Cost Plus Construction Contract - Awareness

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TitleGain/pain share and relational strategies to enhancevalue in target cost and GMP contracts

Author(s) Mahesh, Gangadhar.

Citation

Issue Date 2009

URL http://hdl.handle.net/10722/128694

RightsThe author retains all proprietary rights, (such as patentrights) and the right to use in future works.


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Gain / Pain Share and Relational Strategies to

Enhance Value in Target Cost and GMP Contracts

By

Gangadhar Mahesh

B.Arch., Malnad College of Engineering, University of Mysore, India

M.Eng. (Infrastructure Engineering), Asian Institute of Technology, Thailand

A Thesis submitted in partial fulfillment of the requirements for the Degree of

Doctor of Philosophy at The University of Hong Kong, Hong Kong

May 2009


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Abstract of thesis entitled

Gain / Pain Share and Relational Strategies to Enhance Value in Target Cost

and GMP Contracts

Submitted by

Gangadhar MAHESH

For the degree of Doctor of Philosophy

at The University of Hong Kong

in May 2009

The last decade of the twentieth century saw the construction industry shift focus

from cost to value following several high profile reviews. The revamping

strategies of the industry in its quest for value were: (1) strategies for value and (2)

strategies for integration. However, recent reviews of effectiveness of these

strategies in achieving targeted step changes in value, indicate that these goals are

still elusive. Shortfalls have been attributed to difficulties in implementation and in

changing industry culture; and to improvements and rewards being not all inclusive,

e.g. value gains not percolating to contractor side of supply chain. In this context, the

core concepts of value, value creation and value capture (sharing of value gains)

were explored. Value creation and capture were reviewed in the context of

construction industry needs and expectations. Thereafter, value capture was defined

as a bargaining problem and game theory was used to explain the structure of value

creation and capture processes in a project setting through a three stage negotiations /

decisions model. It was demonstrated that the structure of these processes could and

often does lead to suboptimal outcomes of value capture. However, notwithstanding

demonstrated mutual benefits from cooperation, target cost / guaranteed maximum

price (TC / GMP) approaches have not been widely used, arguably due to

unfamiliarity with the concepts and their possibilities in the industry. In this context,

TC / GMP approaches were chosen as the focus for further investigation to

understand their strengths, weaknesses and potential to address above shortfalls.


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Having examined various options and possibilities, a decision support and

management framework was developed to capture and structure the required

knowledge; and to empower professionals to make more appropriate and informed

decisions. In achieving the above, the significance of a gain / pain share arrangement

that is inherent in TC / GMP approaches in terms of value and cooperation was

established with respect to the developed three stage negotiations structure. The

importance of selecting an appropriate sharing ratio, selecting it at the right point of

the project timeline, employing appropriate relational, and dispute management and

resolution strategies for improved value and relationships were also demonstrated.

Further, the factors influencing the selection of an appropriate sharing ratio,

contractor and sharing ratio selection modes, and best practices in employing

relational strategies and managing dispute resolution and management processes

were also investigated through case studies and surveys. The findings were

integrated and fed into developing the above mentioned framework for crafting and

administering TC / GMP approaches in ways that could achieve desired outcomes. A

model which provides pointers for selection of an appropriate sharing ratio and for

identifying the stage at which it should be selected, was also developed within the

framework. The above contributions to knowledge and applications are expected to

assist in developing appropriate TC / GMP contracts for scenarios where they could

add much value to procurement processes, thereby aiding industrys quest for higher

value and deeper sustainable relationships by empowering value creation and

capture through genuine cooperation.


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I

DECLARATION

I declare that this thesis represents my own work, except where due

acknowledgement is made, and that it has not been previously included in a thesis,

dissertation or report submitted to this University or any other institution for a degree,

diploma or other qualification

Signed --------------------------------------------------------------------------------------------

Gangadhar Mahesh


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II

ACKNOWLEDGEMENTS

I would like to express my profound gratitude to my Supervisor, Professor Mohan M.

Kumaraswamy for his guidance and help in this research work and for his support

and advice throughout my stay at The University of Hong Kong. I would also like to

convey my sincere thanks to Dr Thomas Ng, Dr O O Ogwuu, Dr. Ekambaram

Palaneeswaran and other faculty members for their evaluation and advice from time

to time.

I am thankful to HongKong Land (Hong Kong), Housing Authority (Hong Kong),

MTRC (Hong Kong), Gammon Construction Ltd (Hong Kong), Shui On

Construction and Materials Limited (Hong Kong) as organizations, their staff, all

other respondents of the questionnaires and expert members that were interviewed

for extending their support for facilitating information collection for this research.

Completion of this research report is an important milestone in my career and life,

credit of which goes to my family and friends, because of whom I envision; to my

supervisor Professor Mohan M Kumaraswamy because of whom I could achieve

what I envisaged; and to the almighty, by whose grace I got the opportunity to

achieve. As a token of appreciation this thesis is dedicated to them.


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III

TABLE OF CONTENTS

DECLARATION.........................................................................................................I

ACKNOWLEDGEMENTS...................................................................................... II

TABLE OF CONTENTS.........................................................................................III

LIST OF FIGURES ..............................................................................................VIII

LIST OF TABLES .................................................................................................... X

CHAPTER 1: INTRODUCTION.......................................................................... 1

1.1 Background .......................................................... ........................................................... ....... 1

1.2 TC / GMP Contracts................................................................................... ........................... 2

1.2.1 Selecting Sharing Ratio in TC / GMP Contracts................................................................. 3

1.3 Research Gap...................................................... ........................................................... ................. 31.3.1 Affinity towards Risk, Risk Perceptions and Resulting Strategies...................................... 4

1.3.2 Information Asymmetry and Information Flow........................................................... ....... 5

1.3.3 Managing Relational Risks and Providing Sufficient Motivation....................................... 6

1.3.4 Research Focus ........................................................... ........................................................ 6

1.4 Research Objectives................................................................. .............................................. 7

1.5 Significance of the Research.................................................................................................. 8

1.6 Research Scope..................................................... ........................................................... ....... 9

1.7 Overview of the Thesis................................................................................ ........................... 9

CHAPTER 2: RESEARCH METHODOLOGY ............................................... 13

2.1 Research Methodology ............................................................ ............................................ 13

2.2.1 Literature Review.................................... ........................................................... ............... 14

2.2.2 Case Study ........................................................ ........................................................... ..... 16

2.2.3 Interview ........................................................... ........................................................... ..... 16

2.2.4 Survey ..................................................... ........................................................... ............... 16

2.3 Selecting Appropriate Methods for This Research......................... .................................. 17

2.3.1 Research Initiation and Finalization of Research Topic.................................................... 18

2.3.2 Research Methods in Relation to Objectives ..................................................... ............... 182.3.3 Research Methods Utilized ............................................................. .................................. 20

2.4 Chapter Summary ......................................................... ...................................................... 22

CHAPTER 3: VALUE, RELATIONSHIPS AND PROJECT

NEGOTIATIONS .................................................................................................... 23

3.1 Chapter Introduction............................................................... ............................................ 23

3.2 Concepts of value, Value Creation and Value Capture........ ............................................ 23

3.2.1 Value ....................................................... ........................................................... ............... 24

3.2.2 Value Creation ............................................................ ...................................................... 26

