolvent if the pain were to exceed 10-25% of the project cost, the range being dependent on the contractors financial risk profile. In this regard, it was perceived that a contractors risk profile should be carefully considered and an appropriate cap should be applied on the pain-side. The same was held true for small clients. The use of different sharing ratios for different project objectives as reported from Australia was also discussed. The perception on these was that they could promote better outcomes when employed in conjunction with one point negotiated or multi-point negotiated contracts.

6.2.4.4 Influencing Factors for Sharing Ratio Selection This part of the survey focuses on the critical factors that should guide the selection of a sharing ratio as identified from literature and case studies. The rating response required was similar to that used before. The overall and organization type subgroup results in terms of means and their relative ranks are shown in Table 6.4. The results were consistent across groups as found by spearmens rank correlation test, the results of which are also shown in Table 6.4. Innovation related factors such as motivation to innovate, scope for innovations, and flexibility of design are ranked high, while risk related factors like project risks and stakeholder risk profiles follow these closely.

The influencing factors for which mean values were significant at 95% significance for a hypothesized mean of 2.5 are highlighted in Table 6.4 and can be classified in three main subgroups: (1) motivation related, (2) innovation related and (3) contractor risk related. The inference from motivation related factors is that the share of contractors should not be generally lower than that of the client. The opinion of the many of the contractors was that they generate the saving, hence they should get the higher share. However, as client representatives pointed out, they have to carefully evaluate all the contractors proposals, and approve them, requiring in their own multi-level resources; and also once approved, they need to bear some of the risks associated with the performance of the alternative proposals.

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Table 6.4: Survey Results Influencing Factors for Sharing Ratio Selection
Factors sharing ratios should depend on Scope for Innovations Project Risks Clients appetite for risk Contractors appetite for risk Accuracy of target cost Desire to influence contractors motivation to innovate Desire to influence contractors motivation to cost cooperate Desire to influence contractors motivation to cost cutting Flexibility of design (Level/stage in which design is at the time of fixing sharing ratio) Overall n=33 Mean Rank 1.91 1.88 2.45 2.06 3.06 1.30 2.15 2.24 1.55 4 3 8 5 9 1 6 7 2 Client n=14 Mean Rank 1.93 1.86 2.79 2.14 3.36 1.21 2.36 2.21 1.57 4 3 8 5 9 1 7 6 2 Contractor n=11 Mean Rank 2.82 1.91 2.36 2.09 3.00 1.36 2.09 2.00 1.45 8 3 7 5 9 1 5 4 2 Consultant n=8 Mean Rank 2.00 1.88 2.00 1.88 2.63 1.38 1.88 2.63 1.63 6 3 6 3 8 1 3 8 2

Spearmans rank correlation test between groups of respondents Comparison rs Significance Conclusion

Client ranking vs Contractor .8034 .0091 Can reject H0 at 5% sig. level ranking Client ranking vs Consultant .7780 .0135 Can reject H0 at 5% sig. level ranking Contractor ranking vs .7555 .0185 Can reject H0 at 5% sig. level Consultant ranking H0 = No significant correlation on the rankings between two groups Ha = Significant correlation on the rankings between two groups Reject H0 if the actual significance level (p-value) is less than the allowable value of 5%

The significance of innovation related factors suggest that the incentive mechanism has to be real or should have teeth. This was perceived to be critical for differentiating the TC / GMP approach from traditional approaches. The contractor representatives were critical of employing the TC / GMP approach with no potential to add value which was summed up as if there is no possibility for us to add value to the project...... better to opt for a traditional approach........it saves us money as we can reduce our managerial resources by one of the interviewees.

In both of the full fledged case studies presented in Chapter 5, it was evident that the incentive mechanisms did not have teeth due to improper (too early) positioning of the VE exercise, and relatively low complexity of project, indicating project type and 118

complexity along with design detail level play a significant role in the efficiency of any gain / pain share arrangement. The significance of contractors risk appetite supports the results presented in 6.2.4.3 where interviewees suggested that contractors risk profile should be considered while fixing caps on the pain side.

6.2.4.5 Origin of Savings from a TC / GMP Approach This part of the survey explored the origins of savings while employing a TC / GMP approach. The responses in terms of means and their relative ranks are conveyed in Table 6.5. There was a consensus among opinions from different subgroups as found by spearmens rank correlation test, the results of which are also shown in Table 6.5.

Table 6.5: Survey Results Origin of Savings from TC / GMP Approach

Origin of Savings Overall n=33 Mean Rank 2.82 2.58 1.94 1.45 2.55 1.64 2.24 1.48 1.64 2.67 2.64 2.88 11 8 5 1 7 3 6 2 3 10 9 12 Client n=14 Mean Rank 2.58 2.58 2.07 1.43 2.43 1.64 1.93 1.50 1.50 2.50 2.57 2.86 10 10 6 1 7 4 5 2 2 8 9 12 Contractor n=11 Mean Rank 3.00 2.73 2.00 1.45 2.64 1.73 2.45 1.45 1.88 2.45 2.73 2.90 11 9 5 1 8 3 6 1 4 6 9 12 Consultant n=8 Mean Rank 3.00 2.38 1.63 1.50 2.63 1.50 2.50 1.50 1.64 3.25 2.63 2.88 11 6 4 1 8 1 7 1 5 12 8 10

Inflated target cost Favorable price movements Innovative designs Innovative construction methods Procurement savings Better joint risk management Change in specifications Innovative alternative materials usage Higher level of buildability Reduced claims / disputes Better estimates Higher contingencies

Spearmans rank correlation test between groups of respondents Comparison rs Significance Conclusion

Client ranking vs Contractor .9559 .0001 Can reject H0 at 5% sig. level ranking Client ranking vs Consultant .7778 .0028 Can reject H0 at 5% sig. level ranking Contractor ranking vs .8714 .0012 Can reject H0 at 5% sig. level Consultant ranking H0 = No significant correlation on the rankings between two groups Ha = Significant correlation on the rankings between two groups Reject H0 if the actual significance level (p-value) is less than the allowable value of 5%

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The results are similar to those on influencing factors of savings ratio selection, with innovation related origins ranking high when compared to other origins and closely followed by better risk management practices. Opportunistic origins such as inflated target cost and higher contingencies are ranked lower suggesting that they are not a significant problem.

Also, the perceived benefits from reduced claims and disputes do not seem to be significant. However, the results did not indicate support to the much quoted benefit of savings due to reduced disputes in TC / GMP approach and was interestingly ranked very low. Perceived reasons for the results as gathered from the interviews are dealt with in detail in section 6.2.4.7.

6.2.4.6 Interplay between Sharing Ratio and Influencing Factors In this section, respondents were asked to provide their agreement to a given statement on sharing ratio in relation to a specific context of TC / GMP, quality, risk, information clarity and motivation. The results obtained are detailed in Table 6.6. Statements for which agreement ratings are significant at 95% significance for a hypothesized mean of 2.5 as found by t-test are highlighted in bold.

The agreement levels are significant for the statement higher the share of savings for the contractor, the lower the GMP. The agreement levels for higher the share of savings for the client, the higher the GMP are not, when they are perfectly opposite to each other and should be significant. The interesting finding is the result remains the same even for the organization type subgroup of clients. As shown by Perry and Barnes (2002), theoretically this should not be so as there is interplay between the TC / GMP, sharing ratio and the fee. The inference from this result is that the clients want to have the cake and eat it too, or from an objective viewpoint their bargaining power leads to inefficient outcomes.

