THE PERCEPTION OF ADOPTION OF NIGERIAN PROFESSIONALS TOWARDS RELATIONAL CONTRACTING

CHAPTER ONE

1.0   INTRODUCTION

1.1   BACKGROUND AND NEED FOR THE STUDY

Construction project teams are unique entities, created through a complex interaction of factors, with inter-disciplinary teams from many countries, varying roles, responsibilities, goals and objectives (Goodman and Chinowsky, 1996). Collaboration and teamwork are therefore crucial since sharing up-to-date information between participants lead to minimization of errors, reduction of time delays and breaking the widespread rework cycle, and the formalisation of these issues through partnering mechanisms allows a sustainable relationship between participants to evolve. Benefits of collaborative, rather than adversarial, working relationships within construction organisations are well documented.

Furthermore, Partnering in contracting is actually a commitment between the contracting organizations mainly (clients and contractors) to avoid adversarialism and cooperate with each other in order to achieve their common business objectives(CII, 1991; Bennett and Jayes, 1995). Therefore, a working and a more comprehensive definition of partnering can be a long-term commitment between two or more organizations for the purpose of achieving special business objectives‘ (NEDO, 1991).

It can be considered as an individual project mechanism or can be considered as a long term strategy. Alliancing is normally assumed to be a long term business strategy linking together client, contractor and supply chain. The two serves as a variance of Relational Contracting.

Relational contracting is based on a recognition of and striving for mutual benefits and win-win scenarios through more cooperative relationships between the parties. It embraces and underpins various approaches, such as partnering, alliancing, and other collaborative working arrangements and better risk sharing mechanisms. Relational contracts are usually long-term, develop and change over time, and involve substantial relations between the parties.

Relational contracting goes further than this and brings in the whole philosophy of the value chain and the linking of the inter-dependent parts within the construction project as a key business objective.

If we closely analyze the afore definitions or concepts of relational contracting, we will observe that they all have a few things in common like, common objectives, inter organizational trust, procedures for conflict resolution and my working definition of relational contracting seem to have all in a way that long term commitment is created only when mutual trust exist among organizations. Further, parties to relational contracting strive to achieve specific business objectives by maximizing their effectiveness and minimizing conflicts.

1.2   STATEMENT OF THE PROBLEM

Construction industry is characterized by increasing competition, rapidly evolving client preference, rising client expectations, continually changing competitor actions and uncertain and changing conditions leading to high levels of uncertainty and opportuinism. Such high levels of uncertainty are bound to affect the contractual relationship that exists in the buyer-seller relationship, client-contractors relationship. The considerable amount of literature relating to uncertainty in the building construction industry suggests that this has long been a problem. For example, Crichton’s (1966: 57) report concluded that “nothing contributes more to the industry’s inefficiencies than uncertainty”. The industry has generally been described as being contested, fragmented and highly adversarial with inherent problems (Latham 1994, Egan 1998, Cox and Ireland 2002). These inherent problems include adversarial relationships between clients and contractors; inadequate information exchanges and inappropriate contracting styles.

In an attempt to mitigate these inherent problems, the industry has responded in various ways, including the formation of long-term contracts and collaborative working relationships. These include partnering, project and strategic alliances, joint ventures, supply chain management, lean construction and others. Such initiatives are supported and embraced by the concept of ‘relational contracting’ (RC) Hence this research work is to help us in assess the extent to which the professionals have adopted the use of the relational contracting in the construction to mitigate the above problem.

1.3   RESEARCH QUESTIONS

To guide the study and achieve the objectives of the study, the following research questions were formulated.

Ø  What are the difference dimensions of relational contracting practices

Ø  What are the ways/levels by which relational contracting practices can be deployed in public project.

Ø  What are the barriers to the adoption of relational contracting practices

Ø  What are the benefits of relational contracting

1.4   AIM AND OBJECTIVES

AIM:

The research work has been designed to assess perception of Nigeria construction professionals towards adoption of relational contracting (perspectives of Enugu construction professionals). Moreover, the aim of the research can be broken down into the following objectives;

OBJECTIVES:

Ø  To identity and document the different dimensions of relational contracting practices

Ø  To assess the level of deployment of relational contracting practices in public project

Ø  To assess the barriers to the adoption of relational contracting practices

Ø  To assess the benefits of relational contracting

1.5   SIGNIFICANCE OF STUDY                                                                       

The findings of this study will redound to the benefit of the construction industry considering that relational contracting plays an important role in construction today by reducing the tendencies of opportunism and to mitigate risk or uncertainties.  Moreover the project’s goal is to create awareness of the benefits of relational contracting to the construction professionals, which include time and cost savings (preventing delay) achieved through an established relationship among the construction teams.

1.6   SCOPE OF THE STUDY

The research focuses mainly on assessing the perception of Enugu construction professionals towards adoption of relational contracting.

1.7   LIMITATION OF THE STUDY

This research has been limited to the adoption of relational contracting practice by Enugu construction professionals in Nigeria.

1.8   OVERVIEW OF THE STUDY

Chapter one is the introduction which provides the background of the study, statement of the problem, research questions, aims and objectives of the study, overview of the study, scope of the study, limitations of the study and definition of special terms.

Chapter two discusses the literature review, different citations of scholars and highlights facts on and about the variables.

Chapter three exposes the research design and methodology processes, area of study, sources of data collection (primary and secondary sources of data), research design which entails “ Target population, sampling, sampling techniques, data collections instrument, procedure for data collection, tools for data presentation analysis”.

Chapter four discusses the data presentation and analysis and chapter five treats the summary of findings, conclusion, recommendation and area of future research relating to the work.

1.9   DEFINITION OF TERMS

Trust: A firm believe in the reliability, truth, or ability of someone or something. An arrangement whereby a person (trustee) holds property as its nominal owner for the good of one or more beneficiaries.

Partnering: Means establishing a long term win-win relationship based on mutual trust and teamwork, and on sharing both risks and rewards. Partnering agreement can be between labour and management, subordinates and executive, suppliers and customers. The objective is to focus on what each party does best, by sharing financial and other resources, and establishing specific roles for each participant.

Alliancing: Is an agreement between two or more individuals or entities stating that the involved parties will act in a certain way in order to achieve a common goal. It is in effect, a virtual organisation.

Relational contracting: Relational contracting is defined as the working relationships among the parties who do not often follow the legal mechanism offered by the written contracts, and instead govern the transactions themselves within mutually acceptable social guidelines (Macaulay, 1963).       

CHAPTER TWO

LITERATURE REVIEW

2.0    LITERATURE REVIEW

This chapter presents the result of an in-depth literature review on the effect of relational contracting in construction industry as discussed and commented by different authors in the field. It critically examines the definition of relational contracting, relational contracting tenets, step-by-step approach in creating a relational contracting, norms and principle of relational contracting, barriers of relational contracting and the benefits of relational contracting.

The review of relevant literature is a very important aspect of any successful research work, this is so if the literature must be educative, informative and also if it contributes to the existing body of knowledge.

This is the part of research work that broadens, enlightens and keep researchers informed on the existing information in the area of study.

GENERAL CONCEPT OF RELATIONAL CONTRACTING

A business contract that does not contain a high degree of planning of the exchange relationship has a greater opportunity for good faith disputes (Macaulay, 1963). Traditional contracting methods do not provide sufficient provisions for addressing the future events that will affect project relationships, nor can they. In a field as uncertain and complex as construction, these events cannot be perceived or quantified with accuracy. Therefore contracts should be flexible in order to adjust for future events and address uncertainties when they arise (Macneil, 1974, 1980). In order to be flexible, a contract must focus on relationships.

Relational contracting is a topic that has seen increased academic focus, but there is still no consensus on a precise and comprehensive definition of the concept (Chan et al, 2010). Ludwig Wittgenstein argued that complex concepts are unable to be defined in this traditional way because there may not be a single set of characteristics that are common for all variants of a concept (Nyström, 2005; Yeung et al., 2007). He likened this idea to the resemblance between family members. Some of them may have the same type of nose, ears, or eyes, but no one feature is common to every member. However, there is still a family resemblance common to all the members of the family (Kenny, 1975).

This is a very appropriate way to define relational contracting. While no specific feature is maintained throughout every example of it, a family resemblance is maintained. Wittgenstein’s concept has been previously applied to partnering (Nyström, 2005) and alliancing (Yeung et al., 2007).

More recently, Chan et al. (2010) utilized the Wittgenstein concept and both of these previous researchers’ work to develop a model of the elements of relational contracting. Chan et al. identified twelve elements that form the family resemblance model (Figure 1). These twelve elements provide one of the best definitions of relational contracting available in the literature, and they outline separate concepts that can be used to create a method of improving project performance.

Figure 1 Wittgenstein Model (Chan et al., 2010)

Using the terminology of one of the pioneers of relational contracting Wigmore Professor at Northwestern University Ian Macneil, Psychological research has revealed the troublesome fact that evolution has made us ill-equipped to make good plans and at the same time well-equipped to believe we are good planners. The result is a planning fallacy leading to the contracting paradox, which is the delusion that we write contracts to make plans, but we cannot really plan accurately. And, as a nice twist, we trick ourselves into believing that we can plan.