3.2.3 Value Capture and its Significance for Value Creation and Relationships ....................... 26


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IV

3.3 Value Creation in the Construction Industry.................................. .................................. 27

3.4 Capturing Value in Construction Contracts ...................................................... ............... 30

3.5 Understanding Value Capture...................................... ...................................................... 34

3.6 Influencing Negotiations............................................................................. ......................... 35

3.6.1 Influencing Negotiations for Desired Outcomes......... ...................................................... 353.6.2 Influencing Negotiations for Better Relationships....................................................... ..... 40

3.7 Three Stage Model for Construction Project Negotiations .............................................. 41

3.8 Survey on Post-Tender Pre-Contract Negotiations............................................ ............... 42

3.8.1 Distribution of Questionnaire, Respondents and Response profile ................................... 43

3.8.2 Survey Results and Analysis ........................................................... .................................. 43

3.9 Chapter Summary ......................................................... ...................................................... 51

CHAPTER 4: FOCUSING ON TC / GMP APPROACH................................. 53


4.2 Introduction to TC / GMP Contracts.................................................................. ............... 53

4.2.1 Definition Target Cost Contract ............................................................ ......................... 54

4.2.2 Definition Guaranteed Maximum Price Contract...................................................... ..... 54

4.3 Distinctive Features of TC / GMP Approach ..................................................... ............... 55

4.3.1 Sharing Ratios ................................................... ........................................................... ..... 55

4.3.2 TC / GMP Adjustment mechanism .......................................................... ......................... 55

4.3.3 Avenue for Alternate Proposals ...................................................... .................................. 56

4.3.4 Joint Risk Management..................................... ........................................................... ..... 57

4.3.5 Open-book Accounting ......................................................... ............................................ 574.4 Implications of Distinctive Features................... ........................................................... ..... 58

4.4.1 Implications in terms of Value ........................................................ .................................. 58

4.4.2 Implications in terms of Cooperation and Relationships................................................... 59

4.4.3 Implications in terms of Risk Management ....................................................... ............... 60

4.5 Benefits of TC / GMP Contracts....................................................... .................................. 60

4.5.1 Perceived Benefits - Costs .................................................... ............................................ 60

4.5.2 Perceived Benefits - Time..................................................... ............................................ 61

4.5.3 Perceived Benefits - Quality ........................................................... .................................. 61

4.5.4 Perceived Benefits - Relationships.................................................. .................................. 62

4.6 Potential Pitfalls of TC / GMP Approach........................................................... ............... 62

4.6.1 Associated Risks ......................................................... ...................................................... 62

4.6.2 Requirement of Enhanced Interaction and Commitment .................................................. 63

4.6.3 Unfamiliarity with TC / GMP Approach and Methodology ............................................. 63

4.7 Rationalizing the Choice of GMP Contracts as the Main Focus of this Study ............... 64

4.7.1 Why TC / GMP Contracts?................................................... ............................................ 64

4.7.2 Significance of Sharing Ratio ......................................................... .................................. 65

4.8 Selection of Sharing Ratio....................................................... ............................................ 68

4.8.1 Factors Influencing Selection of an Appropriate Sharing Ratio................................... ..... 69


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V

4.8.2 Selection Mode ........................................................... ...................................................... 74

4.8.3 Selection Timeline ...................................................... ...................................................... 75

4.8.4 Effects of Information Flow Timeline on Efficiency of Selected Sharing Ratio .............. 76

4.9 Value Flow via Negotiations in GMP Contracts .......................................................... ..... 76

4.9.1 Negotiations / Decisions for Value in Stage 1 (pre-tender stage) ..................................... 774.9.2 Negotiations / Decisions for Value in Stage 2 (from tender to contract stage) ................. 78

4.9.3 Negotiations / Decisions for Value in Stage 3 (from contract to final accounts stage)..... 78

4.10 Relational Strategies and TC / GMP Approach....................................... ......................... 79

4.10.1 Value through Relational Strategies .................................................... ......................... 79

4.10.2 Dispute Resolution and Management......................................... .................................. 80

4.11 Chapter Summary ......................................................... ...................................................... 81

CHAPTER 5: CASE STUDIES........................................................................... 82


5.2 Case Study 1 ......................................................... ........................................................... ..... 82

5.2.1 Data Collection Methods................................................................. .................................. 82

5.2.2 Procurement Strategies.......................................................... ............................................ 83

5.2.3 Three Stage Model as Applied to the Case ........................................................ ............... 85

5.2.4 Overall Outcomes ....................................................... ...................................................... 90

5.2.5 Risk Management ....................................................... ...................................................... 91

5.2.6 Partnering at Work as a Relational Strategy ...................................................... ............... 92

5.2.7 Key Observations from Case Study 1 ...................................................... ......................... 93

5.3 Case Study 2 ......................................................... ........................................................... ..... 935.3.1 Data Collection Methods................................................................. .................................. 94

5.3.2 Procurement Strategies.......................................................... ............................................ 94

5.3.3 Three Stage Model as Applied to the Case ........................................................ ............... 95

5.3.4 Overall Outcome ......................................................... .................................................... 101

5.3.5 Risk Management ....................................................... .................................................... 102

5.3.6 Partnering as a Relational Strategy .......................................................... ....................... 102

5.3.7 Key Observations from Case Study 2 ...................................................... ....................... 103

5.4 Case Study 3 ......................................................... ........................................................... ... 103

5.4.1 Data Collection Methods................................................................. ................................ 104

5.4.2 Meeting with HKCA Members....................................................... ................................ 104

5.4.3 In-house Workshops........................................................................ ................................ 105

5.4.4 Meeting with Overseas Advisors of Client ........................................................ ............. 106

5.4.5 Key Observations from Case Study 3 ...................................................... ....................... 107

5.5 Collective Observations from Case Studies ........................................................ ............. 107

5.6 Chapter Summary ......................................................... .................................................... 108

CHAPTER 6: SURVEY RESULTS AND ANALYSIS ................................... 109

6.1 Chapter Introduction............................................................... .......................................... 1096.2 Survey on Sharing Ratio; and Origin and Resolution of Disputes in GMP.................. 109


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VI

6.2.1 Survey Design and Administration .......................................................... ....................... 109

6.2.2 Sample Selection...... ............................................................. .......................................... 110

6.2.3 Survey and Interview Protocol........................................................ ................................ 111

6.2.4 Results and Analysis ................................................... .................................................... 111

6.2.5 Summary and Implications of Results.......................................................................... ... 1246.3 Survey on Joint Risk Management................................................................................ ... 125

6.3.1 Survey Design................................................... ........................................................... ... 126

6.3.2 Results and Analysis ................................................... .................................................... 127

6.3.3 Implications of Results and Limitations.......................................... ................................ 128

6.4 Chapter Summary ......................................................... .................................................... 129

CHAPTER 7: DECISION SUPPORT AND MANAGEMENT

FRAMEWORK FOR PROMOTING DESIRED OUTCOMES AND MODEL

FOR SELECTING APPROPRIATE SHARING RATIO ................................. 1317.1 Chapter Introduction............................................................... .......................................... 131

7.2 Decision Support and Management Framework ......................................................... ... 131

7.2.1 Identify Project and Client Characteristics, and Value Creation and Capture Opportunities

134

7.2.2 Contractor Selection Strategy.......................................................... ................................ 134