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Table 6.6: Survey Results Interplay between Sharing Ratio and Influencing Factors
Statement Higher the share of savings for the contractor, the lower the GMP Higher the share of savings for the client, the higher the GMP Higher the share of savings to contractor, the lower the quality Higher the contractors share of risk, the higher his share of savings Higher the clarity of information, the lower the contractors share of savings ratio Higher the share of savings to contractor, the higher the motivation to innovate Higher the share of savings for the client, the higher the motivation to consent to alternatives Client n=14 2.21 2.57 3.42 1.79 Contractor n=11 2.27 2.73 4.18 1.91 Consultant n=8 2.50 3.63 4.00 1.75 Overall n=33 2.30 2.88 3.82 1.82 Standard Deviation 0.77 0.93 0.88 0.39

3.00

3.09

3.38

3.12

0.89

1.43

1.45

1.50

1.45

0.51

2.29

2.00

2.63

2.27

0.88

6.2.4.7 Dispute Types, Reduction Causes and Influencing Factors Section two of the questionnaire focused on dispute types, causes of reduction in disputes and influencing factors facilitating resolution and management of disputes when employing the TC / GMP approach. The agreements ratings obtained are as shown in Table 6.7.

In terms of dispute types, scope related disputes and omission related quantity variation disputes were found to be significant in terms of their frequency of occurrence. In Chapter 5, an omission related dispute was one of the major issues negotiated as presented in case study 1 where they consumed a large part of GMP allowance. This issue was considered of significant concern by both the contractor and client in the interviews. However, none of the dispute reduction causes were found to be significant as claimed in the literature reviewed in Chapter 4. This seems to tie in with the results found in section 6.2.4.5 regarding origin of savings where savings from reduction in disputes and claims were not rated very highly. Still, the results support the notion that TC / GMP approaches promote easier resolution and management of disputes. The main promoters for easier dispute resolution and 121

management as seen from the results are (1) the structure of the contract which facilitates tradeoffs, and (2) risk sharing or joint risk management.

Table 6.7: Survey Results Dispute types, Reduction causes and Influencing Factors
Major types of Disputes Time related disputes Quantity related disputes other than omissions / GMP variations Omissions related quantity variations Cost related disputes other than related to scope change Scope change related variations Dispute reduction Causes Contract type transfers risks to the contractors and adequately provide incentives for them Contract type brings clarity to ambiguous risks by clearly allocating to one of the stakeholders and reduce ambiguous (residual) risks The savings sharing clause acts as a risk sharing mechanism The open book accounting system which generally accompanies GMP contracts provides little leeway for disputes on magnitude of outcomes Factors influencing resolution of disputes The structure of the contract allows trade-offs The open book accounting system which generally accompanies GMP contracts develops trust Risk sharing mechanism enhances information exchange thereby enhancing the sense of procedural fairness Disputes are limited to the mere principles as to whether dispute exists and if so who is responsible for it rather than negotiating the magnitude of the outcome itself makes it easier to resolve them 1.93 2.5 2.67 2.82 2.13 2.25 2.12 2.55 0.74 0.67 3.29 2.73 2.88 3.00 0.97 Client n=14 3.21 2.64 2.00 2.71 1.79 Contractor n=11 2.73 2.88 2.18 3.00 1.64 Consultant n=8 3.5 2.64 2.38 2.75 1.38 Overall n=33 3.12 2.70 2.16 2.82 1.64 Standard Deviation 0.60 0.59 0.62 0.40 0.60

3.00

2.36

2.63

2.70

0.76

2.71 2.57

2.45 2.64

2.25 2.25

2.52 2.52

0.76 0.80

2.14

2.45

2.25

2.27

0.72

2.86

2.82

2.75

2.82

0.58

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From the interviews, as one of them said if everything is going well, the contract allows us to give in in a dispute for a tradeoff on a saving or scope variationit provides the flexibility. However, as noted by many interviewees, the key to efficiently using this flexibility is in having good relationships with the parties. It was considered that having objective decision making processes with open book accounting and the practice of fully pricing and agreeing to subcontract variations by the client, consultants, main and subcontractors before they were implemented would mean half the job was done in both avoiding and resolving disputes.

Also, sharing of information on risks and managing risks jointly was perceived to have the largest potential to generate savings when employing a TC / GMP approach. The client with the most experience in employing the approach effectively, was of the opinion that, put all ambiguous risks together price them and include them in the GMP allowance if you manage those risks well, share the savings if you dont, share the pain. When employing this approach to JRM, there is a large incentive to share information about risks, identify them early and strive to mitigate their effects together. However, as seen in case study 1 in Chapter 5, the practice is to transfer the risk as opposed to sharing the risk. Risk based or objectives based sharing ratios as discussed in section 6.2.3.3 are yet to be used frequently.

6.2.4.8 Role of Relational Strategies The interviewees were queried about the role of relational strategies in achieving efficient and effective outcomes. Most of the respondents experiences in employing relational strategies were limited to partnering. There was general consensus that they assist in shaping the environment to foster cooperation and collaborative working.

However, it was considered that their success was dependent on the personalities leading the exercise and it was perceived that partnering in itself without adequate incentives would make the partnering process ineffective leading to the participants going through the motions without conviction. Further, it was perceived that partnering alone cannot act as a substitute for contractual safeguards and partnering although important, is not a must for project performance as much as orienting project participants individual objectives towards common objectives. This view 123

seems to tie in with the findings from the case studies presented in Chapter 5. However, deploying pain / gain share mechanism between the main contractor and important subcontractors was found as effective as it is between the client and the contractor.

On negotiated approaches to contracting, the view was that clients would be hesitant to employ the approach unless it was a complex project with high risks. The same argument was used against alliancing and framework agreements. In one of the respondents own words, how many clients are out there with a steady stream of projects and of the stream of projects how many are complex the moment they (client) have an opportunity to test the market they will grab it.. However, they considered alliancing as suitable for delivering mega projects.

6.2.5

Summary and Implications of Results

In summary, the above survey results found that there is interplay between contractor selection modes and savings ratio selection modes. Although there were differences in preferences for the given modes, there was acknowledgement that the outcome was dependent on situational variables and each mode could deliver the desired results when they are the appropriate choice. In other words, the use of TC / GMP does not guarantee the outcomes but properly structuring it to take advantage of the situational variables would improve the probability of success.

The implication of this result is that applying the standard TC / GMP practices taken off the shelf is detrimental to the outcomes. Hence, careful consideration of the situational variables such as project characteristics, risks, stakeholder profiles and others should be employed before choosing the appropriate contractor selection and savings ratio selection mode. The consensual opinion from the stakeholders interviews was presented with the survey results in terms of pointers as to the appropriate choices for given situational variables. Also, the selection of an appropriate sharing ratio was found to be dependent on the objectives of the client and the project characteristics along with stakeholder profiles.

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Reduction of disputes by merely employing TC / GMP approach was found to be a myth. More is needed and in probing further, omission related disputes were found to be a significant problem along with the usual scope variation related disputes. The significance of joint risk management and information exchange in identifying issues early and managing them for achieving better outcomes was also demonstrated. The role of relational strategies in achieving efficient and effective outcomes was explored and shortcomings were identified.

In the absence of integrated frameworks for supporting the decision making processes for choice of selection modes, selecting the appropriate sharing ratio, employing relational strategies, implementing JRM and managing disputes it was considered that integrating the findings and pointers from the survey and case studies into a framework would be a useful contribution to the industry. This is addressed in Chapter 7.

6.3

SURVEY ON JOINT RISK MANAGEMENT

Risk pricing as a contingency within a target cost accompanied by a gain / pain share arrangement has been employed in many projects where risks are jointly managed. However, price adjustments for risks may not be mutually acceptable in some situations. Also, a linear gain / pain share arrangement assumes the responsibility of different stakeholders for all risks to be the same, but this may not be the case and hence, may be unfair.

