Implementing Relational Contracting and Joint Risk Management -

survey results from an ongoing Ph.D. research project at HKU

Mr. M. Motiar Rahman - Ph.D. Researcher

Dr. Mohan M. Kumaraswamy - Supervisor

Prof. Steve Rowlinson - CIB W92 Co-ordinator

The University of Hong Kong

• ‘Contract’ may be treated as– promise of doing something in future– projection of exchange into the future– present communication of a commitment to a future

event

• But ‘present promise’ affects future – by limiting choices that would be available during

contract execution

• All future events can not be perceived or quantified due to uncertainty and complexity– contracts should be flexible – to adjust for future events– in order to effectively address the uncertainties, as and

when they eventualize

Relational Contracting (RC) (1)

• RC considers ‘contract’ as– a process of projecting exchange in the future – relationships among the parties– relationships of inter-related past, present and future

• Parties do not always follow the legal mechanism offered by the written contracts– the relationship itself develops obligations

• RC allows– mutual future planning – sharing of both benefits and burden

• Possibility of problems is anticipated as normal part of the relationship

Relational Contracting (RC) (2)

Relational Contracting (RC) (3)

• Problems are dealt with by– cooperation, restorational techniques, and

adjustment processes

• These processes are– transaction-specific and ongoing-administrative

kind– not a single generalised process

• RC thus provides – the means to sustain ongoing relations– an environment of business fraternity

RC in Practice• RC principles underpin

– partnering, alliancing, joint venturing, relationship contracting

– other collaborative working arrangements– better risk sharing mechanisms

• Present construction organisations follow– both legal and non-legal mechanisms in contracting

e.g: a partnering charter is not legally binding:

if there is any problem - revert to original contract; although ‘partnering contracts’ are also emerging

Risk Management (1)

• Risks are - project-specific- allocated through contract conditions

• Not all risks are foreseeable – nature and extent of risks may change, new

risks may emerge, existing risks may change in importance

– some risks may require joint efforts of all contracting parties for their efficient management

Risk Management (2)

• Target of risk management should be– to minimize the total cost of risks– not the cost to each party separately

• Unforeseen risks need to be managed through a Joint Risk Management (JRM) strategy– as and when they eventualize– under flexible contract conditions– team efforts - if necessary

Extracts from the HKU PhD Research Survey on “Risk Allocation”

• This was the 1st Survey – to identify industry perceptions• Two questions: on perceptions of 41 risk items

– present risk allocation (owner & contractor)– preferred allocation (owner, contractor, JRM)

• 47 responses - av. experience 21.2 years– 20 from Hong Kong, 25 from China, 2 others– FIDIC 25, GCC 8, General 9, Others 5– Consultants 14, Owners 15, Academics 10,

Contractors 8, (grouped as per organisations)– Academics 10, Engineering 18, Managerial 19

Percentage of risk that should be

jointly managed

Number of risks (out of 41, used in the survey) in each category

 Total

Working organization 

CSL CTR OWNNature of present job

ACA ENGG MGR

0 0 0 7 1 0 0 1

1 - 10 12 15 6 13 4 18 10

11 - 20 14 13 17 8 20 12 12

21 - 30 9 9 5 8 13 6 8

31 - 40 6 3 4 6 3 5 7

41 - 50 

1 1 3 1 

1

51 - 60   

1 1   

2

More than 60     

1     

Total No.: 41 41 41 41 41 41 41

Table 1: Average Perceptions on JRM based on groupings of 'working organization' and 'nature of present job'

Joint Risk Management (JRM)• Total sample

– all 41 risk items were recommended for JRM– 29 risk items need 11-50% JRM

• Contractors: 28 risk items need 11-60% JRM

• Owners:– 26 risk items need JRM of more than 10%– 2 risk items need JRM of more than 50%– greater number of risks for JRM in percentage range

slots of 21-30, 31-40 and 41-50 than consultants, contractors and academics

• Managers are more enthusiastic than Engineers

% of risk that should be jointly

managed

Number of risks (out of 41 used in the survey) in each category

Total FIDIC GCC General

0 0 0 0 1

1 - 10 12 20 9 5

11 - 20 14 14 5 11

21- 30 9 5 10 7

31 - 40 6 2 7 11

41 - 50   

4 4

51 - 60   

5 1

More than 60   

1 1

Total No: 41 41 41 41

Table 2: Summary of average perceptions on JRM based on contract categories (i.e. standard conditions of contract)

• This 2nd Survey aimed to find ways to mobilize the industry enthusiasm identified in the 1st survey

• Responses and respondents– 92 from 17 countries, 2/3 from Hong Kong – at least a mid-level managerial position– 65% worked in more than one contracting party– 23 from a contractor company in Hong Kong– 10 years average experience at present organisation– Over 20 years average total experience

