Contracting Phase II (Best Practice)

RT-024 Topic Summary
RT 024

Overview

Trust is believed to be a factor in reducing project costs, while a lack of trust in business relationships is thought to be related to inefficiencies and increased project costs.

A trusting relationship between the parties is based on a mutual understanding of each other’s capabilities and limitations. It is also based on the personal and corporate integrity of both parties.

Trust is defined as “the confidence and reliance one party has in the professional competence and integrity of the other party to successfully execute a project in the spirit of open communication and fairness.”

Aspects of the relationship between the parties that provide the greatest project cost savings include:

  1. Open and honest communication
  2. The professional competence and integrity of the parties
  3. The willingness to adapt and implement changes for the betterment of the project

Based on research data from 262 projects, the intuitive notion that mutual trust and project cost are correlated is now statistically supported. It also identified those aspects of the relationship between the parties that should be addressed in order to realize the greatest project cost savings.

Key Findings and Implementation Tools

1 : Characteristics that Determine the Level of Trust

The following project characteristics are important in determining the level of trust between parties:

  • Involvement in project scoping
  • Involvement in project design
  • Familiarity between the parties
  • Attainment of the most important project objective, and type of contract.

(SD-100, p. 5)

Reference: (SD-100)

2 : Conceptual Cost-Trust Curve

The optimum or least project cost point on the cost-trust curve is defined as “rational” trust. It represents the highest level of mutually verifiable trust between the parties. Beyond the point of rational trust the relationship enters into the "blind trust" area.
Reference: (RS24-1)

3 : Trust Indicators

The level of mutual trust that exists between two contracting parties can be measured through Trust Indicators. These represent areas of activity in the contracting process where a trusting behavior between the parties can be observed and is important in achieving project objectives.

The research has identified a total of 15 major trust indicators that can be observed at different stages of the engineering, procurement, and construction of a project. The level of trust observed for each trust indicator is evaluated independently of the others. The aggregate of trust observed in all trust indicators determined the overall level of mutual trust for the project. A sampling of the Trust Indicators are listed here. Refer to RS24-1 for a complete list.

Reference: (RS24-1)

4 : Cost-Trust Relationship

The cost and trust of two hundred and sixty-two projects were analyzed. The resulting curve statistically documents the intuitive notion of the relationship between cost and trust. The shape of the curve indicates that within the range of trust level observed in the projects obtained from the survey, an increased level of trust between parties leads to project cost benefits.
Reference: (RS24-1)

5 : Contracting Trust Issues

The following are areas of activity in the contracting process where trust-related issues have a significant impact on project cost:

  • Open discussions of alternative methods of performing the work
  • Value engineering
  • Constructability
  • Contract administration
  • Risk allocation
  • Level at which disputes related to risk allocation are solved
  • Communications, and dispute resolution
(SD-100, p. 6)
 
Reference: (SD-100)

6 : Cost Related Factors Affected by the Level of Project Trust

The research lists 18 cost factors affected by the level of project trust. A sampling are listed here. Refer to RS24-1 for the complete listing:

  • Project Team Efficiency
  • Timing of Decisions
  • Timing of Approvals
  • Amount of Rework
  • Administrative Costs
  • Field Supervision
Reference: (RS24-1)

7 : Actions Having the Highest Potential Impact on Project Cost

The following is a sampling of specific actions related to the level of trust have been identified as having the highest potential impact on project cost. Refer to SD-100 for a complete listing.

  • Adopt a mission statement committing both parties to an open and fair approach to contract administration.
  • Emphasize the intent rather than the letter of the contract.
  • Share project objectives with all parties during the scoping and planning stages of a project.
  • Explore alternative methods of performing the work related to project scope, standards, procedures, specifications, and sequence.
  • Openly discuss merits of alternative methods and adopt those that best suit the project objectives.
 (SD-100, p. 6)
 
Reference: (SD-100)

Key Performance Indicators

Improved cost/trust relationships, Improved performance/achieved success

Research Publications

The Cost-Trust Relationship in the Construction Industry - SD-100

Publication Date: 09/1994 Type: Source Document Pages: 207 Status: Reference

Cost-Trust Relationship - RS24-1

Publication Date: 11/1993 Type: Research Summary Pages: 38 Status: Supporting Product


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