For centuries much of the business world ran on “handshake deals,” especially when it came to buyer-supplier relationships. When he researched the use of contracts in 1963, Professor Stewart Macaulay discovered that: “Businessmen often prefer to rely on a ‘man’s word’ in a brief letter, a handshake, or common ‘honesty and decency’ – even when the transaction involves exposure to serious risk.”

At about the same time, legal scholar Ian Macneil coined the term relational contract, referring to the social contract of moral obligations guiding behavior in business that Macaulay and others had discovered.

Relational Contracting (RC) evolved far way back in 1963 when it was initially established by Macaulay (1963), a legal scholar. Based on Macaulay‘s (1963) work, Macneil (1980), also a legal scholar develops social contract theory that takes into consideration the governance of exchange in contractual relations between firms from both the economic and social perspectives. The social contract theory is well recognized as Macneil‘s relational contract theory, in which Macneil defines contract as no more and no less than the relations among parties to the process of projecting exchange into the future' (Macneil, 1980, p.4).

Relational contracting is a philosophy or a set of principles that are adopted in a contract. Relational contracting is defined as the working relationships among the parties who do not often follow the legal mechanism offered by the written contracts, and instead govern the transactions themselves within mutually acceptable social guidelines (Macaulay, 1963). Relational contracting focuses on trust and partnership (Colledge, 2005). Rahman and Kumaraswamy (2004, 2005) found that relational contracting provides the means to sustain ongoing relations in long and complex contracts by adjustment processes of a more thoroughly transaction-specific, continuous and administrative kind.

The importance of good relationship among parties in the construction industry has been accepted as one of the central issues of an organization‘s success. The growing acceptance to the relational contracting approaches that representing partnering, supply chain alliances and other types of collaborative working relationships shows how construction organizations are moving forward from the traditional adversarial culture to a more harmonious working environment.

After extensive research, Macneil concluded that there are primarily two kinds of contracting engagements; ‘transactional’ which is product-oriented and ‘relational’ which is process-oriented. His contention was that the latter is more consistent with the flow and value generation production theories advanced by the Lean Construction community. This was substantiated by further discussion of two salient aspects of contracting- ‘risk’ and ‘(aversion to) collaboration’. Macneil outlines three fallacies related to risk which render conventional contracting insufficient when it comes to contracting organizations grappling with global competition and still trying to maintain profit margins and deploying cost-effective, time-saving and quality-improving methods.

A relational contract provides the means for sustaining long-term and complex contracts with a high degree of flexibility in order to allow parties to express their detailed knowledge in specific situations and adapt to new environments (Macneil 1978, 1980; Joskow 1987, 1990;

Relational contract is a contract whose effect is based upon a relationship of trust between the parties. The explicit terms of the contract are just an outline as there are implicit terms and understandings which determine the behavior of the parties. It is one agreement, signed by the owner, architect and the contractor; that is later “joined” by sub consultants and sub contractors. There are no “general conditions”.

2.1   PARTS OF RELATIONAL CONTRACTING

Ø  Project Partnering,

Ø  Project Alliancing,

2.1.1 Project Partnering: Every contract contains an implied commitment requiring each party to not hinder or delay the performance of any other party (George A. Fuller Co. v. United States, 1947). This sets a basic contract standard of cooperation. The objective of partnering is to change this from a standard of non-interference to a team-based standard of mutual benefits. The basis of partnering is the partnering agreement, a non-contractual but formally structured charter in which each party promises to act in the best interest of the project and the project team (Chan et al., 2001). The partnering process utilizes tools such as regular meetings, partnering workshops, team building exercises, declarations of common objectives, and dispute resolution mechanisms. Its goals are to create an atmosphere of communication, problem solving, harmonious working relationships, and shared goals. While this process does deliver mutual benefits, it falls short of guaranteeing that each party will equally benefit (Walker et al., 2002). It encourages a team approach, but gains and losses are still allocated severally, not jointly. Partnering does not replace the obligations to adhere to the formal contract, and it lacks the definite incentives required to elevate collective interests above those of the individual.

2.1.2  Project Alliancing:

Project alliancing differs from project partnering in that it is both a relationship management system and a project delivery system (Chan et al., 2010). Traditional contracting and partnering allocates responsibilities and risk to individually parties that severally incur consequences for success or failure of the project. Alliancing requires a ‘joint’ rather than a ‘shared’ commitment; parties consent to their contribution levels and jointly incur rewards or losses (Walker et al., 2000). Three key features define a ‘pure’ alliance:

1. Parties are all responsible for performing the work and assume collective ownership of risk.

2. Participants share in the “pain” or “gain” depending on how actual project outcomes compare to targets.

3. The project is governed by a joint body where all decisions must be unanimous (Chan et al., 2010).

While alliancing jointly shares the risk and rewards of a project, the parties remain legally independent organizations with separate ownership and management (Gerybadze, 1995).

2.2   APPROACH TOWARDS RELATIONAL CONTRACTING

The central premise of relational contracting is that it is trust-based, while still allowing for a legal core. A relational contracting approach implies:

Ø  Moving towards commitment to common goals (outcomes).

Ø  Recognition of and respect for the roles and expertise each has independently of the other.

Ø  Risk allocation that involves agreed risk-sharing (including policy risks) between the parties, and, conversely, mutual acknowledgement of the gains from the relationship.

Ø  Each party well-informed about the other, with appropriately open communication.

Ø  Each party motivated to maintain credibility and reputation with the other, and ultimately with the client group the service is designed to serve.

The rationale of relational contracting is the value that accrues through taking a multiyear, holistic approach to the contracting relationship, rather than focusing solely on exchanges taking place at any one point of time. The contract contemplates a future relationship, rather than being conducted separately from that possibility.

However, a relational agreement brings added discipline because it codifies the framework for the relationship the forums, behaviors and mechanisms within which interactions will occur. It recognizes that relationships are not just person to person, but also organization to organization.

Therefore formal definition of a relational contract, at the far right end of the continuum, is seen as a legally enforceable written contract establishing a commercial partnership within a flexible contractual framework based on social norms and jointly defined objectives, prioritizing a relationship with continuous alignment of interests before the commercial transactions.

Relational contracting has equal relevance to achieving desired policy outcomes, because it creates an environment that implicitly and explicitly promotes qualitative, or process, ‘outcomes’ such as co-operation and collaboration.

Over time, a relational contracting approach can potentially allow formal specification to be replaced, to a degree, by flexibility in the terms of the relationship and how it is managed by each party.

Moreover Firms are riddled with relational contracts: informal agreements and unwritten codes of conduct that powerfully affect the behaviors of individuals within firms. There are often informal quid pro quos between co-workers, as well as unwritten understandings between bosses and subordinates about task-assignment, promotion, and termination decisions. Even ostensibly formal processes such as compensation, transfer pricing, internal auditing, and capital budgeting often cannot be understood without consideration of their associated informal agreements.

Business dealings are also riddled with relational contracts. Supply chains often involve long-run, hand-in-glove supplier relationships through which the parties reach accommodations when unforeseen or uncontracted for events occur. Similar relationships also exist horizontally, as in the networks of firms in the fashion industry or the diamond trade, and in strategic alliances, joint ventures, and business groups. Whether vertical or horizontal, these relational contracts influence the behaviors of firms in their dealings with other firms.

Relational contracts within and between firms help circumvent difficulties in formal contracting (that is contracting enforced by a third party, such as a court). For example, a formal contract must be specified ex ante in terms that can be verified ex post by the third party, whereas a relational contract can be based on outcomes that are observed by only the contracting parties ex post, and also on outcomes that are prohibitively costly to specify ex ante.

2.3   FACTORS THAT ENFORCES THE CREATION OF RELATIONAL CONTRACTING

There are quite challenging conditions required of both parties to make relational contracting work in practice. The range of critical success factors includes the requirements that:

Ø  Each party relinquish some of its independence, that is becomes more inter-dependent on the other (literature suggests that an organization cannot build trust while seeking to maintain leverage over another);

Ø  Both parties believe they will gain by becoming a more valuable resource to the other;

Ø  Both parties acknowledge that the other will prize its self-sufficiency, and that inter-dependence does not equate with loss of this;

Ø  The relationship involves sharing sensitive information, investing effort in understanding each other’s business and customizing systems to serve the mutual interests in the contract better.

A relational contract thus allows the parties to utilize their detailed knowledge of their specific situation and to adapt to new information as it becomes available. For the same reasons, however, relational contracts cannot be enforced by a third party and so must be self-enforcing: the value of the future relationship must be sufficiently large that neither party wishes to renege.

There are two theoretical approaches to ‘relational contracts’. The first theoretical approach to relational contracts is described as the ‘norms-based’ approach, while the second is that of a group of organizational economists and is often referred as the ‘incomplete contracts’ approach. In comparison only a limited number of empirical studies have been undertaken.

