American Society of Civil Engineers Researhc Paper 2022

This is the author’s version of a work that was submitted/accepted for pub-
lication in the following source:
Chen, Le & Manley, Karen (2014) Validation of an instrument to mea-
sure governance and performance on collaborative infrastructure projects.
Journal of Construction Engineering and Management, 140.
This file was downloaded from: http://eprints.qut.edu.au/66871/
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1Chen, L., and Manley, K. (2014). "Validation of an instrument to measure governance andperformance on collaborative infrastructure projects." Journal of Construction Engineering andManagement, Inpress. Validation of an instrument to measure governance andperformance on collaborative infrastructure projectsLe Chen1 and Karen Manley2 AbstractCollaborative infrastructure projects use hybrid formal and informal governance structures tomanage transactions. Based on previous desk-top research, the authors identified the keymechanisms underlying project governance, and posited the performance implications of thegovernance (Chen et al. 2012). The current paper extends that qualitative research by testingthe veracity of those findings using data from 320 Australian construction organisations. Theresults provide, for the first time, reliable and valid scales to measure governance andperformance of collaborative projects, and the relationship between them. The results confirmseven of seven hypothesised governance mechanisms; 30 of 43 hypothesised underlyingactions; eight of eight hypothesised key performance indicators; and the dual importance offormal and informal governance. A startling finding of the study was that the implementationintensity of informal mechanisms (non-contractual conditions) is a greater predictor ofproject performance variance than that of formal mechanisms (contractual conditions).Further, contractual conditions do not directly impact project performance; instead theirimpact is mediated by the non-contractual features of a project. Obligations established underthe contract are not sufficient to optimise project performance. CE Database subject headings: Procurement; Partnerships; Australia. Author’s Keywords: Construction; Collaborative project; Project governance, Value for money;Project performance. 1 Le Chen, Research Fellow, School of Civil Engineering and Built Environment, Science and EngineeringFaculty, Queensland University of Technology, S Block, Level 7, Room S724, Gardens Point campus , GPOBox 2434, Brisbane, Qld 4001 Australia. E-mail: [e-mail]. 2 Karen Manley, Associate Professor, School of Civil Engineering and Built Environment, Science andEngineering Faculty, Queensland University of Technology, S Block, Level 7, Room S737, Gardens Pointcampus , GPO Box 2434, Brisbane, Qld 4001 Australia. E-mail: [e-mail].

2IntroductionOver the past decade, collaborative procurement models (CPMs) have beenincreasingly used in many countries for delivering high value, complex infrastructure projectsin industrial sectors such as road, rail, water, energy, mining and defense (Department ofTreasury and Finance 2009; Love et al. 2011; Morwood et al. 2008; Scheepbouwer andHumphries 2011). A collaborative procurement model is designed to encourage relationshipsbetween project participants in an effort to maximise outcomes. The rise in the use ofcollaborative procurement reflects the increasing sophistication of construction projects todeliver infrastructure and the need to manage high levels of complexity and uncertainty(Morwood et al. 2008). Examples of CPMs are project alliances; program alliances;integrated project delivery (IPD); early contractor involvement (ECI); and traditional withpartnering. CPMs have delivered significant community, environmental and social outcomesin conjunction with effective cost management and innovation (Davis and Love 2011; Haucket al. 2004; Love et al. 2010). See Kent and Becerik-Gerber (2010); Love et al. (2010);Scheepbouwer and Humphries (2011); and Lahdenperä (2012) for a description of thesedelivery systems. The literature suggests that the alliances provide the most robust support ofcollaboration (Ross 2008), albeit with question marks over outcomes and the relatively highcost of implementation (Department of Treasury and Finance 2009).The current paper focuses on Alliance-type procurement systems, which are currentlyattracting considerable interest across America and Europe after recent extensive use in theAustralian context (Kelly 2011). The governance of these collaborative projects falls into twoprimary classes – formal and informal. Each project comprises distinct combinations offormal and informal mechanisms and underlying actions (Lahdenperä 2012; Love et al.2010). Formal governance comprises contractual incentives for clear and equitable riskallocation (Lahdenperä 2010; Love et al. 2011). Informal governance comprises non-

