Managing Relationship Risk on Projects

by Dr Andrzej Grossman

Why do people managing projects still fall into the trap of relying on the contract as the only mechanism to regulate relationships which will almost inevitably cause friction?

There are three reasons.

Reason 1 – Dangerously Biased Towards Optimism 

We are dangerously biased towards optimism in plans, projects and estimates and underestimating the time, costs and risks of future actions.

This tendency to believe your own project will proceed as planned, even if similar projects have run late, is called planning fallacy, a term first coined by psychologist and Nobel Prize winner Daniel Kahneman.

Reason 2 – Outdated Views on the Role of Contracts and Management 

Many managers continue to be heavily influenced by the confluence of an outdated view of the role of contracts and an outdated approach in management.

The traditional (Western) view of the purpose of a contract is that it clarifies the rules of engagement and position under the law, it allocates risk and facilitates either party to enforce the contract. Among other things, the requirement of the contract is that there is certainty of object.

Generally, Western culture prefers very detailed contracts that attempt to anticipate all possible circumstances and eventualities, no matter how unlikely.

Why? Because the deal is the contract itself, and one must refer to the contract to handle new situations that may arise.

Other cultures (Chinese), prefer a contract in the form of general principles rather than detailed rules.

Why? Because the essence of the deal is the relationship between the parties. If unexpected circumstances arise, the parties should look primarily to their relationship, not the contract, to solve the problem.

Traditional management theory is characterised by the idea that managers and workers are separated. Managers know everything and workers need to be told what to do and how to do it, and they do as they are told. So, overlay traditional management theory on a traditional view of the contract and you are left with:

  • the team negotiating the contract being largely separated from the implementation team
  • the contract attempting to set out the “blueprint” for the project
  • the implementation team not empowered to change the contractual plan
  • an underlying assumption that everything can be planned which means the contractual plan is correct and will endure for the term of the project.

But, people are imperfect, intrinsically unpredictable and interpret things differently. They work in an environment that is also intrinsically unpredictable. Even if the environment is stable, some effects of people’s actions will be unintended.

If we can accept this, why would we persist in adhering solely to a contractual system on many complex projects which has to rely on certainty and predictability?

Reason 3 – Bounded Rationality 

In 1956, the economist and political scientist Herbert Simon introduced his theory on economic decision-making which he called bounded rationality.

His theory was that people make decisions (irrespective of their level of intelligence) that are often only good enough in light of three unavoidable constraints:

  • only limited, often unreliable, information is available regarding possible alternatives and their consequences
  • the human mind has only limited capacity to evaluate and process the information that is available
  • only a limited amount of time is available to make a decision.

Even if we intend to make rational choices, we are bound by these constraints rather than optimising choices in complex situations. These bounds on rationality also make it almost impossible to draw up contracts that cover every eventuality which means we have to rely on short-cuts. It is now easy to see what can happen.

Parties to a contract may soon find themselves constantly monitoring each other to ensure they are fulfilling their contractual obligations and with this may come the danger of developing a blame culture where people point the finger at each other to avoid being punished or feeling humiliated.

The result is that no personal initiative is taken because people do not want to risk making a mistake or giving bad news.

Finding someone to blame will interfere with quickly finding a practical resolution to a problem and erode effective communication. Human behaviour and weaknesses in communication soon foul up our notion of contract perfection.

A Different Way

Risk management approaches need to include ways of dealing with communication and relationship issues without relying mainly on the implementation of a methodology focussing on the technical aspects of a project.

Applying the mediation skill set either through Project Mediation, Dispute Avoidance Board or team coaching can facilitate communication, build relationships and trust across different cultures.

These approaches do not replace project management.

Their focus is on team communication and interaction, not reliance on the application of management and contract mechanisms.

By their very nature, dispute prevention approaches are best adopted at the start of a project rather than waiting for a crisis to emerge.

This is grounded in the idea of relational contracting, a term first used by Harvard law professor Iain Macneil in 1985 who acknowledged that long term complex contracts can only satisfy their purpose if they break down into relational contracts.

When projects succeed it is because the participants adapt their behaviour to unexpected terrain. As challenges arise they pursue cooperative behaviour and common benefits instead of constantly updating the contract – as if the contract lies at the heart of people rather than people lying at the heart of the contract.

Contracts for complex projects, therefore, should be much more concerned with encouraging cooperative political and social behaviour rather than attempting to transfer a risk which cannot be transferred.

Dr Andy Grossman was interviewed about this topic by Srđan Šimac, Judge of the High Commercial Court of the Republic of Croatia. Access the interview here.

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