Revision as of 16:37, 12 June 2017

The attempts by clients to manage the problem of moral hazard and to reduce the scope of opportunistic behavior by the contractor have the tendency to generate vicious circles of adversarial behavior between parties.^[1]. The dynamic of adversarial relations created by the client's desire to get the 'best deal', can generate an escalation of the transaction costs while the costs of production seem to be pushed down. ^[2].

History

The emergence of general contracting in Europe is associated with the housing crisis following World War II while in Britain this happened much earlier, during the first half of the 19th century after the civil war and the rebuilding of London after the great fire. A shift to 'contracting in gross', where a single contractor undertook the financial responsibility in a single contract for the entire work, had to be done because of the urgency in the building program. This required the development of a system of measurement, removed the master craftsmen from direct contact with the architect while the architects were required to produce complete designs before tender.^[3].

In civil engineering this trend had a similar outcome in the adoption of the professional system. The building of infrastructure, like roads, railways and canals, was supported by private investments. The private promoters were sometimes landowners or other interested parties but in the railway sector they were mostly engineers. In the beginning, the works were divided into small lots who were built by local contractors, closely supervised by the engineers.

But during the 1st half of the 19th century, the role of the general contractor who took on a broader responsibility for the works emerged. Contractors increasingly took over the promotion task, raising the finance for speculative new lines while the momentum of railway building grew. The financial crisis of 1873, that triggered a depression in Europe and North America from 1873-1879 and even longer in some countries, took away much of the competitive advantage of the promoter-contractors. Clients became increasingly public authorities, while banks preferred to lend to governments and established companies rather than finance speculative projects the consulting engineer became more important, the enterprise increasingly took the form of the civil engineering contractor of today. ^[3].

The important feature of this new system was the general contractor undertaking work conceived by others which could be subject to an independent control. It was for the first time that the client could effectively transfer some of the risks inherent in the construction process to an project actor. The rise of the general contractor pushed those not included within its scope, to organize themselves on a professional basis.

The dynamic relationship between the professionals and the contractors was part of a more general trend in the mid 19th century, from a society dominated by entrepreneurial ideal towards the beginnings of a society dominated by the professional ideal.^[3].

The development of the professionally organized consultant architect or engineer reimbursed on a fee basis, and the evolution of third parties as control actors responsible for regulating those activities that remained subject to market forces, was driven by the insulation of the activities facing highest uncertainty. The system that emerged in the 19th century is defined as the professional system.

The problem with the professional system

At its best, the professional system delivered high quality buildings, but delivered them slowly and expensively. As it was put under increasing pressure, its strengths became into weaknesses. By the 1960s, the professional system had become 'an establishment' more concerned with protecting its own interests than meeting client needs.

It was allocating roles, defining responsibilities, specifying liabilities and crucially, it was establishing the reward and penalty structure for the actors in the construction industry. The principal problem generated by this establishment was the double dynamic of adversarial relations and over-engineering.^[1].

The dynamic of adversarial relations

(Cite: ^[1])

The professional system became a low-trust system in which all actors spend a growing portion of their time covering their rear rather than moving forward.

Control is the most important element in the adversarial relations dynamic. Clients that are determined to ensure that keen prices are obtained through competitive tendering and are not competed away by the contractors through opportunistic behavior, develop the role of - the quantity surveyor. An extensive network of in-project cost control has been implemented, which given the fact that the contracts are fixed price,can do no more than manage the shape of the project cash-flow s-curve.^[3]. In response to these techniques the contractors have developed their own quantity surveying capabilities. Adding to site overheads and generating the twin hierarchy site management; with the site surveyor focusing on cost and the contract manager focusing on time and quality. Considering that costs are determined largely by design decisions taken throughout the competitive tendering and contract prices are fixed, there is little chance to reduce costs - the process being one of cost control, rather than cost reduction.