2.4   THEORIES OF RELATIONAL CONTRACTING

As a theoretical movement, relational contract theory can be considered as one attempt to take into account all the surrounding circumstances of relationships, which was split into two major streams of theoretical enquiry into the analyses of contracts:

 a) the norms-based approach; and,

 b) the organizational economists’ study of incomplete contracts.

2.4.1 The norms-based approach

The norms-based approach evolved out of the “Relational Contract Theory”1 developed by Macneil (1974, 1975, 1985, 1987, 2001). Macneil is a law scholar who has challenged lawyers’ traditional premise that all contracts are mere transactions. In particular he stressed the role of norms in determining the manner in which commercial exchanges operate in practice and introduced the concept that individual transactions lie on spectrum ranging from ‘discrete’ through to ‘relational’.

2.4.2   The organizational economists’ study of incomplete contracts

The organizational economists’ study of incomplete contracts recognizes that, absent vertical integration, some form of contract is needed between a supplier and a customer. However, such contracts will almost always be ‘incomplete’ because they contain some ‘third-party unenforceable’ elements. Such elements are described by economists as the relational elements of a contract and are those parts which help firms “circumnavigate difficulties in formal contracting, that is contracting enforced by a third party, such as a court” (Baker et al., 2002, p.40).

The ‘relational contracts’ analyzed by economists do not map exactly onto the concept of ‘relationships’ as described in Macneil’s studies but they do have a common viewpoint which is that all contracts contain a relational element. Macneil reaches this conclusion because he asserts that even a ‘discrete exchange’ has relational elements as a contract exists within society. Economists argue that, because it is almost impossible to write a contract which does not include some elements which cannot be enforced by a third party, all contracts will contain relational elements. Thus, both Macneil and economists agree that all exchanges are, to some extent, relational, but the overall goal remains the same. The main idea is to enhance the project performance by maintaining long term relationship of parties, which acts as a buffer under the constraints of uncertainties, complexities, short lead time and unfavorable market competition.

2.5   RELATIONAL CONTRACTING TENETS

However, as the nature of what we are exchanging (more intangible goods or services) and the environment in which we operate (more global, faster changing, less predictable and more regulated) grows more complex, relational contracts are increasingly riskier because of the extent of the ‘incompleteness’ or uncertainty in contracts. Incompleteness has grown from an estimated average of around 5% when Ian Macneil was writing in 1960 to around 35 – 40% today.

Successful business relationships find ways to proactively address this incompleteness in a fair and balanced manner. IACCM research has shown that there are nine “relational tenets” that typically recur in successful partnerships based on relational contracts. Those tenets are also areas of unrecognized risk. In other words, the research showed that their absence increases the likelihood of failure, yet they rarely appear in any risk register.

They include,

Ø  Communication

Ø  Risk allocation

Ø  Problem solving

Ø  No-blame culture

Ø  Joint working

Ø  Gain and pain sharing

Ø  Mutual objectives

Ø  Performance measurement

Ø  Continuous improvement

2.5.1   Communication: 

A defined framework for communication planning – what, when and how – and a forum established for monitoring the effectiveness of communications and driving future improvement.

2.5.2    Risk allocation:

Ensuring that the allocation of risk under the contract does not act as a disincentive to collaboration and that there are methods established to deal with the unknown or unexpected.

2.5.3    Problem solving:  

Agreeing on principles for the way that problems or future misalignments and change requirements will be identified and resolved, including clarity over review and escalation procedures and paths.

2.5.4    No-blame culture:

Establishing operational principles that focus first on resolution and the principle ‘we are in this together’, but with clarity over individual roles, responsibilities and accountability for performance

2.5.5   Joint working:

Defining the benefits and rationale for joint working and establishing criteria to determine when and for how long it is required.

2.5.6   Gain and pain sharing:

Ensuring the allocation of risk and reward provides each party with the right incentives for success and for introducing added-value through continuous improvement and innovation.

2.5.7    Mutual objectives:

Aligning goals and objectives across the parties to ensure consistency or understand different interests; establish where there are areas of uncertainty and the likelihood of changes in objectives over time.

2.5.8    Performance measurement:

Determine the measures and performance indicators that are critical to success for each party and ensure there are methods for shared data gathering and review.

2.5.9    Continuous improvement:

Develop a framework for delivery of continuous improvement and verify that the necessary mechanisms exist; for example through the approaches established for communication, gain share, performance measurement.

With the promotion of the use of a structured process to create a relational contract, we recognize many organizations may find themselves in an existing relationship and it is impossible to go back and lay the foundation from the beginning. If you are like many organizations, you may have entered into discussions with the intent to have a more strategic relationship, but along the way found you created a more traditional transactional contract. As mentioned previously, transactional contracts are built around classical legal theories of risk allocation, which often leads to frustrations and tensions, as the arm’s length nature of the contract structure encourages more opportunistic and adversarial behaviors. If this has happened in a relationship you are involved in, do not become disenchanted because you got out the gate wrong. We encourage you to not give up. Rather, consider embedding as many of the relational tenets as possible into your existing relationship with the goal to improve the relationship, moving from left to right on the continuum. For example, try adopting a no-blame culture and instead seek to improve processes for managing performance and joint problem solving to get to the root cause and focusing on accountability, rather than blame. Or perhaps develop processes to improve communications and proactively managing changes.

2.6 STEP-BY-STEP APPROACH IN CREATING A RELATIONAL CONTRACTING:

A journey towards a relational contract can start by the parties implementing one and more of the nine relational tenets. While this will definitely benefit both parties, the full value from relational contracting will not be realized until the full relational contract with all its components is implemented.

A key goal of a relational contract is to create a continuous alignment of interests throughout the contract term. As we pointed out in the introduction, to achieve the best results it is important to place equal importance on both the process of entering into the contract as well as on the content of the relational contract.

There are two main reasons why the process matters as much as the content of the contract. The first reason relates to what we explained at the end of Part 2. Evolution has given us a dualistic nature; a tendency for both opportunism and a strong sense of fairness. The relational contract attempts to build on and leverage our sense of fairness while avoiding opportunism and the high transaction costs and value leakage that come with it. While it is possible to adopt relational contracting tenets at any point in a relationship, using a process to lay a strong foundation at the outset of a relationship is the easiest way to success because it helps us avoid opportunism from the start.

The importance of this is well illustrated by the research of Kathleen Vohs, professor at Carlson School of Management, University of Minnesota. Vohs’ research shows how money makes us egoistic.30 For example, in one experiment some individuals were exposed to words and thoughts about money and some were not. The individuals were then tested for their willingness to help others. Those individuals exposed to money prior to being asked to help others showed a significantly lower willingness to help than individuals who had not been exposed to money. Vohs’ work suggests it is critical not to start a relational contracting process by negotiating the deal, where money is always a key component. Instead, the seeds of a non-opportunistic relationship must first be cultivated, by which our opportunistic tendencies can later be avoided or at least minimized.

The second reason we recommend using a formal process at the start of the contracting process is to ensure organizations and individuals feel there has been a fair process for establishing the contract. The situation is analogous to legislation in a democracy. In legislation, both the content and the process for generating the content matter. A law adopted through democratic voting that denies a group of people fundamental rights will be fair from a process perspective, but will be unjust from a substance perspective. Likewise, a law adopted by a dictator giving equal voting rights to men and women will be just from a substance perspective, but will be unfair from a process perspective. If the process is perceived as unfair, the adopted laws will lack legitimacy and the people’s willingness to follow them will be diminished.

For these two reasons, we believe the process for developing the relational contract is equally as important as the contract’s content. The process of negotiating and jointly creating the relational contract is not just a means to get to the written document, but an important part of creating what is actually in focus: the relationship. As outlined in Part 1, there are five essential focus areas for developing a relational contract and nine main relational tenets. We use these five focus area to outline each of the high-level steps in the relational contracting process. Through the process, the nine relational tenets are also implemented.

More still, traditional contracts are formulated on two foundations – price and power. Within these parameters, there is little room for shared values or principled governance. Therefore, one of the main reasons why organizations fail to implement relational tenets into their contracts, moving from the left to the right on the continuum, stems from using conventional procurement and contracting processes that are not fit for establishing the trust and aligned interests needed to succeed with relational contracting.

For this reason, using a formal process or steps and framework for mutually creating a relational contract is recommended. 

1.      Focus on the relationship, not the deal

2.      Establish a Partnership

3.      Embed social norms in the relationship

4.      Avoid and mitigate risks by alignment of interest

5.      Create a fair and flexible framework

2.6.1   FOCUS ON THE RELATIONSHIP, NOT THE DEAL:

This step is designed to help you build the trust necessary to focus on the relationship. It includes ensure alignment within your own organization and using a process for choosing a partner that considers relational competencies in addition to service offerings, quality levels, etc.