• Respondents were requested to add more options• Only extracts of quantitative survey results follow

Extracts from the HKU PhD Research Survey on Implementing RC and JRM

Factors ScoreTechnical capabilities 9.05Approach to joint problem solving 8.97Approach to joint decision making 8.58Timely project completion/ delivery 8.51Similar previous work experience 8.35Creativity/ innovation 8.34Attitude towards team working/ teambuilding 8.27Quality of work/ materials 8.25Attitude to continuous improvement 8.06Approach to negotiation 8.06Willingness for mutual 'learning' 8.00Project management capability 7.97Commitment to exceed project objectives 7.97Adequate resources 7.89Reputation and recognition in the industry 7.85Long-term commitment 7.82Attitude to work place relations 7.56Attitude and performance on safety issues 7.52Reputation on claims and disputes 7.44Organisational culture 7.18Pricing levels 6.78Financial strength 5.84

Notes: (1) 79 responses, (2) scores are out of 10

Table 3: Importance of factors for selecting consultant

Factors ScoreTimely project completion/ delivery 9.18Approach to joint problem solving 9.05Quality of work/ materials 8.93Project management capability 8.91Adequate resources 8.88Attitude and performance on safety issues 8.81Approach to joint decision making 8.79Approach to negotiation 8.71Attitude towards team working/ teambuilding 8.69Technical capabilities 8.61Similar previous work experience 8.58Long-term commitment 8.54Financial strength 8.45Pricing levels 8.43Attitude to continuous improvement 8.31Attitude to work place relations 8.29Willingness for mutual 'learning' 8.19Reputation on claims and disputes 8.13Reputation and recognition in the industry 8.09Commitment to exceed project objectives 8.01Creativity/ innovation 7.93Organisational culture 7.83

Notes: (1) 80 responses, (2) scores are out of 10

Table 4: Importance of factors for selecting contractor

Factors ScoreTimely project completion/ delivery 9.01Attitude and performance on safety issues 8.83Quality of work/ materials 8.78Adequate resources 8.42Pricing levels 8.39Attitude towards team working/ teambuilding 8.35Approach to joint problem solving 8.30Similar previous work experience 8.12Approach to negotiation 8.09Attitude to work place relations 8.04Attitude to continuous improvement 7.86Technical capabilities 7.83Commitment to exceed project objectives 7.64Long-term commitment 7.58Approach to joint decision making 7.55Reputation on claims and disputes 7.51Financial strength 7.49Reputation and recognition in the industry 7.47Willingness for mutual 'learning' 7.36Project management capability 7.00Organisational culture 7.00Creativity/ innovation 6.86

Notes: (1) 77 responses, (2) scores are out of 10

Table 5: Importance of factors for selecting subcontractor

Notes: (1) 79 responses, (2) scores are out of 10

Table 6: Importance of factors for selecting supplier

Factors ALL/79Quality of work/ materials 8.95Timely project completion/ delivery 8.82Pricing levels 8.22Reputation and recognition in the industry 7.25Adequate resources 7.23Approach to negotiation 7.27Long-term commitment 7.03Attitude to continuous improvement 7.09Similar previous work experience 7.04Financial strength 6.82Attitude to work place relations 6.66Technical capabilities 6.90Commitment to exceed project objectives 6.80Approach to joint problem solving 6.75Attitude and performance on safety issues 6.52Attitude towards team working/ teambuilding 6.67Creativity/ innovation 6.54Reputation on claims and disputes 6.58Willingness for mutual 'learning' 6.54Approach to joint decision making 6.27Organisational culture 6.00Project management capability 4.95

Factors Score

Financial strength 8.80

Approach to negotiation 8.66

Approach to joint problem solving 8.64

Approach to joint decision making 8.51

Long-term commitment 8.23

Attitude towards team working/ teambuilding 7.78

Attitude to continuous improvement 7.76

Timely project completion/ delivery 7.65

Attitude and performance on safety issues 7.51

Reputation on claims and disputes 7.50

Pricing levels 7.38

Willingness for mutual 'learning' 7.36

Commitment to exceed project objectives 7.31

Attitude to work place relations 7.24

Reputation and recognition in the industry 7.05

Organisational culture 6.95

Project management capability 6.89

Adequate resources 6.83

Quality of work/ materials 6.63

Creativity/ innovation 6.50

Similar previous work experience 6.39

Technical capabilities 5.28

Notes: (1) 80 responses, (2) scores are out of 10

Table 7: Importance of factors for selecting owner

Importance of Different Selection Criteria for Project Partners - General

• Contractors should have all conducive criteria for RC approaches– score of least important factor is 7.83

• ‘Joint approach’ and ‘responsibility sharing’ related factors are seen to be as the main criteria for selecting different parties

• Contractors should lead the ‘project team’