7.2.3 Sharing Ratio Selection Strategy..................................................... ................................ 135

7.2.4 Effective and Efficient Dispute Management and Resolution Strategy.......................... 136

7.2.5 Relational Strategies and JRM........................................................ ................................ 136

7.3 Model for Selection of an Appropriate Sharing Ratio............................. ....................... 137

7.4 Framework and Model Validation................................................... ................................ 139

7.5 Chapter Summary ......................................................... .................................................... 140

CHAPTER 8: CONCLUSIONS AND RECOMMENDATIONS................... 142

8.1 Chapter Introduction............................................................... .......................................... 142

8.2 Conclusions & Recommendations .................................................... ................................ 142

8.2.1 Research Methodology and Methods....................................................... ....................... 143

8.2.2 Value Creation and Value Capture.................................................. ................................ 143

8.2.3 TC / GMP Approach and Appropriate Sharing Ratio Selection...................................... 1448.2.4 Relational Strategies........................................................................ ................................ 144

8.2.5 Dispute Resolution and Management ...................................................... ....................... 145

8.3 Generalising Conclusions for Procurement........................................................ ............. 145

8.4 Limitations................................................................................ .......................................... 146

8.5 Scope for Further Studies ....................................................... .......................................... 146

8.6 Contribution to Knowledge........................................................................ ....................... 147

REFERENCES.......................................................................................................149

APPENDIX A ......................................................................................................... 163

APPENDIX B ......................................................................................................... 167


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VII

APPENDIX C ......................................................................................................... 172


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VIII

LIST OF FIGURES

Figure 2.1: Methodology............................................................................................ 15

Figure 3.1: Positive Differential Zone ....................................................................... 25

Figure 3.2: Mutual Benefits Gained from the Exchange ........................................... 25

Figure 3.3: Value Addition as Translated to Value Differential Zone....................... 26

Figure 3.4: Transactional Forces in a Traditional Project Set Up.............................. 28

Figure 3.5: Performance of Relational and Transactional Integration Measures....... 30

Figure 3.6: Relational and Transactional Forces Map for Commonly used

Combination of Integration Measures................................................................ 31

Figure 3.7: Decision Making Model in Negotiations (Watkins 1998)....................... 38

Figure 3.8: Proposed Three Stage Model................................................................... 42

Figure 4.1: Target Cost Contract with 50:50 Share Profile (adapted from Broome and

Perry 2002)......................................................................................................... 70

Figure 4.2: Share Profile with Capped Employer Commitment (adapted from

Broome and Perry 2002) .................................................................................... 70

Figure 4.3: Share profile with Capped Employer Commitment and Any Saving Re-

invested In (adapted from Broome and Perry 2002).......................................... 71

Figure 4.4: Share Profile with Progressive Cap (adapted from Broome and Perry

2002) .................................................................................................................. 71

Figure 4.5: Share Profile for Medium Risk Project and Financially Strong Client

(adapted from Broome and Perry 2002) ............................................................ 72

Figure 4.6: Share Profile for Risky project, Financially Strong client and Risk-Averse

Contractor (adapted from Broome and Perry 2002) .......................................... 72

Figure 4.7: Share Profile with Neutral Band (adapted from Broome and Perry 2002)

............................................................................................................................ 73

Figure 4.8: Share Profile for Multi-contract Project (adapted from Broome and Perry

2002) .................................................................................................................. 73

Figure 4.9: Main Thread of Negotiations in TC / GMP............................................. 77


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IX

Figure 7.1: Decision Support and Management Framework for Value in TC / GMP

approach ........................................................................................................... 133

Figure 7.2: Indicative Model for Sharing Ratio Selection given Project

Characteristics and Stakeholder Profile ........................................................... 138


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X

LIST OF TABLES

Table 3.1: Dimensions of 3-D Negotiations (adapted from Lax and Sebenius 2006)35

Table 3.2: Survey results Duration of P-T P-C negotiations (organization type)... 44

Table 3.3: Survey Results Duration of P-T P-C Negotiations (client type and

project type) ....................................................................................................... 45

Table 3.4: Survey Results Frequency of Use of Negotiation Strategies and Tools

(organization type) ............................................................................................. 46

Table 3.5: Survey Results Frequency of Use of Negotiation Strategies and Tools

(client and project type) ..................................................................................... 46

Table 3.6: Survey Results Significance of P-T P-C Negotiations for Relationships

(organization type) ............................................................................................. 48

Table 3.7: Survey Results Significance of P-T P-C Negotiations for Relationships

(client and project type) ..................................................................................... 48

Table 3.8: Causes of Delay (organization type)......................................................... 49

Table 3.9: Spearmans Rank Correlation Test between Groups of Respondents for

Causes of Delay ................................................................................................. 50

Table 3.10: Issues Discussed / Negotiated in P-T P-C Negotiations with respect to

Different Procurement Strategies ....................................................................... 50

Table 3.11: Spearmans Rank Correlation Test between Groups of Respondents for

Issues Discussed / Negotiated with respect to Different Procurement Strategies

............................................................................................................................ 51

Table 5.1: Breakdown of GMP Amount in Case Study 1.......................................... 86

Table 5.2: Negotiation Behavior and Residual Feeling in Case Study 1 ................... 90

Table 5.3: Breakdown of GMP Amount in Case Study 2.......................................... 98

Table 5.4: Negotiation Behavior and Residual Feeling in Case Study 2 ................. 100

Table 5.5: Frequency and Efficiency of Negotiation Tactics Type in Case Study 2101

Table 6.1: Survey Results - Efficiency of Outcomes for Contractor Selection Method

and Price Type ................................................................................................. 112


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XI

Table 6.2: Survey Results - Efficiency of Outcomes for Sharing Ratio Selection

Mode ................................................................................................................ 114

Table 6.3: Survey Results - Efficiency of Outcomes for Types of Sharing Ratios . 116

Table 6.4: Survey Results Influencing Factors for Sharing Ratio Selection......... 118

Table 6.5: Survey Results Origin of Savings from TC / GMP Approach ............ 119

Table 6.6: Survey Results Interplay between Sharing Ratio and Influencing Factors

.......................................................................................................................... 121

Table 6.7: Survey Results Dispute types, Reduction causes and Influencing Factors

.......................................................................................................................... 122

Table 6.8: Contribution Matrix ................................................................................ 127

Table 6.9: Frequency - Risk Management with respect to Each Stage.................... 128

Table 7.1: Validation Results................................................................................... 140


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1

CHAPTER 1:INTRODUCTION

This chapter introduces the background of the research topic, points out the research

gap, identifies the aims and objectives of the research, emphasizes its significance,

demarcates its scope and provides an overview of the rest of the chapters.

1.1 BACKGROUND

The construction industry is known to operate in an adversarial environment which

gives rise to non-productive disputes and disrupted relationships between the

stakeholders resulting in calls to revamp industry practices for better performance

and relationships (Latham 1994; Egan 1998, 2002). The revamping strategies of the

industry which were mainly channeled towards mitigating this adversarial

environment can be classified generally into two broad categories, namely:

(a) Strategies for Value: strategies with aims to create value (such as value

management, lean construction, joint risk management through partnering etc) and

also to distribute value between the stakeholders (such as through gain / pain share

arrangements, other incentivisation measures, alliancing, framework agreements etc)

in targeting better performance; and

(b) Strategies for Integration: strategies with an aim to integrate stakeholders both

structurally and relationally (such as JVs, partnering, alliancing, relational

management stakeholder management etc) for achieving improved cooperation, and

evidently evoking overlaps with the foregoing strategies for value.

