What is Relational Contracts?
The construction industry strongly relies on the contractual norms and conditions for its legal, regulatory, and formal obligation of work. As we know, a contract is an agreement enforceable by law. Broadly, there are three types of contracts classical, neoclassical, and relational contract. Clarity and correctness and contractual documents reduce at least 30% of project risk. As the need for development in increasing day by day, there is also a growing need for adoption of modern technologies, smart contracts methods, regular amendments in regulations and laws. Which in turn requires highly collaborative decision-making teams and well-planned processes for the successful execution of project delivery.
The traditional contracts assume that risk and liabilities of the project lie with the party who is best capable to handle the risk on its own. It becomes very difficult for any stakeholder in such cases to anticipate probable threat/opportunity without the help of other stakeholder’s involvement.
Relational contracting is a term itself suggesting about the relationship in the contracts. Relational contracting is based on mutual benefits and win-win situations through more cooperative relationships between one or more stakeholders.
The relational contracts are not the form of any contract, rather it is about having good relationships between two or more stakeholders, contributing towards the successful completion of the contract. It is the arrangement of a cooperative or a team approach to deal with the accomplishment of best project outcomes. It is a system of exchange trying to express acknowledgement to the commercial relationship between the stakeholders involved in the contract.
How it is different than conventional contracts?
The traditional form of the contract includes contingencies which act as a buffer to be spent at the time of uncertain/delay events. In engineering, procurement, and construction (EPC) mode all the stakeholder’s bear the expenses/losses associated with deviation from contractual clauses if it is mentioned in the contract. The classical contract type usually covers all major and minor contingencies with an aim to avoid disputes due to discrepancy at any stage of the project, whereas neoclassical contract type covers all contingencies same as classical but also hires dispute resolution committee to resolve the dispute and get back on track to complete the project at the expected performance.
The need for relational contracts is the lacking of the other two types, in terms of the increased complexity of projects and the emerging need for mutual understanding among the stakeholders. In relational contracts, responsibilities and benefits of the contract are allocated decently and transparently, with tool for delivery that emphasis on trust and partnership.
The key feature of relational contracts.
Relational contracts are generally long tenure involving the social give-and-take between the stakeholders, mutual trust, relational connection, responsibility to explicit accomplices and cooperative resolving the issues. Again, the relational approach is firmly connected with partnerships and strategic alliances with the contractors maintain a strategic distance from hostile ways to deal with the contract by highlighting the stable bonding mechanisms involving the long-term collaborative agreements on informality, shared resolving issues, correspondence and high trust. The fundamental aim of using a relational contract is to bring cooperative social behaviour among parties and being significant relational clauses/terms as part of the contract.
Views on how it can make the difference to the construction industry, if used.
The use of relational contracting models in business commonly and in the construction industry, in particular, has grown over the past thirty years and has attained significance internationally. The construction industry usually involves various stakeholders, and sub-contractors, which are inter-dependent to each other. The degree of mutuality and interdependence and the requirement for trust and collaboration are significantly amplified. As a consequence, the construction contracts are typical relational contracts. The nature of construction itself, often highly specialised, complex projects, involving multiple stakeholders with prolonged durations for initiation and completion, require relational approaches even on the simplest of building projects.
In the construction industry, this can improve working relationship between all project stakeholders, can encourage proficient and viable development, can enhance financial returns and can minimise the incidence and make simpler the goals of conflict at a project level. The adoption of relational contracting approaches can make a noteworthy contribution to the advancement of social capital, and the four pillars of sustainable communities, those of connectedness, citizenship, creative citizens and competitiveness.
Opportunities and challenges associated with relational contracts
1. Resolving issues/problems with a collaborative approach:
All the responsible, proficient and competent authority to come and discuss on a common platform and put up their views in the discussion to resolve the problem/issues and conclude the issue with the appropriate solution together, instead of just censuring the other party or just countering through correspondences. The mutually resolving the issues/problems with cooperation amongst all the stakeholders will form a bond of trust and ensure towards the successful completion of the task. The aim of the parties should be to work towards common goals and objectives of the project
2.Contributing towards the successful completion:
Successful completion of the project considering all the conditions of the contract without any deviation until it’s obligatory. Again, if there is need to deviate from the contract conditions, the decisions shall be in favour of the successful completion of the project to its best outcome, considering the key factors like time, cost and quality.
