Addressing ownership issues in this chapter has been focused on the client-contractor relationships because this is one of the most common and clear-cut contexts in which ownership issues arise. It is also a useful context to illustrate basic ownership issues that apply in most multiparty situations, including intra-organizational contexts where legal contracts are replaced by various forms of agreement ranging from formal terms of reference, written undertakings, informal 'understandings', to traditional working practices. Even with limited client-contractor focus, ownership issues are not simple, and only an overview has been provided. Those seriously touched by these issues need to follow up the references provided.

Despite the risks inherent in the fixed price contract this is still a very common form of contract. CPFF contracts have weaknesses for the client/project owner that severely limit its use by risk averse client organizations. Incentive contracts offer a variety of middle ground positions, but do not appear to be as widely used as they might be. This may be because of a lack of awareness of the shortcomings of typical fixed price contracts or because of a lack of appreciation of the value of incentive contracts in motivating contractors. However, the additional complexity of incentive contracts may make them difficult and time-consuming to negotiate. In particular, there are problems in selecting the lowest cost contractor and appropriate values for the sharing rate b and the target cost E. Unless firms can be motivated to provide unbiased estimates of costs (perhaps by arrangements such as those described above), client organizations may be wary of incentive contracts when they are unable to formulate realistic project cost targets for themselves. Incentive contracts may be confined to procurement projects where the client has a sound basis to estimate contract costs, there are uncertainties that make a fixed price contract impractical, but the uncertainties are not so great as to justify the use of cost plus contracts (Thorn, 1986). A further problem with incentive contracts is that the evaluation of the consequences of a particular incentive contract is not straightforward when project costs are uncertain. This can make it difficult to carry out negotiations on a fully informed basis, but such difficulties are not insurmountable (Ward and Chapman, 1995a; Chapman and Ward, 2002, chaps 5 and 6). In particular, the Balanced Incentive And Risk Sharing (BIARS) contract approach developed in

Chapman and Ward (2002) provides an operational approach to resolving all the issues the authors are aware of, provided the client is prepared to assess preferred trade-offs between attributes of interest, like cost, duration, and various measures of 'quality'. Perhaps the most significant obstacle to greater use of incentive contracts and risk sharing is the still widespread unwillingness of parties entering into procurement contracts to explore the effects of project risk and the possibilities for effective risk management.

Negotiating a fixed price contract with a trusted or previously employed contractor may be a preferred alternative for knowledgeable clients and perhaps also worth pursuing by less knowledgeable clients. Also, a move away from 'adversarial' contracting towards 'obligational' contracting (Morris and Imrie, 1993) may be mutually beneficial for both clients and contractors and may give rise to an atmosphere of increased trust and sharing of information. In these circumstances there will be opportunities for increased mutual understanding and management of contract risks.

The flexibility of incentive contract forms of payment is attractive here, but more widespread use of such contracts may depend on the development of more 'obligational' contracting rather than 'adversarial' contracting. However, their use is essential for the achievement of effective risk management.

Was this article helpful?

0 0
Project Management Made Easy

Project Management Made Easy

What you need to know about… Project Management Made Easy! Project management consists of more than just a large building project and can encompass small projects as well. No matter what the size of your project, you need to have some sort of project management. How you manage your project has everything to do with its outcome.

Get My Free Ebook

Post a comment