Moreover, allocating risks to a party best able to manage them as compared to joint risk management is still the preferred approach in the industry especially with the consultants (Rahman 2003). It is convenient to assume that a party traditionally seen as best able to manage a certain risk overall is indeed the party, which is best able to manage it through all stages of risk management cycle. However, on closer examination, it was hypothesized that the previous statement need not be true given the development of some complex risks, vis a vis the resources available at different stages to different parties, some of whom may be partially mobilized etc. A survey instrument was developed to test this hypothesis.

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The survey objective was to identify the party best able to manage different stages of the risk management cycle with respect to a specified number of risks. The

instrument was also designed to quantify the contribution of each stage towards the effective performance of overall risk management cycle for the purpose of developing a risk sharing mechanism in which each stakeholders share is proportional to his responsibility for a given risk. The survey instrument used is appended in Appendix C.

6.3.1

Survey Design

From the literature (Lewis et. al. 1992, Rahman 2003, PMBOK 2000), six risk management stages were demarcated: (A) Risk Identification (B) Risk Evaluation (C) Risk Response Planning (D) Risk Knowledge Dissemination (E) Risk Response Implementation and (F) Performance Monitoring. These six steps / stages were taken together to form the comprehensive and mutually exhaustive stages of a risk management (RM) cycle from initiation to completion. In order to measure the contribution of each stage to the risk management cycle as a whole, the following assumptions with respect to RM stages delineated above were made: (1) there is no essential overlapping of stages, (2) the stages are mutually exhaustive of all possible stages of risk management cycle and (3) the success of one stage is dependant on the satisfactory performance of the previous stages.

Based on these assumptions, a survey instrument was developed with two parts. The first part of the survey instrument was used to measure AB, AC, BC, AD and so on wherein the term AC signifies contribution of stage A (as named in the previous paragraph) towards ideal performance of stage C and similarly for BC, AD and others. The second part of the survey instrument was designed to extract opinions from experienced professionals in the domain as to whether an Owner (O) or Contractor (O) or either (C/O) is better placed to manage each stage of the RM cycle, or whether it should be managed jointly for the comprehensive set of risks used by Rahman (2003). In the case of jointly being the preferred answer, respondents were required

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to fill in the perceived relative contribution of each stakeholder for better managing that risk stage on a scale of 1 to 100.

6.3.2

Results and Analysis

Given the need for complete coverage, the survey instrument was found to be cumbersome and time consuming to complete. In spite of repeated efforts to get a larger sample size, only seven completed responses were received. The respondents were project managers and above with a minimum experience of 3 years and above in construction risk management (two from contractors, two from clients and three from consultants).

The mean values of responses for the first part of the survey are illustrated in Table 6.8. These values indicate that risk identification and risk response planning contribute the most to a successful risk management cycle. The results for the second part of the survey in terms of frequency of respondents with an opinion as to which party is best able to manage the risk management stage for the first of the five risks out of 20 risks evaluated are indicated in Table 6.9.

Table 6.8: Contribution Matrix

A A B C D E F Notes: Please refer paragraph 1 of 6.3.1 for the meaning of A, B, C, D, E and F Please refer paragraph 2 of 6.3.1 for the meaning of AB, AC, AD, and so on 100 100 100 100 100 B AB = 100 C AC = 60.00 BC = 40.00 D AD = 17.40 BD = 20.84 CD = 61.66 E AE = 13.33 BE = 13.33 CE = 46.67 DE = 26.67 F AF = 15.00 BF = 07.50 CF = 07.50 DF = 07.50 EF = 62.50

The patterns of results indicate that for some simple risks such as weather, the present approach of allocating it to one single party can achieve the desired results. 127

However for some complex risks, even when a specific individual stage was allocated to a single party, the same respondent sometimes allocated other stages to different parties suggesting that at least in some cases the present approach of allocating the entire risk management to a single party is flawed. This supports the hypothesis tested in section albeit, only with respect to complex risks. Further, there are risks for which, a considerable number of respondents opted for joint management across most of the stages.

Table 6.9: Frequency - Risk Management with respect to Each Stage

Type of Risk Site Access Unforeseen Ground Conditions Quantity Variations Weather Acts of God / Nature Inflation 4 4 2 2 0 3 3 1 2 3 2 2 2 2 4 4 6 2 3 6 3 1 1 6 1 3 5 1 6 1 4 1 O Risk Identification C 5 O/C 1 Joint O Risk Evaluation C 6 O/C Joint Risk Response Planning O C 5 O/C 1 Joint -

From these results, it can be observed that risk allocation is risk dependent and hence risk sharing mechanisms should also be risk dependent (i.e. risk sharing ratios need not be the same for all the risks). Further, it can also be inferred that allocating different risk management stages to different parties may be helpful in the case of unique and complex risks.

6.3.3

Implications of Results and Limitations

As mentioned earlier, shared risk pricing leading to a target cost coupled with a gain / pain share arrangement is a popular risk sharing mechanism. An example of a situation which requires sharing of risks can be where a project requires materials which are not locally available, and are under import controls. The project

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management may conclude that joint efforts are required to deal with the risks involved with the import of these materials.

Further, it can be seen that that a contractor could be best positioned to identify the risks, evaluate them and plan responses but the client is in a better position to implement them because of its stature and his relations with potential suppliers. This being a unique case, the projects overall gain / pain share ratio may not be satisfactory to deal with the situation and may require a risk specific mechanism. In cases like this, evaluated values from this survey instrument can be used for developing risk specific gain / pain share arrangements.

The framework presented here in determining a risk specific gain / pain share arrangement takes a bottom-up approach (for jointly managing risks on the basis of choosing parties best able to handle each of the individual stages of risk management and thereby deciding their share of responsibilities in overall risk management). This can be useful for joint risk management, especially in the case of unique and complex risks.

Although the observations are based on a small sample, the respondents were well positioned / experienced and knowledgeable on the issues raised. The results at least justify conducting a further extensive survey to test and increase their reliability. However, the survey needs to be refined for ease of eliciting responses from a large sample and to target few specialized risks rather than an expanded list, since extracting responses for an extensive list is seen to be extremely time consuming and complex.

6.4

CHAPTER SUMMARY

This chapter presented results from a survey about the influence of different available options in terms of contractor selection, saving ratio selection and type of sharing ratios on outcomes. The guiding situational variables which determine appropriate selection were identified as well. Also, findings on the role of relational strategies in achieving desired outcomes were discussed along with the nature of disputes, their origin and their resolution and management. Further, results from a

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survey aimed at formulating more comprehensive and risk specific gain / pain share arrangements were reported.

These results along with the findings from case studies and literature review results presented in Chapter 4 and 5, are next utilized to develop a decision support and contract management framework as envisaged when formulating the objectives for this research. The developed framework and guidelines towards administering the framework are presented in the succeeding chapter (Chapter 7).

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CHAPTER 7: DECISION SUPPORT AND MANAGEMENT FRAMEWORK FOR PROMOTING DESIRED OUTCOMES AND MODEL FOR SELECTING APPROPRIATE SHARING RATIO
7.1 CHAPTER INTRODUCTION

In this chapter, findings from Chapters 4, 5 and 6 are integrated to develop a decision support and management framework for administering the TC / GMP approach to achieve desired outcomes. A model to select the appropriate sharing ratio within the framework is also presented. Also, validation results for the framework and the model are presented.

7.2

DECISION

SUPPORT

AND

MANAGEMENT

FRAMEWORK
In Chapter 4, the options available in terms of different strategies for contractor and sharing ratio selection modes were discussed. Findings from case studies presented in Chapter 5 and from the interview based survey reported in Chapter 6 indicated that the selection of appropriate strategies for contractor selection and sharing ratio selection should be dependent on project characteristics and requirements, client characteristics and requirements, as well as value creation and value capture opportunities if desired outcomes were to be achieved. The findings also demonstrated the downstream effects of inappropriate selection of these strategies in terms of disputes.