To focus on the relationship and not the deal can be detailed by picking out a classic from the library based on an excellent analogy of what it means to have a long term view versus a short term view by “thought leader” Jim Collins, in his book Built to Last (co-written with Jerry Porras). The book provides a telling comparison between successful and less successful companies by using the terms ‘clock builders’ and ‘time tellers.’  Some companies are successful because they have amazing products and services, but their success fades when those products and services fade in popularity. When the exchanges planned for in the deal have been carried out, the relationship terminates and no more value is created.  Those companies are time tellers. Other companies have successful products and services because they are created by amazing companies, clock-builders who will generate profits year after year by always producing new products and services that the market wants. In the race of the market, it is always the clock builders that win in the long run.

In relational contracting, instead, the focus is on building a clock, that is a relationship that can continue to generate value when all the transactions of the initial deal have been carried out. This means the parties must begin discussions with a potential partner that send signals about the importance of the partnership, and not the importance of the deal.

To focus on the relationship instead of the deal has important consequences for both the contracting process and the actual contract content and this can be achieved by:

§  First, an organization must seek to create trust. Much has been written on the importance of building and sustaining trust in a relationship. Trust is generated when there is alignment between words and actions, i.e. when you can feel confidence that what someone is saying also will be followed by their actions. You can trust a person that shows integrity in this sense. But trust is not only something shown by and to individuals. There is such a thing as organizational trust and organizational integrity. To build trust, the organization must speak with one voice, or at least not with inconsistent voices. But since every organization is made of individuals, it is critical to identify all relevant stakeholders within your own organization as early as possible that may impact the trust level in the relationship you are about to enter into. And in addition, it is important to achieve alignment of goals and objectives among those stakeholders, laying the foundation for later on implementing the relational tenet of mutual objectives.

§  Second, organizations must seek to find partners – not just vendors to provide a good or service. An interesting finding is that most organizations shift to relational contracts with pre-existing relationships by converting their transactional contract into a relational contract. But what if your organization does not have an existing business partner to fulfill a particular need? In that case, it is necessary to first find the right partner.

To achieve this first step, one needs to Identify all relevant stakeholders involved in the process, including top management, external advisors, procurement and sales managers. Ensure alignment before approaching potential business partners.

2.6.2    ESTABLISH A PARTNERSHIP:

This step is designed to explore and lay the foundation of trust, transparency and compatibility between the parties to lay the foundation for a successful partnership. Before starting to build the relationship, analyze together whether there is enough trust, transparency and compatibility between the parties to create a successful partnership.

Establishing a partnership requires a different process. You must first start by understanding if you and your potential partner have a foundation that is strong enough to build a partnership.

As mentioned previously, trust is a critical success factor in all successful relationships. However, trust does not exist at the start of a new relationship. Trust must be consciously built and the relational contract is a fundamental building block. Trust must be combined with a high degree of transparency and compatibility, because given our limited abilities for planning, a high degree of transparency from both parties will be critical. You will need as much facts on the table as possible to be able to cope with the future in a changing market. But even if trust and transparency levels are high, differences in organizational cultures could lead to friction and problems to make the relationship work. Compatibility is not absolutely necessary, but is still highly important.

Using the process we have outlined enables the potential partners to sit down, first by themselves and then together, and ask some serious and sometimes also uncomfortable questions:

Ø  Are we trustworthy? Do we align our actions with what we say?

Ø  Are we prepared to work collaboratively and in good faith with in our partner, or do we feel that we must use power to induce them to do as we want?

Ø  Is there evidence that our potential partner(s) share our values and readiness to operate under shared principles?

Ø  Are we both prepared to be transparent, i.e. to share information about our plans for the future, our internal challenges, our risk register, our costs and even margins?

Ø  Are we compatible? Do we share a base of organizational value, interests and views of the world? Is this alignment likely to continue?

Ø  Do we have evidence to support our answers, or are we just hoping?

By using this process, the parties lay the foundation for implementing the relational tenets of a joint working relationship and communication, which are critical for successful of governance of any commercial partnership.

To achieve this step, parties need to find out if you are ready to become partners with each other by understanding your initial levels of trust, transparency and compatibility.

Once you have ensured you have laid a strong foundation, you will then be able to create a strong ‘society of principles’ by embedding social norms in the relationship.

2.6.3 EMBED SOCIAL NORMS IN THE RELATIONSHIP:

Many researchers define norms as shared expectations regarding behaviour (e.g. Axelrod, 1986; Bendor and Mookherjee, 1990; Gibbs, 1981; Macneil, 1980; Thibaut and Kelley, 1959).

Macneil (1980, p.38) explicitly emphasizes that  norms serve to guide, control or regulate proper and acceptable behaviour, setting limits within which individuals may seek alternative ways to achieve their goals‘. Thus, in achieving long term goals that is open-ended; norms act as essential social and organizational mechanisms of control. They provide a frame of reference, order, and standards for evaluating appropriate behavior in uncertain situations (e.g. Bettenhausen and Murnighan, 1991). However, norms can differ in their content and orientation from one context to another (Thibaut and Kelly, 1959). . The role of norms in determining the manner in which commercial exchanges operate in practice has been central to Macneil’s work.

Building on the work of Macaulay (1963), Macneil developed a set of norms that determine “the behavior that does occur in relations, must occur if relations are to continue, and hence ought to occur so long as their continuance is valued” (Macneil, 1980, p. 64).

Furthermore, Macneil recognizes that contracts vary widely in the depth of the relationship to which they are applied. Thus, he states that “nevertheless, some contracts are far more relational than others. They lie towards one end of a relational spectrum of contractual behavior, opposite from the non-relational end where the discrete transaction is found.” (Macneil, 1983, p.342). Initially Macneil developed nine norms or principles ‘of right action binding upon the members of a group and serving to guide, control, or regulate proper and acceptable behavior’ (Macneil, 1980: 38). He later (1983) developed a tenth and changed the label applied to one of the original nine. He suggests that these ten norms constitute an abstract summary of the wide variety of specific norms that can be found in the many different forms of exchanges that occur in a modern society. These ten common norms are:  

1.      Role integrity.

2.      Reciprocity.

3.      Implementation of planning.

4.      Effectuation of consent.

5.      Contractual solidarity.

6.      The linking norms: restitution; reliance; and expectation.

7.      Creation and restraint of power.

8.      Flexibility.

9.      Proprietary of means.

10.  Harmonization of the social matrix.

 2.6.3.1   Role integrity

The norm of role integrity obliges the parties to be consistent over time, that is to treat like cases alike and to avoid opportunistic behavior but to always, when in doubt, act in accordance with the other guiding principles.  Role integrity occurs when both partners fulfill their respective responsibilities.  Greater complexity to exchange relationship portrays higher levels of role integrity.

In relational exchange theory, parties engaged in the exchange processes have to fulfill certain roles (Ivens, 2004) in which they reflect mutual promises made during the development of their relationship. The promises lead each member to develop expectations concerning each other‘s behaviour (Kaufmann and Stern, 1988). In business-to-business relationship, Ivens (2004) found that the role integrity of the suppliers positively influence customer satisfaction and trust.

2.6.3.2    Reciprocity

The norm of reciprocity obliges the parties to return in kind. Where an exchange is freely entered into it will only occur when both parties perceive that it will result in an improvement in their pre-exchange position. Therefore each party assumes it will get something back for something given. This is perhaps more apparent in a discrete exchange than in a relational one because of the immediacy of a discrete exchange. However, the vital point is that this is a more open-ended perception of reciprocity than that held by economists where exchanges are seen as being of roughly equal value.2 As has been pointed out, the discharge, through social exchange of obligations incurred as a result of services received in the past, entails obligations not specified in advance and the exact nature of the return is left to the discretion of the respondent (Blau, 1967: 93, 113).

2.6.3.3    Implementation of planning

Planning is involved even in discrete contracts because they may well encompass commitments to be fulfilled in the future though with exchanges that are more relational the planning element is generally likely to be larger. Furthermore, once one moves away from the most simple exchange a contract will include some element of defining how it will be implemented.

2.6.3.4     Effectuation of consent

Any exercise of choice involves the sacrifice of other opportunities. In a discrete exchange, by agreeing to sell my watch to another person it is clear that I give up the opportunity to sell it to somebody else. However, in a relational contract, I may in fact or by implication give the other party the ability to take actions that, while not fully determined in advance, will limit my future actions (Hakansson and Snehota, 1995).

2.6.3.5    Contractual solidarity

Solidarity is the extent to which unity or fellowship that arises from common responsibilities and interest dominates an exchange relationship (Kaufman and Dant, 1992; Gundlach et al, 1995). In simple terms, it is the preservation of the relationship, particularly when one partner is in a predicament (Ivens, 2004). It is expressed through behaviors, which contribute directly to relationship maintenance (Heide and John, 1992; Macneil, 1980). It assures the preservation of the unique and continuing relationship in which the commercial transactions take place (Kaufman and Stern, 1988). The extent to which an actor‘s behaviours express solidarity with the exchange partner functions as an indicator of the stability of the long-term business relationship (Ivens, 2004). In industrial marketing relationships, solidarity is defined operationally (Lusch and Brown, 1996; Heide and John, 1992) as a willingness to help in occurrence of any problems, sharing of problems and committed to improvements for mutual benefits. Based on similarity of definition, Medlin and Quester (2001) is associated solidarity with commitment.

