Contracts and Incentives

The separation between researchers who believe partnering can be achieved through formal mechanisms, and those who view partnering as an informal and organic development, is also reflecting their attitude to the importance of contracts and incentives (Pesämaa et al., 2009). Bresnen and Marshall (2000), for instance, emphasised that relying on formal contracts alone is not sufficient to achieve the desired change in the project participants attitudes towards collaboration. On the other hand, Bygballe et al. (2010) also found researchers who argue that the construction industry is characterised by a system-based trust which is facilitated through contracts.

Through a questionnaire, with 113 qualified responses, Suprapto et al. (2016) found that there is not a direct effect between the contract type or incentives and the project success. They did, however, find that the use of a partnering/alliance

35 contract (instead of lump-sum or reimbursable contract) and proper incentives have an indirect positive effect on the project success, by improving the relational attitudes and quality of the teamwork (Suprapto et al., 2016). Also, Lehtiranta (2011) found that relational contracting improves both the social and overall performance by addressing the collaborative work as a focal priority in project implementation.

The contracts do, in general, legally distribute the financial incentives, risks and other rights between the parties before the construction starts (Lavikka et al., 2015).

Traditionally, the contract terms are so strictly applied that little, or none, consideration is given to sustain long-term relationships (Akintan & Morledge, 2013). The formal and comprehensive contracts facilitate a high emphasis on competition (Eriksson, 2008), yet almost all respondents in the survey of Eriksson and Laan (2007) use those contracts.

The choice of contract should depend on various circumstances, such as the product/process uncertainty, desired allocation of risk, the owners’ capabilities and market conditions (Suprapto et al., 2016). If the aim with the relation is to achieve innovations, Eriksson et al. (2007) emphasise that it should be a fair sharing of risks among the parties and minimal contractual constraints. Further, Suprapto et al.

(2016) found that a proper contract will encourage the contract parties to work rationally together to achieve the best possible outcomes, in accordance with their common objectives. They concluded that a partnering/alliance contract should be used, if possible, as it enhances the relational attitudes. They did, however, emphasise that it will come with a cost as the parties must translate their shared norms into effective teamwork throughout the project lifecycle.

In a road maintenance project in the Netherlands, Hartmann and Bresnen (2011) saw that the contract between the client and main contractor changed when they aimed at achieving a partnership. Among the reasons for the change were requirements of greater value with fewer resources, a lack of investments in innovative ideas, and an adversarial relationship (Hartmann & Bresnen, 2011). The new contract involved a longer-term agreement with a possibility for extensions, it

36 had a functional description, and the main contractor was given a much more active role with less direct supervision by the client (Hartmann & Bresnen, 2011).

The contract in the road maintenance project is an example of a dyadic contract between the client and main contractor. Instead of having multiple dyadic contracts in the project, researchers have suggested, and some practitioners have used, multi-party contracts (Lavikka et al., 2015). In the multi-multi-party contracts, risk and rewards are shared between at least the client, designers and main contractor, at the same time as they make collaborative decisions and agree to not sue each other during or after the project (Lavikka et al., 2015). Lavikka et al. (2015) conducted a comparative case study of two complex constriction projects, one using multiple dyadic contracts and the other a multi-party contract. They found that both contract forms can lead to successful results, but that the case with multiple dyadic contracts had to use more procedural coordination mechanisms (see section 3.3.3) to achieve the desired collaboration.

Incentives, in terms of performance-related bonuses, are often included in contracts to motivate the contract parties to reach certain objectives (Eriksson et al., 2007;

Osipova & Eriksson, 2013; van Weele, 2014). From their survey, Suprapto et al.

(2016) found that if the aim of the incentives is to limit the owners’ involvement in the process, incentives should be avoided as it can negatively affect the relational attitudes. On the other hand, if proper incentives are chosen for the right reasons they can have a positive effect on the relational attitudes, which by improving the teamwork can improve the project result (Suprapto et al., 2016).

Hosseini et al. (2016) found target price by sharing bonuses and maluses as the most important interaction element to improve the cost-effectiveness in projects, as it gives strong incentives to save costs and improve the productivity. Further, they found that the architect and subcontractors should be included in the sharing. The latter is in accordance with what researchers (e.g. Eriksson, 2008; Pesämaa et al., 2009) have found as important to facilitate collaboration, namely that incentives should be based on team performance (e.g. total cost) rather than the performance in each specific contract. Eriksson et al. (2007) added an interesting aspect to this topic, as they found that the financial incentives should only be based on the

37 collective performance if increased collaboration is considered more important for innovation and value creation than individual contributions. At the same time, they emphasise that too much faith should not be placed in such incentives, but that they can serve as an additional basis for motivation and commitment. The collaborative procurement approach should also include “soft” incentives, such as an opportunity for future work and better working environment (Eriksson et al., 2007).