However, as Langford (2007) noted, the results of Industrys efforts still remain

elusive due to shortfalls in implementation and the improvements being not all

inclusive. This has resulted in rewards being lower than expected, and also limited to

big clients and contractors at the top of the supply chain. For example, Sze et al.

(2003) confirmed the exclusive nature of non-contractual partnering that tended to

exclude consultants and subcontractors in Hong Kong.

In addition to these strategies, various procurements methods such as design-build,


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GMP / target cost, PPPs which are also strategies aimed at achieving value and

integration, and aid in implementation of the above mentioned strategies have been

in use in the construction industry for many years. However, the desired significant

breakthrough has failed to materialize even with these initiatives, and the search for a

suite of improved procurement approaches that can uplift the industry still continues

(Kumaraswamy 1998, Dissanayaka and Kumaraswamy 1999).

In this context, of particular interest are cases that indicate the success of the

guaranteed maximum price (GMP) and target cost contracting (TCC) procurement

approaches with a gain-share / pain-share arrangement as an incentive mechanism.

These approaches to procurement have been intensely promoted and implemented in

the United Kingdom and Australia and their relative success has been widely

reported. The Report of the Construction Industry Review Committee (CIRC 2001)

in the Hong Kong Special Administrative Region also recommended the use of GMP

and TC contracts for complex and high-risk construction projects.

1.2 TC / GMP CONTRACTS

TC / GMP contracts are incentive-based procurement strategies which reward thecontractor for any savings made against the TC / GMP and penalize him when this

sum is exceeded as a result of his mismanagement according to a pre-agreed share

ratio (Masterman 2002, Bresnen and Marshall, 2000). TC / GMP contracts are also

generally accompanied by relational strategies such as partnering, alliancing to foster

trust which is seen as a requirement by many studies for effective and efficient

management of such contracts. These strategies have been shown to achieve

considerable mutual benefits to all of the parties involved, provided they are properly

structured, implemented and managed (Trench, 1991; Walkeret al., 2000).

The mutual benefits are generally perceived to stem from the pain / gain share

(incentivisation) strategy which has been shown to promote joint risk management.

These mutual benefits are believed to be enhanced by accompanying relational

strategies which many studies report as improving cooperation. In this context, it can

be safely assumed that the selection of appropriate gain / pain share arrangement is

an important aspect of procuring through TC / GMP contracts.


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1.2.1 Selecting Sharing Ratio in TC / GMP Contracts

In a TC / GMP contract, there are three negotiable terms: (a) target cost, (b) target

profit and (c) a sharing ratio (Gandhi, 1979). Although Perry and Barnes (2000) haveshown that the sharing ratio, the target cost and target fees are interrelated, there have

been few studies focusing on the negotiation of a TC / GMP contract in the context

of the construction industry and on the factors that influence the selection and

negotiation of pain / gain share ratios. Broome and Perry (2002) have indicated the

need for an in depth study on how to select a sharing ratio in a TC / GMP contract.

Badenfelt (2008) indicates that there is lack of clear preferences regarding sharingratios in the industry. From an extensive review of literature he summarizes the

following key factors as important in negotiating a sharing ratio in a TC / GMP

contract: (a) the clients and contractors perceived level of risk, (b) their attitudes

towards risk, with risk-averse contractors arguing for a low sharing ratio when the

uncertainty level is high, (c) the desire to influence the contractors motivation, with

the size of the sharing ratio affecting the contractors motivation to keep costs down,

(d) the contracting parties initial perception of the accuracy of the negotiated target

cost, (e) the size of the target profit, with a large profit encouraging the contractor to

choose a higher sharing ratio and (f) the contractors desire to increase the chances

for profit in the longer term. He concludes that there should be more study of the

interaction of risk and the selection of a sharing ratio and stresses the importance of

dealing with asymmetric information risks while designing the contract. He also

mentions the need for accounting of relational risks while selecting a sharing ratio.

1.3 RESEARCH GAP

Various studies, as for example cited above, acknowledge that different sharing

ratios can lead to different levels of project performance and call for research

towards determining the parameters of selecting an appropriate sharing ratio.

Selecting an appropriate sharing ratio for achieving value for all stakeholders is a

decision making problem involving judgment calls on several factors as in Section

1.1 above and as also indicated by case studies undertaken as a part of this research.

These factors are: (a) stakeholders affinity towards risk (b) perceived risks of


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stakeholders, (c) managing information asymmetry and accounting for information

flow (d) managing relational risks (e) providing sufficient motivation for the

contractor to keep the costs down (f) providing sufficient motivation for the

contractor to innovate and for the client to accept innovations.

These factors are analyzed in related groups in the following sub-sections to unveil

the decision making problems they evoke when striving for selection of an

appropriate sharing ratio. A substantiated research gap is identified in the absence of

an integrated model for selection of an appropriate sharing ratio when given project

characteristics and relevant data. The research focus is then directed to developing a

decision support framework which assists through a sequence of required key

decision nodes, in selecting an appropriate sharing ratio for sets of given project

characteristics.

1.3.1 Affinity towards Risk, Risk Perceptions and Resulting Strategies

Risk is a key criterion while pricing any contract and more so with respect to TC /

GMP contracts because of the unique elements of risk sharing arising out of pain /

gain share mechanism that accompany these contracts. Many studies have explored

the relationship between degree of affinity towards risk and the selection of sharing

ratio (Scherer 1964, Bernhard 1988, Broome and Perry 2002, Al-Harbi 1998).

However, they do not venture into the realms of the perceived risk of stakeholders for

a given sharing ratio influencing the target price and the stakeholders resorting to

opportunism if their perceived risks are high which can be detrimental to project

outcome. The roots for possible opportunistic behavior are in the definition of the

contingencies allowed for in design development which enable adjustments of TC /

GMP.

Unclear definitions of design development contingencies have been identified as a

potential pitfall in implementing these contracts. This is because too little scope for

design development diminishes the attractiveness of gain share arrangement and too

high scope for design development increases the associated risks. Also, the tendency

of a contractor is to view all variations as scope changes that would increase the TC

/ GMP higher whereas a client would want to keep as many changes as possible


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under design development to minimize cost increases and reap the benefits of

potential cost savings. Hence, unclear definitions generally lead to disputes over

whether client instructions in construction phase are TC / GMP scope change

variations (TC / GMP price to be adjusted) or are part of design development (hence

part of contractors risk), thereby diminishing value and cooperation, and hurting

relationships.

1.3.2 Information Asymmetry and Information Flow

Information differences among negotiators lead to inefficient outcomes as shown by

Cramton (1984) and information is the key to selecting an appropriate savings ratio

as it provides significant insights to the opportunities, challenges and risks inherentin the project. Information asymmetry is common in the construction industry. For

instance, a clients information about the construction industry market is generally

less than that of the contractor and a contractors interpretation of the scope of the

project can be significantly different from that of the clients. Minimizing

information asymmetry requires information exchange which generally occurs in the

form of tender documents and tender submissions in case of competitive bidding and

through discussions in case of negotiated contracts. In this respect, negotiated

contracts have been seen to lead to better information exchange and thus better

outcomes as compared to competitively bid contracts (Rothkopf 1969, Obrien et. al.