The dynamic of over-engineering

The dynamic of adversarial relations interacts with a second dynamic of over-engineering. Clients have developed a natural tendency to pass the complete responsibility for the design to their professional advisers. Designers can face the possibility of opportunistic behavior form contractors and wish to protect themselves from possible litigation for the defects in their design. The worry to reduce to a minimum the opportunistic behavior of the contractors pushes designers to specify the product completely, yet the increased complexity and uniqueness of never and never projects combined with their inevitable lack of experience of site processes means that their specification decisions are not reflected on site conditions or the capabilities of the contractors. This is reflected through a rigidity in the design which is not optimized in relation to the problems of construction. The designers are encouraged to allow high safety margins in their design that lead to over-engineered thus costly, designs.

The contractors on the other hand, in the absence of the ability to change the specification to better fit their capabilities, try to maximize their flexibility. This in turn freezes the construction technology, preventing contractors to innovate in order to reduce the pressure on their margins. As a result, further opportunistic behavior occurs.^[3].

Conclusion

Competitive tendering despite its emphasis on lowest price, was not actually delivering low production costs and was generating very high transaction costs. The necessity that the designs be fully specified at tender, meant that huge assumptions had to be made regarding the competence of architects and other designers in the technical details of a wide range of construction technologies, and the ability of the client toe keep requirements fixed over a period of years.

In real life, designs were rarely fully specified and changes were inevitable, and thus complex contracts had to be developed to enable such changes to be negotiated. Quantity surveyors became guardians of the contract on behalf of the client, trying to minimize the possibility of opportunistic behavior by contractors. Professionals paid on a fee, calculated as a proportion of the construction budget, are given no incentives to reduce budget, while contractors have no incentive to offer a reduced budget because there is no mechanism in the lowest price tendering to share potential savings between those that can offer them and the client. The professional system slowly became a risk-shedding rather than a risk-sharing system^[1].

From adversaries to partners

By the early 1990s a considerable momentum for change had built up. a series of reports, raised serious questions about the organization of the professional system. An increasing number of renown international comparative studies of construction costs and methods, which are reviewed in Edkins et al. (1999) ^[4] contributed to an awareness that there were serious performance problems.

One development that was enthusiastically supported was that of partnering ^[5], ^[6], ^[7]. Broadly, we can identify two forms of partnering:

- single project partnering, where the parties commit themselves to openness in dealing with each other, together with the use of alternative forms of dispute resolution.

- multi-project partnering, which extends this further in order to realize the benefits of longer term relationships clients and their suppliers.

The tradition of appointment rather than competitive tendering for the supply of design services has meant that repeated relationships - even if never formalized as partnering arrangements - have become the norm for architects and consulting engineers, while multi-project partnering is a major shift in the nature of the relationships between clients and their suppliers of site-related services. Partnering and the reform of standard contracts focus on transaction governance, and by simply reducing transaction costs, important gains can be made as costs are reduced. Differences are resolved before they become disputes, and disputes can be settled without expensive litigation.

However, an important

The evidence comes from the number of partnering agreements, which is rising rapidly, while some leading contractors are reporting that more than half of their work is obtained through partnering arrangements or negotiations.

References

1. ↑ ^{1.0 1.1 1.2 1.3} Winch, Graham M., Wiley-Blackwell, (2010) "Managing Construction Projects, 2nd edition "
2. ↑ Curtis, B., Ward, S. and Chapman, C., CIRIA, (1989) "Roles, Responsibilities and Risks in Management Contracting "
3. ↑ ^{3.0 3.1 3.2 3.3 3.4} Winch, Graham M., Routledge, (2014) "Institutional reform in British construction: partnering and private finance "
4. ↑ Edkins, A.J. and Winch, G.M. (1999) The Performance of the UK Construction Industry: An International Perspective,Bartlett Research Paper 4, London.
5. ↑ Barlow, J., Cohen, M., Jashapara, A. and Simpson, Y. (1997) Towards Positive Partnering Policy Press, Bristol.
6. ↑ Bennett, J. and Jayes, S. (1998) The Seven Pillars of Partnering, Thomas Telford, London.
7. ↑ Cox, A. and Townsend, M. (1998) Strategic Procurement in Construction, Thomas Telford, London.