The role of relational strategies and joint risk management in fostering value creation was also brought out from the findings in Chapter 6, along with useful insights into the nature of disputes arising when employing TC / GMP approach and their origin. Case Study findings in Chapter 5 demonstrate the need to employ mechanisms which could identify issues at an early stage and stop them from flaring up into disputes and 131

leading to value destruction. The above cited findings which impact value creation and value capture processes and their outputs were isolated and juxtaposed against the three stage model described in Chapter 3 to reflect their interplay. The model arrived at was fleshed out with identified best practices, available options and indicators to select the appropriate options that enhance value; with respect to each issue and at each stage to form a framework which assists project managers in decision making and managing a TC / GMP contract.

The developed framework is expected to promote desired outcomes (specifically, equitable value capture or win-win benefits) and is as shown in Figure 7.1. The framework is demarcated according to the two distinct stages: (1) pre-contract stage and (2) construction stage. The first stage of the framework reflects the influence of project and client characteristics on contractor selection and sharing ratio selection strategy and acknowledges that potential for value creation and value capture is dependent on project and client characteristics.

Further, the framework also specifically incorporates the interplay between contractor selection strategy and value creation and capture potential, which ultimately influences the sharing ratio selection strategy as discovered from the case study and survey results. Appropriate sharing ratio selection is modeled as the resultant output of the process and as the culmination of the pre-contract stage of the framework. Thus the pre-contract stage of the framework is a process with three decisions (1) decision as to appropriate contractor selection strategy (2) decision as to appropriate sharing ratio selection strategy culminating in (3) appropriate choice of a sharing ratio.

The second stage of the framework addresses effectively employing relational strategies, and dispute management and resolution which were identified as the key factors in achieving desired outcomes while employing a TC / GMP approach. Each of the building blocks of the framework are discussed in detail in terms of the key criteria that are to be considered, while managing the sequence of decisions that lead to the sharing ratio selection in the following subsection. Pointers as to the appropriate sharing ratio for given project characteristics and stakeholder profiles are modeled separately and presented in Section 7.3. 132

DESIRED OUTCOMES
Construction Stage

Implement Relational Strategies - Inclusive relational processes - JRM processes - Procedural fairness - Other strategies (see Subsection 7.2.5)

Dispute Management & Resolution - Early identification of issues - Clear escalation & resolution timelines - Non-adversarial negotiation tactics - Other strategies (see Subsection 7.2.4)

Select Appropriate Sharing Ratio

(See Figure 7.2)

Sharing Ratio Selection Strategy

Contractor Selection Strategy - Prior experience and relationships - Evaluation systems and costs - Organizational and time constraints - Other relevant factors (see Subsection 7.2.2)

Pre-contract Stage

Identify Value Creation and Capture Potential - Scope for innovation - Joint Risk Management - Flexibility of design - Other relevant factors (see Subsection 7.2.1)

Identify Project Characteristics - Complexity of project - Project risks - Information flow characteristics - Other relevant factors (see Subsection 7.2.1)

Identify Client Characteristics - Client primary drivers - Client risk profile - Client risk appetite - Other relevant factors (see Subsection 7.2.1)

PROJECT CONCEPTUALIZATION
Figure 7.1: Decision Support and Management Framework for Value in TC / GMP approach

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7.2.1

Identify Project and Client Characteristics, and Value Creation and

Capture Opportunities This segment of the framework encapsulates the processes of identifying key information about the project and the client on which the value creation and capture opportunities will be dependent, and by which the contractor selection strategy will be influenced. Pointers as to the sort of information will need to be aggregated are as follows.

Project Characteristics: the complexity of the project (such as specialized, interfacing characteristics), primary drivers of the project (such as cost, quality, time, service), nature of risks (such as can be transferred or shared, their impacts), timelines of information flows, the expected level of design detail at the intended contractor selection time, scope for innovation in terms of design and construction methods and so on.

Client Characteristics: risk profile, risk appetite, primary objectives, experience in general construction procurement and specific to employing TC / GMP approach, relationships with contractors, corporate social responsibility objectives, motivational factors (such as innovation oriented or not) and so on.

Based on the information gathered on the above issues, value creation opportunities and value capture opportunities are expected to be identified. Pointers as to value creation opportunities can be found in Table 6.5 in Chapter 6 where the possible value origins are listed. Additionally, as an illustrative example if time is a primary driver for the project, early contractor selection based on an indicative ratio with an incentive to renegotiate later, could be used as an option for value creation and capture.

7.2.2

Contractor Selection Strategy

In terms of contractor selection strategy, a project manager has three options (1) competitive bidding (2) one point negotiated and (3) multi point negotiated. Various researchers have addressed the issue of contractor selection strategies in general and 134

their findings can be relied on for comparing the general advantages and disadvantages of each approach. From the point of employing a TC / GMP approach, the key to selecting between these from the findings of the study is the experience and familiarity of both the client and the contractor along with the relationships between them.

In the absence of familiarity and / or experience and / or good relationships, one point negotiated or multipoint negotiated approaches are not advisable. Even in the case of having all the three, multi point negotiated is advisable only in the case of mega projects or specialized projects. In addition, other factors arising from project and client characteristics can influence the contractor selection strategy such as for public sector clients where it is mandatory to have at least some element of competition. Additional pointers as to the selection of contractor strategy are discussed in the next subsection in relation to sharing ratio selection strategy, given that there is an inter play between the two that must be recognized and incorporated in the framework.

7.2.3

Sharing Ratio Selection Strategy

Sharing ratio selection strategy is dependent on the selected strategy for contractor selection. Competitive bidding entails three options, a fixed ratio, contractor proposed ratio and an indicative ratio to be renegotiated with the selected contractor. However, for one point negotiated and multi point negotiated imply negotiations on a given ratio at any point of time in the negotiations.

A fixed ratio is easier to evaluate whereas contractor initiated proposals require development of appropriate systems required to evaluate the proposals and incurring costs associated and increased tender / negotiation duration. An indicative ratio that is to be renegotiated exacerbates the potential conflicts and prolongs the duration further. However, the interplay between TC / GMP, fee and sharing ratio can be taken advantage of, if negotiated. Also information exchange while negotiating is expected to promote more optimal outcomes and help in building relationships.

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Hence, the selection of a sharing ratio is a tradeoff between duration, costs and information parity. In developing some guidelines to selection strategy of sharing ratio, the recommendations are: (1) cost + low complexity - fixed (2) time as a primary driver - fixed (3) high complexity and high risks - negotiated or contractor proposed (4) innovation and/or motivation as primary driver - negotiated or contractor proposed.

7.2.4

Effective and Efficient Dispute Management and Resolution Strategy

The findings from this research indicated that the propensity for disputes does not diminish in a TC / GMP approach. The origin of disputes, their nature and factors influencing resolution were dealt with in the findings reported in Chapter 6. The case studies indicated that a suitable strategy to achieve desired outcomes despite these disputes is to manage them effectively.

Clear and early identification of variations was seen as a must for their effective management. Case studies yielded the best practice of early identification through change request tracking. Also, having a clear timeline and guidelines for escalation, management and resolution was seen as essential for achieving optimal final outcomes.

Alternative dispute management and resolution systems like employing a dispute resolution advisor or mobilizing adjudication for quick resolution was found to be effective. In terms of negotiation tactics, seeking integrative solutions with mutual benefits and employing collaborative or accommodating tactics are recommended.

7.2.5

Relational Strategies and JRM

The findings from this research suggest that co-operative relationships are a means to achieve the objectives rather than as an objective in itself, support the argument of Cox and Thompson (1997). Employing relational strategies, although important was found not to be a must for project performance as much as for orienting project participants individual objectives towards common objectives. However, relational strategies such as partnering were found to enhance interactions whereas alliancing

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and framework agreements encourage interdependence which promotes relationship formation.