1995, Briscoe et. al. 2003).

However, the mode of selection has a significant impact on the selection of sharing

ratio and the project outcome in a TC / GMP contract. This is both due to the

collaborative nature of the contract and also due to opportunities and risks for

maximizing value to both the stakeholders by means of adjusting TC / GMP.

Additionally, the degree of information completeness in a construction project is

very much dependant on level of detail and accuracy of scope, design and other

relevant documents at the point of opting for tendering / negotiation. This makes it

imperative to balance the need of project acceleration against the necessities of

having adequate information for arriving at an efficient outcome.


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1.3.3 Managing Relational Risks and Providing Sufficient Motivation

Relational risk depends on the level of cooperation between the contracting partners

and deals with the probability that an agent may demonstrate opportunistic behavior

(Das and Teng 2001, Elmuti and Kathawala 2001, Ireland et al. 2002). The choice ofa sharing ratio, being an upstream event of a project timeline, can have effects on

cooperation during downstream events of a project timeline. In a collaborative

arrangement such as a TC / GMP contract a displeased partner may blame the

partnering company, and thus increase the perceived relational risk (Elmuti and

Kathawala, 2001). An increase in perceived relational risk can cause disastrous

consequences as described in Section 1.3.1.

Perry and Barnes (2000) suggest that a sharing ratio with a higher share of savings

for the contractor increases the contractors motivation to renegotiate the target cost

for new events that occur during the course of the contract. However, they also argue

that the client should avoid setting the contractors share at less than 50 per cent, for

a low share decreases the contractors motivation to reduce the actual cost. This

dichotomy extends to what is the appropriate sharing ratio which motivates the

contractor to innovate for value. A higher share of savings to the contractor arising

out of innovation can result in the client viewing it as a cost cutting ploy and

rejecting it without a fair evaluation while a lower share may not provide the

contractor sufficient motivation to innovate. Also, the type of strategies implemented

to manage relationships on the project can affect both the management of relational

risks and the motivational levels of stakeholders.

1.3.4 Research Focus

Selection of an appropriate sharing ratio for a given project involves interacting

factors as shown above and is a sequential decision problem requiring answers to the

following questions:

(a) What should be the scope for design development?

(b) What should be the definition of design development?

(c) What should be the mode of contractor selection?

(d) What should be the point of contractor involvement?


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(e) When should the savings ratio be fixed?

(f) When should the tendering / negotiation take place?

(h) What relational strategies are appropriate?

Depending on the answers to the above questions and based on the requirements of

the project, a project manager is further required to make a judgment call as to

maintaining the right balance between the requirements of managing relational risks

and providing sufficient motivational incentives to stakeholders. However, no

framework exists at present to assist and guide a project manager in the process of

making these decisions. The aims and objectives as set out in the succeeding section

were formulated to address this problem.

1.4 RESEARCH OBJECTIVES

The aim of this research was crystallized in the context of the above mentioned

research gaps, to provide significant and original contributions to the knowledgebase

on TC / GMP contracts. Specifically, the aim of this research is to provide a

framework for improving the utilization of pain / gain share arrangement and

associated relational strategies to provide enhanced value (project performance) for

all stakeholders involved from project conception to project delivery. In achieving

the above aim, the proposed research has the following objectives:

To develop an integrated model for decision making towards selection of

appropriate pain / gain share arrangement depending on project requirements

and characteristics, and stakeholders profiles to improve project value.

To identify relational strategies that foster integrative value sharing and thus

improve cooperation between stakeholders

To integrate the proposed relational strategies with the developed decision

making model into an overarching framework for TC / GMP contract

management for minimizing disputes, improving cooperation and enhancing

value

To provide a set of guidelines towards administering the framework


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To identify applicable strategies from above that may be beneficially

implemented in other procurement (non TC/GMP) approaches through

further research.

1.5 SIGNIFICANCE OF THE RESEARCH

Procurement through GMP / TC is associated with a cost premium as compared to

traditional procurement methods (Mills and Harris, 1995). The costs generally stem

from the longer time required to draft and tender a TC / GMP contract and the higher

level of commitment and supervision required from the management. Unfamiliarity

of stakeholders with TC / GMP contracts and its mechanisms have also been cited as

a potential pitfall in successful procurement through them (Sadler 2004). In this

context, a case study client conveyed that they were wary of pursuing a TC / GMP in

too many work packages / contracts at the same time given the limited number of

contractors who could perform well in this environment at present.

The absence of widely accepted and localized standard forms of TC / GMP contracts

also exacerbates the difficulties for project managers in drafting and managing them.

Gander and Hemsley (1997) point out the possibilities of drafting errors andmisunderstanding of liabilities between the parties when unfamiliar with the concepts.

Tendering a TC / GMP contract is longer and complex. Tay et al. (2000) suggest that

it is difficult to evaluate the revised contract price when an alternative design is

proposed by the contractor and it takes time to reassess the cost implication. Most of

these difficulties can be minimized (if not eliminated) by providing a better overall

understanding of the complexities of TC / GMP contracts.

The proposed framework that is to be developed will harness the latent knowledge of

practitioners experienced in drafting, tendering and administering a TC / GMP

contract and set it in a generalized contextual perspective of project characteristics

and conditions. The framework and model will unravel the complexities of TC /

GMP mechanisms and provide a better understanding of the consequences of

available options and decisions taken.


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A better holistic understanding is expected to lead to appropriate decisions and

thereby improve value for the stakeholders. Guidelines provided on decision making

when given a set of projects characteristics and conditions are expected to aid the

project manager in the decision making process, thereby cutting down the time

required for decisions and easing the difficulties in arriving at them. These potential

benefits are expected to aid in propagating the use of TC / GMP contracts for

procurement and this should assist in the industrys quest for higher value and

deeper relationships (true integration) thereby fostering value addition and genuine

cooperation.

1.6 RESEARCH SCOPE

This research focuses on two key areas value and relationships, briefly in relation

to procurement in general, and in more detail and depth in the specific context of TC

/ GMP contracts. The research also explores wide ranging and relevant issues

concerning construction project management which are strongly intertwined with

value and relationships in a project such as:

Risk management Contracts management

Negotiations management (through game theory in this research)

Perceptions of value and value management

Selection of contractors

Concepts of cooperation and relationship management

Dispute Management and Resolution

Supply chain management (limited to aspects of value and relationships)

1.7 OVERVIEW OF THE THESIS

The main body of this thesis consists of eight chapters. The background of the

research topic, the research gap, its aims and objectives along with its significance

and scope are discussed in the preceding sections of this chapter (Chapter One).

Chapter Two introduces and reviews various methodologies generally utilized in

construction management research, assesses their potential against the requirements


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of this research topic, spells out the choices made for the study and provides

justifications for the selection. Chapter Three in a traditional thesis outline generally

involves literature review. However, in the context of multiple concepts utilized in

this thesis, it is felt that providing a collective literature review will hinder ease of

reference and confuse the reader. Hence, the literature review is spread out in this

thesis and is presented as and when the relevant concepts appear first in use.

