III : Mobilising the Resource Base 1© Graham M Winch

6 : Motivating the Project Coalition

There are so many advisors and sub-advisors involved in the [channel fixed link] project that

I hate to think of the amount of paperwork being produced. One thing is for sure, none

of them are digging a tunnelThe Sunday Times

III : Mobilising the Resource Base 2© Graham M Winch

Motivating the Project Coalition

• the problem of moral hazard• the problem of switching costs• managing moral hazard• contractual uncertainty and risk allocation• the dynamic of adversarial relations• alliancing

III : Mobilising the Resource Base 3© Graham M Winch

The Problem of Moral Hazard

• suppliers do not share information– impacted information

• buyers cannot monitor quality• performance measurement problems• uncertainties regarding facility exploitation

– possible mission changes

• the role of complex contracts– standard forms and economising on transaction

costs

III : Mobilising the Resource Base 4© Graham M Winch

The Problem of Switching Costs

• the fundamental transformation– pre- and post-contract asset specificity– supplier flexibility and client lock-in

• the sources of switching costs– transaction costs of retendering– inability to recover losses from new supplier– litigation– risk premium charged by new supplier

• the opportunistic margin– the cap of client switching costs

III : Mobilising the Resource Base 5© Graham M Winch

Managing Moral Hazard : The Role of Complex Contracts

• specify adjustment conditions• specify authority systems• provide incentives• provide administered pricing systems• provide conflict resolution procedures• specify standardised operating procedures• post credible commitments• provide for supplier performance measurement

III : Mobilising the Resource Base 6© Graham M Winch

Contractual Uncertainty and Risk Allocation

• three options– fee-based contracts– fixed-price contracts– incentive contracts

• incentive contracts : requirements• responsibility for changes in specification

III : Mobilising the Resource Base 7© Graham M Winch

Incentive Contracts : Requirements

• benefit greater than cost of incentive• drivers of performance in the control of the

motivated actor• rewards from consummate performance

greater than penalties from perfunctory performance

• gains and losses accurately measurable• benefits greater than costs of measurement• an incentive contract

8© Graham M Winch

Incentive Contract with GMP

client’s savings

ACO> ACe

gain (i.e. negative variance)

loss (i.e. positive variance)

budget sanction (ACe)

ACO < ACe

contractor’s rewards

contractor’s

risk

client’s risk

GMP

III : Mobilising the Resource Base 9© Graham M Winch

Gainshare: Schedule Incentive Scheme

late

target date

early

gai

nsh

are

(£

)

time (days)

cap

10© Graham M Winch

The Andrew Gainshare Formula

BP’s savings 46%

ACO> ACe

gain (i.e. negative variance)

loss (i.e. positive variance)

budget sanction (Ace = £373m)

GML

ACO < ACe

contractor’s

rewards 54%

contractor’s risk £27m

client’s risk

III : Mobilising the Resource Base 11© Graham M Winch

Responsibility for Changes in Specification

• client responsibility• supplier responsibility• the contractual options

– cost reimbursable– percentage fee– guaranteed maximum loss– pure incentive contract– guaranteed maximum price– unit rate– lump sum

12© Graham M Winch

Responsibility for Changes in the Specification

cost

reim

burs

able

perc

enta

ge fe

e

guar

ante

ed m

axim

um lia

bility

incen

tive

cont

ract

guar

ante

ed m

axim

um p

rice

unit r

ate

lump

sum

level of uncertainty at

contract formation

supplier responsibility

clientresponsibility

fee

-bas

ed

incen

tive

cont

ract

fixed

pric

e

III : Mobilising the Resource Base 13© Graham M Winch

Governing the Contract and the Role of Third Parties

• transaction costs– search costs (15%-20% adverse selection)– costs of preparing and agreeing contract with

selected supplier– costs of dispute resolution– costs of hiring third parties

• the role of third parties

10%

III : Mobilising the Resource Base 14© Graham M Winch

Principal, Agent and Third Party In the Professional System

principal (client)

principal (client)

agent (architect/engineer)

control (architect/engineer)

agent (contractor)

project definition

project execution

III : Mobilising the Resource Base 15© Graham M Winch

The Role of Third Parties

• measurement of supplier achievement• speedy adjustment of minor changes• first line of dispute resolution• trading in probity

– principal quantity surveyor– bureau de contrôle– supervising officer/the engineer

• the professional institutions

III : Mobilising the Resource Base 16© Graham M Winch

The Dynamic of Adversarial Relations

• the dynamic of adversarial relations– getting the best deal– generating transaction costs– cost control, not cost reduction

• the dynamic of over-engineering– responsibility for design– lack of expertise in site processes– add in safety margin

• the dynamic

17© Graham M Winch

The Dynamic of Adversarial Relations and Over-Engineering

competitivetendering

trimmargins

opportunisticbehaviour

audit &control

adversarialrelations

completespecification

responsibilityfor design

avoidlitigation

over-engineer

client

client

III : Mobilising the Resource Base 18© Graham M Winch

Alliancing

• single project partnering• sharing information• sharing risks• motivating performance

– incentive contracts