The critical factor in the success of these relational strategies was their inclusiveness when they were implemented. Back to back gain / pain share arrangement with main subcontractors under partnering arrangements was found to be relatively successful and is hence recommended for extracting the full potential benefits of partnering. Also, the use of open book accounting was found to be desirable to build trust.

Furthermore, employing JRM as a tool for reorienting project participants objectives towards common objectives by pricing risks associated with project primary drivers and including them as part of GMP allowance so that joint risk management benefits both by means of shared savings is recommended. This is expected to enhance interdependence further and encourage constant exchange of information, thereby fostering relationships and seeking collaborative and integrative solutions.

Also of potential interest is RIVANS or Relationally Integrated Value Networks an ongoing research project which is developing a framework for incentivising and directing supply chains towards agreed best value targets and has the potential to reach beyond partnering and alliancing. If the potentials of RIVANS are realized, it would both enhance and synergize the value streams flowing from each network member (Kumaraswamy and Rahman, 2006) more efficiently and effectively than in traditional supply chains.

7.3

MODEL

FOR

SELECTION

OF

AN

APPROPRIATE

SHARING RATIO
This section integrates the findings on an appropriate sharing ratio for given project characteristics and stakeholder profiles into a model which provides pointers for the selection of appropriate sharing ratios and the range of time bands it should be selected. The resulting model is as shown in Figure 7.2.

In the figure, the horizontal axis is the timeline in terms of pre-selection, selection and post-selection, signifying fixing the sharing ratio at the early stages of the project, 137

during tendering or renegotiating post-tender. The vertical axis signifies the sharing ratio, the imaginary horizontal line that can be drawn through selection, pre-selection and post-selection representing 50/50 for the client and the contractor. Moving below the line signifies a greater share of savings for the client and moving above indicates a higher share for the contractor. The interplay between TC / GMP and sharing ratio is represented by illustrating that the higher the share for the contractor, lower the GMP should be, not necessarily equal in quantum.

INFORMATION FLOW

Contractors Risk Profile

Design Standardization

Contractors share of savings

Pre-selection

Selection

Post-selection

TC / GMP

Scope for Innovation Risk appetite of client and contractor Experienced client / contractor Clarity of Scope Relationship between contactor & client

Figure 7.2: Indicative Model for Sharing Ratio Selection given Project Characteristics and Stakeholder Profile

Each shaded text box illustrates a project characteristic or stakeholder profile, while the arrow leading away from the box signifies that the higher the degree of the project characteristic or stakeholder profile, the recommended ratio moves towards the specified direction in case of a vertical arrow or the recommended selection 138

timeline moves towards the specified direction. As an illustrative example a high affinity for risk by any or both the parties means the recommended ratio is a higher share for the contractor or in case of good relationships between the parties, the recommended timeline to fix the sharing ratio is early in the project. However, if the scope is very unclear despite good relationships a compromise between these two would indicate the need to wait at least until the mid-time range.

In addition, the use of pain side caps for a high risk profile contractor can be considered. However, caps on the gain side have not been found to be advisable. Specific sharing ratios for specific project drivers / objectives are advisable when performance against each driver/objective is considered independently critical. As an illustration, a project where time is critical can use two different gain / pain share arrangements to reflect the relative importance of general project objectives and time. These specific gain / pain share arrangements are expected to provide the contractor additional incentive to perform against each specific objective.

7.4

FRAMEWORK AND MODEL VALIDATION

Effectiveness of the framework and model in practice can be gauged only by application in real life projects and such testing is beyond the scope of this research. In this context, in order to assess the potential for practical implementation a validation exercise was conducted. The panel chosen for validation exercise consisted of three professionals (all three were respondents in the interview based survey presented in Chapter 7) and had proven experience in employing TC / GMP approach fruitfully.

The panel were sent sections 7.2 and 7.3 of this chapter and were requested to assess the framework and the model against five criteria: (1) Adequacy of the framework and model in reflecting factors to be considered in selecting appropriate sharing ratios, (2) Clarity of the framework and model, (3) Usability of the framework and model, (4) Potential of the framework and model in improving outcomes and (5) Reliability of the framework and model in improving outcomes. The assessment was to be on a scale of 1 to 7 (1 = very poor, 2 = poor, 3 = below average, 4 = average, 5

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= good, 6 = very good and 7 = excellent). The assessments of the validation panel members are presented in Table 7.1.

The panel was also requested to provide comments and feedback on its usefulness and any limitations, additional requirements or refinements necessary to improve the model. The model was overall assessed to be good or above for adequacy, clarity and potential for improving outcomes. However, the overall assessment with respect to usability and reliability was just above average.

Table 7.1: Validation Results

Criteria Adequacy of the framework and model in reflecting factors to be considered in selecting appropriate sharing ratio Clarity of the framework and model Usability of the framework and model Potential of the framework and model in improving outcomes Reliability of the framework and model in improving outcomes Client 6 Contractor 6 Consultant 5 Overall 5.67

5 5 5 5

5 4 6 5

5 4 5 4

5.00 4.33 5.33 4.67

In terms of qualitative comments and feedback, the contractor in the representative sample perceived that although the framework and model was very good and reflected the reality, it had limitations in its usage, which he attributed to the industry culture. The consultant was of the opinion that the model seemed to be slightly biased towards the contractor whereas the client termed it extremely useful to new users of TC / GMP approach.

7.5

CHAPTER SUMMARY

This chapter presented the principal deliverable outputs of this research in terms of a framework to promote desirable outcomes by means of selecting appropriate strategies for the selection of appropriate sharing ratio and managing the downstream disputes through appropriate relational and dispute management / resolution strategies. Further, a model to provide indicators as to appropriate sharing ratios for given project characteristics and stakeholder profiles was described.

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The model and framework were validated through a validation exercise and the results of the validation exercise were presented along with the feedback received on limitations, additional requirements or refinements necessary to improve the model.

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CHAPTER 8: CONCLUSIONS AND RECOMMENDATIONS

8.1 CHAPTER INTRODUCTION

The general purpose of this research was to identify strategies to promote the desired win-win outcomes in construction contracts within which a considered choice was made to focus on TC / GMP approaches. In opting to employ TC / GMP approaches, the absence of a framework to assist and guide a project manager in the process of making these decisions towards the selection of an appropriate sharing ratio given project constraints and stakeholder profiles was identified as a critical knowledge gap that also hindered wider deployment in practice. In this regard, the aim of this research crystallized so as to provide a framework for improving the utilization of gain / pain share arrangements and associated relational strategies to provide enhanced value (project performance) for all stakeholders.

Having delivered the targeted framework and model in the previous chapter, this chapter takes a step back in order to capture a holistic view of the research from conceptualization of objectives to meeting them. From this vantage point, it summarizes the conclusions on the processes and outputs of this research while providing relevant recommendations. As needed, the limitations of the research findings and recommendations are identified and further, the potential for utilizing the research findings and conclusions for procurement in general is also explored. In addition, scope for further studies is identified, while the thesis is concluded with a brief summary on the contributions to knowledge from this research.

8.2

CONCLUSIONS & RECOMMENDATIONS

This section revisits the main issues addressed in this research and summarizes the conclusions and recommendations on those issues.

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8.2.1

Research Methodology and Methods

The research being exploratory in nature initially sourced and utilized relevant theories to build a general model of value creation and capture processes in the construction industry. The scope was then narrowed down to focus on TC / GMP approaches and the literature review was used to build the linkages between issues that have significant value impact. The targeted issues were then explored in depth by longitudinal case studies for contextual content and by an interview based survey for a broader sample size. This hybridized approach of utilizing multiple research methods facilitated triangulation for reliability.

