Contracting strategies for the project environment

*Corresponding author. Tel.: #44 (0)121 414 7488; fax: #44 (0)121414 3217.

European Journal of Purchasing & Supply Management 4 (1998) 31—41

Contracting strategies for the project environment

Ian Thompson*, Andrew Cox, Les Anderson

Centre for Strategy and Procurement Management, University of Birmingham, Birmingham Research Park, Vincent Drive, Birmingham B15 2SQ, UK

Abstract

This paper considers the link that exists between a commercial relationship and the form of contract used in business transactions ofa project nature. It comprises conceptual and empirical research, taken from the UK construction industry, to derive a model ofoptimum contracting strategies for a client organisation. The paper cites the example of Railtrack plc to indicate the importance ofdetermining and implementing ‘fit-for-purpose’ contractual relations. It is considered that the research has a broader applicationbeyond construction to other project-related environments and to manufacturing industry in general. ( 1998 Elsevier Science Ltd.All rights reserved.

Keywords: Relationship; Form of contract; Construction industry

1. Introduction

This article presents a combination of conceptual andempirical research on the nature of contracting strategiesrequired for the successful procurement of projects. Theresearch is being conducted by the Centre for Strategyand Procurement Management (CSPM) at the Univer-sity of Birmingham in association with two majorindustrial organisations (Railtrack plc and LondonUnderground Limited). Its aim is to examine the existingcontracting and relational issues in the UK constructionindustry and to identify a framework for selecting Opti-mum Contracting Strategies that support ‘best practice’business processes. Construction is a complex industryinvolving a number of discrete transactions usuallyundertaken on an ad hoc, once-off geographically specificbasis. As such the principles of project procurement (ofeither goods or services) can be seen to be at workthroughout construction’s business environment. Al-though this research is reported in detail elsewhere (Coxand Thompson, 1998), in using the example of construc-tion, this article is able to demonstrate how the generalprinciples can be applied in a broader sense to otherproject-based industries too.

There has been a lot of generic research attempting tolink the business relationship with the overall businessstrategy, but very little which considers the contractingmethod and its contribution to the business transaction.This research has concentrated on the link between therelationship and the contracting method with the aim ofdeveloping a model that can be readily implemented byconstruction clients wishing to select the optimum con-tracting strategy to serve their business needs (see Fig. 1).

This article introduces the need for the research as wellas some of its outputs. It concludes by suggesting a modelof better practice which helps client organisations deter-mine optimal contracting strategies for construction pro-curement. This model is in the process of being calibratedwith industry test cases; the initial findings have sup-ported the proposed theoretical framework and thisarticle presents some of those outputs.

The article is illustrated with a case study of Railtrackplc, one of the UK’s largest construction clients. The casestudy indicates some of the problems Railtrack is attempt-ing to overcome and how the output from this research canbe effectively implemented in organisations such as its own.

2. Background

For the purposes of this article, construction act-ivities are defined as those comprising all new-build,

0969-7012/98/$19.00 ( 1998 Elsevier Science Ltd. All rights reserved.P I I : S 0 9 6 9 - 7 0 1 2 ( 9 8 ) 0 0 0 0 5 - 7

Fig. 1. The business drivers determine the contracting strategy.

refurbishment and repair and maintenance activities, inboth the public and private sectors (property develop-ment, housing, infrastructure, civil engineering and pro-cess plant construction works, inter alia). In this context,construction does not include the materials supply indus-tries.

Construction is an important industrial sector for mostnations. It contributes to domestic economies as botha large employer and as a sector of considerable eco-nomic value. In the European Union it employs approxi-mately 12 million people directly and 14 million peopleindirectly; which is a combined total of 20% of Europe’sworkforce (WS Atkins, 1994). In the UK, constructionexpenditure is approximately £50 billion per annum(DOE, 1996) which is 8% of its Gross Domestic Product.The construction market is three times the size of agricul-ture and larger than any other single manufacturingindustry (New Civil Engineer, 1996).

