Implementing Relational Contracting and Joint Risk Management - survey results from an ongoing Ph.D. research project at HKU Mr. M. Motiar Rahman - Ph.D. Researcher Dr. Mohan M. Kumaraswamy - Supervisor Prof. Steve Rowlinson - CIB W92 Co-ordinator The University of Hong Kong

‘Contract’ may be treated as –promise of doing something in future –projection of exchange into the future –present communication of a commitment to a future event But ‘present promise’ affects future –by limiting choices that would be available during contract execution All future events can not be perceived or quantified due to uncertainty and complexity –contracts should be flexible – to adjust for future events –in order to effectively address the uncertainties, as and when they eventualize Relational Contracting (RC) (1)

RC considers ‘contract’ as –a process of projecting exchange in the future –relationships among the parties –relationships of inter-related past, present and future Parties do not always follow the legal mechanism offered by the written contracts – the relationship itself develops obligations RC allows –mutual future planning –sharing of both benefits and burden Possibility of problems is anticipated as normal part of the relationship Relational Contracting (RC) (2)

Relational Contracting (RC) (3) Problems are dealt with by –cooperation, restorational techniques, and adjustment processes These processes are –transaction-specific and ongoing-administrative kind –not a single generalised process RC thus provides –the means to sustain ongoing relations –an environment of business fraternity

RC in Practice RC principles underpin –partnering, alliancing, joint venturing, relationship contracting –other collaborative working arrangements –better risk sharing mechanisms Present construction organisations follow –both legal and non-legal mechanisms in contracting e.g: a partnering charter is not legally binding: if there is any problem - revert to original contract; although ‘partnering contracts’ are also emerging

Risk Management (1) Risks are -project-specific -allocated through contract conditions Not all risks are foreseeable –nature and extent of risks may change, new risks may emerge, existing risks may change in importance –some risks may require joint efforts of all contracting parties for their efficient management

Risk Management (2) Target of risk management should be –to minimize the total cost of risks –not the cost to each party separately Unforeseen risks need to be managed through a Joint Risk Management (JRM) strategy –as and when they eventualize –under flexible contract conditions –team efforts - if necessary

Extracts from the HKU PhD Research Survey on “Risk Allocation” This was the 1 st Survey – to identify industry perceptions Two questions: on perceptions of 41 risk items –present risk allocation (owner & contractor) –preferred allocation (owner, contractor, JRM) 47 responses - av. experience 21.2 years –20 from Hong Kong, 25 from China, 2 others –FIDIC 25, GCC 8, General 9, Others 5 –Consultants 14, Owners 15, Academics 10, Contractors 8, (grouped as per organisations) –Academics 10, Engineering 18, Managerial 19

Percentage of risk that should be jointly managed Number of risks (out of 41, used in the survey) in each category Total Working organization CSLCTROWN Nature of present job ACAENGGMGR More than 60 1 Total No.:41 Table 1: Average Perceptions on JRM based on groupings of 'working organization' and 'nature of present job'

Joint Risk Management (JRM) Total sample –all 41 risk items were recommended for JRM –29 risk items need 11-50% JRM Contractors: 28 risk items need 11-60% JRM Owners: –26 risk items need JRM of more than 10% –2 risk items need JRM of more than 50% –greater number of risks for JRM in percentage range slots of 21-30, and than consultants, contractors and academics Managers are more enthusiastic than Engineers

% of risk that should be jointly managed Number of risks (out of 41 used in the survey) in each category TotalFIDICGCCGeneral More than Total No:41 Table 2: Summary of average perceptions on JRM based on contract categories (i.e. standard conditions of contract)

This 2nd Survey aimed to find ways to mobilize the industry enthusiasm identified in the 1 st survey Responses and respondents –92 from 17 countries, 2/3 from Hong Kong –at least a mid-level managerial position – 65% worked in more than one contracting party –23 from a contractor company in Hong Kong –10 years average experience at present organisation –Over 20 years average total experience Respondents were requested to add more options Only extracts of quantitative survey results follow Extracts from the HKU PhD Research Survey on Implementing RC and JRM

Notes: (1) 79 responses, (2) scores are out of 10 Table 3: Importance of factors for selecting consultant

Notes: (1) 80 responses, (2) scores are out of 10 Table 4: Importance of factors for selecting contractor