3contractual incentives to enhance mutual trust, enable cooperation, facilitate opencommunication and share knowledge (Rahman and Kumaraswamy 2012). It is evident in theliterature that different combinations of formal and informal mechanisms are applied withinvarious transactional contexts (Love et al. 2010; Scheepbouwer and Humphries 2011). Forexample, high risk projects are likely to involve a greater concentration of informalmechanisms, like relationship workshops, to encourage trust.Empirical evidence has not yet been established to clearly identify what roles the twoclasses of governance play in performance outcomes (Department of Infrastructure andTransport 2011; Kelly 2011; Lenferink et al. 2012; Nyström 2008). This is despite calls fromprominent industry players (Department of Treasury and Finance 2009). The paper respondsto this knowledge gap by addressing five research objectives:1) To build a conceptual model showing the relationship between governance andperformance;2) To verify the essential mechanisms which define formal and informal governancefor complex infrastructure delivery;3) To verify the essential actions that underlie each mechanism;4) To verify key performance indicators for collaborative infrastructure projects;5) To investigate the association between project governance classes and projectperformance.Previous literature on the topic has presented limited statistically rigorous evidencegathered by deductive means about the performance implications of collaborativeprocurement mechanisms (Eriksson and Westerberg 2011). Instead previous contributionsrely on inductive methods such as interviews (e.g. Bresnen 2009; Davis and Love 2011;Hauck et al. 2004; Lenferink et al. 2012; Love et al. 2011; Love et al. 2010; Rose and Manley2012). The current study provides much-needed statistical evidence about the performance

4implications of collaborative governance for infrastructure delivery. This extends the theorybuilding cycle into a deductive phase. The findings reported here provide a moregeneralizable understanding of collaborative governance to maximise project outcomes,compared to inductive methods. Building the Conceptual ModelProject GovernanceInfrastructure projects are usually characterised by a high level of durable transaction-specific investment and a high degree of uncertainty (Morwood et al. 2008). In line with theperspective of transaction-cost economics (Williamson 1979), the construction managementliterature stresses the need to apply collaborative governance to manage the non-marketability challenges associated with infrastructure project transactions where duration,complexity and uncertainty are rapidly increasing (Chan et al. 2010; Lahdenperä 2012; Loveet al. 2010; Rahman and Kumaraswamy 2012).In practice, collaborative infrastructure projects adopt hybrid governance structures(Lahdenperä 2012; Lenferink et al. 2012) comprising formal and informal mechanisms,which utilise both market and hierarchical transactions (Williamson 1991) to facilitate thenegotiation and execution of physical and human capital transactions (Chan et al. 2010).Formal mechanisms include market transactions through formal contracts and de-personalized exchange (Ferguson et al. 2005; Williamson 1991), and hierarchical transactionsthrough performance measurement and dispute resolution procedures (Gulati and Singh1998). Formal governance mechanisms are largely independent of the specific peopleinvolved, can specify outcomes (Hoetker and Mellewigt 2009), and are suitable forcontrolling physical capital, which is easily codified (written down) and transmitted (Hoetkerand Mellewigt 2009).

5By comparison, informal mechanisms focus on relationships (Hoetker and Mellewigt2009; Macneil 2000), and include people and social-based hierarchical relations forenhancing mutual trust, open communication, cooperation and knowledge sharing (Gulati andSingh 1998). Informal mechanisms are normally applied as non-contractual stimuli designedto enable equitable allocation of risk through influencing the attitudes of individuals involvedin the transaction, and are tightly bound to the specific individuals and their relationships(Hoetker and Mellewigt 2009). Hence the outcomes of informal mechanisms largely dependupon interactions between individual participants and cannot be pre-specified (Hoetker andMellewigt 2009). These mechanisms are most suitable for controlling human capitaltransactions, which are idiosyncratic due to the tacit nature of the knowledge and thecognitive context involved (Williamson 1979). Formal MechanismsA previous review of leading construction management literature by the authors(Chen et al. 2012) identified three essential mechanisms of formal governance: ‘collectivecost estimation’, ‘risk and reward sharing regime’, and ‘design integration’. Thesemechanisms are described below prior to verifying that they are a valid measure of formalgovernance. Collective Cost EstimationThe cost of alliance projects are jointly estimated by an integrated team formed by theowner, designer, contractor and other service providers during the Target Cost Estimate(TCE) process (Love et al. 2011). The parties come together to develop the scope of work,define the time schedule, and agree on cost-reimbursable principles (Morwood et al. 2008).As an essential output of the TCE process, the target outturn cost (TOC) is developed to

