Contract Management: Contractual Performance, Renegotiation, and Claims: How to Safeguard and Increase Profit Margins (Law for Professionals) 3030680754, 9783030680756

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Law for Professionals

Alain Brunet Franck César

Contract Management Contractual Performance, Renegotiation, and Claims: How to Safeguard and Increase Profit Margins

Law for Professionals

More information about this series at http://www.springer.com/series/16313

Alain Brunet • Franck César

Contract Management Contractual Performance, Renegotiation, and Claims: How to Safeguard and Increase Profit Margins

Alain Brunet Versailles, France

Franck César WillBe Group Paris, France

Translated by Becky Rawlings DipTrans IoLET MCIL Lyon, France

ISSN 2662-141X ISSN 2662-1428 (electronic) Law for Professionals ISBN 978-3-030-68075-6 ISBN 978-3-030-68076-3 (eBook) https://doi.org/10.1007/978-3-030-68076-3 Translation from the French language edition: Le contract management by Alain Brunet, et al., # Éditions Eyrolles 2019. Published by Éditions Eyrolles. All Rights Reserved. # The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG. The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

International Foreword to the Second Edition

Immanuel Kant, in his 1784 essay, Perpetual Peace through International Cooperation, wrote “the idea of the original contract without which no right over a people can be conceived.”1 As I write the “international” foreword to the second edition of Contract Management: Contractual Performance, Renegotiation, and Claims— How to Safeguard and Increase Profit Margins, by Alain Brunet and Franck César, I think of all the international contractual disputes that could have been avoided if only those involved in the negotiations had read this book! The authors bring a theoretical perspective from the world of behavioral economics to bear on practical applications, using examples from real-world civil engineering. Their discussion, for example, of the Channel Tunnel contract brings up the paradox of completeness as a resource, discussing cost overruns, time delays, and the resultant international embarrassment. Yet the final result of the project created an invaluable link that now seems inevitable and eternal. The End of Time, the theme song of the 2013–2018 television series, The Tunnel, sung by Charlotte Gainsbourg, used alternating lines in English and French to describe the partnership at the heart of any contract: “Set aside all fear/Restons enlacés, pour l’éternité.”2 The role of time in contact management is a key subject. The authors quote Jonas Söderlund, the Swedish organizational theorist, who notes that designers have a tendency to search for the perfect solution and not always the solution suitable for the system. That has certainly been my experience when serving as Commissioner of the New York City Department of Design and Construction (DDC), my city’s primary capital construction project manager. The agency built many of the public facilities and elements of civic infrastructure that New Yorkers use every day, from firehouses, libraries, police precincts, and senior centers, to water mains, sewers, pedestrian bridges, and public plazas. Many of the projects seemed simple at the outset, before the multiple hard-copy contracts were signed. But in many large cities, and in many smaller communities, even simple things become complex. Alain

1

Kant, Immanuel, Perpetual Peace through International Cooperation, 1784; Section 1: Inheritance, Exchange, Purchase, or Donation https://www.mtholyoke.edu/acad/intrel/kant/kant1.htm. 2 Gainsbourg, Charlotte, The End of Time (translation from the French: “Let’s stay entwined, for eternity”) https://tvtropes.org/pmwiki/pmwiki.php/Series/TheTunnel. v

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Brunet and Franck César note that complexity is hard to define, but most people know it when they see it. Managing much-needed projects and producing results in real time—on schedule and on budget—increasingly relies on digital tools not in the toolbox of project managers a decade ago. The authors note that for complex projects, traditional tools cannot deal with events on the horizon or even those in the medium term. When the contract is first being negotiated, there are many sources of ambiguity, which often lead to design changes and complex negotiations over change orders. The book describes how these changes can be the result of a lack of time or consideration, the subsequent introduction of new ideas or program elements, or changes in the project environment involving the insertion of new codes and regulatory standards. In my experience, such design changes and the ambiguities identified on site can also result from changes in leadership, with new civic partners—appointed or elected—often having different expectations or constituent obligations. The authors reference the “Butterfly Effect” described by MIT meteorologist and mathematician Edward Norton Lorenz, whose chaos theory addresses how unexpected consequences result from small actions far away from the original inception. In the Ethics of Ambiguity, Simone de Beauvoir touches on values emanating from choices that require the realization of concrete ends, of particular projects. She writes, “But the present is not a potential past; it is the moment of choice and action; we cannot avoid living it through a project; and there is no project which is purely contemplative since one always projects himself toward something, toward the future. . .”3 The uncertain future—Ten Years After—is the current research subject of the Center for Buildings, Infrastructure, and Public Space4 at Columbia University’s Fu Foundation School of Engineering and Applied Sciences, which I direct. The impact of the coronavirus on the AEC Industry has caused us all to rethink our definitions of force majeure, to enhance our definitions of safety, and, in general, to look afresh at the different ways that technology can be applied to project management and the contracts that define and determine our interaction. As Alain Brunet and Franck César point out, even an internationally recognized standard-form contract could be interpreted differently by the various parties entering into negotiation. The new edition of their book is essential reading for all of us passionate about how we can reduce ambiguity, avoid words that have multiple meanings, and, in so doing, emphatically assure a better future. Colombia University New York, NY, USA

Feniosky Peña-Mora

3 de Beauvoir, Simone, The Ethics of Ambiguity, #1948, translated from the French by Bernard Frechtman, The Citadel Press, Seventh paperbound printing, 1975, p. 76. 4 https://cbips.engineering.columbia.edu.

Foreword to the Second Edition

Contract management is first and foremost a mindset, but as job offers from companies of all sizes show, it is also a professional skill that is increasingly in demand. This is why the new edition of Alain Brunet and Franck César’s go-to reference—always quick to pick up on significant developments in the corporate world—is so timely, arriving at a point when we can capitalize on the experience acquired in the management of contractual relationships over recent decades in order to systematize and optimize it. My own experience relates to three large companies whose technological operations intensify their contractual complexity, both in terms of drafting and implementation. With hindsight, I can see that the contract management mindset and know-how give legal common sense a fair chance, as long as the objective of the contract’s profitability is shared by all those involved in its negotiation and its adaptation to changing circumstances. This requirement makes the fortuitous association of the words contract and management and their productive interaction, all the more interesting. Provided, of course, that you adhere to the comprehensive three-sentence Management Course by Harold Geneen, the iconic head of the International Telephone and Telegraph (ITT) Group in the 1970s: “You read a book from beginning to end. You run a business the opposite way. You start with the end, and then you do everything you must to reach it.” The metaphor of the book is to be taken literally, the contract never being behind us during its implementation, but well ahead, a kind of sacred text for both parties, who will strive to maintain the assurance of a balanced relationship when changes are required. A piece of advice for contract manager candidates: in addition to demonstrating a multidisciplinary approach and good interpersonal skills, your CVs will need to emphasize your sporting prowess, as you will have to behave like hurdlers. The required margin and operating profit will be in your sights, but there will be hurdles to overcome—as is to be expected in the life of the contract—which you can conquer one after another, even toppling them all! Of course, the days when contracts gathered dust in a drawer as soon as they were signed, only being brought out in the event of litigation, are long gone, because such disputes are too costly for companies in terms of time, money, image, and stock market value. Experience has taught me that a poor initial cost estimate is almost impossible to rectify once an industrial contract is implemented, because the parties vii

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lose their primary common reference point: the mutual profitability they expected when the contract was signed. Even more seriously, the loss of trust between the contracting parties that stems from contentious proceedings prevents any negotiated return to the equilibrium at the heart of the contractual relationship, i.e., the mutual interest of the parties. Another observation from experience: often, more time is spent negotiating the necessary amendments internally than with the other party, which fully justifies the role of the contract manager as a link between these two negotiations. Although the contract manager role is now well established in companies, as shown in the first six chapters of Alain Brunet and Franck César’s guide, the environment it faces today is both exciting and disruptive. This can be considered as a challenge to be met, as presented in abundant detail in Chap. 7. It is, of course, the role played by digital technology in developing contract management—in the form of collaborative tools, design methods, the partial automation of the contractual relationship, or decision-making aids to assess the probability of success in the handling of a case—that will call into question what the authors coyly call “the traditional legal approach.” What strikes me about this plethora of digital tools, aside from its unbridled creativity, is its galloping sophistication, which may lead to the contract’s irreplaceable value, namely the (vigilant) trust between the parties and the common goal of profitability, being forgotten or diluted by technology. Trust is established between two individuals when each person can predict the actions of the other, and it is the same between two companies. The usefulness, and therefore the legitimacy, of contract managers lies in their ability to determine the tools that will make the contractual relationship more readily understandable for the contracting parties. AFCM French Contract Management Association Paris, France August 2019

Coralie Bouscasse

Foreword to the First Edition

Risk-taking goes hand in hand with an entrepreneurial spirit: the entrepreneur’s very raison d’être is typically to anticipate and manage risk. In an uncertain context where margins have been reduced to a bare minimum, contractual problems will require rapid reaction and change. The Channel Tunnel is a prime example if ever there was one. When we consider that the consultation process, launched by the respective governments for one of the largest structures ever built, lasted a mere 5 months, there is no need to be a fortune-teller to predict what happened during performance: an economic disaster for some and a genuine strategic opportunity for others. Although contracts clearly remain part of a company’s strategic arsenal, they require a post-signature operational implementation that can no longer be overlooked. It is to the credit of this publication (largely inspired by Anglo-Saxon practices) and of its authors, Alain Brunet and Franck César, both undisputed experts and practitioners, that they have shed light on this issue at such an opportune moment. Although the rules of law are often (wrongly) seen as obstacles to entrepreneurial freedom, the authors convincingly demonstrate that contracts can prove to be formidable performance tools once practitioners understand how to use them. Contrary to the notion that “a contract is made to be broken and to help lawyers serve some sort of purpose. . .,”5 the authors show that in a volatile context, particularly in the international field, companies are gradually becoming aware of the importance of intervening very early on, during the drafting of the contract, to prevent disputes, or during the contract’s performance phase in order to mitigate the effects of such disputes. The risk of dispute becomes particularly acute when we consider that most international contracts are managed by specialists who devise renegotiation strategies designed to achieve a result in the best interests of the party they represent. The risk of non-performance is all the more pronounced since the creation and closing of the contract call for long-term processes. The authors use this dynamic view to constantly remind us that it is individuals, with their limitations and

5

Marcelle Bourgault, Les Héritiers de la visonnière (authors’ translation). ix

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Foreword to the First Edition

preferences, who are in charge of implementing the contract. They define contractual engineering by drawing on the work of experimental psychology, a discipline that has finally succeeded in making its mark in the field of behavioral finance.6 Alain Brunet and Franck César have succeeded in pooling their experiences. They have also—and I am particularly pleased to point this out-drawn on the sense of belonging fostered by the alumni community of the Institut de Haute Finance (IHFI), which created the Turgot Prize, whose exceptional influence also owes much to the support of Professor Philippe Dessertine, Director of the IHFI. Driven by the desire to contribute to “economic education,” in the truest sense, and to offer executives of both large and small companies, as well as operational managers, the key tools to guide their actions, they transmit both contractual knowhow and a contractual mindset, which will help to make a lasting change to the mapping of company risks. An essential “bedside book” for professionals as well as teachers and their students. Turgot Prize Paris, France

Jean-Louis Chambon

Cercle Turgot Paris, France October 2013

The Grand Jury of the Prix Turgot (awarded for the best book on financial economics) was also a forerunner in this respect, crowning Mickaël Mangot in 2005 for his work on investor psychology and financial markets, Psychologie de l’investisseur et des marchés financiers (Dunod, 2005). 6