Chapter Three explores the concepts of value and defines value, value creation and

value capture (sharing of added value) in the context of this research. The

significance of value capture perceived value in fostering value creation and

improving risk management, relationships and cooperation is brought out. Value

capture is linked to negotiation outcomes. Value creation and value capture processes

in the construction industry from project conception to project delivery are reviewed

and negotiations in a life cycle of a construction project are analyzed and classified

from game theory perspective. A three stage model based on the presented analysis

and classifications is developed to explain the complex inter-linkages of negotiations

of individual issues influencing the overall outcome and relationships. Diverse

strategies and tools for influencing negotiation outcomes and improving relationships

are unraveled from the literature and outlined.

Chapter Four explores TC / GMP contracts in detail to provide an understanding of

their characteristics, benefits and associated risks. General distinctive features of TC

/ GMP contracts such as incentivasation and accompanying relational strategies like

open book accounting, partnering and so on are described and analyzed to provide

understanding on their implications for value, negotiations, dispute resolution and

management, cooperation and risk management. Further, justifications for the

selection of TC / GMP contracts for the research are provided and the three stage

model of negotiations is applied to delineate the structure of negotiations in a TC /

GMP contract. The significance of selecting an appropriate sharing ratio at the right

point of the project timeline for achieving improved value and relationships is

revealed.

Chapter Five presents three case studies (two on GMP contracts and one on a TCcontract) undertaken as part of this research. A description of each project and the


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research methods used for data mining in the case are provided. The rationale of the

stakeholders in choosing TC / GMP contract as the procurement option and the key

risks associated with the projects are explained. Distinctive contract conditions and

management strategies in each project are brought out and analyzed in terms of their

implications for value, negotiations, cooperation and risk management. Key

observations from document review and participating in stakeholder meetings along

with key perceptions generated from analysis of semi-structured interviews and

questionnaire surveys of stakeholders are described. The format of semi-structured

interviews and mini-questionnaires used are provided in Appendix A at the end of

the thesis. The findings are seen to generally buttress the significance of selecting an

appropriate sharing ratio at the right point of the timeline in achieving improved

value and relationships. Additionally, they are found to support the utilization of

relational strategies to improve project outcome and cooperation.

Chapter 6 presents the major questionnaire survey of this thesis and discusses the

findings from this survey. The survey itself is an interview based survey on different

types of gain / pain share ratios, their implications on value and cooperation along

with dispute resolution and management in TC / GMP contracts. The survey

methodology is described and the interview format and the questionnaire itself are

provided in Appendix B. Despite the lack of preference towards particular gain /

pain share ratios in the industry as seen in the literature, the findings indicate

significant correlations between project characteristics and the perceived appropriate

sharing ratio that will produce an efficient and effective outcome. The findings also

strengthen the need for relational strategies to enhance cooperation. This is

considered to validate the hypothesis of this study that different project

characteristics require different sharing ratios to produce efficient project outcomes.

Chapter Seven integrates the findings from the case studies and the survey presented

in Chapter Six with strategies and tools for influencing negotiation outcomes and

improving relationships described in Chapter Three to develop a model for selecting

appropriate gain / pain share ratios when given project characteristics and

stakeholders risk affinities. The model validation process is described and validation

results are presented. The developed models usage is contingent upon (a) having afirm contractor selection strategy, (b) mapping project information flow and (c)


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identifying value generation opportunities and associated risks. Therefore, best

practices harvested from the case studies and literature reviews are used to formulate

guidelines to make the appropriate choices and to derive the details required. The

guidelines together with the model form the framework for improving the choice and

utilization of pain / gain share arrangement and associated relational strategies to

provide enhanced value for all stakeholders in accordance with the aim of this thesis.

Chapter Eight summarizes the main conclusions and recommendations, while

outlining the limitations of this research. The findings are generalized for adaptation

in traditional procurement if and where possible, while areas and scope for further

studies are identified. Chapter Eight is followed by references and next by an

Appendix section providing a list of publications arising from this research, as well

as presenting other relevant items contributing to the research itself.


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CHAPTER 2:RESEARCH METHODOLOGY

This chapter presents a brief overview of research methodologies employed in

construction management research and discusses their appropriateness in the given

context of this thesis and its objectives. The chapter also provides the rationale

behind the research method choices made along with an insight into the research

journey towards achieving the objectives. However, it does not delve into details of

the specific design aspects within the methodological choices made as they are

discussed at appropriate points in the thesis as and when they are mobilized, so as to

frame them in a more specific and relevant context.

2.1 RESEARCH METHODOLOGY

Value enhancement in construction projects employing TC / GMP contracting

approached is the aim of this research. Value enhancement as defined in Chapter 3

subsequently, is considered to consist of two distinct processes: (1) value creation

and (2) value capture or appropriation. Equitable value appropriation is brought out

as the critical requirement for value enhancement and value appropriation is

demonstrated to be a bargaining problem and analyzed within the concepts of game

theory. The underlying assumption in game theory is of bounded rationality. Since

the assumption of bounded rationality is a prerequisite to analyze a bargaining

problem in the context of associated uncertainties, the analysis in the research is

confined to the limitations arising from this assumption.

Within the realms of game theory, research questions as outlined in Subsection 1.3.4

of Chapter 1 suggest a sequential decision making problem involving single party

decisions and at times negotiations. Understanding the structure of the sequence of

decisions / negotiations is explorative research whereas modeling it to influence the

outcomes is interpretive research. Also, the research comprised of an applications

part wherein well established knowledge from decisions / negotiations research

needed to be transplanted into the realms of construction contracts.

In developing the methodology, the research aim was considered as consisting of 3parts which are (1) developing a structure for sequential decisions /negotiations in


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construction contracts (2) applying the developed structure on TC / GMP and

conducting an in-depth exploration of inter-linkages between decisions / negotiations

(3) identifying factors that influence the outcomes of the decisions / negotiations and

understanding the interplay between them. The research methods were carefully

reviewed for their suitability for addressing above requirements and a research

strategy involving four types of research method was formulated.

For developing a structure for sequential decisions / negotiations in construction

contracts and understanding the interlinkages, knowledgebase from game theory

literature was utilized. The choice was based on the primary question that game

theory answers which is to identify the conditions that will make it possible for two

rational opponents to cooperate in achieving an efficient, Pareto-optimal, outcome

which in essence is the purpose of this research in the context of construction

contracts. In addition, a three pronged approach of case studies, questionnaire

surveys, and interviews was used to flesh the gaps between the skeleton provided by

applying game theory. The rationale behind the selection of these methods is

discussed subsequently. A methodology map of the approach taken by this research

is illustrated in Figure 2.1.

2.2 REVIEW OF RESEARCH METHODS IN CM RESEARCH

Generally, researchers in construction management employ a spectrum of research

methods which can be broadly classified into four categories namely: literature

review, case studies, interviews and surveys.

2.2.1 Literature Review

Literature review is a critical appraisal of the existing body of scholarly knowledge

on the concerned topic. According to Cooper (1988) a literature review seeks to

describe, summarize, evaluate, clarify and/or integrate the content of reports of

primary or original scholarship. Apart from establishing the authors grasp on the

subject, literature reviews are meant to identify the gaps in the current knowledge

base, establish the need and significance for undertaking research to fill the gaps

identified and formulate research objectives and methodology for undertaking the


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research.