However, construction is very different from manufac-turing and should not be compared with it readily. Con-struction is a project-related industry and is not based oncontinuous or repetitive processes; it generally does notshare the benefits of regular/repeat orders or produc-tion-line activities. Works are usually ‘one-off’ and site-specific (with a small number of notable exceptions).They are procured in a discrete manner: the transactionhas a distinct beginning and end and is therefore rela-tively short-term. As a result, there are very specifictrends in purchasing behaviour displayed. Generic ap-plications of Supply Chain Management and/or LeanSupply, inter alia, have yet to make any significant contri-bution, nor are they likely to without considerable struc-tural change (Cox and Townsend, 1998).

One of the organisations that the CSPM has beenworking closely with in the course of this research isRailtrack plc. Railtrack is an asset-based company whichowns and manages the majority of Britain’s railway in-frastructure; its core business is the provision of train

paths for passenger and freight companies. It operates ina regulated environment with a turnover of £2300 million(1995/96), of which 82% comprises bought-in goods andservices. Railtrack’s main source of increased profitabi-lity can only come through improved efficiency in theway it manages its bought-in expenditure, since the RailRegulator has declared that price increases are to becapped at 2% below the nation’s retail price index. Con-sequently, procurement has a strategic role to play in thecompany’s future success. As Railtrack’s largest itemof expenditure, construction (at approximately £1100million per annum) must be procured effectively andefficiently to ensure the company’s continuing success.

3. Key contractual/procurement problems

The UK construction industry has become a source ofincreasingly high levels of customer dissatisfaction interms of service delivery, cost and quality. This is demon-strated in the considerable amount of debate within theindustry concerning its failure to deliver satisfaction andValue for Money to customers (NEDO, 1988; Latham,1994; Levene, 1995; HM Government, 1995 (Chapter 4);The Royal Academy of Engineering, 1996; The Institu-tion of Civil Engineers, 1996; Audit Commission, 1996).

One of the most significant catalysts of change hasbeen the Government/Industry review of procurementand contractual arrangements (Latham, 1994). Thisreview highlighted the fragmented structure and adver-sarial nature of the industry and made several recom-mendations for its improvement and introduction of ‘bestpractices’. However, subsequently there have been sev-eral conflicting suggestions concerning the efficacy ofthese recommendations and their application to the in-dustry (Cox and Townsend, 1996, 1997). While differentgroups are promoting their own ‘new’ forms of contract(Abrahamson, 1995; Barnes, 1996), others are suggestingthat relational practices, with an emphasis on collabora-tion and ‘partnering’, are the solution to the industry’sailments (Baden-Hellard, 1995; Bennett and Jayes, 1995).There is no singly agreed ‘best practice’ and the industryis lacking advice as to which procurement methods aremost appropriate for whom and on what occasion.

Meanwhile, the industry is continuing in its traditionalbehaviour and approach to procurement. Projects con-tinue to be procured on a one-off basis with little regardto future needs or supply development. Thus, the supply-base is bespoke to the needs of each transaction: theparties come together for the duration of the project andthen go their own ways. There is little benefit gained fromshared learning or synergy between parties as the frag-mentation leads to individualism and self-seeking inte-rest. Relationships are confined to the discrete durationof the contract; trust, commitment, reciprocity andother behavioural aspects associated with long-term

32 I. Thompson et al. / European Journal of Purchasing & Supply Management 4 (1998) 31—41

Table 1The existing plethora of contracts

Form of contract Number of variants Current status

JCT’80 Six variants#partial design supplement 15 existing amendments, in use but under reviewJCT’81 1 Nine existing amendments, in useJCT IFC’84 1 Nine existing amendments, in useJCT MW’80 1 Nine existing amendments, in useJCT MC/87 1 Two existing amendments, in useFIDIC, 4th ed. Two construction contracts In useICE 6th ed. 1 1 set of corrigenda, in use but 7th ed. under reviewICE Design-Construct 1 In use but under reviewICE Minor Works, 2nd ed. 1 In useNEC, 2nd ed. Six Options In use but 3rd ed. under reviewGC/Works/1, 2nd ed. (Minor Works) 1 In useGC/Works/1, 3rd ed. Three variants In useDEFCON 2000 Two construction contracts About to be publishedIChemE Red Book, 3rd ed. 1 In useIChemE Green Book, 2nd ed. 1 In usePSA/1 1 In useCCS 1 Little used

Total number 31

collaborative relations are essentially absent. Instead, theparties tend to rely heavily on the formality of the gov-erning contractual conditions: the focus of the transac-tion is contractual rather than relational.