Acknowledgements

We are fortunate to be indebted to Christine Pauleau and Rory Unsworth for their continued encouragement during our efforts to formulate and present a different view of strategic thinking. We are also grateful to Camille Chaserant and Karim Medjad for their comments on earlier editions. Special thanks are due to Delphine Marie Grosset for her significant contribution to the design of the figures that illuminate the reader’s path through our book. Paris, France May 2021

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Contents

1

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1 3

2

Contractual Performance, a Strategic Challenge . . . . . . . . . . . . . . . 2.1 Contract Management: A Business Lever . . . . . . . . . . . . . . . . . . 2.2 Strategic Contracts That Carry Critical Risks . . . . . . . . . . . . . . . 2.2.1 New Industrial and Competitive Approaches . . . . . . . . . . 2.2.2 Customers, Partners, Subcontractors: More Open-Ended Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.3 “Coopetition” Strategies . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.4 Business Process Outsourcing . . . . . . . . . . . . . . . . . . . . . 2.2.5 The Contract, at the Center of the Partnership Relationship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.6 Contract Risks Are Often Inadequately Controlled . . . . . . 2.2.7 More Inherently Complex Contracts . . . . . . . . . . . . . . . . 2.2.8 Difficulties Understanding the Completeness of the Commitments Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.2.9 Difficulties Monitoring the Contract Lifecycle . . . . . . . . . 2.3 Controlling Contract Performance: A Major Undertaking . . . . . . 2.3.1 More Offensive Commercial Strategies . . . . . . . . . . . . . . 2.3.2 First of All Win Business, and Then Make a Profit Over the Life of the Contract . . . . . . . . . . . . . . . . . . . . . 2.3.3 Standardization of Practices . . . . . . . . . . . . . . . . . . . . . . 2.3.4 A Stronger Aversion to Performance Risks . . . . . . . . . . . 2.4 A Favorable Regulatory and Governance Framework . . . . . . . . . 2.4.1 Risk Management, a Key Corporate Governance Device . 2.4.2 The Rise of Risk Management . . . . . . . . . . . . . . . . . . . . 2.4.3 The Contributions of Enterprise Risk Management . . . . . . 2.4.4 A Regulatory Framework That Reinforces the Need to Control Operational Activities . . . . . . . . . . . . . . . . . . . . 2.4.5 Regulations Applicable to Financial Institutions . . . . . . . . 2.5 Controlling Contract Risks: A Necessity for General Managers . . 2.5.1 The Project Performance Phase, a Source of Value Creation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

5 6 6 8 8 8 9 10 10 12 13 14 15 15 16 16 17 17 17 18 18 18 19 21 21 xiii

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2.5.2

Understanding the Sources of Value Leakage and Potential Levers for Action . . . . . . . . . . . . . . . . . . . . . . 2.5.3 Managing Reciprocal Commitments . . . . . . . . . . . . . . . 2.5.4 Ensuring the Traceability of Project Events . . . . . . . . . . 2.5.5 Putting Respective Responsibilities into Perspective . . . . 2.5.6 Arguing the Case and Valuing Damages . . . . . . . . . . . . 2.6 Necessary Changes in Attitude and Cultural Developments . . . . 2.6.1 Going Beyond Preconceived Ideas of Contract Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6.2 A New Perspective: Optimizing the Performance and Contribution of the Contract . . . . . . . . . . . . . . . . . . . . . 2.6.3 Accepting the Adversarial Dimension, Without Naivety . 2.6.4 Implementing Processes and the Governance of Contractual Commitments . . . . . . . . . . . . . . . . . . . . . . 2.6.5 An Appropriate Contract Strategy . . . . . . . . . . . . . . . . . 2.6.6 A Preventive Contract Management System: Contract Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.6.7 A Defensive/Offensive Claims Management System: Claim Management . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.7 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

4

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21 22 23 24 24 26

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27 28

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28 29

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32 33 34

The Project: A “Brave New World”. . . . . . . . . . . . . . . . . . . . . . . . . 3.1 A Rigid Disciplinary Field . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.1.1 Origins Rooted in Contemporary History . . . . . . . . . . . . . 3.1.2 A Collection of Pragmatic Knowledge . . . . . . . . . . . . . . . 3.1.3 A Renewed Focus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2 Project Management Tools: The Failure of the Mechanistic Model . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.2.1 The Work Breakdown Structure (WBS) . . . . . . . . . . . . . . 3.2.2 An Observation: The Risk of Overrun . . . . . . . . . . . . . . . 3.3 The Human Factor: Heuristics and Cognitive Bias . . . . . . . . . . . 3.3.1 The Need to Take “Soft” Factors into Account . . . . . . . . . 3.3.2 Cognitive Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.3.3 The Illusion of Control . . . . . . . . . . . . . . . . . . . . . . . . . . 3.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

35 36 36 38 39

. . . That Cannot Be Fully Protected by a Contract . . . . . . . . . . . . 4.1 Contracts and Renegotiation . . . . . . . . . . . . . . . . . . . . . . . . . . 4.1.1 Characteristics of the Contract . . . . . . . . . . . . . . . . . . . 4.1.2 A de facto Renegotiation . . . . . . . . . . . . . . . . . . . . . . . 4.2 Detecting Opportunistic Strategies . . . . . . . . . . . . . . . . . . . . . . 4.2.1 A Threat of Opportunism Throughout the Whole Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

40 41 45 49 49 52 54 56 57

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59 60 63 68 71

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4.3

Managerial Implications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.1 Managing Contractual Risk . . . . . . . . . . . . . . . . . . . . . 4.3.2 Avoid the Element of Surprise . . . . . . . . . . . . . . . . . . . 4.3.3 Trust . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.3.4 The Partnering Solution . . . . . . . . . . . . . . . . . . . . . . . . 4.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

. 83 . 84 . 94 . 96 . 97 . 105 . 106

5

The Contributions of Experimental Psychology . . . . . . . . . . . . . . . 5.1 A Contract Framing Theory . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.1 The Importance of Wording . . . . . . . . . . . . . . . . . . . . . 5.1.2 The Sociologist and the Lawyer . . . . . . . . . . . . . . . . . . 5.1.3 Attention is the Scarce Resource . . . . . . . . . . . . . . . . . . 5.1.4 Situational Objectives . . . . . . . . . . . . . . . . . . . . . . . . . 5.1.5 The Three Phases of Contractual Relationships . . . . . . . 5.2 Is the Contract a Game? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2.1 In Theory: The Quest for Maximum Gain . . . . . . . . . . . 5.2.2 In Practice: A “Theory” of Players . . . . . . . . . . . . . . . . 5.2.3 The Dictator Game . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.3 Promoting Active Management . . . . . . . . . . . . . . . . . . . . . . . . 5.3.1 Taking Biases into Account . . . . . . . . . . . . . . . . . . . . . 5.3.2 Accepting Incompleteness–Preventing Hold-up Risk . . . 5.3.3 Integrating Complexity . . . . . . . . . . . . . . . . . . . . . . . . . 5.3.4 Anticipating the Change of Framework . . . . . . . . . . . . . 5.3.5 Don’t Take Cultural Patterns for Granted . . . . . . . . . . . . 5.3.6 Pay Attention to Relational Signals . . . . . . . . . . . . . . . . 5.3.7 Have an Intelligible Strategy . . . . . . . . . . . . . . . . . . . . . 5.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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109 110 110 112 112 113 116 125 125 126 127 128 129 131 131 135 135 137 137 140 141

6

Day-to-Day Management of the Contract . . . . . . . . . . . . . . . . . . . . 6.1 Defusing Conflict . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.1.1 A Proven Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2 Redefining Contract Governance . . . . . . . . . . . . . . . . . . . . . . . . 6.2.1 Reducing Financial Risk . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.2 Taking Contract Dynamics into Account . . . . . . . . . . . . . 6.2.3 Shared Knowledge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.2.4 Developing Procedural Knowledge . . . . . . . . . . . . . . . . . 6.2.5 Creating Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.3 Exploiting the Facts and Asserting Our Rights: Practical Advice . 6.3.1 Operational Implementation . . . . . . . . . . . . . . . . . . . . . . 6.3.2 The Metaphor of the Game of Go . . . . . . . . . . . . . . . . . . 6.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

145 146 146 150 150 152 154 156 159 174 174 179 180 181

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7

The Contract Manager Function in the Organization . . . . . . . . . . . 7.1 Building Contract Management Ability . . . . . . . . . . . . . . . . . . . 7.1.1 The Maturity of the Process . . . . . . . . . . . . . . . . . . . . . . 7.1.2 A Shared Competency . . . . . . . . . . . . . . . . . . . . . . . . . . 7.2 The Contract Manager Function . . . . . . . . . . . . . . . . . . . . . . . . . 7.2.1 Understanding Governance Issues . . . . . . . . . . . . . . . . . 7.2.2 Choosing the Right Organizational Model . . . . . . . . . . . . 7.2.3 Assessing Opportunity Cost and Return on Investment . . . 7.3 An Emerging Profession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.1 A New Profession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.2 A Job of the Future . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.3.3 The Contribution of External Consultants . . . . . . . . . . . . 7.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

183 184 185 189 190 190 193 197 201 202 206 210 213 214

8

How Innovation Can Support Contract Management . . . . . . . . . . . 8.1 Contract Management in the Digital Transformation Era . . . . . . . 8.1.1 New Mobilization Methods and Communities of Practice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.1.2 New Project Development Methods: Agile, BIM (Building Information Modeling) . . . . . . . . . . . . . . . . . . 8.1.3 Contract Lifecycle Management (CLM) Software Packages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2 Legal or Contract Design . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.1 Experiencing Information as a Resource . . . . . . . . . . . . . 8.2.2 Improving Readability Without Weakening the Legal Scope of the Contract . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.2.3 The Fundamental Mechanisms of Legal Design . . . . . . . . 8.2.4 Making the Contract Visual, Clear, and Accessible . . . . . . 8.2.5 Legal Design: Where Do We Stand? . . . . . . . . . . . . . . . . 8.3 The Future of Contracting and New Contract Management Tools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.1 Artificial Intelligence (AI) . . . . . . . . . . . . . . . . . . . . . . . 8.3.2 Smart Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.3.3 Decision-Making and Dispute Resolution Tools . . . . . . . . 8.4 Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

215 215

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216 219 228 234 234 235 235 239 242 243 243 248 253 261 262

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 265 References . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 266

Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267 Index of Persons . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 273 Subject Index . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 275

1

Introduction

How many people today have heard of Herbert Casson? Casson, a Canadian consulting engineer, is the author of a 1915 book entitled The Axioms of Business, although the nod to Euclid only thinly disguises its goals. Admittedly, its publication did not exactly revolutionize management science and its theoretical flaws are plain to see, but the first of the 16 axioms of this summit of modernity is too tempting to resist: “Business requires two or more individuals”.1 The present book is dedicated to examining this truism. We aim to clarify the bilateral relationship between project owner and contractor before turning to very simple, but hopefully very practical, tools. To support this reflection, we draw on two fields related to contract law and the study of relationships between companies: the first, essentially pragmatic and oriented toward the project and its organizational aspects, is project management. The second is rooted in the most recent findings of contract theory, experimental psychology, and sociology. Most management decisions have legal or contractual consequences. It therefore seems logical to consider the role of the contract when analyzing a firm’s decisionmaking processes. The firm’s actors do not necessarily perceive the sources of legal uncertainty in their daily activities, and largely attribute this feeling of uncertainty, which is reflected in the neologism “judicialization”, to a more global development that they believe to be beyond their control. It is not uncommon for complex projects to lead to an arbitral award. Although the relative ease of international enforcement is one of the reasons why unsuccessful litigants concede, aside from the fact that they behave like gentlemen and accept “the glorious uncertainty of litigation”,2 investors, and especially shareholders, find this uncertainty difficult to accept. As we know,

