6 : Motivating the Project Coalition

1. 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 tunnel The Sunday Times III : Mobilising the Resource Base

2. 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. 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. 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. 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. 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. 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 III : Mobilising the Resource Base

8. Incentive Contract with GMP gain (i.e. negative variance) client’s savings contractor’s rewards ACO> ACe ACO < ACe contractor’s risk client’s risk budget sanction (ACe) GMP loss (i.e. positive variance)

9. Gainshare: Schedule Incentive Scheme gainshare (£) early late time (days) target date cap III : Mobilising the Resource Base

10. gain (i.e. negative variance) BP’s savings 46% contractor’s rewards 54% ACO> ACe contractor’s risk £27m ACO < ACe GML client’s risk budget sanction (Ace = £373m) loss (i.e. positive variance) The Andrew Gainshare Formula

11. 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 III : Mobilising the Resource Base

12. Responsibility for Changes in the Specification fee -based incentive contract cost reimbursable guaranteed maximum liability percentage fee incentive contract fixed price guaranteed maximum price client responsibility level of uncertainty at contract formation unit rate lump sum supplier responsibility

13. 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. Principal, Agent and Third Party In the Professional System project definition agent (architect/engineer) principal (client) control (architect/engineer) project execution agent (contractor) principal (client) III : Mobilising the Resource Base

15. 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. 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 III : Mobilising the Resource Base

17. The Dynamic of Adversarial Relations and Over-Engineering competitive tendering client audit & control trim margins adversarial relations opportunistic behaviour avoid litigation complete specification over- engineer responsibility for design client

18. Alliancing • single project partnering • sharing information • sharing risks • motivating performance • incentive contracts III : Mobilising the Resource Base