To add to the industry’s problems, there are at least 16recognised standard forms of contract in regular use atpresent, as well as many other less popular conditions(refer to Table 1). These contracts are principally con-cerned with the dyadic business relationship between theclient and main contractor and not the rest of the sub-contracted supply network. Furthermore, there is little orno guidance available on which type of contract is themost appropriate under which conditions. The guidancewhich does exist (Clamp and Cox, 1989) relies heavily onthe traditional approaches to procurement using some ofthe existing forms of contract but with no regard to theexisting market conditions or the effect of a governingrelationship. The result is general confusion concerningwhich contracting strategies are optimum at any particu-lar instance. This has a consequential effect of drivingclients along a narrow path that suggests the form ofcontract alone is the fundamental basis of the transac-tion.

For example, at the time Railtrack commissioned thisresearch it had an approved list of contract forms thatcould be used for construction works. The list comprised20 different standard forms of contract and a further 15specially drafted bespoke contracts (a number which hassince increased). The result was that different procure-ment practices were carried out in different parts of theorganisation with no real guidance on which form ofcontract should be used and when. Suppliers were notalways familiar with the contract that they were being

asked to price, which led to inefficiencies while anotherlearning curve was climbed. Furthermore, suppliers sup-plying the same goods or services to different parts of theRailtrack organisation were being asked to do so underdifferent contractual conditions, which could often bemanaged in very different ways. These wide-scale ineffi-ciencies simply added unnecessary costs to an alreadycostly process.

The result of this confusion throughout the industry isthe prolongation of customer frustration and dissatisfac-tion while disputes and contractual claims continue toincrease.

One recent survey suggested that a quarter of the UK’scontracting firms earned between 10% and 15% oftheir turnovers from contractual claims with theirclients or suppliers, while a further third earned between5% and 10% of their turnovers from the same(Financial Times, 1995). The total cost of this to theindustry has been conservatively estimated at £2800million p.a. (Cox and Thompson, 1997) which is morethan 5% of national expenditure in construction. Assuch, this represents an inefficiency which the client-baseultimately pays for.

However, this inefficiency only reflects the level ofadversarialism at the ‘first tier’ of the supply chain anddoes not include claims and disputes between clients andtheir professional advisers, or between other tiers furtherupstream in the supply base.

Furthermore, this does not include the cost to theindustry in terms of legal and professional fees to‘manage’ the disputes. The Chairman of the Associationof Regulated Procurement (a construction lawyer) re-cently estimated this cost at £500 million per annum

I. Thompson et al. / European Journal of Purchasing & Supply Management 4 (1998) 31—41 33

Fig. 2. The four ‘R’s of contractual relations.

(Clark, 1996). Whilst in the UK’s High Court, approxi-mately 80% of the Official Referees’ cases are construc-tion-based (Murdoch and Hughes, 1996).

It is clear that the existing contracting strategies aresub-optimal; they appear to be the focus of conflict anddispute, rather than an optimum mechanism for thedischarge of efficient and effective projects. Thus, thereis an outstanding need for clients to develop OptimumContracting Strategies which will more successfully servebusiness needs and ensure ‘best practice’ project procure-ment.

4. Research methodology

In 1995, full-time research was commissioned to exa-mine the use and performance of the existing contractingmethods and verify the current state of industry practice.This was done with a view to establishing a workingmodel which would select optimum contracting strate-gies for the successful procurement of construction.