6represent the expected cost of the project’s scope at completion, including project specificcosts and overheads, as well as service providers’ profit margin and non-project relatedcorporate overheads (Morwood et al. 2008). The TOC is used as the benchmark to assessperformance and to determine how risk and rewards are shared by the parties (Department ofInfrastructure and Transport 2011; Love et al. 2011). An actual outturn cost (AOC) close tothe TOC also demonstrates value for money (Love et al. 2011).ECI combines principles of Alliances and traditional Design and Build (DB) methods,and uses a two stage arrangement to manage initial risks. The collective cost estimation isprimarily carried out in the collaborative stage, where the owner, contractor and designerwork together to develop the design, program, budget and risk allocation model (Lenferink etal. 2012; Scheepbouwer and Humphries 2011). Alliance and ECI project structures aretailored to the unique characteristics of a given project, where owners ensure pricecompetitiveness through selecting either one or multiple service provider teams to participatein the scoping and pricing stage (Lahdenperä 2010; Lenferink et al. 2012; Love et al. 2011;Scheepbouwer and Humphries 2011).Engaging only one service provider team in the pricing stage has been found to enablebetter development of a trustful and cooperative relationship between the owner and theproponent (Kelly 2011; Ross 2008). However, this approach is also criticized for lackingsufficient incentive to achieve cost-effective pricing, which has been argued as the advantageof the multiple team approach, since the later builds competitive tension between theproponent teams (Department of Infrastructure and Transport 2011). The choice of approachdepends largely on the transactional context of the specific project (Lenferink et al. 2012;Morwood et al. 2008).

7Risk and Reward Sharing RegimeThe risk and reward sharing regime constitutes the foundation of collaborativeprocurement’s commercial framework (Chan et al. 2010; Lahdenperä 2012; Lenferink et al.2012). In alliance projects, this regime enables the parties (including the owner) to sharesavings and overruns according to the set TOC. That is, any cost under- or over-run againstthis TOC is split in pre-agreed, specified proportions (Lahdenperä 2010; Love et al. 2011).Normally, the owner takes 50% of both the gain (profit due to cost underruns) and pain (lossdue to cost overruns), and the remaining 50% is available to be split between the serviceproviders (Department of Infrastructure and Transport 2011; Morwood et al. 2008).Historically, most Alliance contracts cap the overall risk for each service provider atthe loss of the service provision fee, which means that even in the worst case scenario, theservice providers will still be reimbursed for the direct costs of the project (Morwood et al.2008). The owner’s non-price objectives are represented by Key Result Areas (KRAs) suchas facility performance, safety, and timely completion, which are pre-agreed between theowner and service providers, and measured and rewarded based on Key PerformanceIndicators (KPIs) (Department of Infrastructure and Transport 2011; Morwood et al. 2008).In the case of ECI projects, the payment to the contractor is based on actual cost at anagreed rate, plus an agreed amount for profit and overheads (Scheepbouwer and Humphries2011). Similarly to project alliances, the contractor is financially rewarded for success insome KRAs from a performance pool (Edwards 2009). Design IntegrationFormal mechanisms are designed specifically to spur the parties to invest andcooperate in joint design during the development phase, which is critical for innovation andproject success (Lenferink et al. 2012; Love et al. 2010; Morwood et al. 2008). Through