Construction Incentivization

Many construction projects end with cost overrun, delay and defects. These undesirable outcomes are particularly disheartening with mega projects. The construction industry has been seeking ways to improve project performance and inter alia, incentive schemes have been used widely as one of the means to induce extra efforts from contracting organisations. In 2007, the Hong Kong Government announced the construction of ten mega projects. Notwithstanding these mega projects have all incorporated certain forms of incentive, delay, substantial cost overruns and quality issues have been reported. The authors observed the following pattern of use of construction incentivization (CI): (i) Most of the CI have targets set on time, cost, quality, and safety, (ii) No clear pattern of how CI are developed, (iii) ‘Carrots’ are used far more often than ‘sticks’, (iv) The use of CI is far more common in public projects than private projects, (v) Most targets are quantitative, and (vi) Choice of CI is rather incidental. Apparently, there are two major shortcomings of the prevailing CI arrangements. First, CI is anchored on motivation theories that are mostly related to individuals; Second, the targets are outcome based and mainly tied with developers’ goals. This outcome-based approach is useful for tasks of high programmability with outcome that can be accurately projected. However, construction tasks, especially those that need innovation, are typically of low programmability with loose outcome predictability. To overcome these shortcomings, this primer suggests that incentivization should aim for effort greater than mere competence and go beyond carrot and stick should be used. It is advocated that integrative incentive should be used and have five functions: (1) Goal Commitment; (2) Expectation Alignment; (3) Information Exchangeability; (4) Risk Efficiency; and (5) Relationship Investment.

Construction incentivization in this book is used as a collective term for all forms of incentive arrangement that aim to engender extra effort of the contracting parties for the improvement of project performance. It is quite often assumed that all enterprises are seeking continual performance. In this regard, incentives in various forms have been used as performance motivator. In construction projects, incentive schemes have also been used to engender performance. Typically, incentive arrangements in construction involve setting cost, schedule, and outcome performance targets. Moreover, the success of incentive schemes is not guaranteed. It had also been found that many projects with incentives still end with project overruns, huge claims, and embarrassing defects. This study identified several design assumptions of conventional incentive that may not suit the ever-increasing complex projects. First, the targets for incentives are often set without consultation with the ultimate project performer. Second, the targets are quantified thus are outcome based. Third, no consideration is given to the behavioral aspect of the incentive. Fourth, there is no appropriate arrangement to solicit superior performance. With reference to the commonly used theoretical underpinnings of incentive arrangements, it is suggested that to have effective construction incentivization, it is necessary to have the scope jointly formulated by the major stakeholders. In this connection, the outcome targets must be agreed. Ideally, risk allocation can be much enhanced should construction incentivization can be used ex post to address ex ante unidentified risks. To bring about superior outcome, incentivization should embrace elements of behavioral performance.

Construction Incentives and Disincentives (I/D hereafter) arrangements are common project control measures. This study aims to investigate the attributes and scope of application of I/D. Comparatively, incentivisation is more about encouragement of performance improvement by reward provisions. It is objective-driven and generates pressure toward smaller and elite actions. Disincentivisation is less costly and can function well when monetary reward is not the sole performance motivator. It takes effect by penalties to force contractor to comply with their requirements. The analysis of these two mechanisms is further conducted based on two set of case studies in construction industry. It was found that some incentive strategies are attractive for contractor for further negotiation. Moreover, some financial rewards balance the unequal risks and encourage innovation. The proposition of disincentivisation is discussed and illustrated through a case study on the Hong Kong Zhuhai Macau Bridge (HZMB) project (Hong Kong Zhuhai Macau Bridge Authority (2009). Through focus group discussions, it is found that disincentivisation is successful for mega project controlling and unanimous cooperation for multi-agents. The importance of maintaining reputation a signature that disincentivisation is a less costly and viable project control measure.

It is quite often assumed that all enterprises seek continual performance. In this regard, incentives in various forms have been used as performance motivators. Typically, incentive arrangements in construction involve setting cost, schedule, and outcome performance targets. Moreover, the success of incentive schemes is not guaranteed. Many projects with incentives still end with project overruns, huge claims, and embarrassing defects. It is advocated that defective design is one of the key causes of the nonfunctioning of incentive arrangements. This study reminds us that there are certain norms to be followed in the planning of construction incentivization. The characteristics of three well-known normative principles are introduced. In addition, this study advocates that construction incentivization should also be planned to engender the commitment of the contracting parties. In this respect, managing behaviours between the parties should be one of the planning norms of construction incentivization. Empirical support is also provided.

