Society

Types of contracts for project partnerships

MEET

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scottbellows

Summary

  • Individuals or organisations you choose to work with will determine outcome of client’s work.

Organisations often undertake large projects that outpace the abilities of their entity. A construction firm might win a tender to rebuild part of the highway between Nairobi and Mombasa. An NGO might receive a USAID donor award to supply HIV antiretroviral medicine to a million Kenyans. A university may win a Government of Kenya bid to train thousands of youth on employment skills. An IT firm may seal a deal to build a new enterprise resource planning (ERP) system that also integrates a procurement front-end as well as payroll features and a geo-tagging app interface for employees’ mobile phones.

In such instances, each organisation might not hold the wherewithal to complete the entire project satisfactorily within timeframes allotted.

Ramping up staffing and processes takes time if project size exceeds current firm resources.

In response, most organisations choose to partner with likeminded entities in order to reach economies of scale through critical mass.

In partnering, three different general types of contractual arrangements exist for partnerships.

First, a lump sum or fixed-price contract where the partner gets paid a set pre-agreed amount for the entire project as defined in the contract.

Second, lead organisations can choose a reimbursable contract whereby partners get refunded for all actual accosts reasonably sustained during the project with a specific allowed markup, often a percentage or a fixed fee, for the partner’s profits.

Third, an alliance contract can be utilised, also called a partnering contract, whereby both parties jointly determine the targets and the associated costs and then both partners share in any upside or downside of meeting or exceeding cost targets or time deliverables.

Researchers Mohammad Suprapto, Hans Bakker, Herman Mooi, and Marcel Hertogh investigated which types of contracts had better linkages with project performance.

Interestingly, the type of contract whether lump sum, reimbursable contract, or an alliance contract had no direct relationship with performance on the project.

There was no affect at all. So, the scientists delved into the psychology behind the contracts. They hypothesised that a psychological process would happen in the minds of the contractors depending on the contract type. The research investigated relational attitudes that the contractors felt with the lead partner and also the teamworking quality between the two partners.

Fascinatingly, the research team found that the type of contract that had the most significant impact on relational attitudes was the partnering/alliance type of contracts.

Those enhanced relational attitudes that include relational norms and senior management commitment caused a better teamworking quality environment such as inter-team collaborative processes.

It is this psychological chain of events that then caused an improvement in the project performance.

When considering partnering, executives must consider the psychological implications of different contract types when selecting and signing up partners.

A more flexible partnering/alliance contract allows for a stronger bond that also enables both firms to recognise more financial incentives.