An Equity-based Analysis of Construction Incentivisation


Student thesis: Doctoral Thesis

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Awarding Institution
Award date18 May 2020


Construction is project-based and needs to be carried out by teams with members coming from different organisations. Team members are also of different professional backgrounds. Non-cooperative attitude among these project participants is common notwithstanding its damaging effect. In this regard, cost overruns, delays and quality issues are recurrent happenings in construction projects in general and for mega complex ones in particular. Fundamental change in contracting behaviour that embraces common interests and cooperative working has been advocated in many industry reviews. Construction incentivisation (CI) has been suggested by literatures as a possible contractual strategy to guard against opportunistic behaviours as well as to improve efficiency. CI can be identified as a collective term to cover the range of incentive schemes that aim to enhance project performance. In fact, many mega projects are using various forms of CI. However, despite the much-heralded benefits, researches show that the effectiveness of many CIs in enhancing performance is not as forthcoming as intended. For example, all the mega projects currently carried out in Hong Kong have incorporated CI but all are experiencing delay, cost overrun, major defects and huge claims. These undesirable underperformance point to the urgency of reviewing the planning, design and implementation of CIs. This study has five objectives: 1) review the current implementation status of CI; 2) analyse the effectiveness of CI; 3) develop a framework for the working of CI; 4) develop normative principles for the design, planning and implementation of incentivisation in construction projects; and 5) investigate the power of incentivisation in construction dispute resolution. The research process embodies the exploration of the fundamental governing the usefulness of CI. The research findings are as follows:

For Objective 1, a critical review of the literatures on CI was conducted to consolidate the various perspectives and applications. CIs have been used to seek additional value by proposing a change; and/or to save a project that is running into difficulties. Four primary tangible features of CIs were summarized after completing case studies of representative projects in Hong Kong: 1) Goal Commitment; 2) Risk and reward allocation; 3) Monitoring method application; and 4) Performance evaluation. Furthermore, literatures on organisational performance also suggested that enhancing Project Performance (PP) and maintaining Inter-Organizational Relationship (IOR) can also be effected through the use of CIs. Five cases were studied in Hong Kong to validate these propositions. Data were mainly collected through interviews, contract documents and participants’ observations. Apart from the theoretical inferences were supported, it was also found that: 1) The use of CI is highly objectives driven; 2) Developers are the key initiators of financial incentives in the Hong Kong construction industry; 3) The use of CI is more common in public projects than in private projects; 4) Carrots are far more often used than sticks; 5) Achievable goals are the enablers of effective incentive schemes and 6) The input/output ratio may well be the main consideration for contractors to commit to CIs.

For Objective 2, the key enablers of CI towards PP were detected. Certain unattended research gaps were investigated in this stage. First, the theoretical explanation of CI is mainly based on motivation of individuals. Moreover, for construction projects, organisational perspective is far more relevant than individual behaviours and decision- making. Second, the evaluation of CI is mostly target-oriented and imposed by the offering party. This arrangement may not be able to engender performance enhancement. Third, the reported findings cannot explain why the same type of CI only effect in some projects has but not all even they are of same nature and similar characteristics. These prompted an in-depth case study to explore the missing links through a real-life project. As such, the success DNA of the Hong Kong-Zhuhai-Macau Bridge (HZMB) Project was studied. The CI of this project comprises a penalty system operationalised by a Performance Reputation Evaluation System (PRES). Through trend analysis on the longitudinal performance scores of the contractor, it was found that improved IOR was the key project performance generator. It was further found that CI that can address ex poste the equity gap created ex ante to engender genuine cooperation. Balancing equity gaps (EG) is thus fundamental for an effective CI.

For Objective 3, an equity-based development framework (the Framework) for CI was developed and verified. The Framework was established based on all the aforementioned input from literatures and advice from senior members of the project participants. Review of literatures also inform that CI can be a positive influencer for better PP and IOR enhancement. However, the empirical works of this study also identified certain gaps between the anticipations and the actual happenings. Through the HZMB case study, it was found that CI could balance the unequal footing between developer and contractor. A second-round literature review was conducted to further investigate the roles of EG in construction. It is proposed that EG in construction can be measured by: power risk, information and expected returns. An equity-based CI development framework (the Framework) that include CI, EG, IOR and PP is proposed. Using the data collected from 142 construction projects, the PLS-SEM analysis results support the following hypotheses derived from the Framework. First, effective CI should address ex poste the EG created ex ante to moderate conducive IOR. Second, effective CI should address ex poste the EG created ex ante to improve PP. Third, effective CI moderates conducive IOR to improve PP. In this stage of the study, the relationships among the enablers were identified. It was found that contrary to typical treatment, CI should not be designed as a single and direct financial tool for specific objective-based performance enhancement. Balancing EG and maintaining IOR are two fundamental enablers for PP improvement and thus should be integral parts of CIs.

For Objective 4, normative principles were harvested to guide the design, planning and implementation of CI in construction projects. For this, an importance-performance mapping analysis (IPMA) was conducted using the Partial Least Square–Structural Equitation Modelling (PLS-SEM) analysis results. The IPMA results suggest that to improve project performance, 1) the intention of balancing EG should be an integrated part of every CI; 2) the arrangements of CI should be clearly addressed and recognized by both parties; and 3) for projects seeking outstanding performance, continuing developing IOR to evoke and fortress cooperation would promote project performance. Five normative principles of CI are organized as: 1) Mitigate the imbalance of power and expected returns are necessary for CI planning to prevent project running into difficulties; 2) Consistent management of risks and uncertainties should be addressed throughout the project duration; 3) Goal and expectation alignment are necessary for CI planning and 4) Promoting Inter-organizational relationship is the key for excellent project performance.

The concept of incentivisation is extended to construction dispute management for Objective 5. A literature review revealed that perception of unfairness is mainly stemmed from disproportionate risk allocation and power distribution. Incentivisation offers an avenue to address this imbalance and consequently reduce the occurrence of construction contract disputes. The functions of incentivisation in reallocating risks and increasing investment in relationships are discussed. It is further found that perception of unfairness may occur throughout the project. Incentivisation is thus not restricted as a strategy in contract planning. Some incentive behaviours, such as apology, can be deployed as the circumstances require. Offering an apology as a kind of incentivizing behaviour in construction disputes is then further analysed. It was found that given the right contexts, offering an apology can 1) Strengthen the intention of construction dispute settlement; and 2) Overcome psychological barriers against positive responses. Recommendations for the use of apology are also offered as: 1) Offer an apology to drive for equal footing; 2) Offer an apology to break an impasse; 3) Offer an apology with sincerity; and 4) Offer apology when emotional distress is at stake.

The research outputs of this study include: 1) A summary of the of the current implementation status of CI in Hong Kong; 2) An equity-based development framework for CI; 3) A set of normative principles for the design, planning and implementation of CI; and 4) Specific recommendations of incentive behaviour for construction dispute management. The Framework proposed in this study conceptualises the enablers of PP and highlights the importance of embracing elements to engender IOR in CIs to enhance its effectiveness. The set of normative principles harvested from this project is first of its kind. The use of equity as the analysing agent is novel, enthusiastic endorsement from key stakeholders have been received. Further studies were also conducted to explore the effects of incentive behaviour towards specific performance enhancement as dispute prevention and resolution. Suggestions for further research study include: 1) An investigation of the multi-party relationships is further suggested when analysing the effectiveness of CI; and 2) Tools for equity gap identification and monitoring during the project life cycle would be instrumental for improving IOR and PP.