The chosen methodology comprised a combination ofconceptually and empirically driven research methods.An initial conceptual model of ‘fit-for-purpose’ con-tractual relations in the construction industry based onrelational competence analysis (Cox, 1996) was estab-lished. Empirical evidence was gathered from a broadspectrum of industry sources in order to verify or falsifythe initial theory. This evidence includedf a desk study of all commonly used standard forms of

contract and methods of dispute resolution;f interviews throughout the sponsoring clients’ organi-

sations to understand the conditions in which theyspecifically procured construction projects;

f two national postal surveys of construction clients andcontractors;

f industry case studies to propose the ‘first-draft’ con-ceptual model;

f detailed interviews with construction personnelthroughout the industry to test, verify and calibratethe first-draft model.This method of research is referred to as abstractive

reasoning (Cox, 1997); it resulted in more than 80 indus-trial interviews and over 40 individual case study reviewsto comprise a combination of deductive and inductivemethods of enquiry. The rest of this article is devoted todisseminating some of these findings and describingthe development of a conceptual model for determiningoptimal contracting strategies in project environmentssuch as construction. In particular, it concentrates on theimportant link between the relationship and the contractwhich exists in contractual relations.

Through establishing the optimum contracting stra-tegy, there is an inherent recognition of the practicalrealities of implementation. Ideal strategies cannot bedelivered owing to the presence of ‘real-world’ restraints

(regulations, statutory legislation, imperfect markets,limited resources, etc.); conversely, however optimal stra-tegies are wholly practicable in that they represent thebest, given the presence of restraining influences (Cox,1997).

5. The conceptual framework

Contractual relations have been defined as ‘‘2bothexplicitly contractual and some non-contractual but nor-mative elements in all economic transactions’’ (Sako, 1992;p. 250) which can be seen to comprise four main compo-nents:f the relationship between the parties;f the responsibilities of each party within the transac-

tion(s);f the risk apportionment of the contract for given

actions and events;f the reimbursement structure.

These four components interact in such a way as todefine the manner of contractual relations (Cox andThompson, 1997) and the way in which the contract islinked to the relationship between the parties (refer toFig. 2). As already suggested, the relationship should bea driver for the division of contractual responsibilitiesand the apportionment of risk. Some contractual rela-tions seek to impose strict liability in an arms-lengthapproach, while others may encourage collaborativeapproaches with an emphasis on joint responsibility andrisk-sharing. The manner in which responsibility and riskis apportioned will be reflected in the reimbursementstructure of the contract. This occurs in two ways: first inthe reimbursement mechanism (e.g. guaranteed maxi-mum all-in pricing at one extreme as opposed to costtransparency and pre-agreed fixed margins at the other).Second, it will affect the price premiums suppliers add totheir tendered sums to reflect the balance of risk and


Fig. 3. A conceptual approach to contractual relations.

structure of power in the contract (Cox and Thompson,1998).

The majority of academic research in purchasingand supply has concentrated on the relationship per se,whereas the majority of project management researchhas concentrated on the contractual issues. Little workhas been done to connect the two although it is generallyrecognised that there is an important link between them.

It has become increasingly accepted that a range ofexternal contractual relations exists between the ex-tremes of adversarial arms-length transaction and highdegrees of collaboration. The range is typified by Sako’sACR-OCR framework (Sako, 1992) which describes thetwo extremes of the ‘continuum’ well, but fails to identifyany interim relations. Thus, in Sako’s own words, theframework only serves as a dichotomous contrast. Therange has been developed by others including Ellram(1991), Ring and Van de Ven (1992), Macbeth and Fer-guson (1994) and Cox (1996). Although each range ofcontractual relations has essential differences, thereremain some descriptive similarities between each model.

These models have not been examined as part of thisresearch; it was assumed that the client knows the type ofrelationship it wishes to have with its supply-base andthat it is able to achieve this. However, it should be notedthat few of these models (with the exception of Cox, 1996)offer any indication of how to derive the optimum rela-tionship which suits the organisation’s purposes andserves the main business drivers of the firm (i.e. they aredescriptive not prescriptive). Since it is of fundamentalimportance to link the relationship with the contract, thecategories identified by Cox (1996) have been developedfor the purposes of this research. These comprisef arms-length transactional relationships;f preferred supplier relationships;

f single (or restricted) sourcing relationships;f network sourcing relationships;f (vertical) strategic alliances;f in-house supply.It was this theoretical range of contractual relationswhich was used to establish an initial conceptual model.Each category represents the dyadic relationship foundbetween client and main contractor (although it is alsopossible to extend this theory further upstream along thesupply chain to subsequent subcontractors and materialssuppliers).