Principal-agent theory (PAT) considers that relational risks for contracting parties are significant and may lead to opportunistic behavior. As mega projects often have high asset specificity and facing great uncertainty, the demand for cooperation between different participants is particularly prominent. Effective moves to enhance interorganizational relationships and alleviate the related bottlenecks are therefore encouraged. Construction incentivization is thus advocated because of its flexibility and high acceptability. This study examines the stimulating effect of construction incentivization on interorganizational relationships for mega projects. A PLS-SEM analysis of 142 projects shows that the interorganizational relationship acts as a mediator between construction incentivization and project performance. Furthermore, developers and contractors have different perceptive views on construction incentivization. It is therefore suggested that construction incentivization should go beyond conventional uses and embrace relationship investment as a goal. Furthermore, there is no substitute for negotiated agreement on incentivization arrangements if mutually aligned interests are pursued.

Integrated project delivery (IPD) has been able to optimize the value for money for the owner by integrating diverse talents from the earliest design stage. The nucleus that contributed to the superior IPD performances is multi-agent risk/reward sharing incentive (RRSI). By overviewing the RRSI, four issues (i.e. setting target cost, incentives for non-cost performances, sharing ratios and caps of risk/reward) are important to IPD participants who involve RRSI. Moreover, a closer inspection of the multi-agent RRSI for IPD revealed that compared to any other procurement strategy, IPD has designed its RRSI with (1) a larger size of risk/reward pool, and (2) a greater amount of incentive pool. This explains why IPD empowers to achieve an effective multidisciplinary integration. However, not all the parties are inclined to join the RRSI, due to risk aversion or the concern of “inequity”. To increase the participants’ willingness to join the multi-agent RRSI, an optimum sharing model is proposed. With the application of concepts from cooperative game theory and prospect theory, the model can competently incorporate fairness in an optimum sharing of risk/reward. This chapter is helpful for the industry practitioners who are interested in the use of multi-agent RRSI in IPD projects.

Psychological well-being problems have raised concerns in the construction industry with reported high levels of mental health illness and suicide rate. Worse yet, the global COVID-19 pandemic has deteriorated the situation and caused more anxiety and depression cases. When basic psychological needs are not met, workers tend to experience less autonomous engagement at work. Thus, it is vital that management in the construction industry develop procedures, mechanisms, and interventions to improve worker experience. In this chapter, construction workers’ experiences at work are examined by conceptualising the construct of psychological well-being in the context of construction community. Three types of well-being outcomes and their antecedents are discussed: Hedonic (i.e. job satisfaction, life satisfaction), Eudaimonic (i.e. work-life balance, job engagement) and Negative (i.e. Stress, burnout, psychological symptoms). The association between construction worker well-being experience and motivation at work is highlighted, emphasizing the importance of managerial commitment for a motivated and engaged workforce. More practically, hands-on prevention-focused leadership practices are suggested to support resilience and mitigate risks to health and well-being in times of disturbance. Management implications are recommended for decision makers to improve worker well-being and engagement in the construction community.

This chapter explores the concepts of incrementalism and incentivization in the context of land and housing policy agendas. Given ongoing challenges in land and housing shortages and a rapidly changing environment, status quo orientation of government will lead to success or otherwise failure of new people-based and result-oriented strategies. On one hand, incremental land and housing policies seemingly fail to “muddle through” the status quo. On the other hand, public administrators are exposed to more uncertainties in increasingly complex policy mixes and a fragmented sociopolitical and economic context, without properly incentivized, they will eventually lose their job satisfaction. As such, there is a pressing need to develop a model to improve applicability of the theory of incrementalism as a commonplace accounting of recent effort in changing policymaking process. The chapter addresses three main questions: why are virtues of incrementalism remaining valuable, how can incremental policy changes and unfavourable policy outcomes be explained, and what can be done to reduce vices of incrementalism? First, the chapter argues that incrementalism, as a “branch method” of decision-making, offers a more realistic and effective approach to land and housing policymaking compared to classic bounded rationality model. This “branch method” describes power of small, marginal, momentous and accommodated steps to achieve policy goals. The virtues of incrementalism, such as its resourcefulness in overcoming cognitive limitations, diverging interests, and changing policy goals, make it a valuable tool in complex policy situations. Second, the chapter acknowledges that accumulative incrementalism recognizes the long periods of policymaking stasis without theorizing the co-existence of very seldom events of drastic policy changes. The empirically predominant form of accumulative incrementalism comes at certain cost in its explanatory power. This proposition guides this study to draw on Atkinson’s intellectual inquiries of institutionalism and behavioural economics to analyze the dynamic of incremental policy changes and unfavourable policy outcomes and view punctuated equilibria as part of policy continuity. Third, incentivization is identified as one of the crucial factor in the effectiveness of incrementalism in a rapid changing environment. The chapter proposes a framework that incorporates normative, affective and calculative incentives. Overall, the chapter presents a conceptual model that analyses the dynamic of incrementalism, intellectual inquiry and incentivization in the context of land and housing policy agendas.