2.6.3.6    The linking norms: restitution, reliance and expectation interests

This is a body of principles relating to the acceptance that within an exchange it may be necessary to make adjustments after agreement has been reached to undertake the exchange. Thus restitution might be necessary if, for whatever reason, one party gains unfairly from the exchange; reliance is needed with regard to promises made but is not necessarily legally binding; and, expectation is what has been promised. In circumstances where a discrete exchange occurs then restitution, reliance and expectation interests are served by rigorous adherence to the contract. In a more relational exchange these three issues become factors that contribute to determining the nature of any change to the contract that is necessary in response to unforeseen circumstances.

2.6.3.7   Creation and restraint of power/The norm of autonomy/Limitation of power.

This refers to the degree of restraint with regards to contractual power over one or other of the parties (Kaufmann and Dant, 1992). The more relational values are put to an exchange, the less likely the parties will exercise their legitimate or coercive power (Macneil, 1981; Young et al., 1996). Limiting the power of one party over another is perhaps the best way to maintain a business relationship. For example, in construction industry, if a supplier faces some problems and is not able to supply the materials within the time required, the customer may exercise their power to penalize the supplier.

Relationships could be adversely affected with the use of such power. However, a business relationship could be improved by limiting such power and a good relationship would be maintained if both parties can provide some forms of co-operation and taking steps in resolving such problems.

2.6.3.8   Flexibility

Flexibility refers to the willingness of parties to adjust practices and policies in response to unforeseen or changing conditions (Boyle et al., 1992). As Stinchcombe (1990: 207) suggests, there are three categories of uncertainties which may have to be coped with in an exchange: the client’s uncertainties about what it will want; cost uncertainties, due to contractor technical or cost uncertainties, to client ignorance, or to commercial or legal uncertainties in the client-contractor relationship; and, problems of observability of contractor faults.

Due to uncertain business environment, planning and adjustment are required to continue business in the future. Flexibility allows for ongoing planning and continuous adjustment of obligations between the exchange partners, whereas a more rigid approach leads to fixed terms of working (Boyle et al., 1992; Young et al., 1996).

2.6.3.9   Propriety of means

There are often several ways of achieving a given end. Those that are seen as appropriate will vary between industries and cultures. Thus, in the case of a relationship, resolving conflicts by the use of formal means will usually be seen as injurious to the relationship. However, ways of working together may develop between relationship partners that while acceptable to them, may simply not ‘work’ in their links with any other partners that they may have.

2.6.3.10   Harmonization with the social matrix

Macneil argues (1983: 344) that the social matrix stipulates the minimum necessary for exchange to occur. This comprises: a means of communication which both parties understand; a system of order so parties exchange instead of robbing; a monetary system; and, a mechanism to enforce promises.

Where these factors exist then a society shares a number of common norms. He proposes that these ten norms [that is role integrity, reciprocity, implementation of planning, effectuation of consent, flexibility, contractual solidarity, restraint of power, propriety of means, the linking norms (restitution, reliance, and expectation interest) and harmonization with the social matrix] comprise a summary of specific norms that may occur in a range of different exchanges within the modern society (Macneil, 1980; 1983).

The guiding norms/principles fulfill at least four important functions in the relational contract:

       I.            They will guide the parties during the rest of the negotiations. The only valid arguments in the discussions are those than can be justified under one or more of the guiding principles.

    II.            All the contract clauses shall be aligned to the principles. This will to a maximum extent ensure that the contract is fair, balanced and facilitate creation of a frictionless relationship.

 III.            The guiding principles shall, together with the shared vision, constitute the basis for interpreting the agreement, both when the written clauses are ambiguous and when the contract is silent on a particular matter. We will deal with this further in the next section.

 IV.            The guiding principles will also assist the parties when making changes to the contract.

Not only will the guiding norms/principles ensure a fair and balanced agreement, they will also ensure that the contract remains mutually beneficial throughout its term. The guiding norms are therefore also a key instrument for risk avoidance and mitigation.

By embedding the guiding principles in the relationship, the parties also lay the foundation for implementing the relational tenets of risk allocation, communication, pain and gain sharing and no-blame culture, to be formalized in the fourth and fifth steps of the relational contracting process.

The parties should “discover” and together define the guiding principles and formalize them as part of their contract.

2.6.4 AVOID AND MITIGATE RISKS THROUGH ALIGNMENT OF INTERESTS:

To lay the foundation for continuously aligned interests, agree upon a shared vision and strategic objectives for the partnership, specifying what joint success and value looks like. In the relational contract, you take a different approach: you attack the causes of conflicting interests and not their symptoms. The intention is to always keep interests aligned.

Misaligned interests are the most common cause of value leakage and unnecessary transaction costs. It is only when the parties interests are misaligned that opportunism becomes a problem in a commercial relationships. The source of misaligned interests is conflicting goals and objectives. If a customer’s goals and objectives can only be achieved at the cost of a supplier achieving its goals and objectives, interests will be misaligned and opportunism and friction will follow as a necessary consequence. For example, an important source of value leakage is the fact that customers’ goals of lowering their costs comes into conflict with the suppliers goals of increasing their revenue and margin. This is not a goal conflict given by nature, but instead a result of conventional economic models most often used in commercial relationships today.

A relational contract by design seeks to align interests by avoiding goal conflicts between the parties. Joint not separate goals and objectives should be adopted. Effectuation of consent requires that each party’s interests are treated with equal value.

 There are three main components in a relational contract that aim for risk mitigation and avoidance through aligned interests:

       I.            The ten norms

    II.            A shared vision and a set of common strategic objectives for the partnership

 III.            A governance process for continuous risk and change management

When you have created a shared vision, it is often a good idea to break it down into a number of shared objectives, which specifies in more detail what the shared vision means. The objectives range based on the intent of the relationship. Having adopted a shared vision and strategic objectives, the relational tenet of mutual objectives will have been implemented. We must however emphasize that these alone may not be enough to align interests. It is typically also necessary for the parties to take a hard look at how risks will be allocated and at the economics of the deal, as both can create perverse incentives due to conflicting interests.

2.6.5 CREATE FAIR AND FLEXIBLE FRAMEWORK:

A relational contract gives up the ambition of completeness and accepts that complete planning is impossible. The contracting parties try to establish a fair and flexible framework for their deal and their relationship. The relational contract operates as a framework, setting forth clear rights and obligations as the parties pursue their mutually defined shared vision and objectives. But on a more general level, a relational contract is designed for flexibility, enabling the parties to deal with change not just change control. This means creating a sound governance structure and mechanisms to help the parties manage the business in a dynamic environment, not just enabling the customer to manage the supplier. The guiding norms and relational tenets ensure that the explicitly laid out rights and obligations and the processes for managing the relationship are kept fair during the term of the contract.

As stated previously that the foundation of a relational contract is trust. Sometimes we are asked if the relational contract should contain common clauses like service scope, service levels, confidentiality, termination clauses, limitation of liability, dispute resolution etc. The underlying question is whether it is compatible with trust to want to implement legally enforceable rights and obligations in the relationship.

Trust is a complex phenomenon. But it should not be mistaken for naivety. We have noted how as humans we have a tendency for opportunism, looking out for our own interests to the detriment of others. Evolution has made us that way and it would be naïve to ignore this fact. And somewhat paradoxically, trust exists because of opportunism. To trust someone is to have confidence that she will do what she says, despite her opportunistic DNA. Without opportunism, trust would serve no purpose.

The aim of the relational contract is to create circumstances as favorable as possible for our sense of fairness to dominate over our opportunistic nature. But that does not mean that this opportunistic nature is ignored.

At this stage of the process, three cornerstones of the framework have been placed. These cornerstones are the shared vision, the strategic objectives and the guiding norms/principles. Here is how they work together.

v  The shared vision and the objectives are set at the beginning of the relationship. They can of course be changed over time, but they should typically lay the foundation for the foreseeable duration of the contract.

v  The guiding norms/principles should be considered fixed and should be strictly adhered to not only during the contracting process, but also post contract signing.

v  The parties should be flexible in the means they use to achieve shared vision and objectives, as long as they always act in accordance with the guiding principles.

To create a fair and flexible framework based on the three cornerstones requires the parties to agree on clear rights and obligations regarding ‘the deal’ and the risks related to it and the relationship. In addition, the parties must agree on a robust governance process for managing the relationship.