Irrespective of the stakeholder (say client or consultant or contractor), if one reminds the other regarding any pending matter/correspondence, just giving a reminder on call, instead of later on blaming them for the same reason, will help in completing that particular task within the stipulated time frame. When a similar methodology is followed throughout the project, all the critical activities can be controlled with mutual efforts and trust amongst all stakeholders leading to the successful completion of the final outcome. Project duration also plays a vital role, longer the project duration, higher the chances that changes may occur, thus a coordinated and collaborative approach is needed to run the show.
Mutual trust amongst all the stakeholder’s involved plays the major role as it avoids the criticism of the opposite party/agency by addressing the issue with all appropriate solutions towards the successful completion of the task. At any cost, an environment of trust shall be created by top management in the organisation to avoid any kind of conflict within team members.
The culture of the organisation plays a vital role in the relational contract. The work environment should be such that it enhances effective communication and should be able to eliminate the barrier of miss-communication at all levels with a healthy work culture within the organisation and among other stakeholders as well, to share and implement useful project-based solutions for the problems.
It is complex to define and put good faith into contractual terms, but it can be referred to as an informal agreement among stakeholders to work with honesty for the betterment of the project. It means parties need to act diligently, interpret contract on fair terms, a common language for the contract, refrain from either party for using their positional powers, delivering without understanding the scope of work, etc.
The project risk are to be identified in detail at the beginning of the project as well as periodically with the concern of all stakeholders, and qualitative and quantitative assessment shall be conducted to find the root cause and eliminate/reduce the impact of such risks.
Projects of complex nature are more prone to changes in terms of scope of work or deviations from the agreed scope of work. The parties involved in the project shall be aware of such uncertainties and shall be ready to accommodate changes by means of sharing risk or transferring to third parties like insurance companies.
7.Dispute Resolution Board (DRB)
DBR should be formed to resolve, mediate, adjudicate claims if in any case remains unsettled over the difference in opinion or change in work scope.
Is India ready for relational contracts to be used in metro rail?
Metro rail projects in India is taking shape as a promising mode of transportation for urban areas. As such projects are mega infrastructure projects and involve many stakeholders into planning, execution as well as operations. It is very difficult to accommodate and consider the opinion of each and every stakeholder while making decisions. The relational contracts are most suitable in such conditions. Some characteristics which suggest why Metro rail projects in India shall use relational contracts are:
- Long-term relations: As metro rail projects are majorly funded by foreign players, it is very essential to make a long term promise for investor related to revenue generation from such projects. Relational trust gives the opportunity for more investments and timely funding for the smooth completion of projects.
- A high degree of flexibility: Heavy engineering projects are inflexible in nature due to high initial investments and due to constraints of resources. The relational contract gives a large degree of flexibility as other parties are aware of work complexity and contingency plan is in place to accommodate changes.
- Project repayments: Metro rail projects are forecasted for 30-40 years for revenue generations, to maintain good relation with banks a detail and precise financial appraisal shall be put forth to win the confidence of investors.
- Project Communication: Top management of any project spends 90% of their time in communication. It is very crucial for the team to deliver correct information to an internal and external team of the project to avoid any dispute due to misinterpretation of said information.
What are the key benefits of using relational contracts for metro rails?
- It encourages parties to strive for common goals and objective of the project to deliver on time metro system for faster commute in the cities as well as within the budget and with quality standards.
- Most of the time, in Metro projects contractor usually takes the major risk in the project whereas client/consultant moreover supervise or assist the ongoing works; relational encourages knowledge sharing and alert from other parties of their expertise.
- Encourages parties to share risk and reward associated with the projects.
- While drafting the requirements metro projects have complex elements, it suggests following agile work practices to accommodate changes as the project progresses.
- Encourages equal participation and effective communication from all stakeholders.
The relational contract has the potential to provide long term benefits to metro rail projects, as an interest of the government and private parties are in line with the project objectives. The projects are bound to follow legal and contractual obligations but only by adding relational to it, accountability and ownership of project get enhance leading to the successful and satisfactory completion of the project and developing commercial relationship between the stakeholders involved in the contract.