Construction is one of the most dangerous sectors to work in; governments from various countries enact health and safety regulations to cultivate good health habits and impose stakeholders’ duties to ensure the work environment is safe. However, these regulations always impose penalties on the stakeholders of construction organizations in attaining their objectives. This chapter gives an overview of these regulations in the United Kingdom, Australia, New Zealand and Singapore and discusses the effectiveness of these penalties that Deterrence Theory underpins. In addition, alternative means to incentivize safety compliance at work from literature are discussed. Recommendations are then given for further research on incentivizing safety compliance in the construction sector. These include developing incentive and penalty provisions in construction contracts, revisiting the applicability of Deterrence Theory and reinforcing the link between safety incentives and compliance at construction sites.

Project delays caused by the COVID outbreak are unprecedented. The associated loss and expenses are supposed to be equitably shared between the client and the contractor. Nonetheless, Standard Forms of Building Contracts in many countries do not consider delay caused by COVID-19 lockdown as a qualifying event for any time and monetary claim. Disagreements and disputes have arisen as a result. In this aspect, incentivization has been advocated as an effective measure to fill the equity gap. But how incentivization can be introduced into construction contracts, and how this may help reduce disputes arising from the COVID-19-associated delay has not yet been explored in prior studies. This chapter presents a study investigating how the claims for COVID-related project delays were managed. Sixteen semi-structured interviews with the contract administration experts were conducted in Melbourne, Australia—a city that experienced the world’s most prolonged COVID lockdown in 2020–21. Measures taken to mitigate the consequences of the COVID-related delay were identified. The effect of incentivisation on rebalancing the risk between the client and the contractor was also investigated. The findings reveal that although the existing Standard Forms of Building Contracts cannot be applied flawlessly in managing COVID-related time and monetary claims, interviewees were hesitant to introduce any radical change to the contract provisions. While incentivisation can instigate more active actions towards resolving COVID-related disputes, interviewees preferred the incentive schemes to be developed outside the construction contract regime. Views regarding how incentivisation can be implemented to avoid COVID-related disputes in future projects were sought. The study reported in this chapter illustrates how incentivisation may foster equitable risk sharing between the contracting parties in future contracts.

What incentives and disincentives motivate negotiators to settle or not in a construction dispute negotiation (CDN)? A thorough literature review is conducted on this subject to identify the antecedents of negotiators’ intention to settle (ITS) in CDN. Three relevant constructs are identified: motivation (i.e., prosocial and proself motive), cognition (i.e., justice and power), and psychological bonding (i.e., trust and shared vision). Categorically, this study finds that in the negotiation context, negotiators having a prosocial motive and perceiving justice about the negotiation process and outcome can stimulate negotiators’ ITS, which can be seen as incentives; however, the proself motive and perceived power advantage would serve the opposite, thus can be classified as disincentives. In addition, cumulated trust and shared vision during the project collaboration can also play an incentive role in promoting negotiators’ intention. As a result, this study develops a link between the incentive/disincentive (I/D) and negotiators’ intention to settle through the literature review. A better understanding of these agents of I/D can help explain negotiation conditions and negotiators’ decisions whereby appropriate negotiation strategies can be devised.

In recent years, the use of mediation as an alternative to arbitration/litigation has gathered momentum at both industry and national levels. One characterising feature of the mediation movement is keeping voluntary participation as one of the core design features of mediation arrangements. The use of mediation in construction has started in the mid-eighties in Hong Kong. Despite the concerted efforts of the Hong Kong Government and the mediation services providers, its adoption had soon flattened off after an initial rise. A slight decline in usage has in fact been recorded recently. Use of mediation to resolve construction disputes has not been as promising as expected. From a pragmatic point of view, this study identified four potential mismatches between contracting arrangements with the voluntary participation. These are (i) principal-agent relationship; (ii) power asymmetry between the parties; (iii) quasi-imposed adoption; and (iv) biases of the disputing parties on the process. It is concluded that voluntary participation may not directly lead to the adoption of construction dispute mediation.