Figure 2.1: Methodology

Explore concepts of value, value

creation and value capture

Develop a structure (model) forsequential decisions / negotiations

in construction contracts

Literature Review

Explore TC / GMP approaches forimproving value creation & capture,

and relationships

Three Stage Model of negotiations inConstruction Contracts

Identify primary threads of negotiations / decision making which has significant

impact on value

Literature Review Game theor

Consolidate Literature review

Significance of gain / pain share arrangements

Explore and identify factors influencing gain / pain share arrangements, relational

strategies, dispute management and resolution

2 longitudinal case studies + 1 mini case study + 1 interview based Survey on

TC / GMP approach + 1 mini survey

Integrated findings in developing a decision support and managementframework + model for selection of an appropriate sharing ratio

Validated framework and model

Questionnaire surveyon three stage model

Final Output

Intermediate output Research Method

Purpose


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2.2.2 Case Study

A case study is defined an intensive study of a single group, incident, or community

(Shepard and Greene 2003) which in the context of construction management can be

termed as a study of a work package(s) or a project(s). Case studies provide anavenue for investigating issues in detail in a specific context and the data collected

can vary from first hand (primary data) involvement of the researcher in the

concerned project to second hand (secondary) data sourced through other research

methods inbuilt into the designed case study methodology such as document reviews,

interviews, surveys and so on.

Often considered to be narrow and deep in scope (Fellows and Liu 1997) because ofthe specific context, case studies yield both quantitative and qualitative data and are

of two types: (1) transverse a snapshot of the case at a given point of time and (2)

longitudinal a complete follow through of the case from initiation of the project to

completion. Selecting the appropriate approach from these two is generally

dependant on the requirements of the issue researched into, and external factors like

accessibility, confidentiality and the available timeframe as against the required

timeframe.

2.2.3 Interview

An interview is a qualitative research method aimed at gathering in-depth

information by harnessing facts and opinions on a particular issue as experienced by

a specialist/expert. As described by Fellows and Liu (1997) interviews can be

classified into three categories: (1) structured: rigid order with same questions (2)

semi-structured: same questions, but with a flexibility to follow tangential issues and

seek clarifications and (3) unstructured could be same questions but free flowing.

Selecting the appropriate method of the three has to address the requirements of the

issue being researched and the skills of the interviewer.

2.2.4 Survey

A survey is a standardized form of data collection from selected samples of a

population and is used to generate statistical inferences which can be generalized to


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the whole population. They are the most commonly used research method in CM

research with many advantages as summarized in Mangione (1995). However, they

are seen to be broader and shallow in scope as the data collected generally tends to

be standalone in the absence of contextual data.

Moreover, they have to be very carefully designed to benefit from the advantages, as

they are not open to the flexibility of adaptation as the study progresses (Delphi

method and longitudinal/sequential surveys are exceptions), which is possible in case

studies and interviews. Also, care needs to be taken while designing a questionnaire

to avoid ambiguity and redundancy and the reliability of the data collected depends

on the sampling choice.

2.3 SELECTING APPROPRIATE METHODS FOR THIS

RESEARCH

This research aims to achieve multiple objectives (as in Section 1.4, Chapter 1) by

relying on multiple concepts (as in Section 1.6 of Chapter 1). According to Fellows

and Liu (1997), the selection of an appropriate research method is dependant on the

scope and depth required for the given research topic. In addition, Robson (1993)suggests that results obtained by relying on a single research method cannot be

reliable as they would be limited by the restrictive aspects of the research method

used.

Moreover, there has been a raging debate as to whether qualitative or quantitative

research methods are the most appropriate choice for CM research and consensus is

that triangulated approaches should be used (Jick 1979, Blackwood et al. 1997, Love

et al. 2002). Black (1993) defines triangulation as the use of multiple research

methods and/or measures of a phenomenon to avoid the problems of bias and validity.

In addition to the requirements of appropriateness and reliability, the selection of

research methods used in this thesis was guided by one other factor: the genesis,

evolution and crystallization of the research focus and objectives over the timeline of

the research project, which also injected time constraints that curtailed the options

available. These are discussed in detail in subsequent sections.


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2.3.1 Research Initiation and Finalization of Research Topic

This research was initially initiated with the purpose of understanding negotiations in

construction contracts with an aim of improving efficiencies of their outcomes and

optimizing the distribution of perceived value between stakeholders; thereby

fostering relationships and enhancing cooperation between stakeholders. However,

feedback from expert academics suggested that the scope was too broad and the

industry would be better served with reliable outputs if the research focus was

narrowed down in terms of the contract type.

It is in this context, target price / GMP contracts were chosen as the focus area.

Extensive literature reviews identified the selection of the appropriate sharing ratio

for the project in target price / GMP contracts as the trigger which has significant

influence on value creation and distribution; and thereby on relationships and

cooperation (as discussed in detail in Chapter 4).

The evolution of this research along the timeline as delineated above in terms of

narrowing scope and refinement in research objectives placed certain constraints onresearch methods utilized which are: (1) data collected and research methods

initiated before the change in scope and objectives had to be utilized in the changed

context and (2) research methods had to be tailored to fit into the available time

frame. Nevertheless, the range of data and methodological tools available, provided

for achieving the planned objectives.

2.3.2 Research Methods in Relation to Objectives

The primary aim of this research was to develop an integrated model for decision

making for selecting appropriate pain / gain share arrangement depending on project

requirements and characteristics, and stakeholders profiles to improve project value

and foster relationships. Value in the context of fostering relationships and for the

purpose of this research was defined as a negotiated outcome between stakeholders,

the concepts of which are described in detail in Chapter 3.


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Hence, it was imperative for the research to understand the negotiations involved in

target price / GMP contracts and develop a generic model for the same. Developing a

process model for negotiations involved in target price / GMP contracts entailed

tracking a project from initiation to completion. The most suitable method in

achieving this as discussed before is a case study, since surveys and interviews do

not generally provide the contextual insights necessary to build a complete process

model. Also, the negotiation set up is different in public sector and private sector

projects which required at least two case studies. In addition, GMP contracts and

target price contracts differ in certain characteristics which are dealt with in Chapter

4 which suggested at least four case studies to cover the spectrum of possible

negotiation processes.

However, due to the fact that target price / GMP contracts are limited in use in Hong

Kong and also due to project accessibility and time constraints, the research project

settled for two longitudinal case studies on projects employing GMP contracts; one

each from the public sector and the private sector, along with a mini case study on a

project employing a target price contract. It was believed that the two longitudinal

case studies on GMP contracts would provide the rich sources of material for the

basic model, and the mini case study would provide necessary insights to tweak the

model to reflect the target price contract characteristics when required.

In building the model to select appropriate sharing ratio given project conditions, the

it was necessary to identify project and stakeholder specific factors which influence

value creation through value sharing and thereby project outcomes. This required

harvesting knowledge from a broader base of experts; i.e. a bigger sample size.

Hence, case studies were deemed inappropriate and use of surveys was suggested.

However, it was important to understand specific contexts notwithstanding the

requirement of a broader base. Hence, an interview based questionnaire survey was

considered appropriate to harvest this knowledge as this provided both the

opportunity to consider a broader sample size while maintaining the flexibility to

investigate tangential and contextual issues influencing the effectiveness of a given

sharing ratio.