The use of a relational contract approach from a certain perspective is an all-or-nothing choice. You cannot, if you want to succeed, play an opportunistic and a collaborative game at the same time. The opportunistic player will then take advantage of the collaborative player and the relationship will fail. Therefore, you have to jointly choose which game to play and stick to that choice. With that in mind, you can then determine how formal of a process you want to use for embedding the concepts we outline into your relationship. We highly recommend that no matter what process you use or how formal or informal the process, it is essential to make the ten guiding norms/principles a key focal point of any relational contract. A relationship where reciprocity, autonomy, honesty, loyalty, equity and integrity do not exist will never succeed in establishing the level of trust and transparency needed to get out of the contracting paradox discussed previously.

2.7.   COMBINATION OF THE PROCESS STEPS AND TENETS

Table below outlines a process based on a combination of the five focus areas defining the relational contract set forth above and the nine IACCM relational tenets.

PROCESS STEP	DESCRIPTION	TENETS
1. Focus on the relationship, not the deal	To build the trust necessary to focus on the relationship, ensure alignment within your own organization and thereafter use a process for choosing a partner that considers relational competencies in addition to service offerings, quality levels, etc.	Mutual objectives
2. Establish a Partnership	Before starting to build the relationship, analyze together whether there is enough trust, transparency and compatibility between the parties to create a successful partnership.	Joint working, communication
. 3. Embed social norms in the relationship	Jointly discover and agree on following the ten guiding principles or social norms of the relational contract	Risk allocation, communication, pain and gain sharing, no-blame culture
4. Avoid and mitigate risks through alignment of interests	To lay the foundation for continuously aligned interests, agree upon a shared vision and strategic objectives for the partnership, specifying what joint success and value looks like. Also ensure that the economic/pricing mechanisms later agreed upon support achievement of the vision and the objectives.	Mutual objectives, risk allocation, gain and pain sharing
Create Fair and Flexible Framework	Agree upon the written contract clauses necessary to establish the more specific rules of the relationship, all of them aligned with the six guiding principles. Finally establish a robust governance framework for continuous relationship managemen	Communication, problem solving, no-blame culture, joint working, mutual objectives, performance measurements and continuous improvements

Whether you start with the formal process we discussed above or you work to embed the relational tenets into an existing relationship, I believe the investment will pay off.

As you make the shift to relational contracting, it is important to understand why it is essential to add relational contracts to today’s contracting toolkit.

2.8  FACTORS USED TO MEASURE THE RATE OF RELATIONAL CONTRACTING

The relational extent of a contract may be measured by factors such as cooperation, organizational culture, risk, trust, good faith, flexibility, use of alternative for dispute resolution and contract duration (Cheung 2002, Feinman 1992, Goddard 1997 Macneil 1974, 1975, 1978, 1987, 2001,2003a,b, Williamson 1979, 1985).

v  ‘Cooperation’ is a situation under which the contracting parties work toward the common goals and benefits of the project

v  ‘Organizational Culture’ is the social energy which guides human behavior in an organization. It provides implicit directions for the organization’s members

.

v  ‘Risk’ refers to a situation in which the assessment of the probability of a certain event is statistically measurable. It relies upon the availability of known events for this purpose.

v  ‘Trust’ is a complex construct with multiple bases, levels, and determinants (Hart 1988), and is often associated with situations involving personal conflict, uncertain outcomes, and problem solving. It is also a prediction and expectation of future events. Varying in intensity this is the confidence in and reliance upon the prediction

v  ‘Good Faith’ governs the contracting parties’ behavior in terms of honesty.

v  ‘Flexibility’ in a contractual performance is made explicitly or implicitly contingent upon external events affecting one of the parties, therefore making it a form of insurance and risk sharing. The riskier the environment, the higher the need for flexibility, the higher the likely incidence of contract nonperformance, and the higher the expectation to renegotiate.

v  Use of alternative dispute resolution- is an alternative to adjudicatory procedures. The ADR includes conciliation, mediation, adjudication, and the dispute resolution advisor system.

v  Contract duration- refers to the length of the contract period. Generally, the longer thecontract period, the higher the chance that changes will occur and thus a greater reliance on the relationship is needed to maintain the contractual bond.

2.9 BARRIERS IN ADOPTING RELATIONAL CONTRACTING

When contracting parties adopt relational contracting as opposed to formal contracting stance, the construction project may achieve good outcomes. However, public project usually face more constraints in adopting relational contracting, as close relationship may lead to allegations of corruption.

The barriers to adopting relational contracting practices are reviewed and classified into 5 constructs. These are discussed below.

Ø  Lack of experience/knowledge in relational contracting

Ø  Misalignment among project participants

Ø  Adversarial environment

Ø  Cost and time to conduct relational contracting

Ø  Uniqueness of public projects

2.9.1    Lack of experience/knowledge in RC

The lack of experience or knowledge in RC can impede the adoption of RC practices. Kumaraswamy et al. (2005) found that clients' lack of knowledge of relational approaches significantly deters the implementation of RC and the formation of a project-based integrated team. They argued that commitment from clients is imperative as they can more effectively drive the team building process as the project sponsor. Ng et al. (2002) found that the lack of training and guidance in RC affected the attainment of project goals. Moreover, when parties have past negative experience of relational arrangement, it is difficult for them to adopt RC practices again

(Glagola and Sheedy, 2002). Lastly, the lack of experience in relational arrangement poses a barrier to implementing RC due to a lack of understanding on how it works (Glagola and Sheedy, 2002).

However, from a critical point of view it has been pointed out that training and education are key issues which can facilitate this move from adversarial to proactive relationships in the project team. This training and education needs to be focused on the skills and techniques and philosophy of relational contracting.

2.9.2    Misalignment among project participants

A misalignment among project participants may impede the adoption of RC. Eriksson et al. (2008) reported that not all organizations have the will and ability to cooperate with other parties and their unenthusiastic participation is a common barrier to adopting relational approaches.

Akintoye et al. (2000) found that a lack of senior management support contributes to the failure of collaboration in construction projects. Lack of top management support may discourage individual decision makers from seeking new and more effective RC approaches (Eriksson et al., 2008). Furthermore, the lack of client's initiative in implementing RC practices dissuades other parties from adopting it (Rahman and Kumaraswamy, 2008). The lack of common goals among contracting parties may be a barrier to implementing RC (Drexler and Larson, 2000). Packham et al. (2003) found that many problems arise because of different definitions of project goals. Drexler and Larson (2000) also pointed out that it is necessary to recognize that parties should work toward the same goals and need each other to achieve them.

2.9.3 Adversarial environment

1. The antagonistic culture and incompatible personalities between parties (Kumaraswamy et al., 2005) engender adversarial environment which impedes the adoption of RC. Contracting parties are used to working in opposition to each other to achieve their own objectives (Eriksson et al., 2008). The adversarial “win–lose” attitude exists due to a lack of trust among contracting parties (Ng et al., 2002).

2. Another barrier to RC adoption is the presence of opportunistic behaviors due to commercial pressures, absence of risk-reward plans and cultural clash at individual levels (Ke et al., 2011). The persisting adversarial setting deters contracting parties from adopting RC and instead may cause them to behave opportunistically (Rahman and Kumaraswamy, 2008).

3. Incompatible culture at organizational and inter-personal levels may deter parties from adopting RC practices. Incompatible organizational cultures among contracting parties arise due to short-term focus on single projects (Eriksson et al., 2009). Inter-personal cultural clash may take place among project team members because they are of different nationalities (Hofstede, 2012).

2.9.4  Cost and time to conduct RC

The additional cost and time needed to conduct relational contracting may impede its adoption. A substantial amount of cost may be needed to establish and maintain relational approaches (Ross, 2003). Cost may be incurred in cultural management which includes activities such as coaching and workshops (Ross, 2003). Bresnen and Marshall (2000) found that organizations need to spend additional cost to change their systems to facilitate open communication and information sharing between partner organizations.

To have successful relational contracts, a considerable amount of time is needed to find the right partners and develop the partnership (Cook and Hancher, 1990). Time is required to set up partnering charters and dispute resolution mechanisms, conduct team bonding exercises and workshops (Bresnen and Marshall, 2000).

2.9.5   Uniqueness of public projects

The uniqueness of public projects may be a barrier to adopting RC. Palaneeswaran and Kumaraswamy (2000) observed that clients, especially in the public sector, showed great reluctance to adopt changes and innovations as beliefs such as “there is no need to change current approaches/practices that are good enough” or a “not invented here” syndrome, do exist. Conservatism and inflexibility are barriers to RC since they hamper team work (Ng et al., 2002).

Parties adopting RC may project their current exchange into the future (Macneil, 1974). However, contracting parties have misgivings about future relationships because fresh tenders need to be called for each new public project (Drexler and Larson, 2000). The need to call fresh tenders is because the public sector needs to maintain transparency to avoid allegations of corruption, and it needs to be accountable to tax payers (Ke et al., 2013). The need for transparency and accountability leads to the enactment of stringent rules, regulations and laws.

