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DEVELOPING COOPERATIVE project CLIENT-SUPPLIER RELATIONSHIPS: How much to Expect from Relational Contracts?

FORTHCOMING CALIFORNIA MANAGEMENT REVIEW, WINTER 2009

NUNO GIL

SENIOR LECTURER (ASSOCIATE PROFESSOR) CENTRE FOR RESEARCH IN THE MANAGEMENT OF PROJECTS (CRMP), MANCHESTER BUSINESS SCHOOL, THE UNIVERSITY OF MANCHESTER, BOOTH STREET WEST, MANCHESTER, M156PB, UK, E-MAIL: NUNO.GIL@MBS.AC.UK, TEL: +44 (0) 161 3063486

Organizations promoting new infrastructure projects range from private owners of airports, hospitals, and utilities to governments and local authorities. They typically chose to strategically position themselves as the project clients. Instead of building in-house capabilities to design and build new infrastructure, they opt to intermittently source works from the fragmented architecture-engineering-construction supply chain. In the last decade, infrastructure promoters have become increasingly interested in translating the Toyota lean management paradigm ─ its underlying business infrastructure as well as technical processes ─ into the project-based environments associated with new infrastructure developments.[1] A prerequisite at the core of this strategic approach is the development of cooperative relationships with members of the architecture-engineering-construction supply chain, the project suppliers. To enable this, infrastructure promoters realized they needed to rethink commercial practices, and started to experiment with ‘relational’ contracts. A relational contracting strategy ─ or ‘intertwined’ strategy in that personal relations become heavily intertwined with the economic exchange[2] ─ presumes that the project clients are willing to discard adversarial forms of contracting for others that nurture cooperative, long-term relationships with the preferred project suppliers. Through an in-depth empirical study on the implementation of relational contracts with all the first-tier suppliers involved in a large-scale infrastructure project, this work confirms the old adage that the devil is in the details. A relational contracting strategy undoubtedly enables the project client and suppliers to work together for a common purpose, suggest the empirical findings. But, the interwoven ways in which the client implements the strategy ─ in terms of, first, writing up the commercial details, and second, interpreting and adapting the contract design ex-post in the course of managing the project ─ are critical for encouraging the project suppliers to work cooperatively and meet the expectations of the client. The purpose of this reflection is to inductively unpack key do’s and don’ts for making this type of contract work effectively in project-based environments.

RELATIONAL CONTRACTS AND PROJECTS

FROM THE PERSPECTIVE OF RELATIONAL CONTRACT THEORY, ALL CONTRACTS HAVE A RELATIONAL ELEMENT IN THE SENSE THAT ALL ECONOMIC EXCHANGES HAPPEN IN A RELATIONAL CONTEXT.[3] AT ONE END OF THE SPECTRUM ARE THE DISCRETE CONTRACTS EMPHASIZING COMPLETENESS, PLANNING, AND PRECISE AND TIGHT MEASUREMENTS OF PERFORMANCE ─ THEY SUIT SHORT-TERM TRANSACTIONS INVOLVING LIMITED PERSONAL INTERACTION. AT THE OTHER END ARE THE ‘RELATIONAL’ (OR ‘INTERTWINED’) CONTRACTS EMPHASIZING FUTURE COOPERATIVE BEHAVIOR, RECIPROCITY, AND MUTUAL DEPENDENCE ─ THEY SUIT LONG-TERM TRANSACTIONS REQUIRING FLEXIBILITY TO MAKE ADJUSTMENTS OVER TIME. THE ADOPTION OF RELATIONAL EXCHANGES IN THE SERVICES AND MANUFACTURING SECTORS HAS RECEIVED SIGNIFICANT ATTENTION FROM A RANGE OF LITERATURES, INCLUDING TRANSACTION COST ECONOMICS (TRANSACTIONS OF THE MIDDLE RANGE),[4] SOCIOLOGICAL APPROACHES (NEO-LIBERAL FORMS OF GOVERNANCE),[5] AND SUPPLY CHAIN MANAGEMENT (JAPANESE-STYLE PARTNERSHIPS).[6] THE THREE STRANDS OF RESEARCH SHARE A COMMON INTEREST IN FINDING SETS OF CONDITIONS AND INCENTIVES THAT CAN DRIVE INDEPENDENT FIRMS TO PERFORM WELL AND BEHAVE IN A TRUSTWORTHY MANNER THROUGHOUT A RELATIONAL TRANSACTION. NOTWITHSTANDING CONTROVERSY,...
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