Édouard Herriot’s preface to the French edition of The Axioms of Business offers high praise for Casson, “A fully modern man, free of metaphysical fog, without historical clouds before his eyes.” (Cited by Nikitin 2003, pp. 67–75, authors’ translation). 2 Loquin (2003), pp. 747–760 (authors’ translation). 1

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3_1

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1 Introduction

they are notoriously averse to unpleasant surprises, but they are nonetheless convinced that the contract has a key role to play in improving the company’s performance. Authors and practitioners regularly question the reasons for the frequently inexplicable discrepancies between their expectations and the actual results generated by the dominant management model. This is despite the development of increasingly sophisticated methods (at the risk of oversimplification, the main stages of this process could be summarized as follows: the 1970s were devoted to project management software, the 1980s to design-to-cost and expert systems, and the 1990s to human resources and risk management). The problem, behavioral economists tell us, is that our choices are far from optimal and our cognitive model is based on rational assumptions that are untenable in a context of uncertainty: a cause must generate effects, productivity is an input, and the project is defined once and for all. . . In reality, individuals do not know how to adapt their mental schemas and are subject to the optimism bias. According to Pierre Charreton, “We are no longer in the age of sustainable products, sustainable relationships, and sustainable partnerships, although the term remains very much in fashion. Opportunism is now the order of the day.”3 The strong discretionary power of the project owner explains, if not legitimizes, the pre-eminence of the fixed-price contract, a melting pot of complex and often conflicting situations that push risk onto the contractor. A company’s assessment of a business deal tends to be based above all on financial return and there is a strong temptation to focus solely on the goal of profit. When two parties negotiate, their requirements regarding various aspects of the contract convey relational signals that reveal the spirit in which the agreement is reached. Regular negotiations and contractual adjustments offer them many opportunities to break this dynamic, but also, conversely, many opportunities to signal their willingness to cooperate. The dynamics of framing provide us with an integrative model: there are different phases in a contractual relationship and the contract plays a different role in each of these phases. It is also reasonable to question whether employees receive sufficient legal support, particularly in the field of contract law. It is clearly surprising that the engineers acting on behalf of their companies on a daily basis have only a very vague notion of their ability to commit their entire organization, even if awareness has evolved considerably since the early 1990s, when the lawyer Roger Percerou4 noted that the term “mandate” merely evoked a “money order” for some (or the response of the CFO who claimed with aplomb that he had never entered into a contract on behalf of his group). Once “contractual engineering” has been implemented, with its combination of contractual mechanisms and behavior, the actors acquire a certain autonomy and the

3

Charreton (2011), pp. 117–125 (authors’ translation). The following article by Roger Percerou may well be of interest to readers, Percerou (1990), pp. 8–35. 4

References

3

method can be of great help to practitioners, who will be supported by contract managers–professionals who have become experts in the field. There is no doubt that after more than 30 years of uninterrupted development, behavioral economics is on the way to becoming the dominant paradigm, especially following the 2002 Nobel Prize in Economics,5 which was awarded to Daniel Kahneman. Following in the footsteps of French researcher Maurice Allais, Kahneman (a researcher in experimental psychology) and Amos Tversky6 designed a series of experiments that showed that the choices we make are not necessarily in our best interests. While it is well established in the field of market finance that players sometimes act irrationally (some critics have noted that it didn’t take a Nobel Prize to bring this point to light!), we would agree that much work remains to be done in the area of contracts. Where appropriate, and to enrich our arguments, we include quotations from the works cited, translating foreign-language texts so that readers are able to benefit directly from the insights provided. Throughout the book, the reader will find “in practice” boxes highlighting specific points relating to the practical arena. These include illustrative anecdotes, descriptions of experiments, or practitioners’ reactions to practical situations. The overall challenge is knowing how to interpret behaviors that form strategic or psychological obstacles, in order to overcome them and cooperate successfully with the other party.

References Charreton P (2011) Le juriste, acteur stratégique de l’entreprise. In: Roquilly C (ed) La contribution des juristes et du droit à la performance de l’entreprise. Lextenso éditions, Paris, pp 117–125 Loquin É (2003) The enforcement of international arbitral awards at the beginning of the third millennium - assessment and survey. Int Bus Law J (7):747–760 Nikitin M (2003) De la science des affaires aux sciences de gestion : un siècle de tâtonnement ? Annales des mines – Gérer & comprendre (74):67–75 Percerou R (1990) Améliorer la performance juridique de l’entreprise. Revue française de gestion (81):8–35

Or more precisely, “The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel”. 6 Amos Tversky died in 1996. His collaboration with Daniel Kahneman was exemplary in every respect. 5

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Contractual Performance, a Strategic Challenge

In the business world,1 contracts govern, structure, and influence the way that companies and organizations operate, and they play an essential role in creating sustainable competitive advantages. In a globalized economy, entering into a contract with a third party, which often has a different culture, legal system, and business practices, can bring both opportunities and threats. Awareness of the potential impact of contract risks, not only on the legal security of the company, but also on its sustainability, its image, and its business continuity, is relatively recent. This awareness has developed strongly over the last 20 years, both in private companies and in organizations in the public or parapublic sector, alongside an increasing interest in risk management, which has become a central preoccupation for senior management. But controlling contract risks is not only a question of compliance. Although the concept of contractual performance has yet to gain a solid foothold, the increase in competitive intensity has highlighted the positive role of contract management as a key element in a company’s overall performance. From this perspective, companies cannot ignore the challenges and benefits of an active vision of contract management, which is: • a conscious activity undertaken by the company in its contractual sphere; and • oriented towards one goal: the improvement of economic and operational performance.

For Éric Brousseau, the notion of a Walrasian “market secretary”, who would centralize all offers and requests, is pure fiction. It was not until the early 1970s that economists “sought to better account for what markets are actually made up of: contracts” (Brousseau 2000, authors’ translation).

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# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3_2

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2.1

Contract Management: A Business Lever

Faced with the ever-increasing complexity of the economic and legal environment, safeguarding the interests of the company (or of the organization in the broadest sense: public companies, local authorities, associations, etc.) in its commercial relationships with its contractors is of strategic importance. In a context of globalized trade where companies are increasingly focusing on their core businesses, the number, complexity, and criticality of the contracts that link companies to external partners (customer contracts, partnership contracts, subcontracting, technology transfer agreements, etc.) have increased significantly (as have their negotiation and monitoring costs!).

2.2

Strategic Contracts That Carry Critical Risks

In the digital age, the customer is “everywhere”: customer strategies are “omnichannel”, distribution channels are multiplying (web, mobile, physical distribution), interactions with the customer are frequent, and sometimes at all stages of the value chain. Customers want to remain in control of their purchasing activities, whether this relates to monitoring the progress of their orders or to personalizing their products, and will impose the highest e-commerce standards on suppliers (order modifications, delivery times, returns management, cancellation conditions, etc.). To adapt to these new requirements and to offer new services and greater responsiveness, companies need to broaden their supply chain, which now extends beyond the boundaries of the company to connect (thanks to the internet and the Internet of Things (IoT)) to the outside world (suppliers, logistics providers, marketplaces, etc.). In Practice

Internet of Things security The Internet of Things (IoT) is often referred to as the “Internet of Threats” to highlight its low level of protection against cyber threats such as ransomware and other types of malware. The security of IoT systems will be one of the major challenges to address in the coming years. Security can be extraordinarily complex due to the number of physical devices (sensors, peripherals, etc.) found on industrial sites and their massive deployment via cross-platforms and clouds that continually connect in real time. The potentially large area of attack makes threat modeling a necessity. While blockchain (which we will discuss in the last

2.2 Strategic Contracts That Carry Critical Risks

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chapter) is supposedly unhackable, this is not the case for the applications that use it.2 ◄ These new, open ecosystem, industrial strategies encourage companies to conclude multiple and often novel forms of partnerships (white labels, marketplaces, etc.), characterized by increased interactions between contractors, a stronger overlap between their respective service offerings, and, ultimately, by greater dependence and increased risks, particularly for the image of each partner. However, these developments are not specific to the B2C world: in traditional B2B sectors, the Industry 4.0 revolution is manifested by increasingly interconnected value chains, as in the automotive or aeronautics industries, where the notion of a “supply chain” is now tending to replace the traditional segmentation between automakers, original equipment manufacturers (OEMs), and Tier 1 suppliers. Integration is no longer merely vertical and the service delivery chain is no longer linear (customer ! supplier ! subcontractor), but is based on a network organization, with multiple interaction loops at each stage of service delivery, and on a tangle of underlying contractual relationships. Nevertheless, contract risks are often among the least controlled business risks, particularly in view of their changing nature throughout the life of the contract. To reduce legal risk–if we consider that lawyers have the ability to act on “legal standards” in general, whether they are laws, regulations, or a compliance program3– we need to reduce uncertainty (echoing the irrepressible sense of dread that grips lawyers at the precipice of a “legal vacuum”). Sound management of contract risk involves understanding the optimal point between the economically justifiable level of risk and the effort required to control the effects of an acceptable degree of uncertainty. Finding the right balance between the entrepreneurial risk-taking necessary to develop the company, the contract’s required flexibility and adaptability to change (business, technological, regulatory, etc.), and the control of performance risks becomes one of the major challenges for contract management. Some groups have understood this, and are seeking to “de-legalize” their approach to contracts, in particular by drawing on “proactive law” contributions (which we will return to later), the primary purpose of which is to enable the parties

Indeed, given that “virtually everything can now be connected to the Internet, we have to recognize its corollary statement: everything that can be connected to the Internet can be hacked” (quoted by Weber and Studer 2016, pp. 715–728). A recent survey (2018) conducted by Deloitte of 1,100 IT and line-of-business executives in US companies shows that cybersecurity is the most important issue for 23% of them, so much so that one in five respondents decided not to launch artificial intelligence investment initiatives. 3 For Pierre Charreton, the notion of legal risk inherent in a legal world that is “in a state of levitation”, decoupled from entrepreneurial risk, stems from an abuse of language that is “very often maintained by lawyers themselves, perhaps out of existential concerns” (Charreton 2011, pp. 117–125, authors’ translation). 2

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to achieve their partnership objectives. Winning in court is no longer the primary objective. The challenge is to maximize value creation while controlling risks. The issue is no longer limited to protecting oneself against uncertainties or legal events that will probably never happen, but is about contributing to positive results for the business, measured in terms of costs, deadlines (setting up the contract, administration, etc.), and economic gains (control of risks and management of opportunities).

2.2.1

New Industrial and Competitive Approaches

Companies’ business models are no longer based solely on their intrinsic competitive advantages (product quality, technological expertise, etc.), but also on their ability to forge strategic partnerships with third-party companies.

2.2.2

Customers, Partners, Subcontractors: More Open-Ended Models

New business models have thus been developed with the aim of building sustainable competitive advantages by collaborating with actors who can be both partners and competitors, depending on the context of the intervention. Commercial, technological, and industrial partnerships are numerous and have now taken their rightful place in managers’ strategic arsenal, whether in the form of extended supply chains that aim for “pull-flow production” with one or more global players, close partnerships with strategic suppliers, or clusters based on industry expertise. What is at stake? To be part of a more global, evolving, and competitive environment, driven by the highly segmented needs of versatile customers. . . In this context, the company’s objective is no longer simply to further internalize technical capacities, but to develop negotiation and contractual engineering skills that will help it to position itself at the heart of a complex ecosystem comprising a multiplicity of distinct players–in terms of expertise, size, and country of origin.

2.2.3

“Coopetition” Strategies

The notion of “coopetition”,4 a neologism derived from the contraction of the terms cooperation and competition, has emerged to describe the ad hoc collaboration mechanisms between players who may be competitors in historical markets. Coopetition was used by Yahoo! and Microsoft in 2010. Despite being competitors in the search engine market (Yahoo! and Bing), the two companies 4

On this topic, see https://www.youtube.com/watch?v¼FhQBtOUF9oI.

