7/28/2019 Cost Plus Construction Contract - Awareness
1/196
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.
7/28/2019 Cost Plus Construction Contract - Awareness
2/196
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
7/28/2019 Cost Plus Construction Contract - Awareness
3/196
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.
7/28/2019 Cost Plus Construction Contract - Awareness
4/196
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.
7/28/2019 Cost Plus Construction Contract - Awareness
5/196
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
7/28/2019 Cost Plus Construction Contract - Awareness
6/196
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.
7/28/2019 Cost Plus Construction Contract - Awareness
7/196
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
7/28/2019 Cost Plus Construction Contract - Awareness
8/196
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
4.1 Chapter Introduction............................................................... ............................................ 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
7/28/2019 Cost Plus Construction Contract - Awareness
9/196
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
5.1 Chapter Introduction............................................................... ............................................ 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
7/28/2019 Cost Plus Construction Contract - Awareness
10/196
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
7/28/2019 Cost Plus Construction Contract - Awareness
11/196
VII
APPENDIX C ......................................................................................................... 172
7/28/2019 Cost Plus Construction Contract - Awareness
12/196
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
7/28/2019 Cost Plus Construction Contract - Awareness
13/196
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
7/28/2019 Cost Plus Construction Contract - Awareness
14/196
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
7/28/2019 Cost Plus Construction Contract - Awareness
15/196
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
7/28/2019 Cost Plus Construction Contract - Awareness
16/196
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,
7/28/2019 Cost Plus Construction Contract - Awareness
17/196
2
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.
7/28/2019 Cost Plus Construction Contract - Awareness
18/196
3
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
7/28/2019 Cost Plus Construction Contract - Awareness
19/196
4
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
7/28/2019 Cost Plus Construction Contract - Awareness
20/196
5
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.
7/28/2019 Cost Plus Construction Contract - Awareness
21/196
6
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?
7/28/2019 Cost Plus Construction Contract - Awareness
22/196
7
(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
7/28/2019 Cost Plus Construction Contract - Awareness
23/196
8
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.
7/28/2019 Cost Plus Construction Contract - Awareness
24/196
9
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
7/28/2019 Cost Plus Construction Contract - Awareness
25/196
10
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
7/28/2019 Cost Plus Construction Contract - Awareness
26/196
11
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)
7/28/2019 Cost Plus Construction Contract - Awareness
27/196
12
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.
7/28/2019 Cost Plus Construction Contract - Awareness
28/196
13
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
7/28/2019 Cost Plus Construction Contract - Awareness
29/196
14
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
7/28/2019 Cost Plus Construction Contract - Awareness
30/196
15
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
7/28/2019 Cost Plus Construction Contract - Awareness
31/196
16
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
7/28/2019 Cost Plus Construction Contract - Awareness
32/196
17
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.
7/28/2019 Cost Plus Construction Contract - Awareness
33/196
18
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.
7/28/2019 Cost Plus Construction Contract - Awareness
34/196
19
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.
7/28/2019 Cost Plus Construction Contract - Awareness
35/196
20
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
7/28/2019 Cost Plus Construction Contract - Awareness
36/196
21
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
7/28/2019 Cost Plus Construction Contract - Awareness
37/196
22
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.
7/28/2019 Cost Plus Construction Contract - Awareness
38/196
23
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
7/28/2019 Cost Plus Construction Contract - Awareness
39/196
24
(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
Top Related