It was generally considered that the influences of eitherthe contract or the relationship between the partieswould vary depending on their position on the con-tinuum of contractual relations. Thus, relations that aremore collaborative have less contractual influence andgreater relational influence (as illustrated in Fig. 3).

This article has stated that the UK construction indus-try traditionally paid very little attention to the relationalelements of business transactions and preferred to con-centrate on the contractual elements (the responsibilities,risks and reimbursement). That is not to say the rela-tional aspects were missing, they were simply not con-centrated on. Thus relationships have tended to bearms-length, sometimes becoming outwardly adversarial,with parties preferring to concentrate on ensuringcontractual compliance in preference to collaborativeworking patterns.

This approach is now beginning to change as moreclients become increasingly dissatisfied with these prac-tices and the benefits of collaboration are more widelyrecognised. However, some of the key questions facingthe industry are: under which conditions does collabora-tion add-value and under which conditions does itnot? Can collaboration be effectively maintained while


Fig. 4. The contract as a wedge driven between parties.

adversarial arms-length contracts are still being used? Isit appropriate to separate the contract from the relation-ship in this way? Do these contracts simply create un-necessary transaction costs? Under which circumstancescan the need for a contract be obviated?

6. Empirical evidence from existing practices

In 1996, the CSPM conducted a survey of 163 regularclients of the construction industry, capturing the viewsand practices of 16% of the national construction mar-ket. It found that 100% of respondents were activelyusing the current industry standard forms of contractlisted in Table 1. Although 93% recognised the impor-tance of a governing relationship and a further 80%recognised that a good relationship is more likely toensure good performance than anything written in theconditions of contract, clients were still using traditionalarms-length procurement practices to procure their con-struction works.

When clients were asked about their satisfaction withthe existing standard forms of contract only 6% of res-pondents were found to be fully satisfied with them.Furthermore, only 5% were found to be satisfied with thegiven apportionment of risk in the contracts and only23% of respondents were constantly provided with therequired results by them. A surprising 47% of clients hadexperienced disputes over the wording of the contracts tothe point where some had even stopped using particularforms.

This high level of dissatisfaction was supported by theextent to which clients would attempt to use other con-tractual solutions. Over 90% of respondents claimed toamend the standard contract clauses to suit their ownrequirements, of which 87% did it to re-allocate specificrisks onto the contractor. Only one respondent claimedto amend its contracts in the contractor’s favour.

Similarly, 43% of clients were using their own speciallydrafted ‘bespoke’ contracts in addition to the industrystandard forms. Clearly, they must have considered thatthe benefits of these were sufficiently attractive to justifythe added transaction costs of drafting a new contractand allowing new suppliers to become familiar with it.

The conclusions drawn from this survey held contract-ing practices to be still very traditional (Cox and Thom-pson, 1998). Clients are extremely dissatisfied with theexisting forms of contract. Despite recognising the valuethat an appropriate governing relationship could add,few clients were adopting anything other than traditionalprocurement practices revolving round the use of a stan-dard form of contract.

To understand why these contracts were giving so littlesatisfaction, an analysis was made of each standard form.The study found that the vast majority are essentially‘arms-length contracts’ written and employed to ensure

contractual compliance. The general principles tend to bethat if something fails to be performed when it has beencontracted to be done, then recourse of action will follow(usually in the form of the recovery of damages and/orpenalties). This principle would essentially join RichardLamming’s description of vendor assessment as being‘‘2a one-way blame-attachment process, often used ina shallow manner by purchasers, to de-select suppliers andto chastise others with whom they wish to continue busi-ness’’ (Lamming, 1995).