2.2 Strategic Contracts That Carry Critical Risks

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agreed to strengthen their joint competition against Google, which at that point dominated two-thirds of the global online advertising market. Some competing pharmaceutical groups also pool R&D resources to develop new products (such as Plavix, the result of an alliance between Sanofi and Bristol-Myers Squibb) or the Alstom and Bombardier groups, which, although direct competitors in the rail transport sector, are partners in various consortia, for example in France for the supply of trains to the Paris transport operator RATP. Long regarded as defensive or solely focused on reducing costs, coopetition strategies are increasingly seen as an offensive strategy: pursuing innovations that no company would have been able to implement in isolation or creating offers aimed at capturing new market share, thus distancing other competitors. Although seemingly counter-intuitive and even paradoxical, these strategies– which are not without their challenges (particularly contractual and legal)–aim to create market disruptions and develop new capacities through cooperation, which each partner will then use individually to strengthen its own position.

2.2.4

Business Process Outsourcing

In parallel with these coopetition dynamics, companies have been refocusing on their core businesses in recent years, considering that delegating certain aspects of their value chain to third parties not only guarantees the efficiency of outsourced functions, but also drives flexibility and agility in their core businesses. In the IT sector, for example, many large groups have outsourced the bulk of their infrastructure management or application development activities to large software engineering companies, often based in India or Eastern Europe. The beneficiaries of these outsourcing movements experience massive changes of scale, as in the case of Accenture (450,000 people in 2018), whose workforce in India and the Philippines alone now exceeds the company’s total workforce less than 10 years earlier (200,000 people in 2010). With the economic boom in certain countries with low labor costs, entire functions are now largely outsourced, not only so-called “support” functions (IT, general services, accounting, etc.) but also operational functions (manufacturing, logistics, etc.). Business intelligence provider Visiongain estimates that the pharmaceutical sector’s “contract manufacturing outsourcing” market will be worth US$93 billion in 2022, with most “active pharmaceutical ingredient” (API) production now being outsourced (particularly to Asia). For large laboratories, given the industrial, regulatory, and image risks and the impact on public health, all supplier relationship management practices must be reviewed: in particular, contracts must offer a flexible framework to meet the need for traceability, quality monitoring, and transparency. However, this upsurge in outsourcing is not exclusive to industrial players and is gradually spreading to the service sector, particularly the banking and financial

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sector, which outsources many critical activities, such as cash transportation, payment methods, and middle or back-office services. In this context, when groups outsource functions that are essential to the production of the product or service provided to the client, the contract becomes the major lever for controlling operational risks, including the risk of dependency on third party companies, a consequence of the loss of know-how of internal teams.5

2.2.5

The Contract, at the Center of the Partnership Relationship

These developments have naturally established the ability to lay contractual foundations and to establish, negotiate, and manage complex contractual commitments beyond classic customer/supplier relationships as a key skill for organizations. Whether it is a commercial contract with a customer, a procurement contract with a supplier, or a partnership or outsourcing contract, the contract has thus taken on an increasingly central position. Taking the lead and dominating the competition now depend just as much on a winning partnership strategy as on traditional internal know-how. The purpose of the contract, and the underlying contractual engineering, is no longer simply to transfer ownership of a good, a service, or a risk, but is also to drive strategic differentiation and risk security. This new reality is summed up in a concise and enlightening way by the following quotation, attributed to an American CEO, “If you are not in control of your contracts, you are not in control of your business.” However, although companies’ contract management has generally become more institutionalized and complex, new areas of risk have emerged, linked to a contractual corpus that is sometimes poorly controlled, even within the largest organizations.6

2.2.6

Contract Risks Are Often Inadequately Controlled

The increase in the number and criticality of contracts has gone hand in hand with an increase in their complexity. 5 An analysis of the “hidden costs” of outsourcing operations shows that the greatest effort should be put into the contract itself (Barthélemy 2001, pp. 60–69). See also Michael J. Earl, “The Risks of Outsourcing IT”, MIT Sloan Management Review, 1996, https://sloanreview.mit.edu/article/therisks-of-outsourcing-it and https://www.supplychainquarterly.com/articles/746-the-10-hiddencosts-of-outsourcing. 6 A survey conducted by Ernst and Young in 2006 with a sample of 140 financial executives indicated that 52% of respondents considered that their contract risk management was under control, 22% “did not know” their degree of vulnerability, and 26% saw this as a likely “opportunity for improvement”.

2.2 Strategic Contracts That Carry Critical Risks

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What Is Contract Risk? Contract risk is often defined as “the possibility of financial loss either due to a buyer reneging on the contract or a failure by the organization to adequately manage the contractual benefits or obligations”. (Source: lexology.com) It is standard practice to consider contract risk as distinct from legal risk. Drawing on one of the examples cited by Christophe Collard and Christophe Roquilly, an operational definition could be: • contract risk is specifically related to “imprecision, gaps, or other inadequacies in contractual documentation, which result in the contract failing to fully and clearly reflect the parties’ intentions or to sufficiently protect (the contracting party’s) interests by avoiding the risk that it will be held liable”; • legal risk, on the other hand, covers “non-compliance with the legal, regulatory, or case law provisions governing the exercise of the company’s activities”. From the inception of the contract, each signatory party agrees to accept a degree of exposure to a number of risks that it deems acceptable: • financial: hope of making a gain, likelihood of making a loss, etc.; • technical: beyond the delivery of the product or service, each party judges both its own capacity (and the capacity of the other party) to perform its contractual obligations and the risk and impact in the event of each party’s failure to meet its own obligations; and • legal (legal security, compliance with regulations, etc.). Contract risk therefore lies at the crossroads of these different dimensions. It is a type of entrepreneurial risk that each of the parties agrees to accept when signing the contract, with respect to: • its interpretation of the obligations entered into by each of the parties at time t; and • the likely evolution of the contractual relationship over the term of the contract. We would like to highlight three major points here: • contract risk is not stable or linear over the duration of the contract; it evolves as soon as the contract has been signed, and its development will be influenced by all of the operational events that mark the life of the project; (continued)

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• contract risk, which is a type of “performance risk”, is affected by the ability of the contracting parties to perform their contractual obligations. It has a strong temporal and operational dimension (which, as we will see, calls for the implementation of specific governance processes to manage the contractual commitments); and • contract risk is cross-functional: it is not the sole responsibility of the legal department, in that it reflects the company’s strategy (and in particular its partnership strategy) and its degree of risk appetite or aversion.

2.2.7

More Inherently Complex Contracts

Beyond the differences between legal systems,7 a number of factors add to the complexity of contracts, including their very structure, which tends to increase their unit cost (cost of contract). Complexity corresponds to what is impossible, or in any case difficult, to understand, analyze, manage, control, anticipate, and forecast.8 This complexity is primarily cognitive and informational given the multiple contractual documents, including technical appendices as voluminous as they are specialized, which require a very broad range of skills in order to fully understand all the associated contract risks. Contractual patterns are also built around numerous partners from various professions, working on interrelated work packages. Contract risk therefore also arises from the numerous and complex interfaces between these partners, remembering that a delay generated by one of them can cause a delay for all the other players involved in the interface. The result of this complexity is longer lead times and higher costs. According to a study carried out by the International Association for Commercial and Contract Management (the IACCM), the time taken to review and validate contracts (the cycle time) has increased by 14% since 2010. Similarly, according to another IACCM study (conducted among 700 organizations and dating from 2017), the average cost of creating a contract (drafting, negotiation, approval) may have

7

These differences, and the increasing interactions between the various systems, are evoked by French jurist Mireille Delmas-Marty as follows: “Despite the discontinuities created by the autonomy of the various legal systems, the novelty is that the increasing number of interdependent situations is making isolation impossible and encouraging such interactions. Regardless of the field considered, neither the governments of ‘independent’ states, nor the legislators of ‘sovereign’ parliaments, nor the judges of ‘supreme’ courts can totally ignore the existence of other national, regional, and international legal systems: national law is, in a way, surrounded from all sides.” (Delmas-Marty 2006, authors’ translation). 8 Franck Marle, Modèles d’information et méthodes pour aider à la décision en management de projet. Doctoral thesis at École Centrale Paris, 2002.

2.2 Strategic Contracts That Carry Critical Risks

13

risen by more than 38% in the space of 6 years, in particular because of the number of stakeholders involved in drafting the contract, regulatory inflation, or new challenges (cybersecurity, personal data, etc.). Companies have taken on board this trend toward more complex contracts and are trying to control it, in particular by mapping the interfaces between actors (by defining as precisely as possible the actions to be performed by each one) and by preparing visual representations (responsibility matrices, RACI, tree structures, etc.). However, studies have shown that traditional project management approaches often fail to take into account the extent of the interrelationships between actors.9 Finally, contracts are often designed to serve profitability and return on equity objectives, which have tended to increase since the 2000s (with a level of around 15% in Europe).10 This often leads to the inclusion of clauses relating to deadlines and to compensation payments for delays, which can be extremely costly for the defaulting party. This can in turn encourage the parties to strengthen their respective safeguards and to try to insert loopholes (often located in the technical appendices), making the contractual corpus even more complex.

2.2.8

Difficulties Understanding the Completeness of the Commitments Made

Despite this growing complexity, many companies have only a cursory view of the contractual commitments they have entered into, which is clearly problematic in terms of controlling the associated risks. Although the emergence of Contract Lifecycle Management (CLM) software solutions partially resolves these difficulties (we will come back to this topic later), it is estimated that 80% of companies have difficulty assembling all of their contractual reference documents (contracts and amendments) and, therefore, understanding and analyzing their content. Necessary information such as due dates, analysis of all current contracts at a supplier or customer level, or the typology of the most risky clauses is often only available on a piecemeal basis, requiring manual, ad hoc analysis, leading to delays and information processing costs. In addition, efficient contract management requires the ability to quickly prepare “standard” contracts, based on tried and tested clauses and terminology, and to validate any deviations from this standard via proven validation circuits. However, in reality, contracts often mechanically replicate clauses drawn from the company’s past projects. They may also be based on the habits of the person drafting the contract, or may recycle and “customize” templates, which may not necessarily be appropriate for the project at hand. These modifications are performed 9

Rodrigues and Bowers (1996), pp. 213–220. Source Datastream/Worldscope.

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on a case-by-case basis, sometimes without a formal analysis and validation process to examine deviations from the standard wording. Finally, too few companies genuinely examine the efficiency of their clauses by benchmarking them against best practices, which is undoubtedly due to the lack of a universally recognized best practices framework for contractual clauses. However, some notable initiatives include: • the CommonAccord project developed by James Hazard, which aims to build a library of contractual clauses, accessible in open source and enriched collaboratively by a community of users. This initiative aims to codify, standardize, and automate the drafting of clauses (by removing lawyering), contributing to the move toward “smart-er” contracts; • the IACCM’s “virtuous” contracting principles (IACCM Contracting Principles) and the related model clauses, accessible to all and expected to be enriched by a large number of users. Overall, companies frequently lack the capacity to control the exhaustiveness and scope of their exposure to contract risks, both in the upstream (pre-signature) and performance (post-signature) phases.