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The secondary objective of this research was to investigate the role of relational

strategies in value optimization and enhancing cooperation and better relationships

and to identify appropriate strategies that foster integrative value sharing and thus

improve cooperation between stakeholders. This required both a broader sample size

and deeper understanding which suggested a combination of case studies and surveys

to be the appropriate research approach.

With the above constraints in mind the research zeroed in on 2 fully fledged

longitudinal case studies, one mini case study and one interview based survey as

primary research methods for collection of required data. Two other surveys which

were initiated before the change in research scope and objectives have been partially

utilized to form the launching pad for the primary methods. Both the primary and

secondary research methods are explained briefly in the following sub-section.

2.3.3 Research Methods Utilized

In addition to literature review which was continuous through the research process

this research relies on the data collected by the following research methods:

2.3.3.1 Surveys

Three questionnaire surveys were conducted as a part of this study and are briefly

explained below:

(1) Email based questionnaire survey on construction contract negotiations (only

relevant parts of the results are used): This survey addressed issues related to

efficiencies of negotiations leading to the formation of the contract and was initiated

before the change in scope and objectives of the research. However, the results are

utilized in this thesis to form the basic model of negotiations in the construction

industry and buttress the results from the main survey and case studies.

(2) Email based questionnaire survey on Joint Risk Management (only relevant parts

of the results are used): This survey was completed before the narrowing of scope

and objectives of the research, and was aimed at (1) identifying who is better able to

manage some specified risks in construction projects (Owner or Contractor, or


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Either one of them, or Jointly) at each stage of risk management cycle and to (2)

evaluate the percentage contribution of various stages of the risk management cycle

in achieving an ideal risk controlled environment. The results of this survey are

utilized in understanding and refining risk management in target price / GMP

contracts as there is greater emphasis on joint risk management in these contracts and

many researchers have identified that JRM is a critical factor in achieving desirable

outcomes in target price / GMP contracts.

(3) Interview based survey on sharing ratios, and origin and resolution of disputes in

GMP contracts: This survey was targeted at managerial level professionals with

experience in one or more projects employing target price / GMP contracts and was

conducted during the interviews explained in Section 2.3.3.3. This survey addresses

different types of sharing ratio with respect to their outcomes, key factors and

selection processes influencing the selection of an appropriate sharing ratio for given

project conditions, origin of savings and origin of disputes, and their management

and resolution within the specific context of target price / GMP contracts.

2.3.3.2 Case Studies

(1) Longitudinal case study on a private sector office cum commercial complex

project employing GMP contract: This case tracked the project from beginning to

end and addressed issues such as contract management, negotiations management,

risk management, origin of disputes, their resolution and management, cooperation

and relationships. The data from this project was drawn from multiple sources: notes

from observations at meetings, meeting minutes, interviews, and embedded mini

questionnaire surveys from time to time along with an extensive study of project

documents.

(2) Longitudinal case study on a public sector housing complex project employing

GMP contract: This case study was conducted along similar lines to that of the first

longitudinal case study mentioned above.

(5) Mini case study on a quasi government infrastructure project employing a target

price contract: This case addressed understanding the rationale behind the conditionsof contract in a target price contract as its main concern, and was focused on the


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early stages of contract delineation and refinement. The data from this project mainly

took the form of notes from observations at meetings, workshops and interviews, and

a few additional supporting documents supplied by the client.

2.3.3.3 Interviews

Semi-structured interviews were conducted with managerial level professionals with

experience in one or more projects employing target price / GMP contracts. The

structure for the interviews was guided by the interview based questionnaire

explained above. Tangential and related questions influencing the issues dealt with in

the survey were explored in greater depth through these interviews.

2.4 CHAPTER SUMMARY

Selection of appropriate research methods is important in extracting and synthesizing

reliable results. This chapter has rationalized the utilized research methods in the

context of the research scope and objectives, and explained / answered why the

particular methods were chosen in order to justify the reliability of the research

outputs. As indicated, more information and relevant details on specific methods are

embedded in relevant sections of the following chapters.


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CHAPTER 3:VALUE, RELATIONSHIPS AND

PROJECT NEGOTIATIONS

3.1 CHAPTER INTRODUCTION

In terms of value, until the more recent series of high profile reviews (Latham 1994,

Egan 1998, CIRC 2001, Fairclough, 2002), the construction industry was dominated

by the term cost and the buildings designed down to a budget by consultants and

then tendered for by contractors, where the lowest cost tender usually won. This

approach enabled clients to maximize profits with little consideration for the concept

of value (Brady et. al. 2005). Following the reviews, a new mission for the industry -to add value for customers and society by shaping and delivering the built

environment to meet their needs (Saxon, 2003) was formulated.

However, as Langford (2007) noted, the results of Industrys integration efforts still

remain elusive due to shortfalls in implementation and the improvements being not

all inclusive. Further, the CIB initiative on Revaluing Construction (Barrett 2005)

goes further in articulating the need for not only defining and pursuing (maximizing /creating) the value created by the construction industry stakeholders, but also the

need for the equitable distribution of the resulting rewards or value.

In this context, this chapter explores the concept of value, value creation and value

capture (sharing of added value). Value creation and value capture in the

construction industry is reviewed. The significance of value capture in fostering

value creation is also brought out. Value capture is defined as a bargaining problem

and game theory is used to explain the structure of value creation and value capture

processes in a project setting by means of a three stage model. Questionnaire survey

results that focus on stage two of the proposed three stage model are presented.

3.2 CONCEPTS OF VALUE, VALUE CREATION AND VALUE

CAPTURE

Maximizing value is a ubiquitous concept in the world of business strategy.However, firms often do not know how to define value or even to measure it


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(Anderson and Narus, 1998). This section explores the concept of value in a business

setting to identify what organizations mean when they are searching for value.

3.2.1 Value

Miles (1961) identified and differentiated four types of value of an item: (1) use, (2)

esteem, (3) cost and (4) exchange and defined use value as the properties and

qualities that accomplish a use, work or service; esteem value as the properties,

features or attractiveness that cause a want to own it; cost value as the sum of labor,

material and various other costs required to produce it; and exchange value as its

properties or qualities that enable it to be exchanged for something else that is

wanted. Integrating the concepts of these 4 types of value, he defined value as theminimum amount that must be expended in purchasing or manufacturing a product to

create the appropriate use and esteem factors.

The above definition, on closer investigation reveals that it is not a single measure,

but is different for the purchaser and for the manufacturer, i.e. it is subjective leading

to a subjective theory of value in the realms of economics. Subjective theory of value

relies on exchange value or price as fixed by the market or market value and

assumes that all voluntary trade is mutually beneficial. In this regard, Anderson and

Narus (1998) define market value as the worth in monetary terms of the technical,

economic, service and social benefits a customer company receives in exchange for

the price it pays for a product offering.

However, market value should not be confused with the perceived value, as the

value of the product or service as individually perceived by the buyer and the seller

are different. Market value is just the exchange value of the product / service as

agreed between the buyer and the seller. An agreed value leads to an inference (on

the assumption that all trade is mutually beneficial) that the buyers perceived value

of the product / service is higher than that of the seller, and that the sellers perceived

value of the service/product is less than that of the buyer.

Furthermore, because of the informational asymmetry that exists during an exchange,

perceived value is generally not an absolute val

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