Typical examples where this is evident are found in theprovisions of liquidated damages for delayed perfor-mance, the use of performance bonds and retentionmonies for inadequate performance and use of the rightsof ‘set-off ’. The tendency of these contracts is to push therisk attached to responsibilities into a strict liabilitysituation (i.e. to ensure that the liability for a given set ofactions belongs wholly to one party of the contract orwholly to the other). There are very few opportunities forrisk and reward-sharing schemes, very few incentives toenhance performance and little opportunity to promotecollaboration.

The conclusion from this study was that arms-lengthnon-collaborative behaviour is being actively encour-aged by most standard forms of contract. Furthermore,rather than being a mechanism to unite buyer and sup-plier in a common cause (i.e. to construct the works), thecontract was being used as a wedge to drive distancebetween them (see Fig. 4).

7. The existing standard forms of contract

Table 2 charts the standard forms of contract that wereexamined and their provisions to apportion liabilityand/or incentivise collaborative behaviour. Although themeasures recorded here are not fully inclusive, they donevertheless show distinctive trends, especially if, as sug-gested, virtually all construction clients use these con-tracts.

Measures that support arms-length contractual rela-tions include the use of disincentives, or ‘negative incen-tives’ (Ashley and Workman, 1986), which are measuresthat penalise the contractor if the contract is not com-plied with. The four categories used in this table illustrateways in which the client is able to exert pressure on the


Table 2Analysis of the UK standard forms of construction contract

Measures to support arms-length relations Measures to support collaborative relations

Form of contract Use of Damages Retention Set-off or Incentives Risk-sharing Shared Promotionbond or penalty of monies withheld schemes rewards of joint

clauses payment working

JCT’80 @ @ @JCT’81 @ @ @JCT IFC’84 @JCT MC/87 @ @JCT MW’80 @ @FIDIC @ @ @ OptionalICE 6th @ @ @ICE D and C @ @ @ICE MW @ @NEC Optional Optional Optional Optional Optional Optional @IChemE Red @ @IChemE Grn. @ @ @GC/Works/1 @ @ @ @DEFCON 2000 Optional @ @ @ @ @

contractor to comply with the express requirements ofthe contract. The use of the Performance Bond andretention monies operate in similar ways: if the con-tractor fails to comply, then the client has the meansand the right to take or withhold money from him.Similarly, damages are ‘awarded’ to the client if thecontractor defaults in his responsibilities; the client thenhas the right to deduct money from the contractor’spayment either directly, or on occasions by set-offagainst other payments. These four measures treat thecontractor at arms-length and do little to instil trust orcollaboration.

Measures that support collaborative contractual rela-tions tend to use incentives rather than disincentives. Thefour categories used in this table illustrate ways in whichthe client draws the contractor closer by providing theincentive to work collaboratively. The emphasis is onshared responsibility and shared risk or reward. Thiscould include sharing cost-savings, co-working throughproblems on-site and/or principled agreements to sharerisk rather than seek liability.

At a glance, Table 2 indicates a general preferenceamong the contracts for measures that support arms-length relations, rather than collaboration. One con-clusion to be drawn from this analysis is that the majorityof construction contracts are reactive mechanisms de-signed to apportion blame as and when non-complianceoccurs. Moreover, collaborative relations are unlikely tobe fostered if clients continue to use these types of con-tract.

A potential solution would therefore appear to be theintroduction of positive incentives to all standard formsof contract. However, previous research on incentives inconstruction contracts in the United States (Ashley and

Workman, 1986) has revealed that, although the generalperformance is marginally greater (by perception), thereare significantly more disputes and contractual disagree-ments associated with these conditions. Clients tended touse incentives as an inducement for contractors to acceptgreater risk. The research empirically showed that theinclusion of incentive clauses simply exacerbates the ad-versarial nature of the industry; this time with increasedclaims concerning whether or not the improved perfor-mance target was achieved and the incentive rightfullygained.