2.2.9

Difficulties Monitoring the Contract Lifecycle

The contract is a “living” object, sometimes so alive that it can prove fatal in terms of the strategic commitments made. Companies must therefore be able to analyze the “trend” of the contract: • over the course of the project to measure changes in its risk exposure; and • at certain key milestones, in particular to ensure that binding contractual deadlines are met. However, in practice, few companies are able to globally monitor their contract lifecycles, although it would help them to comply with the contractual milestones for which they are responsible (possibly subject to compensation payments for delays). The Increasing Complexity of Contractual Patterns: The Example of “Turnkey” Contracts In a turnkey contract, the contractor undertakes to deliver the complete product to the project owner in working order, from design to acceptance, after verification of its performance guarantees where appropriate. (continued)

2.3 Controlling Contract Performance: A Major Undertaking

15

These types of contract have specific features that are worthy of mention here, in that they frequently involve a consortium of separate companies that “jointly and severally” enter into contractual commitments with the customer. In this context, one of the partners often plays a leading role as integrator of an overall system, the components of which are then designed and manufactured by other partner companies in the consortium. By its very nature, this type of contract implies a tangle of overlapping responsibilities and specific risks for the lead partner, toward both the client and the other members of the consortium. As shown in the example here relating to an international project for the construction of a subway, the lead partner agrees to accept “global responsibility for all the work packages and sub-systems”, including: • committing to respect overall performance deadlines; • ensuring that the services delivered are adequate with respect to the contractual documents; • committing to take full control of the interfaces between all of the work packages and sub-systems “to form a coherent and effective integral system”; and • making a financial commitment, since in the event that any of the consortium members make errors that harm the project owner, the lead partner will potentially be liable “in respect of any of the members of the consortium”. Consequently, although each member of the consortium remains responsible for the technical tasks allocated to it and, in particular, for the operation of its equipment, the lead partner cannot absolve itself of all responsibility in the event that one of the consortium members fails to deliver the required services.

2.3

Controlling Contract Performance: A Major Undertaking

2.3.1

More Offensive Commercial Strategies

Random events may jeopardize all or part of the company’s activity and/or assets. Not all risks are insurable and the implementation of contracts by operational staff legitimizes the need to design appropriate strategies that use the contract as a resource.

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2.3.2

2 Contractual Performance, a Strategic Challenge

First of All Win Business, and Then Make a Profit Over the Life of the Contract

The intensification of competition, following globalization and the opening up of markets, has led to the development of a practice (historically emanating from the building and construction sector) that appears nonsensical or even suicidal at first sight: entering into low or zero-margin contracts. This practice, which aims to secure market share, is no longer synonymous with an automatic deterioration in profitability. This is a fundamental change in the competition dynamics between players. Long-term contracts warrant long-term strategies, and a shrewd contractor will be able to use the contract performance phase to restore profitability by taking an active approach to contract management. It is not uncommon for a contractor to win a contract by including a low margin in its initial bid and then to increase this margin by several points during the performance phase to arrive at a more acceptable level of profit that it could never have included in its initial bid. In addition to squeezing out the competition, this practice allows the astute contractor to develop its references, its expertise, and the potential for additional sales on its contract.

2.3.3

Standardization of Practices

Although the active management of contracts was originally the prerogative of large groups, particularly in the engineering and construction sectors, practices are gradually becoming standardized and are spreading from one sector to another. The strategy described above of restoring profitability in the performance phase is increasingly common, particularly in the private sector, which is subject to strong international competition. As a result, large contracts in sectors such as IT, particularly for outsourcing and software integration projects, are now frequently managed using contract/claim management techniques (described later in this book), with very significant returns on investment. The public sector has not escaped this trend either, particularly during very active periods of infrastructure construction (major projects, key sporting events such as the Olympic Games, etc.). One by one, through a “domino effect”, all spheres of the economy are affected by contract management. Today, no company, regardless of its industry sector, can consider itself immune from the contract management tactics of an astute contractor.11 Companies that have 11 For example, opportunistic strategies using the law as a lever for competitiveness have been observed in recent years. See Bagley (2008), pp. 378–390. Those who, like Flaubert in his

2.4 A Favorable Regulatory and Governance Framework

17

weaknesses in their own organization will automatically need to strengthen their expertise in order to protect their margins or even ensure their survival.

2.3.4

A Stronger Aversion to Performance Risks

Delays, liquidated damages, cost overruns, or miscalculating outstanding work are particularly unwelcome factors, especially for listed companies, since financial markets have “zero tolerance” for bad news. Given the increased need for guaranteed results, executives have three key contractual performance issues in mind: • How to protect against contract risks and take advantage of the contractual levers that can be activated to protect margins? • How to maintain a global vision of risks and opportunities in order to make informed decisions and arbitrate when necessary? • How to have visibility on the actual state of progress of projects with regard to the commitments made to the other contracting parties? Answering these questions involves developing a proactive and systemic contract management approach designed to strengthen risk control and the ability to influence future events before they occur.

2.4

A Favorable Regulatory and Governance Framework

Although contract management is now established as a major element in the company’s overall performance (economic and operational), this role is not exclusively focused on the “business” issues described previously, but is also an essential preventive component in the control of business risks (risk management).

2.4.1

Risk Management, a Key Corporate Governance Device

The last 20 years have been characterized by the emergence of best practices and regulations relating to corporate governance, which can be defined as “the set of processes, customs, policies, laws and institutions affecting the way people direct, administer, or control a corporation”.12 Against this backdrop, risk management processes have flourished within companies and organizations, driven firstly by regulatory changes and then, more Dictionary of Accepted Ideas, adhere to the view that “the law: nobody knows what it is”, risk paying the price. 12 Haidar (2009), pp. 1–4.

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2 Contractual Performance, a Strategic Challenge

fundamentally, serving as practices that management can use to control operational activities.

2.4.2

The Rise of Risk Management

Risk management is no longer confined to the risks relating to the production of financial information, but is now integrated into the overall management of the company’s activities, as close as possible to operational issues. In particular, it must address the complexity of companies and respond to management’s demand to master all of the opportunities and threats affecting the organization and its operations. The emergence of risk management has thus led managers to develop strategies based not only on insurance or strict internal control procedures, but also on contractual safeguards that can be used to spread risks between the parties. The control of contract risks has therefore gradually become a component of risk management, for those risks related to the contract’s performance phase.

2.4.3

The Contributions of Enterprise Risk Management

Updated in 2013, the COSO II “Enterprise Risk Management (ERM)–Integrated Framework” was drawn up in the 2000s in the wake of the numerous financial scandals that had marked the business world, with spectacular bankruptcies in both Europe and the United States. In an environment where potential uncertainties are having an increasing effect on financial performance, the heads of the COSO Committee (Committee Of Sponsoring Organizations of the Treadway Commission) extended the “frame of reference” of the COSO I report published in the 1990s, supplementing it with a fourth objective concerning the control of risks likely to jeopardize the achievement of corporate objectives. Beyond financial risks, risk management must henceforth be an integral part of the company’s strategy and must contribute to the reduction of incidents and operational losses. The management of contracts and contract risks, inasmuch as it makes it possible to strengthen the control of risks at the heart of operational activities, is therefore fully in line with this evolution of corporate governance mechanisms.

2.4.4

A Regulatory Framework That Reinforces the Need to Control Operational Activities

The place assigned to risk management in corporate governance arrangements was reinforced by legislators following various high-profile cases in the early 2000s, the most symbolic of which is unquestionably Enron.

2.4 A Favorable Regulatory and Governance Framework

19

In the United States, the Sarbanes-Oxley Act of July 30, 2002 represented a major change in corporate governance principles. It has had worldwide repercussions, particularly given the extraterritorial nature of some of its provisions, applicable to foreign companies listed on US markets. In particular, the Sarbanes-Oxley Act gave the supervisory authorities enhanced powers to impose sanctions in the event of violations, introduced the requirement for independent directors, and required management to certify the accounts. In the wake of these regulations, several countries have passed legislation on the financial reporting obligations of listed companies, thus reinforcing internal control obligations. Although contract risks are not systematically mentioned in these texts, this regulatory context has undeniably been a breeding ground for the emergence of risk management, giving it a strategic dimension and visibility in the eyes of senior management. Internal control is not simply a formal obligation or a control covering the production of accounting and financial information. It is an operational control covering all operational and management processes, with the aim of controlling activities, the effectiveness of operations, and the efficient use of the company’s resources. Managers may thus be held liable if the internal control system fails to detect the existence of a major contract risk for the company. The control of contract risks, at the heart of economic performance issues, is now, by law, an integral part of management responsibility and good corporate governance practices. Moreover, some institutions make specific reference to contract risks, for example the French financial markets authority (l’Autorité des Marchés Financiers, AMF), which specifically identifies “the risks arising from the failure to comply with contractual commitments” as one of the major sources of risk in the execution of the company’s strategy, “regardless of the quality of the counterparty (customers, suppliers, employees, related companies, financial institutions, partners, etc.) and regardless of the defaulting party or presumed defaulting party”.

2.4.5

Regulations Applicable to Financial Institutions

The problem of controlling contract risks that affect a company’s operations is particularly felt in certain regulated sectors, such as the banking and finance sector. In Europe, in light of the risks generated by the growing outsourcing of essential banking activities, the European Banking Authority (EBA) has introduced stricter requirements for institutions that outsource activities close to their core business, which are likely to have an impact on their customers or which present risks for the organization.

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2 Contractual Performance, a Strategic Challenge

In its “Guidelines on outsourcing arrangements”, the EBA recalls the context at the origin of this policy,13 “Over recent years, there has been an increasing tendency by institutions and payment institutions to outsource activities also in order to reduce costs and improve flexibility and efficiency. In the context of digitalisation and the increasing importance of information technology (IT) and financial technologies (fintech), institutions and payment institutions are adapting their business models, processes and systems to embrace such technologies. IT has become one of the most commonly outsourced activities. Notwithstanding its benefits, outsourcing IT and data services poses security issues and challenges to the governance framework of institutions and payment institutions, in particular to internal controls as well as to data management and data protection.” The regulations define criteria that view service provisions as having a critical impact on the risk profile or internal control framework of the institution. Financial institutions therefore have an obligation to ensure that the risks stemming from the outsourcing of their activities are controlled, in particular with regard to business continuity, dependence on their service providers, compliance with regulatory obligations, and risks to the confidentiality of customer data, etc. As soon as they present risks deemed critical, outsourcing contracts must be managed by means of an ad hoc organization during the performance phase and specific clauses must be introduced (SLAs, audit clauses, right of resale, etc.). A New ISO 31022 Standard Announced for 2021 (Risk Management– Guidelines for the Management of Legal Risk) Why ISO 31022? “Currently, all kinds of organizations including corporations and NGOs are facing increasingly challenging legal risks, including that the regulatory and legislative requirements for organizations in many countries are becoming more stringent and commercial contracting is become more complex . . . When organizations manage their legal risks, they should want to be in a position more than just meeting their legal and contractual requirements, they should want to create value for their stakeholders. The purpose of the new standard ISO 31022 is to guide organizations in the management of legal risk in relation to all their operations and activities. It should help organizations meet the legal and regulatory requirements, manage contractual risk, enhance the organization’s strategic decision-making and improve the organization’s capability of handling complex legal environments. Organizations can use this standard to implement [a] legal risk management process and establish a proper legal risk management framework tailored to their unique situation and needs.” Source: https://committee.iso.org/

13 https://eba.europa.eu/regulation-and-policy/internal-governance/guidelines-on-outsourcingarrangements.

2.5 Controlling Contract Risks: A Necessity for General Managers

2.5

21

Controlling Contract Risks: A Necessity for General Managers

Governance issues, regulatory issues, and operational performance issues: controlling contract risks has become a performance lever for general managers, faced with demanding investors who are less inclined than ever to accept cost slippages on their project portfolios.

2.5.1

The Project Performance Phase, a Source of Value Creation

If the parties want to optimize their margin above the level agreed when the contract was signed, they will need to base their management of the contract on five key aspects: • • • • •

understanding the sources of value leakage and potential levers for action; managing reciprocal commitments; ensuring the traceability of project events; putting respective responsibilities into perspective; and arguing the case and valuing damages.