8.2.2

Value Creation and Value Capture

Modeling value creation and capture processes in the construction industry identified that the process is a combination of sequential and parallel decisions / negotiations with multiple options at each decision node. The nature of each outcome is dependent on the choices made at these nodes and generally the construction industrys failure to efficiently capture value are due to inappropriate choices at these nodes or due to inappropriate structuring and / or sequencing and bundling of the decisions / negotiations.

This calls for improved structuring, sequencing and bundling of decisions / negotiations in more directed ways that are specifically targeted to exploit the potential for value creation. This should also include the targeting of strategies such as collaborative negotiation strategies, relational strategies, and risk sharing mechanisms to promote optimal value capture.

Further, omissions related risk arising from consultant performance issues is identified as critical in reducing omission related disputes which leads to reduction in project value. Consultant inclusive overall or risk specific gain / pain share arrangements designed to reduce and manage omission related risks and reward consultant performance are recommended to manage the above mentioned omissions related risk.

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8.2.3

TC / GMP Approach and Appropriate Sharing Ratio Selection

On applying the developed three stage negotiation / decision model to TC / GMP approaches it was found that the appropriate selection of a sharing ratio has a significant impact on final outcome both by influencing value capture at contract stage and at construction stage. Further, the research identified that factors arising from project characteristics and stakeholder profiles have a substantial influence on the selection of an appropriate sharing ratio; and that there is also an interplay between value creation and capture opportunities and contractor selection strategy.

In this regard, it is recommended that the influencing factors and the interplay should be carefully considered while selecting a sharing ratio. A framework and model for steering through the process and assisting the selection of an appropriate sharing ratio has been developed and presented in Chapter 7, the use of which is expected to promote optimal outcomes and accrue mutual benefits. In implementing the framework for selection of an appropriate sharing ratio, it is critical in the first instance for the parties to collect reliable information both about the project and about each other.

8.2.4

Relational Strategies

Structuring the contract appropriately and selecting the right sharing ratio can go a long way in promoting desired outcomes. However, opportunities still do persist for parties to exhibit opportunistic behavior in the post contract stage. In mitigating the potential for exhibiting opportunistic behavior, building cooperative relationships has always been seen to be a useful deterrent. Relationships exist on trust that must be developed overtime. Cooperation and relational strategies such as partnering to facilitate relationship building and management, along with specific mechanisms such as open book accounting are recommended for trust building.

However, the effectiveness of partnering is limited to facilitating and creating a conducive environment for relationships. Apart from the need for top to bottom commitment as dealt with in other studies, the absence of incentives or reorienting various project participants diverse objectives towards common objectives has been

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found in this study to be a specific barrier to growing and reaping the fruits of partnering.

A useful strategy for reorienting project participants objectives towards common objectives is through jointly pricing risks associated with project primary drivers and including them as part of GMP allowance. In this way, joint risk management benefits both parties by means of shared savings and hence is strongly recommended. Strategies such as alliancing, framework agreements are recommended for sustainable relationships in case of long term engagement expectations.

8.2.5

Dispute Resolution and Management

The nature of disputes predominantly noticed in TC / GMP approaches is that either they are related to scope variations or quantity variations associated with omissions. The origin of these disputes lies in the definitions of scope variation and design development as provided in the contract.

In order to mitigate these dispute risks, contracts need to focus more on unambiguously defining these terms. Omission related disputes being related to consultant performance issues, it is advisable to either exclude them from the scope of the design development definition or incorporate consultant participation in the gain / pain share arrangements.

In addition, clear and early identification of variations, having clear timelines and guidelines for escalation, resolution and management, along with alternative dispute resolution strategies for quick resolution and identification of integrative solutions with clear mutual benefits are recommended. Employing collaborative or accommodating negotiation tactics while negotiating are recommended for desired outcomes are necessary items in mobilizing the above strategies and to achieve the desired objectives.

8.3

GENERALISING CONCLUSIONS FOR PROCUREMENT

The outputs and recommendations of this research have focused on TC / GMP approaches as an important component of contractual strategy. However, the 145

principles of negotiations / decisions being the same, i.e. sequential and parallel in nature, similar analysis of other contract strategies to identify potential value creation and capture opportunities can be conducted in other components of procurement.

The identified opportunities can be exploited for mutual benefits as done here and is recommended as a promising area for further research in general (for example, the effects of sequencing or bundling of related disputes on outcomes through alternative dispute resolution mechanisms). Further, the recommended use of relational strategies, JRM and dispute resolution and management strategies are applicable and are expected to add value to any contracting strategy.

8.4

LIMITATIONS

The framework, model and conclusions have drawn upon empirical data from 2 full fledged case studies of projects employing GMP approach and one mini case study of a client employing TC approach; and have been complemented and supplemented by data from surveys and interviews. The triangulation of data achieved thus achieved enhances the reliability of each component, given that they reinforced, rather than contradicted each other.

However, the data is limited in its origin, i.e. from Hong Kong and the experience of Hong Kong in employing TC / GMP approaches is limited to very few projects which in turn limited the sample size of available experienced professionals. Also, the findings and conclusions on the pain side of the gain / pain arrangement rely mainly on a single and small case study, and anecdotal data. Hence, more detailed study is considered necessary before substantiating and employing the findings and conclusions on the pain side of the gain / pain share arrangement.

8.5

SCOPE FOR FURTHER STUDIES

With regard to the limitations discussed above and the need for further validation of the developed framework and model, it was considered that an expanded empirical study of a large sample size of case studies of projects employing TC / GMP approaches will be worthwhile. Also, the increasing utilization of JRM in TC / GMP

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approaches calls for a calibrated study on the interplay between treatment of JRM risks within TC / GMP contracts, and the outcomes of TC / GMP.

Further, in light of Barretts (2005) call for the need for the equitable distribution of the resulting rewards of value, and to complement this research, focused studies on value capture processes, bargaining power and its effects on value capture, and negotiation tactics and outcomes in the construction industry are also recommended.

In addition, this research focused mainly on contractor-client strategies for sharing ratio selection although it touched upon pain / gain share arrangements between contractor and subcontractors. A study on the effects of contractor-subcontractor pain / gain share arrangements on value creation and value capture would probably be useful in answering Barretts (2005) calls for equitable distribution of value down the supply chain which can indeed reinforce upstream value through mutual reinforcement. Further, having identified consultant performance issues as a critical area for dispute reduction in TC / GMP approach, the impact of consultant inclusive gain / pain share arrangement for a project or an exclusive (independent) gain / pain share arrangement for omission related risks is also considered worthy of investigation.

8.6

CONTRIBUTION TO KNOWLEDGE

Contribution to knowledge from this research is two pronged: (1) bridging the existing critical knowledge gap of selection criteria to be considered for selecting an appropriate gain / pain share arrangement and strategies to assist in the selection process and (2) streamlining the existing knowledgebase on TC / GMP approach to develop appropriate and easy to use decision support and management frameworks.

In achieving the above, this research project: (1) strengthened and extended the understanding of value creation and value capture processes in the construction industry, (2) identified the available options for optimal value creation and capture within TC / GMP approach, (3) provided an understanding of the interplay between the available options and identified strategies to exploit the interplay for better outcomes and (4) provided a framework and model which simplifies the concepts of

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TC / GMP approach aids in decision making, as regards to the selection of suitable options of contractor and sharing ratio selection strategy and the selection of an appropriate sharing ratio.

Apart from bridging the critical knowledge gap, the above contributions are expected to mitigate the problems associated with unfamiliarity of TC / GMP approaches among industry professionals. This is in turn expected to aid in propagating the use of TC / GMP contracts for procurement and assist in the industrys quest for higher value and deeper relationships thereby fostering overall value addition and genuine cooperation at project, organizational and industry levels.

