Building projects rely on contracts to achieve the desired results. Construction contracts dictate when the results must be delivered, the overall project cost, and the standard of quality that must be met. Thus, when a party bound to the contract fails to deliver the results in compliance with the terms and conditions stated in the contract, it’s so easy for the other parties to resort to legal remedies. This is where the conflict starts, delaying project completion and creating additional cost.
Relational contract challenges the effectivity of formal contracts in setting and achieving goals within an organization. While formal contracts define and enforce the obligations and rights of contracting parties such as, “when one party agrees to provide a good or service to another party and the other party agrees to compensate the first party for that good or service, the mutual agreement creates the contract” (Williston 1920), relational contract with reference to CRC CI (2002) deals with identifying and endeavoring an approach of mutual benefits through developing cooperative relationships and establishing a mechanism of risk-sharing.
The notable difference between these two contracts is seen when one party fails to deliver a certain obligation. Using formal contracts, the issue is resolved through legal means which involve costs and reputational risk. Whereas, using the relational contract, the other parties will try to understand and assess why expectations aren’t met to preserve the relationship between the parties rather than terminating the same.
As stated by Kumar N (1996), relationships must have a degree of elasticity to flourish which cannot be established by enforcing the legal force of contracts rather by mutual obligatory force of trust. Reciprocity as one of the attitudinal norms of relational contracting encourages parties to focus on each other’s well-being; to be fair and to show high mutual respect. Relational contracts allow relationships to flourish over time. Its continuance promotes the flexibility of adapting to changes that are most likely to happen in construction due to unforeseen circumstances. This avoids delays and high costs that would otherwise have incurred had the organization failed to deal with the unexpected change.
The industry has generally been described as being contested, fragmented and highly adversarial with inherent problems (Latham 1994, Egan 1998, Cox and Ireland 2002).
An alternative approach that is based on trust, cooperation and commitment could end the industry’s inherent problems rather than by using the traditional arm’s length. The findings by Macaulay concluded that the dysfunction created in a business relationship when enforcing a contract is more detrimental to businesses than deciding to cooperate and jointly solve problems. If parties are allowed to work proactively and refrain from using the contractual language which provides authority, they can work together for the betterment of the project.
While some business dealings may still require contractual reinforcements, relational contracts show to be an effectual contracting form in construction. When there are mutual trust and the willingness to work together amid conflicts and disputes, it becomes a win-win situation for all.
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Jan is a passionate writer for BestAccessDoors.com who always aim for the best and providing only the most useful info for the construction industry. When she’s not writing, you’ll be sure to find here finishing a whole season of her favorite series in one day.