2.5.2

Understanding the Sources of Value Leakage and Potential Levers for Action

In our experience as practitioners, we observe that companies frequently adopt an “intuitive” approach to contract management that suffers from a lack of objectification: despite the multitude of reports in place, organizations struggle to concretely value the (hidden) cost of poor contract management and they therefore fail to convince management of the urgent need to act. Although managers may intuitively perceive their exposure to contract risk, they generally link it to their past experiences (losses, disputes, etc.). They also face a serious shortage of data to corroborate the economic impact of leakage (an impact generally referred to as value leakage). To meet this challenge, and rather than adopting a KPI-based approach (which usually struggles to make an economic contribution, we will come back to this later), we recommend using management control and economic analysis methods to quantify (for a contract or a set of contracts) the value leakage stemming from contractual agreements. The objective of this approach is to establish a strong and unambiguous link between contractual levers and economic performance. Paradoxically, while no one questions the contribution of sound contract management to economic performance, too few companies analyze the contractual origins of the variances calculated by their management controllers.

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2 Contractual Performance, a Strategic Challenge

In our experience, this work on “contractual performance drivers” has the advantage of demonstrating a direct causal link between contract management and economic performance. It is particularly appreciated by investors, who are often reluctant to use KPIs that do not directly relate to, or have a direct impact on, the income statement. Let’s take an example here. Regardless of the type of activity, a variance analysis (realized vs. budget) will isolate the effects of: (a) volume (quantity) variances, (b) the price effect, and (c) the product mix effect, which can then be used to isolate, ceteris paribus, (d) an “efficiency effect”, which is the balance (positive or negative) of the first three factors. The efficiency effect is itself the result of various components: • raw material productivity; • the productivity of resources and the means of production; and • more generally, overruns likely to lead to a variance between expected and actual performance. Detailed analysis of this last component will often help to isolate, and to make visible to management, contract performance drivers, in particular: • respect for/adherence to contract stipulations: – costs relating to the non-application of contractual conditions, – failure to meet contract productivity targets, – costs relating to the misuse (or “abuse”, whether conscious or not) of contractual mechanisms (particularly in terms of price); • effectiveness/efficiency of continuous improvement plans: – loss of revenue due to lack of tangible results, or excessive delays in the implementation of contract improvement plans, – an unexpected increase in team members required to ensure the delivery of the services covered by the contract; • claims risk management. Finally, we note that one of the benefits of this type of economic analysis is to raise awareness of (and sometimes to refocus the contract manager on) the “real” contractual performance factors that the contract manager can influence and use for leverage.

2.5.3

Managing Reciprocal Commitments

It is customary to define a contract as a kind of “framework of reciprocal commitments” between parties. Adopting a visual approach, the contract can be “broken down” into a set of unitary commitments that, although often interrelated, can nevertheless be assigned to different actors within the organization.

2.5 Controlling Contract Risks: A Necessity for General Managers

23

In complex contracts, it is not unheard of to find several hundred or even thousands of reciprocal commitments. This representation, which can be easily modeled in Excel or via specialized contract management software packages, restores the full completeness and richness of the contract. Commitments can then be grouped into categories and sub-categories and managed as part of a variance analysis system. The first (albeit tedious) task is to perform an inventory and catalog the various commitments, often distilled in the various contractual documents. This enables the person responsible for the performance phase to get to grips with the contract and to fully master its form. This will provide the contract manager with the raw material for effective contract management, despite the inevitable difficulties of interpretation and the varying degrees of commitment–from the most precise to the most generic (similar to declarations of intent). We should not overlook this notion of “reciprocal” commitment: even in contracts where the customer has limited its exposure as much as possible, it often retains certain obligations (document validation, availability of authorizations, supply of inputs, etc.) that some operational staff may be tempted to gloss over (but which a resourceful contractor will know how to use!).

2.5.4

Ensuring the Traceability of Project Events

Projects are affected on a daily basis by dozens of events that can have an impact on contract performance or the level of margin at the end of the contract. These events are very diverse in nature and can affect: • quality: technical difficulties, uncertainties, unexpected work; • deadlines: delays in the delivery of contractual deliverables or input data, work that is more complex and time-consuming than expected; and • resources: mobilization delays, teams with insufficient members or skills. These events, although sometimes relatively trivial when taken in isolation, may, in combination with other events, have a decisive impact on the satisfactory performance of the contract. All of these events must therefore be traced, not only to be logged in chronological order, but so that they can be aggregated, put into perspective, and analyzed in terms of their combined impact on the company’s overall ability to keep to an agreed schedule (impact on the critical path) and to meet its contractual commitments. Given the number of events and their overlapping nature, it is almost impossible, or in any case extremely difficult, to put these elements into perspective after the fact, in an objectifiable chronological and causal framework. These events must therefore be cataloged and tracked as they occur, in order to ensure their traceability, even if their impact cannot be exhaustively measured or consolidated at time t.

24

2.5.5

2 Contractual Performance, a Strategic Challenge

Putting Respective Responsibilities into Perspective

Contract management activities will of course focus on analyzing impacts, i.e., assessing the sequence of events, their interrelationships, and their causal links, in order to understand the consequences for the performance of the contract, in particular the fulfillment of commitments in terms of deadlines, quality, or performance. Naturally, the analysis of impacts and causalities is not an end in itself, but a means of allocating responsibilities, with the aim of building a factual case regarding the respective breaches of the parties, in particular their lack of diligence in rectifying the unexpected events that led to the observed situation. Identifying responsibilities is a complex exercise, as there are numerous interrelationships between the roles and responsibilities of the parties. For example, one party’s delay often stems from a delay incurred by the other, or by the poor quality of the instructions received (plans, specifications, provision of input data, etc.). One of the essential elements of contract management is therefore to put into perspective the parties’ respective responsibilities, which involves: • providing an overall picture, based on clear arguments and causalities, objectified by dated and documented events; and • providing an explanation of the impact (direct or indirect) of the causalities on the contractual commitments entered into and the resulting cost overruns.

2.5.6

Arguing the Case and Valuing Damages

Identifying responsibility is an integral part of contract management, not so much to find or punish “culprits” as to seek financial compensation for damages attributable to the other party. The underlying issue is therefore the quantification of damages, which can be approached from two angles: • attributable damages: what costs were specifically caused or incurred (i.e., they would not have been incurred in the normal course of the project) as a result of the contracting party’s breach: additional resources, maintenance of resources over a longer period of time, etc.; • valuation of the loss, based on work units (number of days, hourly rate, etc.) that can be objectively proven by accounting documents (invoices, time sheets, etc.).

2.5 Controlling Contract Risks: A Necessity for General Managers

25

Analysis framework of damages stemming from termination of an information system project

In Practice

How to quantify damages? Step 1: Determine the baseline situation What would the situation be without the damages? By its very nature, the baseline situation is often difficult to define in an incontrovertible and unique way, since it involves describing what the injured party was entitled to expect on conclusion of the contract, in the absence of damages. The extent of the obligor’s liability (and the compensation for damages) is thus limited to the damages foreseeable when the contract was concluded, except in the case of performance with intent to harm (fraudulent performance). However, the judge will need to consider the relevance and reliability of the evidence presented in order to determine the baseline situation for establishing damages. To define the baseline situation, we can for example: • benchmark against comparable companies not affected by the same damages; or • compare to past situations or other examples where the normal situation has been restored. Step 2: Measure the quantum of damages Although the damages must be certain, their quantum may be uncertain or random. Several options may be considered:

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2 Contractual Performance, a Strategic Challenge

• the certain part of the quantum, at the risk of understating the damages; • the most probable quantum; or • the most probable quantum minus an allowance for uncertainty. To quantify the quantum, an economic approach should be used rather than a purely accounting approach: • by taking into account opportunity costs (loss of earnings) that are not recorded in the accounts, for example a loss of margin; • by excluding certain non-recoverable costs (e.g. depreciation, which merely corresponds to the spreading of a previously incurred expense over time); and • by favoring a marginal cost approach. The advantage of the economic approach to costs is that it provides a better understanding of the reality of the injured party’s operational activity and takes into account all of the genuine, additional costs that the injured party will have to bear in order to restore its pre-damages situation. Step 3: Determine the damage assessment date The starting point for the calculation is either the date of the loss (date the damages occurred) or the date of the claim, or somewhere in between. Consequently, in order to define the length of the damages, all the consequences from the agreed starting point must be taken into account. The judge does not, however, have to take the judgment date as the end date for the damages period. This may be the case in the following situations: • the obligee has refused a reasonable offer of compensation made by the obligor; • the market price of the goods in question has fallen significantly on the judgment date; or • the asset has been impaired after the damages occurred. This rule is designed to avoid giving a windfall gain to the party that caused the damages. ◄

2.6

Necessary Changes in Attitude and Cultural Developments

Although contract management is a key component of project management, in many companies its effectiveness can depend more on the personal skills of the project managers than on a formalized and well-equipped process. However, to be effective, contract management should be a conscious and structured process, widely promoted and applied in the company. Having a “good” contract is one thing, but knowing how to perform it effectively (and how to use it to your advantage!) requires specific skills and processes, and an ad hoc organization. Strengthening contract performance thus implies changing certain principles rooted in project management practices.

2.6 Necessary Changes in Attitude and Cultural Developments

2.6.1

27

Going Beyond Preconceived Ideas of Contract Management

The contract represents “mutual assent to create a legal obligation or obligations. It is a voluntary commitment, formal or informal, alone or between several parties, and recognized by law.” As an object enshrined in law, the contract tends to confine itself to the judicial arena and risks losing sight of its purpose as an instrument that should be used proactively to steer the contractual relationship between parties. This trend is highlighted by the lawyer Helena Haapio, “Contracts are too often designed for lawyers who seek to protect their clients in case of a dispute, not for managers who want their business and projects to succeed.”14 For example, it is frequently observed that companies are not exempt from preconceived ideas, according to which: • contracts are purely legal instruments designed solely as safeguards in the event of litigation; • the management of the contract, post-signature, is limited to occasional, administrative tasks that do not require specific resources; and • contract management can be carried out in isolation, by each function (procurement, operations, etc.).

2.6.2

A New Perspective: Optimizing the Performance and Contribution of the Contract

Contract performance has long been judged on the basis of customer satisfaction and the technical quality of the product or service delivered. Project management approaches have typically institutionalized the well-known quality/cost/delivery (QCD) triptych, which has recently expanded to include risk control. However, this is too often confined to the control of technical risks and their financial implications, without considering these risks in relation to the contractual commitments made. This book proposes putting the contract back “at the heart” of project management, by viewing the contract as the frame of reference both for the reciprocal commitments made by the parties and for the analysis of all of the project’s contract risks, since it defines the responsibilities of the parties, the baseline values, and the methods for dealing with variances. This paradigm shift is absolutely essential in that it introduces a new framework for understanding risks, both with regard to their appraisal by practitioners and with regard to the formal commitments made.

14

Haapio (2013).

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2 Contractual Performance, a Strategic Challenge

Managing the contract thus involves not only satisfying the customer in compliance with the QCD triptych but also managing contractual commitments and, more specifically: • optimizing the contract’s contribution to the company’s profitability; and • controlling the overall risk portfolio, from the signing of the contract to its closing.

