6 : Motivating the Project Coalition

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6 Motivating the Project Coalition

• There are so many advisors and sub-advisors
  involved in the channel fixed link project that
  I hate to think of the amount of paperwork being
  produced. One thing is for sure, none of them are
  digging a tunnel
• The Sunday Times

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Motivating the Project Coalition

• the problem of moral hazard
• the problem of switching costs
• managing moral hazard
• contractual uncertainty and risk allocation
• the dynamic of adversarial relations
• alliancing

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The Problem of Moral Hazard

• suppliers do not share information
• impacted information
• buyers cannot monitor quality
• performance measurement problems
• uncertainties regarding facility exploitation
• possible mission changes
• the role of complex contracts
• standard forms and economising on transaction
  costs

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The Problem of Switching Costs

• the fundamental transformation
• pre- and post-contract asset specificity
• supplier flexibility and client lock-in
• the sources of switching costs
• transaction costs of retendering
• inability to recover losses from new supplier
• litigation
• risk premium charged by new supplier
• the opportunistic margin
• the cap of client switching costs

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Managing Moral Hazard The Role of Complex
Contracts

• specify adjustment conditions
• specify authority systems
• provide incentives
• provide administered pricing systems
• provide conflict resolution procedures
• specify standardised operating procedures
• post credible commitments
• provide for supplier performance measurement

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Contractual Uncertainty and Risk Allocation

• three options
• fee-based contracts
• fixed-price contracts
• incentive contracts
• incentive contracts requirements
• responsibility for changes in specification

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Incentive Contracts Requirements

• benefit greater than cost of incentive
• drivers of performance in the control of the
  motivated actor
• rewards from consummate performance greater than
  penalties from perfunctory performance
• gains and losses accurately measurable
• benefits greater than costs of measurement
• an incentive contract

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Incentive Contract with GMP
gain (i.e. negative variance)
clients savings
contractors
rewards
ACOgt ACe
ACO lt ACe
contractors risk
clients risk
budget sanction (ACe)
GMP
loss (i.e. positive variance)
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Gainshare Schedule Incentive Scheme
gainshare ()
early
late
time (days)
target date
cap
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The Andrew Gainshare Formula
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Responsibility for Changes in Specification

• client responsibility
• supplier responsibility
• the contractual options
• cost reimbursable
• percentage fee
• guaranteed maximum loss
• pure incentive contract
• guaranteed maximum price
• unit rate
• lump sum

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Responsibility for Changes in the Specification
fee -based
incentive contract
cost reimbursable
guaranteed maximum liability
percentage fee
incentive contract
fixed price
guaranteed maximum price
client responsibility
level of uncertainty at contract formation
unit rate
lump sum
supplier responsibility
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Governing the Contract and the Role of Third
Parties

• transaction costs
• search costs (15-20 adverse selection)
• costs of preparing and agreeing contract with
  selected supplier
• costs of dispute resolution
• costs of hiring third parties
• the role of third parties

10
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Principal, Agent and Third Party In the
Professional System
project definition
principal (client)
agent (architect/engineer)
control (architect/engineer)
project execution
agent (contractor)
principal (client)
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The Role of Third Parties

• measurement of supplier achievement
• speedy adjustment of minor changes
• first line of dispute resolution
• trading in probity
• principal quantity surveyor
• bureau de contrôle
• supervising officer/the engineer
• the professional institutions

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The Dynamic of Adversarial Relations

• the dynamic of adversarial relations
• getting the best deal
• generating transaction costs
• cost control, not cost reduction
• the dynamic of over-engineering
• responsibility for design
• lack of expertise in site processes
• add in safety margin
• the dynamic

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The Dynamic of Adversarial Relations and
Over-Engineering
competitive tendering
client
trim margins
audit control
adversarial relations
opportunistic behaviour
complete specification
avoid litigation
over- engineer
responsibility for design
client
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Alliancing

• single project partnering
• sharing information
• sharing risks
• motivating performance
• incentive contracts