2.10   BENEFITS OF RELATIONAL CONTRACTING

2.10.1 Rapid decision making

During the course of this research a series of benefits, to different people at different levels, were identified to come about through the adoption of relational contracting approaches. A major advantage was identified in operating on a face to face basis. When the “protective barrier” of “paper warfare” is broken down by a collaborative approach the need to formally document every discussion or event disappears and the traditional, contract specified route for resolution of discrepancies is circumvented. Direct discussion between decision makers is legitimized, as is rapid decision making. The consequence is that participants are more comfortable at devolving decision making to appropriate levels within the organization and greater job satisfaction ensues.

2.10.2   More eager to go to work

More enjoyable to go to work was a commonly cited view of relational contracting. When the adversarial nature of the conventional contract is replaced by collaborative, proactive working then participants find work more rewarding and enjoyable. People enjoy going to work in an atmosphere which allows each to make a positive contribution to moving the project forward. Most people are part of this industry because they like to see, and are proud of, their achievement being used and the contribution it makes to society.

2.10.3   Cost and time savings

Undoubtedly, the atmosphere on a well managed relational contract is more pleasurable to work in and conducive to joint decision making. Innovative solutions are more likely to develop, and consequent cost and time savings and quality improvements accrue, when a number of heads are put together to solve a problem. The range of perspectives brought to bear on the problem may well be enlightening to participants and help them to understand and appreciate more fully the differing objectives which always exist in a project. By building the level of trust and being convinced of the contractors competence and trustworthiness, the organization personnel can be freed from the chore of being on the spot all the time in order to conduct supervision. When the situation arises, when the organization personnel can trust the Contractor to carry out the job correctly, not only is work more enjoyable but time can be spent on more creative issues

It also aid in reducing time in delivering the project, reduces risk and mitigate their influence. Relational contracting also helps to reduce the cost of changing partner in projects, at the same time maximizing resource utilization

2.10.4   More focus on work issues

The organization is capable of providing assistance on the technical and knowledge aspects of the project and can, in a relational contracting approach, provide faster, better and more solutions to construction problems. More harmonious working relationships allow both parties to focus on work issues rather than other contractual issues. The organization becomes more proactive in helping the Contractor. The lower level of necessity to use formal channels and documentation allows for more focus on project problem solving but this new regime is dependent on trust being established. Undoubtedly, the sources of claims still need to be documented but this is not the central focus of either party. When the situation arises as “business as usual” when both sides are proactive in solving construction problems then a new focus of attention can emerge.

2.10.5   Best quality

Improve the design which leads to improved quality of project. Moreover it also helps to achieve better safety performance, through response to technology changes. It also help to facilitate creative and innovative approaches.

At a state level, relational contracting has the potential to deliver on government priorities such as regional and industry development, empowerment, work life balance and a sustainable industry (in terms of economics, environment and people). This being an internal marketing issue should be fully realized and utilized by the organization.

CHAPTER THREE

3.0      RESEARCH METHODOLOGY

This chapter is concerned with the methodology used in arriving at the research topic. It comprises the reason for the study or research work while the opinions of professionals in the industry are sourced.

This chapter also contains the area of study, instrument of data collection and this includes structured survey design administered to the relevant professionals in the field.

3.1    AREA OF STUDY

The study area encompasses a number of private quantity surveying, architectural and civil engineering consultancy firms in Enugu State, South-eastern Nigeria, that have been involved in building projects in a school.

3.2    SOURCE OF DATA COLLECTION

The source for this study were primary and secondary data

v  Primary data

v  Secondary data

3.2.1    PRIMARY DATA

This is the first hand information collected, upon which data analysis is carried out to draw conclusions satisfying the research questions. The primary data method used were direct oral interview with the practicing Quantity Surveyors, Architectures and Civil Engineers in the consultancy firms and questionnaires submitted to construction professionals, to get detailed information on their perception of the adoption of relational contracting

3.2.2    SECONDARY DATA

This method is based mainly on the review of related past literatures and write ups from books, journals, seminars, paper reports and other forms of published and unpublished materials that were considered relevant in the research exercise. These sources however helped immensely to give the useful and relevant information with regard to their views and opinions concerning the topic.

3.3   RESEARCH DESIGN

Research design may be defined as the plan for getting the research question up to the conclusion. It is a blue print for data collection and interpretation. It deals with the logic of scientific inquiring, a strategy for testing the hypothesis or the interpretation work, for understanding phenomena. The research design employed for this investigation was written questionnaires and from practicing Quantity Surveyors, Architectures and Civil Engineers in consultancy firms.

3.3.1    TARGET POPULATION

The totality of all observations with specified characteristics of interest relevant to particular decisions constitutes a population. The word population is in fact used in this study to indicate any well defined class of people that satisfies this study objective. From the above, the population has been drawn from Quantity surveying, Architectures and Civil Engineers consultancy firms in Enugu State.

3.3.2    SAMPLE SIZE

Since the research study focuses its intention on an assessment of the perception of Nigeria construction professionals in Enugu, towards adoption of relational contracting , the researcher meticulously selected his sample size of five professionals from each field summing it up to fifteen professionals.

3.3.3    SAMPLING TECHNIQUES

The sampling methods employed in the course of this research was random sampling. This method accords each entity in the population an equal probability of being chosen for the sample without showing bias.

In order to ensure that data obtained are reliable, the data were collected from consultant Quantity Surveyors, Architectures and Civil Engineers in the consultancy firms, being that they keep appropriate record of contract documents.

3.3.4    DATA COLLECTION INSTRUMENT

This was done through a well structured survey design which involves questions specifically drawn up to be answered by the professional Quantity Surveyors, Architectures and Civil Engineers in consultancy firm for the purpose of getting facts and information. The questions contained in the survey are designed and directed towards obtaining enough facts and information as required by the researcher to fully exploit the topic of the study.

3.3.5    PROCEDURE FOR DATA COLLECTION

The data collection instrument was administered to the target respondents by the researcher and complete responses were obtained. At this point, adequate time and care was taken in order to explain and ensure that the target respondent understood what was required of them to do when answering the questions.

3.3.6   TOOLS FOR DATA PRESENTATION/ANALYSIS

It is important to examine the relevant statistical techniques for all the decision making procedures built in the study. It is also pertinent to discuss the methods which will elicit the raw data for empirical analysis. To achieve the aims and objectives of this research work, certain methods were used which includes percentage indexes and graphs.

3.4    METHODS OF DATA PRESENTATATION/ANALYSIS

In the data analysis, data collected and research question testing are represented using the Correlation analysis. According to Eze et al (2005) Correlation can therefore be regarded as a form of statistical analysis or test used to measure the degree of relationship between two or more different sets of data, one independent(x) and the other dependent(y).

                                               CHAPTER FOUR

                        DATA PRESENTATION AND ANALYSIS

4.0 INTRODUCTION

In this chapter, the data gathered by the researcher during the process of this research are hereby presented, analyzed and interpreted. The data collected based on the Research Methodology prescribed in Chapter 3 are a response to the research questions outlined in Chapter 1. The research questions are as follows:

Ø  What are the difference dimensions of relational contracting practices?

Ø  What are the ways/levels by which relational contracting practices can be deployed in public project?

Ø  What are the barriers to the adoption of relational contracting practices?

Ø  What are the benefits of relational contracting?

4.1 QUESTIONNAIRE SURVEY RESPONSE

4.1.1 RESPONSE RATE

The questionnaire survey was conducted in August 2017. The researcher advanced to submit the survey questionnaires to construction professionals (Quantity Surveyors, Architectures and Civil Engineers) in fifteen consultancy firms and a number of responses were obtained unfortunately a number of the professional consultancy firms were absent at the locations sourced via their different bodies’ official website and a few where present but not available to attend to the researcher during the period of the survey. However, survey questionnaires where successfully administered to nine construction professionals. A total of 5 respondents from these 5 firms were issued with the survey questionnaires all of which responded to it, representing a 100% per 60%(27%,20% and 13%) response rate (Table 4.1.1.1 and fig 4.1.1.2 below). This is considered adequate for the reporting and analysis of the collected data.

             

PROFESSIONALS	NUMBER	PERCENTAGE(%)
Engineers	4	27
Architects	3	20
Quantity Surveying	2	13
None	6	40
Total	15	100

Table 4.1.1.1: RESPONSE RATE

                                                                                                           Source: Field Survey 2017

Fig 4.1.1.1: RESPONSE RATE

4.1.2        RATE OF ADOPTION

PROFESSIONALS	NUMBER	PERCENTAGE(%)
Engineers	3	33
Architects	1	11
Quantity Surveying	1	11
None	4	45
Total	9	100

                      Table  4.1.2.1: RATE OF ADOPTION                       Source: Field Survey 2017

Fig 4.1.2.1 RATE OF ADOPTION

Table 4.1.2.1 and fig 4.1.2.1 above indicate the rate at which the construction professionals adopt the relational contracting. Out of the nine professionals that responded to the questionnaires, only five indicated that they adopt relational contracting while four do not.

