The design of risk sharing to promote cooperation

Abstract

Cooperation figured prominently in the Dutch construction industry’s agenda over the past years. In 2016, major clients, sector organizations and the relevant market parties officially committed to promote a culture based on good cooperation and healthy relationships by signing the "Market Vision" (De Marktvisie, 2016). This document illustrates the objectives, principles and necessary changes to achieve this ambition in 2020. However, according to the report of Rijkswaterstaat (2019), there have not been structural changes in cooperation within the supply chain where fighting relationships, self-interest and opportunistic behaviours still prevail. The unattractive risk-return profile, i.e. the ratio between the expected return and the amount of risk undertaken by contractors, of large projects in the civil engineering sector is considered to be a barrier that prevent this change. The current approach to risk management is one factor that contribute to decrease the risk-return ratio. According to the report of Rijkswaterstaat (2019), market parties have the impression that risks are not always allocated to the "natural owner". The natural owner is the party that has the knowledge, ability and financial capacity to manage a certain risk. Market parties have more or less consciously accepted risks under competitive pressure although Rijkswaterstaat argue that during the tendering process of large complex projects some risks are taken back based on the contractors’ argumentation. However, construction companies point out that the dialogue focus on limiting risks on the client’s side and they are not yet sufficiently stimulated to discuss their own risks. This research proposes risk sharing to fills the gaps of the current approach with the purpose of stimulating the development of cooperation. The scope of the research is limited to Dutch infrastructure projects procured by public authorities through Public-Private Partnership. The research objective is to provide partner organizations with a framework to share risk at the project level in order to foster commitment and cooperation for the long duration of the partnership. The first step to achieve the research objective is to investigate current risk sharing from a theoretical and practical perspective. This is achieved through literature review, exploratory interviews with employees of WitteveenBos and document review. The results of these activities are compared with the elements mentioned in the literature to stimulate cooperation. Afterward, a conceptual model is elaborated based on the
results of literature review and exploratory interviews. The purpose of the proposed conceptual model is to illustrate contractual and relational elements that can be added to the current risk sharing in order to promote cooperation. Then, the proposed risk sharing mechanisms that constitute the conceptual model are discussed with practitioners. This activity aims to refine the proposed risk sharing mechanisms in order to obtain detailed measures that form the risk sharing framework. Finally, the proposed framework is validated with experts in order to assess whether it meets the economic and functional requirements of its intended users and fits within the restrictions imposed by the current practice. The risk sharing mechanisms applied in the construction sector mentioned in the literature refer to financial incentives such as government guarantees, target cost contracts, etc. However, the literature study suggests that the attitude and willingness of partners to engage in cooperative behaviours is stimulated more by trust and relational norms than formal enforceable rules. Therefore, it can be argued that risk sharing requires additional elements in order to promote cooperation. The proposed risk sharing framework requires certain personal attitudes of team members in order to be effective in promoting cooperation. According to practitioners, partners should: • seek the participation of all team(s)members, internal and external; • take the initiative to help rather than being passive; • show behaviours oriented toward the achievement of common goals and mutual benefits; • be open and receptive to new ideas, different perspectives, external influence; Furthermore, an essential attitude is to accept and embrace the idea that risk ownership does not exclude the chance of managing a risk together. The legal boundary of having one risk owner should not prevent partners from being forthcoming and providing support to control risks. Based on the results of the discussion with practitioners, the proposed risk sharing framework is effective in stimulating cooperation only if partners coordinate with each other and commit to implement these measures together.