Notes: (1) 77 responses, (2) scores are out of 10 Table 5: Importance of factors for selecting subcontractor

Notes: (1) 79 responses, (2) scores are out of 10 Table 6: Importance of factors for selecting supplier

Notes: (1) 80 responses, (2) scores are out of 10 Table 7: Importance of factors for selecting owner

Importance of Different Selection Criteria for Project Partners - General Contractors should have all conducive criteria for RC approaches –score of least important factor is 7.83 ‘Joint approach’ and ‘responsibility sharing’ related factors are seen to be as the main criteria for selecting different parties Contractors should lead the ‘project team’

Specifics Consultant –technical capabilities, previous experience, creativity/ innovation Subcontractor –time, performance and safety, quality, adequate resources, pricing levels Suppliers –quality, time, pricing levels Owner –financial strength, long term commitment

Table 8: Perceptions on Who should be brought in at Which stage of RC oriented approach for JRM Stages / Options Consu- ltants (88) Contr- actors (87) Sub- contr (79) Supp- lier (81) Inception of project During preliminary/ early stage of design Towards end of design After design but before tendering During tendering but before submission of bid21514 After awarding the contract1108 No need to consider27 Note: Figures in parentheses ( ) are number of responses

Items/ FactorsAverageSTDV Mutual trust Open communication among the parties Understanding each-other's objectives Equitable and clear allocation of foreseeable and quantifiable risks Attitude of the project participants Readiness to compromise on unclear issues Awareness of risks and rewards Effective coordination Collective responsibility, instead of personal responsibility Alignment of objectives Professional ethics Agreed process for dispute resolution Frequent formal and informal meetings Developing a partnering culture, first, within the organisation Agreed mechanism for performance appraisal Compatible organisational cultures Pioneering role of the owner/ client Possibility of future work Partnering workshop Partnering experience Role of partnering facilitator Legal implications Cost of implementing partnering Jointly organised social/ cultural activities (e.g. karaoke, sports) Traditional owner, contractor, subcontractor hierarchy Table 9: Importance of factors for developing a successful Relational Contract for implementing JRM

Factors for RC and JRM- Specifics ‘Mutual trust’ is the most important factor; while ‘traditional owner, contractor, subcontractor hierarchy’ is the least important factor ‘Professional ethics’ is more important than ‘possibility of future work’ and ‘partnering experience’ ‘Trust’ and ‘responsibility’ related factors are more important than ‘legal’ and ‘monetary’ issues ‘Developing partnering culture’ is more important than ‘role of partnering facilitator’

Options All (87) Acad- emic (13) Cons- ultant (12) Cont- ractor (43) Own -er (19) Provide contingency in contract and assign to the contractor when they materialise Provide contingency in contract and assign to the party ‘best able to handle’- when they occur Risk sharing or JRM, if needed Table 10: Perceptions on dealing with risks that are not foreseeable and quantifiable at planning stage Note: Figures in parentheses ( ) are number of responses

Options All (87) Acad- emic (13) Cons- ultant (12) Cont- ractor (43) Own -er (19) No need to take any burden, assign it to the other party(ies) by contract If given opportunity – assume the risk, reluctance of other party will help to profit more Risk sharing or JRM, as needed Note: Figures in parentheses ( ) are number of responses Table 11: Perceptions on dealing with risks that are clearly seen and quantifiable, but need joint efforts

Options All (86) Acad- emic (13) Cons- ultant (12) Cont- ractor (43) Own -er (18) Adjust and/ or extend contract provision Re-allocation of risks at their occurrences, if needed Risk sharing or JRM, if needed Note: Figures in parentheses ( ) are number of responses Table 12: Perceptions on dealing with risks that unforeseeably change in nature during project progress

Concluding Observations Worldwide growing enthusiasm towards RC and JRM Owners’ should initiate the ‘new’ approach –they effectively control project organisation and contract content, and select other parties –project specific approaches Knowledgeable project partner –learn and understand the approach and it’s procedure –identify clearly what each party needs –to realise that 'they need to pay properly for what they need’ and ‘need to work properly for the proper pay’

Future Research A Model will be formulated for JRM –to provide a basic Framework for Owners/Clients to target JRM –through project-specific RC approaches

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