4.1.3        BARRIERS IN ADOPTING RELATIONAL CONTRACTING

Table 4.1.3.1 BARRIERS IN ADOPTING RELATIONAL CONTRACTING

ITEMS	NUMBER	PERCENTAGE (%)
Lack of experience/ knowledge	4	23.52
Misalignment of interest	1	5.88
Adversarial Environment	4	23.52
Cost and Time	2	11.76
Uniqueness of project	6	35.29
Total	17	100

                                                                                                              Source: Field Survey 2017

 FIG 4.1.3.1 BARRIERS IN ADOPTING RELATIONAL CONTRACTING

Table 4.1.3.1 and fig 4.1.3.1   above indicate the rate or extent at which some items canbe a barrier towards the adoption of the relational contracting. The result was obtained from those that adopt relational contracting(what can hinder the adoption) and those that do not.

4.1.4        BENEFITS OF RELATIONAL CONTRACTING

ITEMS		PERCENTAGE(%)
Rapid decision making	5	25
More eager to go to work	2	10
Cost and time savings	3	15
More focus on work issues	5	25
Best quality	5	25
	20	100

Table 4.1.4.1 BENEFITS OF RELATIONAL CONTRACTING Source: Field Survey 2017

   Fig 4.1.4.1 BENEFITS OF RELATIONAL CONTRACTING     

Table 4.1.4.1 fig 4.1.4.1 above indicates the benefits of adopting relational contracting. The result was gotten from the response of the five professionals that adopt relational contracting.

CHAPTER FIVE

5.0       SUMMARY, CONCLUSION AND RECOMMENDATIONS.

This chapter summarizes the study by highlighting the research conducted on the topic. The conclusions given were drawn up from the outcomes of the research and observations on the rate of adoption of relational contracting by construction professional. Moreover, recommendations were based on findings and conclusion of the study.

5.1       SUMMARY OF FINDINGS

This study was conducted for the purpose of assessing the perception of Nigerian construction professionals towards adoption of relational contracting (perspectives of Enugu construction professionals). The random sampling technique was used for gathering data, and direct oral interview through a well structured survey design with drawn up questions was used as the instrument for collecting data.

In the light of this, the findings of this research were summarized as follows:

1.           Most of the construction professionals have been adopting this type of contracting without the knowledge that they are into it. Rather they took it as an informal contracting.

2.           Moreover, due to the condition of the country, some of the professionals have preferred to carry out work by themselves due to lack of trust or opportunism.

3.           Furthermore, client’s desire to maintain the same type of construction style(uniqueness of project) has been the greatest reason or barrier to the adoption of relational contracting.

4.           Hunger for best quality(especially between a contractor and supplier) has been one of the sole reasons why relational contracting is been adopted by some of the consultants.

5.2   CONCLUSION

Alliancing, partnering and relational contracting, all have a common theme, which is to

 develop a long-term relationship for such to be applied successfully. Successful sustainable relationships rely on relational forms of exchange, with high levels of trust and open and frank communication. Also, the issues concerned in relationship at each level are different. In order for relational contracting to be successful, realising and understanding the different levels at which relational contracting takes place is an extremely important issue.

Relational contracting brings about a more proactive and collaborative working approach. People find work more rewarding and enjoyable. There is much less paperwork to deal

with and the traditional, contract specified route for problem resolution is circumvented.

During the process, a level of trust is built. Also, problem resolution on the technical and

 knowledge aspects of the project is shared, providing faster, better and more solutions in a relational contracting approach. Other than at the operation level, relational contracting, at a state level, has the potential to deliver on government priorities such as regional and industry development, empowerment, work life balance and a sustainable industry.

Problems may be overcome by education, training and experience. By making the management of relational contracting project part of craft training, tertiary education and management policy, project team members can be predisposed to buying into the relational contracting philosophy, even those who have not attended all (or any) of the workshops. A good facilitator is important to the success of a relational contract but, other than a good facilitator, the right attitude of senior management in both organisations  is also important.

5.3    RECOMMENDATIONS

Here are four things you can start doing today in your journey towards relational contracting:

 1. Arm yourself with facts about relational contracts. Investigate whether you suffer from problems in your relational contracts and analyze whether the problems can be understood as result of your weaknesses. Investigate your most successful commercial relationships and analyze whether success may be a result of use of relational contracting elements. Facts must be your weapon when confronting superstitious beliefs and skepticism about relational contracts.

2. Involve the right stakeholders. Upper management should become aware of the potential advantages and economic upside associated with relational contracting. Make them your allies and sponsors.

 3. Start with lower-risk contracts and call it a pilot. De-risk and build a success story from which you can continue using relational contracting for bigger and more business critical contracts.

4. Be very forgiving and patient with nay-sayers and skeptics. Relational contracting will meet resistance, regardless of the undeniable evidence of its advantages in many situations. We are all humans and typically don’t like change. Hesitation should not be confused with bad intentions. Instead, try education as your change agent. Please remember that this white paper is available as a free, open source document and we encourage you to share it with your colleagues, clients, customers, suppliers and business partners. ‘

If you are hesitant and still want to try, start by implementing one or a few of the relational tenets and see what happens. It should then be clear to you that this will not mean that you are creating a relational contract - that will only happen when you make the guiding norms/principles the true North of the relationship. But you will then maybe have started a relationship journey that hopefully will lead you to adopt the relational contracting approach in full in those commercial relationships where this contract model is the best fit and will produce most value to your organization.

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APPENDIX

QUESTIONNAIRE

TOPIC: ASSESSMENT OF THE PERCEPTION OF NIGERIA CONSTRUCTION   PROFESSIONALS TOWARDS ADOPTION OF RELATIONAL CONTRACTING

“Relational contracting is defined as the working relationships among the parties who do not often follow the legal mechanism offered by the written contracts, and instead govern the transactions themselves within mutually acceptable social guidelines (Macaulay, 1963)”.

Name of the firm……………………………………………………………………………………

………………………………………………………………………………………..

Address…………………………………………………………………………………………………………………………………………………………..

What number of school public building projects have the firm carried out?

Role of the respondent in the project………………..

Name of the project……………………..

Location…………………..

Which tender procedure was used in those projects:

• Invited tendering

• Open competitive tendering

• Project-specific prequalification/short listing

• Negotiated tendering

Which delivery system was used in this project:

• Traditional

• Turn-key

• Public-private partnership

• Design & Construct

• Other, namely: ______________________

1(Strongly agree)                                          5(Strongly disagree)

To assess the level of deployment of relational contracting practices in public project

S/N	ITEM	1	2	3	4	5
1	Most of the projects are based on trust and not formal contract
2	I established a relationship/partnership between I and the other parties
3	During the project, contractor/consultant/supplier and I reached an agreement on the principles/norms to guild our relationship?
4	There was an alignment of interest between us
5	Both partners fulfill their responsibilities
6	We adjust practices and polices in response to unforeseen conditions
7	Both parties were willing to help in occurrence of any problem
8	Any party can exercise power in penalizing other party in the case of delay
9	I focused more on maintaining the relationship than the deal
10	During this project, the contractor/consultant/supplier and I treat problems constructively
11	I do not have the feeling of being misled by the contractor/principal/supplier
12	The contractor/consultant/supplier provides me with information relevant to the project
13	The relationship helped in rapid decision making
14	The relationship helped in motivating the teams or creating more eagerness to work
15	I was able to save cost and time
16	The alignment of interests help in mitigating risks
17	This type of contracting has been of good help to our firm
18	My partners have experience of this type of contracting

To assess the benefits of relational contracting practices

S/N	ITEM	1	2	3	4	5
	The relationship helped in rapid decision making
	The relationship helped in motivating the teams or creating more eagerness to work
	Relational contracting provide faster, better and more solutions to construction problems
	Relational contracting helps in saving costs and time
	The alignment of interests help in mitigating risks
	The embedded social guildlines helped to checkmate the activities of the contractor/consultant/supplier

To assess the barriers to the adoption of relational contracting practices         

S/N	ITEM	1	2	3	4	5
1.	Relational contracting been of good help to my firm
2.	I still maintained the relationship after the project
3.	The contractor/consultant/supplier once experienced the relational contracting before the project
4.	With reference to number 3, my firm incur cost in cultural management which includes activities such as coaching and workshops
5.	It takes time to set up partnering charters and dispute resolution mechanisms, conduct team bonding exercises and workshops
6.	My firm spends additional cost to change the systems to facilitate open communication and information sharing between partner organizations.
7.	The time and cost incurred limit the adoption of relational contracting
8.	The contractor/consultant/supplier see the embedded social guild lines as evidence of lack of trust
9.	My firm has the will and ability to cooperate with other parties
10.	My client has the initiative of implementing relational contracting
11.	There is still incident of opportunism and uncertainty in the adaptation of the relational contracting

Apart from formal contracting, what other ways can opportunism or uncertainty be abolished from construction industries…………………………………………………………………………………………………………………

……………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………………….

Thanks and God bless you.                                                                             ……………………………………………

                                                                                                                            Name of respondent and signature