Thus, the general conclusions from this analysis are:f the majority of standard forms of contract are reactive

mechanisms designed to apportion blame between theparties;

f collaborative relations are unlikely to be fostered ifclients continue to use contracts based on disincentivesand blame-apportionment;

f collaborative relations are unlikely to be fostered evenif incentives are included in contracts;

f a balance needs to be established between the typeof relationship and the contracting strategy that isadopted.These conclusions would appear to support the earlier

statements regarding the correlation between the con-tract and the relationship. If parties continue to focus onthe contract alone without due regard to the appropriaterelationship, then arms-length adversarial behaviour(and all its effects) will prevail; a balance needs to befound (see Fig. 5).

Having established that there are several typologies ofrelationship within a continuum of types, it follows thatthere should be a corresponding series of contracttypologies. These may typically comprise


Fig. 5. The contract must be balanced against the relationship.

Fig. 6. Optimal contracting model.

f conditions of contract designed to apportion risk forevery possible circumstance;

f a governing head of agreement supported with stan-dard form of contract;

f negotiated terms and conditions governed by a head ofagreement;

f a (negotiated) memorandum of understanding with noexpress terms or conditions;

f an oral contract.These classifications have been expanded elsewhere

(Cox and Thompson, 1998) and generally describe eachof the various methods of contracting business in theconstruction industry. For example, commodity ‘spot’purchases are usually contracted through a purchaseorder of standard terms and conditions. Similarly, com-petitive open tendering for contracts is usually supportedwith a full set of express terms and conditions to ensurethe risks associated with every eventuality are covered.In these two examples, the first category conditions ofcontract apply and business is usually associated witharms-length behaviour.

The second two categories of contract imply a reduceddependence on the written conditions of contract andthe introduction of relational factors associated withpreferred supply sourcing. The head of agreement, some-times referred to as a framework agreement, can becontractual (as in a term agreement or call-off contract)or non-contractual (as in a teaming agreement). When

the importance of the relationship between the parties isgreater and there is more focus on collaborative working,jointly agreed (negotiated) contract terms will be moreappropriate.

In the situation where suppliers are highly integratedin the form of an extended enterprise and high degrees ofreciprocity and interdependence exist, there is little needfor a contract despite the distinction between organisa-tions. This is the virtual company structure of verticalquasi-integration (Blois, 1971) and network sourcing(Hines, 1994). The parties do not need express terms andconditions to govern their responsibilities as ‘‘2theissues of ownership, control and power become incrediblyblurred and confused’’ (Cox, 1996). Instead, a joint under-standing is negotiated and a ‘coincidence of interest’prevails: the contract need be nothing more than a Mem-orandum of ºnderstanding and carries little legal force.

In the case of strategic alliances, joint ventures andshared equity ownership, a contract is not necessary.Distinction needs to be made between the contract re-quired to form the alliance and the individual transactionepisodes for the works. This is a similar distinctionbetween the relationship and the episodes defined inthe IMP Interaction Model (Hakansson, 1982). Theindividual transactions do not require contracts asownership is shared: an oral contract will suffice.

8. A model for contractual relations

Thus, a link has been established between the relation-ship and the contracting strategy which is best sum-marised in the model in Fig. 6. Developing this modelfurther, a correlation between the type of contract andtype of relationship can be found to exist by examiningcurrent practice in the construction industry. The two


Fig. 7. Existing correlation of relationship vs. contract.

continua of relationships and contracting strategies canbe plotted against each other to express the trend (seeFig. 7). Each plotted point represents a constructionclient that has been involved in the empirical data gather-ing part of this research study.

The total number of clients represented is 70, althoughthey may be represented in this figure more than once fordifferent approaches to individual construction activitiesand/or projects. (For example, Railtrack has four majorcategories of construction expenditure spread acrosseight geographical business units; in the diagram onlythree of these practices have been plotted).