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APPENDIX A
SURVEY QUESTIONNAIRE ON POST-TENDER PRE-CONTRACT NEGOTIATIONS
This survey is part of a research project at the University of Hong Kong. The objectives of the survey are:

1. 2.

To identify the most frequently negotiated issues in Post-tender Pre-Contract negotiations of a construction project To identify the causes of delays in Post-tender Pre-Contract negotiations of a construction project.

Thank you in advance for participating in the survey and providing us your valuable opinion.

SECTION 1: PERSONAL INFORMATION Please indicate one answer to the following questions A. Nature of your work organization Contractor Client Consultant Others

Please specify if others: .. B. Nature of your job Managerial Technical Planning / Design Others

C. Do you have experience in Post-tender Pre-contract negotiations? Yes No

If answered yes to the above indicate the number of years of experience Post-Tender PreContract negotiations

Less than 3 years

3 years or more E. Predominant experience with project

D. Predominant experience with client type type Public Sector Mechanical and Electrical Private Sector

Building

Civil

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SECTION 2: GENERAL INFORMATION ON POST-TENDER PRE-CONTRACT (P-T P-C) NEGOTIATIONS Please indicate your range of agreement to the following statements with reference to P-T P-C negotiations (1-strongly agree, 2-agree, 3-neutral, 4-disagree, 5-strongly disagree):

STATEMENT

RANGE OF AGREEMENT 1 2 3 4 5

Elongated duration of P-T P-C negotiations is a concern for the construction industry Conclusion of P-T P-C negotiations in a fair and friendly manner is a must for efficient relations between the stake holders during construction stage Conclusion of P-T P-C negotiations in a fair and friendly manner is important for effective relations between the stake holders during construction stage P-T P-C negotiation durations are inversely proportional to the conventionality of the contract (i.e. more innovative contracts take longer to negotiate) Inadequacy of information available significantly affects the efficiency of P-T P-C negotiation outcomes Inadequacy of information available leads to less effective outcomes in PT P-C negotiations

Please answer how often do you use the following in your P-T P-C negotiations (1-very often, 2-often, 3-sometimes, 4-rarely, 5-never): TOOLS RANGE OF AGREEMENT 1 How often do you use decision trees to understand and analyze available options and outcomes of negotiations? How often do you use Decision support systems to select and support the strategies you use in negotiations? How often do you use Milestones and deadlines to control negotiation schedule How often do you concentrate on the issues where expectations converge while ignoring issues where expectations diverge? How often do you try to externally (artificially) create an issue where expectations converge in order to mask issues where expectations diverge? 2 3 4 5

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SECTION 3: ISSUES NEGOTIATED IN POST-TENDER PRE-CONTRACT (P-T P-C) NEGOTIATIONS AND CAUSES OF DELAYS IN THESE NEGOTIATIONS Please indicate how often do you negotiate the issues listed in the table below during P-T P-C negotiations with respect to the contract strategies listed by circling the value of your rating for each contract strategy on a scale of 1 to 5 (5-very often, 4-often, 3-sometimes, 2-rarely, 1-never):

ISSUES NEGOTIATED Open Bid -

CONTRACT STRATEGIES Bid by Invitation Lump Contract 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Traditional Sum Open Bid Bid by Invitation GMP Contract

Traditional Lump Contract Specification qualifications Quality qualifications Methods of Measurement Resources Requirements Key Staff Requirements Payment Modalities Amendments to Contract Risk management strategies Method Statements Retention Insurance Performance bonds Incentives / Disincentives Scheduling Requirements Others (Please Specify): 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 Sum

GMP contract

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

1 2 3 4 5

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Assuming that a range of agreement value exists for the issue being negotiated, please rate the below listed probable causes of delays in P-T P-C negotiations on a scale of 1 to 5 with respect to their relative importance in causing delays to P-T P-C negotiations (5 being most important, 4 very important, 3 important, 2 less important, 1 not important) CAUSE OF DELAY 1 Strong one sided bargaining power leading to unacceptable conditions being put forward by the stronger party Equally balanced bargaining power leading to no party giving in Lack of information (On strategies of the other negotiating party) Lack of information (Insufficient preparation for negotiations) Lack of decision support systems to aid negotiations Lack of decision making authority with first hand negotiators Reluctance to reveal information by the concerned parties Delaying as a tactic to force commitments Delaying as a tactic to gather information Sunk investment in tender costs coupled with industry norm of initiating work without contracts (Absence of incentive for forceful negotiations) Reluctance to perceive the other party to be fair and trustworthy leading to reluctance to commit or reveal information Lack of tools to understand and analyze options available and their likely outcomes in negotiations Lack of understanding of available strategies to streamline / drive negotiations Others (Please RATING 2 3 4 5

Specify): .

Would you be interested in receiving a summary / further discussions of the survey outcomes? Yes No

If the answer to the above questions is yes, please fill in the following: Name: Job Title: .. Postal / Email address : . Please return the filled in questionnaires by post, fax, or email to: By Post Mr. Gangadhar Mahesh gangadhar.Mahesh@gmail.com Research Student, Dept. of Civil Engineering HKU, Pokfulam Attn: Mr. Gangadhar Mahesh Road, Hong Kong By Fax 852 - 2559 5337 By Email

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APPENDIX B
QUESTIONNAIRE ON SAVINGS SHARING RATIO, AND ORIGIN AND RESOLUTION OF DISPUTES IN GMP SECTION 1: PERSONAL INFORMATION Please indicate one answer to the following questions: E. Nature of your work organization Contractor Client Consultant Others

Please specify if others: F. Nature of your job Project Management Construction Stage Project Management Bid Preparation Stage Please specify if others: G. How many projects you have worked with adopted GMP/TCC contracts? 0 1 2 3 or above

H. Type of client for the project that you worked with GMP/TCC contract was: Public Sector Private Sector

E. Type of project that you worked with GMP/TCC contract was: Building Civil Mechanical and Electrical

SECTION 2: GMP CONTRACTS & SAVINGS SHARING RATIO Please indicate your range of agreement to the following statements (1-strongly agree, 2-agree, 3-neutral, 4-disagree, 5-strongly disagree): GMP + savings sharing ratio most often produce better outcomes when they are: Competitively bid One Point negotiated Multi-point negotiated Cost + fee Lumpsum with fee component included
1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 4 4 4 4 4 5 5 5 5 5

167

GMP contracts can produce better outcomes when the mode of fixing a savings sharing ratio is: At tendering stage by the client Contractor proposed ratios at tendering stage Indicative ratio at tendering stage subject to negotiation with the winning bidder Savings sharing ratios produce better outcomes when they are: Fixed share irrespective of savings amount Floating share ratios linked to amount of savings, with higher contractors share for higher overall savings Floating share rates linked to amount of savings, with higher clients share for higher overall savings Savings sharing ratios should depend on: Scope for Innovations Project Risks Clients appetite to risk Contractors appetite to risk Accuracy of target cost
1 1 1 1 1 2 2 2 2 2 3 3 3 3 3 1 4 4 4 4 4 2 5 5 5 5 5 3 4 5 1 2 3 4 5 1 1 2 2 3 3 4 4 5 5 1 2 3 4 5 1 1 2 2 3 3 4 4 5 5

Desire to influence contractors motivation to innovate Desire to influence contractors motivation to cooperate Desire to influence contractors motivation to cost cutting

168

Flexibility of design (Level/stage in which design is at the time of fixing sharing ratio)

