Total Length: 3179 words ( 11 double-spaced pages)
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Page 1 of 11
Question 1
Background:
A relational contract can be described as “informal agreements and unwritten codes of conduct that powerfully affect the behavior of individuals, clearly emphasizing the informal nature of contracts.” (Ho?hn 35) They help businesses overcome obstacles typically faced in formal contracting. Formal contracts must be written in a manner that allows for easy verification by any third party, therefore must be self-enforcing. (Ho?hn) The basis for relational contracts is self-enforcement, especially when relationships are finite. When relationships remain open-ended, the situation changes. Meaning, inclusion of extensions with information self-enforced provisions. When these changes happen, such contracts become self-enforced relational contracts. (Ho?hn) Thus, begins the ‘trust game’.
The trust game is simple, player 1 must choose to ‘trust’ or ‘not trust’ player 2. If player 1 ‘trusts’ player 2, player 2 can have the opportunity to betray or honor player 1. Should both parties not betray each other, they each get a payout. However, when one party betrays they other, they may get a payout of two, rather than one. (Ho?hn) It is important to explain the concept of relational contracts and the ‘trust game’ because of the inherent aspect of trust within the partnering terms. “The Partnering team members shall work together and individually in the spirit of trust, fairness and mutual cooperation for the benefit of the project, within the scope of their agreed roles, expertise and responsibilities as stated in the partnering documents”. When companies or parties aim to trust each other, their expected payouts are one, but allow for an open-ended relationship that can grow and expand to suit the needs of both parties. Such flexibility could be crucial in proper development of the desired aims within a new or existing relationship between two or more parties, potentially leading to positive outcomes.
PPC 2000:
The key factors of partnering are:
1. Collaborative working
2. Selection of advisers and partners
3. Maximization of effectiveness related to resources
These areas when performed correctly lead to proper partnering and improved outcomes for both parties. For example, collaborative working is a time-intensive endeavor that requires extensive communication between both parties and compromise regarding what each party can get from the other or from the overall objectives. However, when executed correctly, collaborative working allows for a cohesive, effective, and functioning effort that can last long-term. (MacRoberts)
What is PPC 2000? “PPC is a multi-party contract: not only do the client and the contractor enter into the contract, but also the client’s representative and any consultants appointed by the client, and possibly certain specialists.”(MacRoberts 19) PPC 2000 encourages partnering relationships with specialists that may become full members of partnering teams allowing for the execution of a joining agreement. Additionally, PPC 2000 offers establishment of a core group comprising of key people who undertake and make decisions related to regular previews, performance and progress. (MacRoberts)
When partnering is involved, the likelihood of incorporating other best practices like good communications, fair allocation, risk analysis and management, and strong project programming and management increases. See diagram 1 for the various potential parties involved. When it comes to mutual cooperation or good faith, there are duties to disclose latent defects, carry out the work with care and skill, and cooperate as needed to permit contractors to perform designated tasks. (MacRoberts) The PPC2000 is designed to cover the entirety of the process from design, supply, and construction. To pursue a mutual cooperation, parties must fulfill specific duties and integrate everything under a single multi-party contract.
When it comes to assessment of performance within these kinds of contracts, one must examine the agreed financial sanctions or benefits and against agreed KPI’s. By looking at incentives and profit and overhead, parties can manage potential hurdles that naturally arise in these kinds of partnerships. The Problem-Solving Hierarchy involves period to resolve, the Core Group, mediation, conciliation or other forms of ADR, and litigation or arbitration (MacRoberts).
Partnering Terms:
As previously stated, a core aspect of partnering is trust. Therefore, there must be some level of assurance that both parties or however many parties involved, take on specific responsibilities and put forth a collaborative effort. “Early involvement of key parties, transparent financials, shared risk and reward, joint decision-making, and a collaborative multi-party agreement are some of the features incorporated in all the arrangements to a varying degree.” (Lahdenperä 57) By agreeing to joint decision-making and having for example, transparent financials, such efforts provide an environment from which partnering team members can build trust and therefore, commit to a long-term endeavor.