In general, terms the evidence presented in Fig. 7 sup-ports the conceptual model suggested in Fig. 6; there isa link between the relationship and the chosen form ofcontract. This link and the factors which form the match-ing criteria are discussed in greater detail by Cox andThompson (1998). Fig. 7 presents a theoretical ‘best-fit’line given the ideal, although in practice the contractingstrategies adopted tend to be far more complex than thissimple classification and correlation can show. It is notalways possible to differentiate between the contract andits application from the relationship; contractual rela-tions lack distinct resolution and are more effectivelyconsidered as a holistic concept. That is not to say thata distinction cannot be drawn: it is clearly possible to

mis-align relational and contractual practices. The effectsof this could result in unnecessary transaction costs andinappropriate risk apportionment which would eitherlead to unnecessary additional price premiums beingpaid, or a potentially hazardous position of liability forthe firm (see Fig. 8). Furthermore, there is the dangerthat attempts to foster collaborative relations could bejeopardised through the application of an inappropriatecontract.

Contractual relations therefore represent an importantconsideration for all purchasers of construction (as in-deed they do for any given category of expenditure,whether it is project-based or not). There is a need toreview clients’ procurement strategies to ensure that theyare aligned to the overall business goals of the firm, byselecting and forming the right relationship integratedwith the most appropriate form of contract.

The benefits of getting the right link between the rela-tionship and the contract can be seen to bef an appropriate allocation and control of commercial

risk;f price optimisation and the minimisation of transaction

costs;f complementary practices that result from relational

behaviour and the application of the right contractbeing suitably matched.


Fig. 8. The risks of sub-optimal contracting strategies.

A final consideration needs to be given to the imple-mentation of such a strategy. The need to address con-tractual relations raises specific human-related andbehavioural issues in order to successfully optimise therelationship for business success. The business needsmust be maximised and continually focused on, in orderto create ‘fit-for-purpose’ contractual relations.

Railtrack is one such company implementing theseissues as part of its broader Culture Change programme.Like other organisations it faces barriers to change in thebelief and value systems of the company (its ‘culture’) aswell as barriers to change in its processes and practices.The issues of project management strategies, including itsrelationships with the supply-base and the accompany-ing conditions of contract, are being addressed throughTask Force J to which this research has an input. It isinsufficient simply to change the contractual methodwithout addressing the relational issues that are requiredand driven by the overall business needs.

9. Further developments

It is too early to report on the tangible benefits accru-ing from the implementation of these contracting stra-tegies. The conceptual model presented in this articlerepresents a more detailed working model published byCox and Thompson (1998).

Further research work is required to determine whichaspects of contractual relations determine the other.There is some evidence gathered in this research (albeitlimited and somewhat anecdotal) to suggest that therelationship governs and that the contract is merely com-plementary. Thus, attempts to change contractual rela-

tions and behaviour by changing the contractual ele-ments alone have little or no effect. This is an importantarea of study for clients who wish to change the way inwhich they purchase goods and services on a projectbasis. The implementation of these contracting strategiesis key to achieving fit-for-purpose contractual relationsand improving overall business efficiency.

Finally, it should be noted that the link between rela-tionship and contract developed in this article has beenbase on the construction industry specifically. However,despite this, the model has generic applications, specifi-cally, in other project-related environments and, moregenerally, in a wider manufacturing context. Furtherresearch is required to establish the particular conditionsand circumstances under which the application of differ-ent contractual relations applies in order to maximisebusiness success.

10. Summary and conclusions

This article has reviewed the current state of contract-ing in the UK construction industry and found consider-able dissatisfaction with existing methods. An analysis ofthe standard forms of contract has demonstrated thatmost contracts have been designed as reactive mecha-nisms to apportion strict liability in an arms-lengthfashion. An adversarial culture prevails which createsconsiderable inefficiency and cost for all parties andwhich the client ultimately pays for in upwardly adjustedprices.

The article has established a need for optimising con-tractual relations in order to serve clients’ business needs.A model has been suggested to align the contract with the


governing supply relationship and this has beensubsequently tested with empirical evidence to verifyit. Finally, it has been recognised that the implementa-tion of this process is the key to its success and furtherwork is required to suggest the optimum means of chang-ing/ developing contractual relations, both in otherproject-based industries and in a broader businesscontext.

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Contracting strategies for the project environment

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