Example The need to keep partners informed of possible changes

Joint venture partners are important to address explicitly, in terms of the interests and roles of all the partners. Many offshore oil projects involve a lead partner who takes operational responsibility and other partners who help to fund the project and share the product. A significant change in plans will require approval by all the partners. If they are not all kept informed of the possible need to make such changes, managing the decision to change the plan can be a question of crisis management rather than risk management, adding to the cost of the incidents necessitating the change or eliminating the possibility of responding to an opportunity.

Multination military joint ventures, such as the development of new weapon systems or their platforms (aircraft, ships, etc.), make the who dimension very rich indeed, due, for example, to different technical requirements, different needs in terms of timing, and different contracting systems between the partners and their contractors. It clearly complicates the why, in the sense that each party's objectives need attention.

Regulators, planning authorities, and others providing approvals may also prove to be key players. For example, combined cycle gas turbine power stations involve warm water discharges into rivers and vapour plumes that are regulated, in addition to the planning permission issues associated with such plant. Nuclear power stations involve obviously increased levels of regulation, including safety standards that may be changing during construction, necessitating redesigns with delays that yield still more regulation-induced design changes in a vicious circle, which can prove extremely expensive. Channel tunnel rolling stock development and production encountered this kind of difficulty. To manage this kind of source it is important to understand what is driving changes in the regulatory environment and to endeavour to meet the regulations that will be relevant at the appropriate time in the future, rather than those currently in force.

Competitors for limited resources (wherewithal) can also prove a profitable area of study. For example, oil majors have attempted to avoid bidding up the price for key scarce resources by timing their projects (moving the when) to avoid excessive competition. If only a half a dozen players are involved, individual study and perhaps direct collaboration may be feasible. More generally, it may be appropriate to look at the markets for specific resources as a whole. Successful commercial property developers are aware of the need to time new building construction, hopefully while the market for resources and cash are depressed, just before the market for office space takes off. Many failed developers are also well aware of the importance of these considerations too late.

Much of the uncertainty inherent in project management arises from agents appointed by the client, such as contractors and subcontractors. The client may not be able to rely on an agent performing as the client wishes for reasons related to the nature of the work and the agent's motivation, ability, and understanding of the work. In theory, it should be possible for the client to maximize the chances of satisfactory performance from the agent by careful selection of a suitable agent, careful monitoring of the agent's activities, and ensuring that the agent is appropriately motivated. Unfortunately, lack of knowledge on the part of the client and the presence of uncertainty can make these things difficult to achieve.

The so-called 'principal-agent' relationship, whether between parties in the same organization, or between a client and contractor, is prone to three fundamental problems: adverse selection; moral hazard; and risk allocation (Eisenhardt, 1989).

Adverse selection refers to misrepresentation of ability by the agent and the principal's difficulty in selecting an agent with appropriate skills. The agent may claim to have certain skills or abilities when hired, but the principal cannot completely verify these skills or abilities either at the time of hiring or while the agent is working. A 'selection' problem can also arise where a contractor misrepresents the work that will be done or the likely final price. Once a contractor has been hired, it may be difficult for the client to ensure that costs are contained and work promised is what is actually delivered.

Moral hazard refers to an agent's failure to put forth the contracted effort. This can be of greatest concern to the principal when it is particularly difficult or expensive for the principal to verify that an agent is behaving appropriately, as when task specifications are inadequate or the principal lacks knowledge of the delegated tasks.

Risk allocation concerns the manner in which responsibility for project-related issues (sources and responses) is allocated between principal and agent. Risk allocation is very important because it can strongly influence the motivation of principal and agent and the extent to which uncertainty is assessed and managed. In so far as principal and agent perceive risks differently and have different abilities and motivations to manage uncertainty, then their approach to risk management will be different. In particular, either party is likely to try to manage uncertainty primarily for his or her own benefit, perhaps to the disadvantage of the other party. This issue is explored in more detail in Chapter 16.

The uncertainties arising from problems of adverse selection, moral hazard, and risk allocation are more likely to arise where principal and agent are separate organizations, as in most client-contractor relationships. Where principal and agent belong to the same organization it might be expected that such problems would be less likely to arise, to the extent that the parties can share information, responsibilities, and objectives more readily. Unfortunately, this is not always the case. Chapman and Ward (2002, chap. 6) explores 'internal contracts' to address such issues.

Was this article helpful?

0 0

Post a comment