Savings in GMP / Target price contracts generally occur due to: Inflated target cost Favorable price movements Innovative designs Innovative construction methods Procurement savings Better joint risk management Change in specifications
1 1 1 1 1 1 2 2 2 1 2 2 2 1 2 2 2 2 1 3 3 3 2 3 3 3 2 3 3 3 3 2 4 4 4 3 4 4 4 3 4 4 4 4 3 5 5 5 4 5 5 5 4 5 5 5 5 4 5 5 5

Innovative alternative materials usage Higher level of buildability Reduced claims / disputes Better estimates Higher contingencies
1 1 1 1

Higher the share of savings for the contractor, the lower the GMP Higher the share of savings for the client, the higher the GMP Higher the share of savings to contractor, the lower the quality Higher the contractors share of risk, the higher his share of savings Higher the clarity of information, the lower the contractors share of savings ratio

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Higher the share of savings to contractor, the higher the motivation to innovate Higher the share of savings for the client, the higher the motivation to consent to alternatives

SECTION 3: ORIGIN AND RESOLUTION OF DISPUTES Please indicate your range of agreement to the following statements (1-strongly agree, 2-agree, 3-neutral, 4-disagree, 5-strongly disagree): Majority of disputes in GMP contracts are generally limited to: Time related disputes
1 2 3 1 4 2 5 3 4 5

Quantity related disputes other than omissions / GMP variations Omissions related quantity variations Cost related disputes other than related to scope change Scope change related variations GMP contracts reduce disputes because: They transfer risks to the contractors and adequately provide incentives for them They bring clarity to ambiguous risks by clearly allocating to one of the

1 1

2 2

3 3

4 4

5 5

stakeholders and (residual) risks

reduce

ambiguous

The savings sharing clause acts as a risk sharing mechanism The open book accounting system which generally accompanies GMP contracts provides little leeway for disputes on magnitude of outcomes

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GMP contracts resolve disputes in an effective and efficient manner because: The structure of the contract allows trade-offs The open book accounting system which generally accompanies GMP contracts develops trust Risk sharing mechanism enhances
1 2 3 4 5 1 2 3 4 5 1 2 3 4 5

information exchange thereby enhancing the sense of procedural fairness Disputes are limited to the mere principles as to whether dispute exists and if so who is responsible for it rather than negotiating the magnitude of the outcome itself makes it easier to resolve them
1 2 3 4 5

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APPENDIX C
SURVEY QUESTIONNAIRE ON RISK MANAGEMENT This survey is part of a research project at The University of Hong Kong. The objectives of the survey are:

To identify who is better able to manage some specified risks in construction projects (Owner or Contractor, or Either one of them, or Jointly) at each stage of risk management cycle. To evaluate the percentage contribution of various stages of risk management cycle in achieving an ideal risk controlled environment

There are three sections in this questionnaire. Section 1 is to ascertain the composition of survey respondents; Section 2 is to collect data for achieving objective 1mentioned above; and Section 3 is to collect data for achieving objective 2 above.

172

SECTION 1

Please tick one answer in the following questions Nature of your work organization: Contractor Client Consultant Academic Others

Please specify if others: Nature of your job: Managerial Total Experience: 1 to 3 years 3-7 Years 7-10 Years > 10 Years Site Supervision Planning Design Academic Others

Please fill in the following: Job Title: Name (Optional): Address (Optional): Email address (Optional): .. 173

SECTION 2:

Provided that achieving a controlled risk environment requires effective and efficient performance in the following stages: A. B. C. D. E. F. Risk Identification Risk Evaluation Risk Response Planning Risk and Response Knowledge Dissemination Risk Response Implementation Risk Management Performance Review

For each of the specified risks in the 1st column below, please indicate your opinion of whether Owner (O) or Contractor (O) or either (C/O) is better placed to manage each stage of risk management cycle or whether it should be managed jointly. In the case of jointly being the preferred answer, please fill in the perceived contribution of each stakeholder for better managing that risk stage on a scale of 1 to 100.

Example: Risk 1 presented in the shaded row is an illustrative example for convenience on filling in the table. The row is filled as per the data shown below.

Risk Identification: Risk Evaluation: Risk Response Planning:

Perceived to be better managed by owner Perceived to be better managed by Contractor Perceived to be better managed by either one of them independently

174

Risk and Response Knowledge Dissemination:

Perceived to be better managed jointly with owners responsibility being 40% and Contractors responsibility being 60%

Risk Response Implementation: Risk Management Performance Review:

Perceived to be better managed by Contractor Perceived to be better managed by owner

Type of Risk

Risk Identification

Risk Evaluation

Risk Response Planning

Risk

&

Response

Risk

Response

Risk

Management

Knowledge Dissemination O C
O/C

Implementation

Performance Review

Joint O C

O C

O/C

Joint O C

O/C

Joint O C

O C

O/C

Joint O
40

O C C
60

O/C

Joint O C

O C

O/C

Joint O C

Risk 1 (Example) Site Access Unforeseen Ground Conditions Quantity Variations Weather Acts of God/Nature Financial Failure Contractor Inflation of

175

Type of Risk

Risk Identification

Risk Evaluation

Risk Response Planning

Risk

&

Response

Risk

Response

Risk

Management

Knowledge Dissemination O C
O/C

Implementation

Performance Review

Joint O C

O C

O/C

Joint O C

O/C

Joint O C

O C

O/C

Joint O
40

O C C
60

O/C

Joint O C

O C

O/C

Joint O C

Risk 1 (Example) Sub-Contractor Failure Economic Disaster Labor, Materials & Equipment availability Materials and Equipment Quality Owner Furnished Equipment Environmental Control (As impacting on the Project) Environmental Hazards (Project area only) Existing Codes & Regulations Changes in Codes & Regulations Safety at Site Public Disorder Union Strife

176

Type of Risk

Risk Identification

Risk Evaluation

Risk Response Planning

Risk

&

Response

Risk

Response

Risk

Management

Knowledge Dissemination O C
O/C

Implementation

Performance Review

Joint O C

O C

O/C

Joint O C

O/C

Joint O C

O C

O/C

Joint O
40

O C C
60

O/C

Joint O C

O C

O/C

Joint O C

Risk 1 (Example) Errors and Omissions Conflicts in Documents Defective Design Quality of Work Change in Scope of Work Change Order Evaluation and Negotiation Contractor Competence Cost of Legal Process Delayed Payment on Contracts Delays in Resolving Contractual Issues Delays in Resolving Disputes Labor & Equipment Productivity Third Party Delays

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Legal Impossibility Physical Impossibility Buildability Constructability Construction Method /

SECTION 3

For the stages of risk management cycle as stated in Section 2 assume that: (1) there is no essential overlapping of stages, (2) the stages are mutually exhaustive of all possible stages of risk management cycle and (3) success of one stage is dependant on satisfactory performance of the previous stages. Please evaluate the percentage contribution of each preceding stage towards ideal performance of each succeeding stage in risk management cycle and fill in values for AC, BC, AD, BD, CD, AE, BE, CE, DE, AF, BF, CF, DF and EF in the flowing flow chart such that

AC+BC = 100, AD+BD+CD = 100, AE+BE+CE+DE = 100 and AF+BF+CF+DF+EF = 100

Where, the term AC signifies contribution of stage A towards ideal performance of stage C and similarly for BC, AD and others.

178

179

Would you be interested in receiving a summary of the survey outcomes?

Yes

No

Would you be interested in further discussions on the above?

Yes

No

Please return the filled in questionnaires by post, fax, or email to

By Post

By Fax

By Email

Mr. Gangadhar Mahesh Research Student Dept. of Civil Engineering University of Hong Kong Pokfulam Road Hong Kong

852 - 2559 5337 Attn: Mr. Gangadhar Mahesh

gangadhar.Mahesh@gmail.com

THANK YOU FOR YOUR CO-OPERATION AND INVALUABLE TIME

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C-181