Stuck Writing Your "The Significance of Relational Contracts" Essay?
While project partnering allows for growth of trust and communication, there is another more extreme mode of operation called partner alliancing. “Similarly, project alliancing takes relational contracting to the extreme compared to the current forms of integrated project delivery and, especially, project partnering.” (Lahdenperä 57)
What is project partnering and project alliancing? Project partnering “is a single project application of a management approach used by two or more organizations to achieve specific business objectives…(Lahdenperä 58) Project alliancing describes the approach of “delivering major capital assets where owner and non-owner participants work together as an integrated, collaborative team in good faith, acting with integrity and making unanimous, best-for-project decisions, managing all risks of delivery jointly, and sharing the outcome of the project.” (Lahdenperä 58) Integrity is a key aspect of project alliancing and something that should be considered regarding partnering terms. When parties involved in the relational contract all have a good sense of integrity, rule-breaking and underhanded behaviors are less likely to occur. Relational contracts then become the sign post from which interested parties who wish to work together may use to achieve shared and individual objectives.
From the viewpoint concerning relational contract theory, “all contracts have a relational element in the sense that all economic exchanges happen in a relational context.” (Gil 145) Examining things at one end is the subject of discrete contracts and the emphasis on planning, precision, wholeness, and tight measurements of performance. These kind contracts suit situations where there is limited personal interaction and involve short-term transactions. (Gil) Whereas at the opposite end are intertwined or relational contracts with emphasis on reciprocity, cooperative behavior, and mutual dependence. Relational contracts are useful for long-term transactions in need of adaptability and flexibility. Considering relational contract theory puts on full display the variety and complexity of contracts, it reinforces the realization that contracts require cooperative social behavior within a team setting.
That is why relational contracts are so important for the proper integration of positive values within a partnership. For example, the T5 Project concerning the Toyota production system allowed for an analysis on the business infrastructure and technical processes involved in long-term cooperative relationships among suppliers and assemblers. (Gil) “In this system, first-tier suppliers are not selected on the basis of bids, but rather on the basis of past relationships and a proven record of performance.” (Gil 150) By observing past relationships and witnessing a good track record, that all important trust building begins. To recap, trust, integrity, communication, and use of relational contracts allows for the growth and positive interactions between parties interested in a long-term functional business relationship.
The Importance of Relationships:
In the present day, firms and organizations pay more attention to the management of relationships than to maintaining contractual terms. Although things like litigation and arbitration can and are used if conflicts arise, the need to spark a casual, non-formal arrangement allows for growth of esteem, trust, and communication. (Seshadri) Neoclassical as well as arm's-length contractual relations decrease “lean” working ensuring the opposite of desired outcomes like defensive behavior and mistrust, potentially adding to transaction costs leading to a prioritization of maintenance of trust. (Seshadri) Antagonistic methods to contracting as seen in the construction industry, have led to diminished effectiveness with lower productivity levels. The opposite is seen with relational contracting as companies and organizations see an increase in efficiency and trust through sound development of partnering agreements, reviews, and joint team goals, enhancing financial returns and minimizing conflicts and accidents. (Seshadri)
Relational contracts and the focus on relationships strips down the past reliance on formality. While there is room for formal contracts such as the case in royalties and so forth, for partnerships, especially long-running partnerships, management of relationships remains key in acquiring and accomplishing shared and individual goals for all parties involved. As businesses expand to become multi-national corporations, these strategies to manage relationships allows for positive outcomes in various situations. Because companies then prioritize trust building above formalities.
In conclusion, partnering terms should focus on relationship management. Things like trust building, communication, and even removal of some formalities, allows for the growth of parties regarding shared objectives. Relational contracts are the foundation from which relationship management can begin. A key aspect of relational contracts is integrity.….....
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