Specifics

• Consultant– technical capabilities, previous experience,

creativity/ innovation

• Subcontractor– time, performance and safety, quality, adequate

resources, pricing levels

• Suppliers– quality, time, pricing levels

• Owner– financial strength, long term commitment

Table 8: Perceptions on Who should be brought in at Which stage of RC oriented approach for JRM

Stages / Options

Consu-ltants (88)

Contr-actors (87)

Sub-contr (79)

Supp-lier

(81)

Inception of project 73 21 4 4

During preliminary/ early stage of design 13 38 17 14

Towards end of design 1 14 20 24

After design but before tendering 1 11 11 10

During tendering but before submission of bid 2 15 14

After awarding the contract 1 10 8

No need to consider 2 7

Note: Figures in parentheses ( ) are number of responses

Items/ Factors Average STDVMutual trust 9.10 1.25Open communication among the parties 8.85 1.29Understanding each-other's objectives 8.76 1.32Equitable and clear allocation of foreseeable and quantifiable risks 8.69 1.58Attitude of the project participants 8.57 1.50Readiness to compromise on unclear issues 8.28 1.26Awareness of risks and rewards 8.24 1.35Effective coordination 7.94 1.54Collective responsibility, instead of personal responsibility 7.87 1.72Alignment of objectives 7.83 1.86Professional ethics 7.79 1.84Agreed process for dispute resolution 7.69 1.72Frequent formal and informal meetings 7.55 1.55Developing a partnering culture, first, within the organisation 7.28 1.87Agreed mechanism for performance appraisal 7.20 1.82Compatible organisational cultures 6.94 1.91Pioneering role of the owner/ client 6.91 2.08Possibility of future work 6.91 2.03Partnering workshop 6.77 1.86Partnering experience 6.75 1.86Role of partnering facilitator 6.52 2.00Legal implications 6.29 2.02Cost of implementing partnering 5.69 2.25Jointly organised social/ cultural activities (e.g. karaoke, sports) 5.17 2.25Traditional owner, contractor, subcontractor hierarchy 4.05 2.20

Table 9: Importance of factors for developing a successful Relational Contract for implementing JRM

Factors for RC and JRM- Specifics

• ‘Mutual trust’ is the most important factor; while ‘traditional owner, contractor, subcontractor hierarchy’ is the least important factor

• ‘Professional ethics’ is more important than ‘possibility of future work’ and ‘partnering experience’

• ‘Trust’ and ‘responsibility’ related factors are more important than ‘legal’ and ‘monetary’ issues

• ‘Developing partnering culture’ is more important than ‘role of partnering facilitator’

Options

All

(87)

Acad-emic

(13)

Cons-ultant

(12)

Cont-ractor

(43)

Own-er

(19)

Provide contingency in contract and assign to the contractor when they materialise 5.71 4.62 3.83 6.42 6.05

Provide contingency in contract and assign to the party ‘best able to handle’- when they occur 7.79 7.69 8.67 7.63 7.68

Risk sharing or JRM, if needed 8.43 9.31 8.17 8.40 8.05

Table 10: Perceptions on dealing with risks that are not foreseeable and quantifiable at planning stage

Note: Figures in parentheses ( ) are number of responses

Options

All

(87)

Acad-emic (13)

Cons-ultant (12)

Cont-ractor (43)

Own-er

(19)

No need to take any burden, assign it to the other party(ies) by contract

3.45 2.69 2.5 3.74 3.89

If given opportunity – assume the risk, reluctance of other party will help to profit more

4.60 4.23 3.42 5.16 4.32

Risk sharing or JRM, as needed 8.69 9.23 8.50 8.81 8.16

Note: Figures in parentheses ( ) are number of responses

Table 11: Perceptions on dealing with risks that are clearly seen and quantifiable, but need joint efforts

Options

All

(86)

Acad-emic (13)

Cons-ultant (12)

Cont-ractor (43)

Own-er

(18)

Adjust and/ or extend contract provision

6.43 5.15 6.17 6.49 7.90

Re-allocation of risks at their occurrences, if needed

6.56 5.85 6.83 6.84 6.22

Risk sharing or JRM, if needed 8.21 8.00 8.08 8.26 8.33

Note: Figures in parentheses ( ) are number of responses

Table 12: Perceptions on dealing with risks that unforeseeably change in nature during project progress

Concluding Observations• Worldwide growing enthusiasm towards RC and

JRM

• Owners’ should initiate the ‘new’ approach– they effectively control project organisation and

contract content, and select other parties– project specific approaches

• Knowledgeable project partner– learn and understand the approach and it’s procedure– identify clearly what each party needs– to realise that 'they need to pay properly for what they

need’ and ‘need to work properly for the proper pay’

Future Research

• A Model will be formulated for JRM

– to provide a basic Framework for Owners/Clients to target JRM

– through project-specific RC approaches

THANK

YOU