2.6.3

Accepting the Adversarial Dimension, Without Naivety

Managing contract risks also implies recognizing that the interests of the parties may diverge and that, even in partnership relationships that go beyond a simple customer/ supplier agreement, the parties’ respective interests must be safeguarded by specific means, both offensive and defensive. On the other hand, the opposing financial interests inherent in the contractual relationship must not take precedence over the parties’ clearly understood goal– motivated by commercial or reputational considerations–to “come out on top”, without necessarily seeking to withdraw from or terminate the contract, even after heated exchanges. Contract management must recognize and accept the idea that the risks of opposing interests imply rigorous management without naïve optimism, but not necessarily a conflict-based or aggressive relationship. Each of the parties must be able to legitimately assert its rights, if necessary by claiming financial compensation from the other party, although this position does not equate to a systematic search for disputes, as this would only lead to endless conflict. In practice, this position is often misunderstood by the operational teams in charge of the day-to-day performance of the contract. They generally find it difficult to combine a partnership arrangement driven by trust-based interpersonal relationships with a contract strategy driven by minimizing risks and seeking opportunities to claim financial compensation.

2.6.4

Implementing Processes and the Governance of Contractual Commitments

Best practices for contract risk management are based on implementing an operational management structure for contract risks and on defining a strategy adapted to each contract.

2.6.4.1 A Structure for Managing Contract Risks Beyond legal or regulatory compliance requirements, strengthening the operational management of contract risks provides tangible benefits for senior management.

2.6 Necessary Changes in Attitude and Cultural Developments

29

2.6.4.2 Influencing Future Events Firstly, implementing a contract risk management framework will enable companies to establish an exhaustive and structured approach to consider and evaluate risks and opportunities. This involves: • identifying all the risks and opportunities associated with the contract, analyzing them (in terms of their impact and likelihood of occurrence), and valuing them in order to make a provision on the income statement; • defining and monitoring the progress of an appropriate action plan to address or reduce these risks (mitigation plan); and • estimating the cost of implementing the action plan as well as the associated financial stakes (reducing risk or its likelihood of occurrence).

2.6.4.3 Developing Skills and Managerial Dialogue Beyond the objective of influencing the course of events and controlling the financial impact of risks, the management of contract risks is a powerful tool for improving collective performance. In fact, it provides managers with a lever and an operational tool for promoting, in a very concrete manner, a culture of controlling risks that are likely to have an impact on operational performance. This approach involves operational teams in a dynamic approach focused on improving practices, which helps to: • develop the capabilities and forecasting skills of project managers; and • better capitalize on the lessons learned, including improved anticipation of future risks (or, where appropriate, valuing them during the bid phase, as a performance risk). The operational management of contract risks also enhances the managing team’s visibility and its involvement in the decision-making process relating to contract risk management. Better informed and more involved, management can thus better play its role with regard to its operational teams. Implementing a contract risk management framework also provides operational teams with a tool for ongoing communication and dialogue with management, including milestones for regular meetings on contract risks, in addition to any emergency meetings required.

2.6.5

An Appropriate Contract Strategy

Implementing a structure for the operational management of contract risks is a fundamental element in the governance of contractual commitments. However, contract performance is also based on the definition of an appropriate contract strategy, formalized at the level of each major contract (or each partner).

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2 Contractual Performance, a Strategic Challenge

The contract strategy clarifies the contract management objectives: minimization of risks/maximization of gains, search for a “no claim, no penalty” type agreement, preservation of the partnership relationship on the grounds of strategic interests, etc. The formalized contract strategy will be applied to each of the following two mechanisms, depending on whether the approach is preventive and/or offensive.

2.6.6

A Preventive Contract Management System: Contract Management

Contract management aims to ensure the control of contract risks and, more specifically, the traceability of operational events likely to affect the degree of exposure to contract risks. Effective contract management involves implementing a structured process for monitoring the performance of the contract throughout its lifecycle, from signature to closing. Implemented by all of the actors who actively participate in the contract (operational, legal, and commercial teams, for example), contract management is based on a methodology and on specific monitoring tools, integrated into the project management corpus. For the benefit of the project and each stakeholder, contract management can be represented in the project’s organization chart by a dedicated function (the contract manager). The contract manager will report on contract performance, on the use of best practices, and on the governance of the process. In order to ensure rigorous contract management, it is customary to set up simple contract administration principles, such as monitoring contractual correspondence. This monitoring may involve cataloging important correspondence likely to be contractually significant. The purpose of this catalog is to present in a summarized and structured way (by theme) all the correspondence relating to: • • • •

operational events, a prerequisite for achieving contract milestones; contractual issues (deadlines, schedules, etc.); risks of claims, actual or potential, from the customer or subcontractors; and claim opportunities (extra work, deadlines etc.). This simple table for monitoring contractual correspondence will:

• ensure that the most critical themes (in terms of number or according to severity criteria) are reported; and • monitor the activity of the contract manager and reduce the risk of a lapse of rights or a failure to respond to contractual letters requiring processing within a given timeframe.

2.6 Necessary Changes in Attitude and Cultural Developments

31

In Practice

What is contractual correspondence? Contractual correspondence must be drawn up on a medium (letters, e-mail, observation checklist) that complies with the specified contractual delivery methods and must be issued by a person who has been formally identified as having decision-making authority for the contract. For example, contractual acts such as service orders, work orders, minutes, notices, etc. are dealt with in letters and are provided for in the contract. An observation checklist is also contractual correspondence. Managing response times Certain deadlines for sending letters or replies are imposed by the contract and may concern: • – – – – • – – –

for the customer: response times for technical documents from the contractor, response times for the contractor’s invoices, response times for approval requests, approval deadlines (acceptance, subcontractors, etc.); for the contractor: response times for subcontractors’ invoices, response times for technical documents transmitted by the customer, deadlines for expressing reservations following the transmission of a service order (SO), at the risk of losing rights, – time limits for making claims, – etc. Best practices and key points when drafting correspondence Best practices: • • • •

answer all correspondence, on all contractual points; systematically recall the context of the exchange; refer to the contract; do not make value judgments or introduce personal/emotional opinions: the facts, nothing but the facts; • be aware of your responsibility. ◄ Key Points

• beware of the effect of silence; • beware of letters with a hidden legal purpose; • beware of overly complicated texts: a third party must be able to understand the context when reading it; • beware of digital exchanges (problem of proof). ◄

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2.6.7

2 Contractual Performance, a Strategic Challenge

A Defensive/Offensive Claims Management System: Claim Management

The purpose of claim management is to protect against claims from the customer, or to issue claims following the non-performance of contractual obligations that have resulted in damages. In Chap. 6, we will present some simple tools that can contribute to effective claim management.

2.6.7.1 Contract Variation Forms During the course of the project, all members of the project team, including the operational managers in charge of performance, must be made aware of, and made responsible for, the need to identify all events likely to constitute a variation from the original contractual framework (the basis for the initial contract price). These variations may relate to: • the quality or quantity of the services to be provided; • performance conditions (change in schedule, work to be performed concurrently with other work packages, access to works, etc.); • the supply of input data by the customer, necessary for the proper performance of the services; • etc. To this end, it is advisable to provide the operational teams with contract variation forms so that they can record the sequence of events for a given topic as they unfold, as well as the impacts, even if these are not yet fully understood at the date of the report. Example Contract Variation Form Model Contract Variation Form

Description of Work Item Summary Change in scope Engineering solution Cost/Measurement Resources 3 time Suspension of work Test means

Unit Function Reference Consequences Direct impact Workaround solution Risks Additional Information Date and time of the event Drawings Cumulative effects

Submitted by To Date

The contract manager must analyze the impact of each variation on the contractual commitments made (in particular on the conditions and performance deadlines) and, more generally, on the contract’s financial situation.

2.7 Conclusion

33

2.6.7.2 Notice of Claim Events likely to constitute contractual variations must be formally notified within the time limits specified in the contract. A notice of claim paves the way for the issue of a claim and includes a financial appendix that allows the claimant to establish the financial amounts involved “to date”. To successfully ensure that the other party acknowledges its responsibility for the contract variations, the party making the claim must submit notices (with supporting evidence) that will be aggregated in the form of monitoring assessment letters. Example Notice Clause in a FIDIC Contract “The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance.” “If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment, and the Employer shall be discharged from all liability in connection with the claim.” “The Contractor shall also submit any other notices . . . and supporting particulars for the claim. . .” “The Contractor shall keep such contemporary records as may be necessary to substantiate any claim. . .“

2.6.7.3 Issuing Claims Correctly issuing claims is an important task in the claims management process. It involves presenting the concrete details of the claim and its value to the customer. Claims notices may be unsolicited or may be issued in response to claims received (counter claims). The claim file must set out all the factual and chronological elements deemed to entitle the claimant to compensation for the losses suffered, in accordance with the contractual provisions on which the claim is based. This phase will pave the way for commercial negotiations or, failing agreement, lay the foundations for a future dispute file. It is therefore important to clearly present the contract variations, causal links, and damages invoked, in order to optimize the claim’s chances of success.

2.7

Conclusion

Contract management–and the control of related contract risks, defined as the entrepreneurial risk accepted by each party when signing a contract–has become a key element in overall corporate performance.

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2 Contractual Performance, a Strategic Challenge

The emergence of this issue over the last 20 years reflects various challenges and opportunities: • a business challenge, taking into account more open industrial strategies, based on partnership and “coopetition”, and the evolution of competitive practices, characterized by strong commercial aggressiveness and a permanent quest to control performance risks; • a favorable regulatory environment and governance framework, reinforced by the emergence of risk management as a steering and regulatory mechanism, which provide incentives to control performance risks; and • an awareness on the part of senior management that managing the project’s performance phase can act as a value creation lever, despite the practical and cultural changes required. Project management has spread to all industries and services, both public and private, to such an extent that the sociologists Luc Boltanski and Ève Chiapello15 see it as a kind of redeployment of capitalism. The entrepreneurial economic objective must therefore be analyzed from the dynamic perspective of project management practices, since performing a contract that extends over a long period of time (long-term contract) requires the parties to consider the effects stemming from an initial contractual imbalance and the risk of non-performance. Industrial projects generally require significant capital investment. It is obvious that, because of their complexity and duration, they present particular risks. In the next chapter, we examine the structure and governance of these projects.

References Bagley CE (2008) Winning legally: the value of legal astuteness. Acad Manag Rev 33(2):378–390 Barthélemy J (2001) The hidden costs of IT outsourcing. MIT Sloan Manag Rev 42(3):60–69 Boltanski L, Chiapello È (2005) The new spirit of capitalism. Verso, London Brousseau É (2000) L’économiste, le juriste et le contrat. Université Paris I, Paris Charreton P (2011) Le juriste, acteur stratégique de l’entreprise. In: Roquilly C (ed) La contribution des juristes et du droit à la performance de l’entreprise. Lextenso éditions, Paris, pp 117–125 Delmas-Marty M (2006) Les forces imaginantes du droit : Tome 2, Le pluralisme ordonné. Seuil, Paris Haapio H (2013) Next generation contracts: a paradigm shift. Lexpert Ltd, Helsinki Haidar JI (2009) Investor protections and economic growth. Econ Lett 103(1):1–4 Rodrigues A, Bowers J (1996) The role of system dynamics in project management. Int J Project Manag 14(4):213–220 Weber RH, Studer E (2016) Cybersecurity in the Internet of Things: legal aspects. Comp Law Security Rev 32(5):715–728

15

Boltanski and Chiapello (2005).

The Project: A “Brave New World”. . .

3

Contracts are based on the fundamental doctrine of freedom of contract.1 They act as both legal instruments (mutual assent with legal effect) and commercial vehicles, and as such govern the reciprocal conduct of the contracting parties. Often suppletive, contracts generate standards and rules and are an independent source of law. Most contracts for large-scale works make extensive use of project management methods, a discipline traditionally focused on meeting pre-defined objectives for costs, deadlines, and specifications (the QCD triptych from the previous chapter). The contracting party, engaged in its daily project activities, is therefore compelled to adopt a certain type of behavior. This is extremely important since such projects may last for several months, or even years, from the negotiation phase to completion. In practice, determining what a contract has to offer presumes that we are able to precisely define the project activities. We can identify three main categories of project: (a) megaprojects, which generally involve large corporations or several States, (b) multi-company projects, and (c) microprojects, which are often undertaken within the company itself. All of these projects require a complex system of contracts to bring together users, suppliers, and external services. Our historical journey into the origins of project management begins in the 1960s, against the backdrop of the Cold War. At the time, organizational management research was focused on the rational and effective.2 The methods that gradually took

“The inherent flexibility of contracts is due to the fact that the contract itself provides the body of law by which the contract is interpreted and enforced” (DiMatteo 2010, pp. 727–794). 2 For American mathematician Warren Weaver, the RAND (US Air Force think tank) vision of the world contributed to the development of “rational life”. “It implies or suggests that all technical and human systems . . . are coordinated or ‘coordinable’ sets, which can be optimized according to common goals and criteria, and that reason, via mathematics, is the preferred tool for finding the best arrangement.” (Dominique Pestre, “La pensée mathématique des systèmes”, La Recherche, Special Edition “La science et la guerre”, No. 7, 2002, pp. 10–15, authors’ translation). 1

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3_3

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hold were essentially developed for the American Department of Defense and NASA and culminated in the creation of a body of knowledge encapsulated in the Project Management Body of Knowledge (PMBOK®), published by the Project Management Institute (PMI), which had been created in the United States at the end of the 1960s by project management professionals from various backgrounds. Unfortunately, the standard model developed from these methods, and enriched by “best practices”, does not prevent overruns and its high failure rate raises questions about the relevance of this project management approach. Contributions to the organizational research literature demonstrate a pressing need to move beyond a mechanistic conception of organizations. Although all authors agree on this point, few of them genuinely diverge from the initial blueprint and this disarray is plain to see in their publications, which inevitably end with the conclusion that “this issue requires further study”.

3.1

A Rigid Disciplinary Field

Although project management was rationalized from the 1930s onwards, with the funding of public procurement contracts for major engineering works (military, naval, large dams, etc.), this expertise was almost exclusively confined to a handful of companies that ran their projects like operations. It was not until the 1950s that project management was enriched with dedicated planning and scheduling tools.

3.1.1

Origins Rooted in Contemporary History

Project management in the modern sense of the term emerged in a context of technological competition between the United States and the USSR. Put simply, the “scientific” approach to project management began in the aftermath of the political crisis provoked on 4 October 1957 by the launch of Sputnik 1, the world’s first artificial satellite. To solve the problem of coordinating the development of a project comprising a large number of interrelated tasks, the US Navy Special Project Office developed a new planning method known as PERT (Program Evaluation Research Task), which it would use to develop the Polaris program (a US submarine-launched missile).

3.1.1.1 First of All, Effective Communication Management. . . The Polaris program was an undeniable success. This is often attributed to the extensive implementation of the PERT approach, but it in fact stemmed from effective management of communications with the Pentagon, with the aim of acquiring a slice of the cake to be divided between the Navy and the Air Force, which was developing a rival project.

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Harvey Sapolsky, in his book on the history of the Polaris project,3 recounts that “The fact that no one of the participant groups claimed to have benefited directly from the installation of PERT did not prevent unanimous agreement that PERT was of great benefit to the program as a whole. It had lots of pizzazz and that’s valuable in selling a program. The real thing to be done was to build a fence to keep the rest of the Navy off of us. We discovered that PERT charts . . . could do this. It showed them we were top managers. PERT made us OK with people who had the money.”

3.1.1.2 . . . and Then a Real Concern for Management Although the PERT method emphasized planning, the concept of management control only really appeared under the impetus of Robert McNamara (President of Ford, appointed as US Secretary of Defense in 1961). Most US Department of Defense contracts, which until then had been cost-reimbursement (cost-plus) contracts, became lump-sum, or firm-fixed-price, contracts.4 The notion of urgency to guarantee national security at all costs was replaced by a desire for budgetary control. This had a knock-on effect on contractors, who saw their level of risk increase significantly. European MoD Procurement in the Early 1980s “Until the critical juncture of the ’80s, military programs were managed on an in-house basis and were characterized by a continuous flow of specification changes that resulted in never-ending projects with seemingly limitless costs (Rafale, Tiger, etc.). Practices then shifted to a fixed-price approach. The first program to adopt this method was the Future Large Aircraft (better known as the A400M). The States decided at that point that requirements would be defined in a firm and definitive manner and that prices would be fixed, with compensation payments for delay if delivery dates were exceeded.”5 Management principles had therefore been defined and were already ingrained in the industrial community. For example, as early as 1959, a paper by Paul O. Gaddis published in the Harvard Business Review offered an extremely realistic description of the project manager function–the project manager does not have an easy life and already faces uncertainty, playing it by ear while relying on deficient indicators. 3 Sapolsky (1972). More information on PERT and the US Navy Polaris ballistic missile submarine is available at the following URL: https://www.youtube.com/watch?v¼eIhobMrdzTk. 4 This can easily be explained by budgetary drift and an unfavorable incentive for the buyer. Frederic Scherer has shown that cost-plus contracts may actually cost 10% more than firm-fixedprice contracts. (Scherer 1964, pp. 257–280.) In addition, it is worth noting that in June 2010 another Secretary of Defense, Robert Gates, also announced a plan to reduce Department of Defense spending by several billion dollars over five years by shifting from cost-reimbursement to firm-fixed-price contracts. 5 David Bonnus, “Comment limiter les retards des grands programmes aéronautiques ?”, L’usine nouvelle, July 2010 (authors’ translation).

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Revisiting his article shows that, more than 60 years later, there is no need to reinvent the content of this role. The Qualities of the Project Manager in 1959. . . “Some of the qualifications that a successful project manager must possess proceed logically from the preceding discussion: (1) His career must have been molded in the advanced-technology environment. (2) He must have a working knowledge of many fields of science, the fundamental kind of knowledge which he can augment when necessary to delve into the intricacies of a specific technology. (3) He must have a good understanding of general management problems – especially marketing, control, contract work, purchasing, law, and personnel administration. The concept of profitability should be familiar to him. (4) He must have a strong, continuous, active interest in teaching, training, and developing his supervisors.”6

3.1.2

A Collection of Pragmatic Knowledge

Initially described as an “accidental profession” for engineers who had inadvertently fallen into the management cauldron, the function was eventually institutionalized, and is now represented by the Project Management Institute (PMI),7 created in 1969, and the International Project Management Association (IPMA). The resulting institutionalized practices reflect social norms and rules. Project managers must therefore accept these principles to ensure the legitimacy of their actions.

3.1.2.1 A Systems Science Approach In order to reinforce this hard-won legitimacy, painstakingly acquired through practical experience, the PMI and the IPMA have defined a body of knowledge that assembles the necessary operational processes and the essential knowledge that a project manager requires to be eligible for certification. This body of knowledge, or BOK,8 is partly based on systems analysis and is rooted in fields as varied as civil engineering, nuclear power, shipbuilding, aeronautics, IT development, and, more generally, major engineering projects. The BOK, which is in effect a standard, must–although this is not explicitly stated–meet two objectives: it must firstly reassure actors confronted with an 6

Gaddis (1959), pp. 89–97. https://www.pmi.org/. 8 The Project Management Body of Knowledge (PMBOK®) Guide includes no fewer than 39 project management processes! 7

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uncertain, complex, and risky environment, but it must also respond to the problem of organizational amnesia by relying on a set of formalized tools. The following chapters will show that we still have a long way to go. Two Lessons from the Polaris Program There are two vital takeaway points from the Polaris story: 1) “Defining the ‘total’ project is critical to success”. In this case, the management team “saw the complete system – rocket plus submarine – while everyone else was concentrating on a part of the total system.” 2) The “forecast rate of technological change was being consciously examined.” This was crucial, since underestimating the rate of technological change is the root cause of numerous project failures.9

3.1.2.2 A Collection of “Best Practices” Academic circles have to date shown little interest in project management. Project management “theory” is essentially a collection of “best practices” implemented, as described above, in the American defense industry and subsequently extended to various fields such as infrastructure projects and R&D. Efforts are focused on promoting pragmatic knowledge that is exclusively planning oriented. Despite the battery of methods employed by these various associations, practitioners’ experiences show that a lack of recognition of a specific professional certification is juxtaposed with the stress of meeting deadlines, budgetary pressure, and the very real coordination and communication difficulties that arise when managing major projects.

3.1.3

A Renewed Focus

Although project management suffers from a lack of academic recognition, in recent years authors have begun to examine the reasons for the sometimes colossal discrepancies between the predictions of the dominant model and the reality on the ground. This is despite the development of increasingly sophisticated management software, the emergence of concurrent engineering10 in the 1980s, and the existence of other so-called “strategic” models.

9

Morris (1994). Concurrent engineering involves running project phases simultaneously rather than consecutively, as in traditional approaches. Deadlines are shortened, requiring enhanced interaction between functional departments, which multiplies coordination difficulties. 10

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The Project: A “Brave New World”. . .

3.1.3.1 The Rejection of All Forms of Uncertainty The origin of these discrepancies may perhaps be found in the very genesis of modern project management. The “McNamara revolution”11 significantly influenced managerial practices, generating an ideological premise that rejects all forms of uncertainty: a project must start with clearly defined objectives in terms of cost, performance, and deadlines and must be organized in sequential phases in order to control its execution. In reality, uncertainty cannot be completely removed until the contract has been signed (the underlying reasons will be set out in the next chapter). As the discipline is essentially performance-oriented, the way the contract is managed is therefore of paramount importance. 3.1.3.2 Answers from the Scandinavian School The institutionalization of project management and the lack of reproducibility have led a number of researchers to redefine the conditions for success. They have finally rediscovered–reassuringly enough–the crucial role of the individual (a return to 1959, so to speak...). We also note the contributions of Mats Engwall,12 who uses a well-known example, which will be discussed in Chap. 5, to demonstrate the importance of social practices within a project, and Johann Packendorff,13 for whom project management purports to be a general theory in its own right when it should in fact be more focused on empirical evidence.

3.2

Project Management Tools: The Failure of the Mechanistic Model

While the administrative structure is permanent, the project is determined by its end date. This date, which usually corresponds to a delivery, can only be achieved if the various decisions punctuating the activity sequences are made on time. This means that the relevant information needs to be available in advance. A project model is therefore required to organize this information, its interrelationships, and its dynamics. The information needs to be reconciled to elementary units, which possess their own attributes and which are linked to one another through specific connections. These units are organized into hierarchies, linked in turn to other hierarchies, each of which represents a coherent set of information. A decomposition, or allocation, is used to draw up a reference structure–the Work Breakdown Structure, or WBS–which holds all the relevant information during the project’s life. The WBS is effectively a functional hierarchy of project activities. Managing the project involves controlling and making decisions 11

See also Lenfle and Loch (2010), pp. 32–55. Engwall (2003), pp. 789–808. 13 Packendorff (1995), pp. 319–333. 12

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about the content of each work package. Each work package must be sufficiently homogeneous to be assigned to a single manager. The specific organization employed for the project is called the Organizational Breakdown Structure, or OBS. The paradox of project management is that the most important decisions must be made when the level of uncertainty is at its highest, in other words at the beginning of the venture. The relevant information will only be available once the project has finally come to an end, by which stage there is no turning back.

3.2.1

The Work Breakdown Structure (WBS)

The classic method for developing a technical system is to systematically break down the activity into work packages using a task organization chart known as a Work Breakdown Structure. Let’s take the example of a satellite application: • the project comprises a first level with four main parts (the satellite itself, the launcher, the telecommunications stations and the control center) plus general functions such as launch and ground operations and system coordination; • the next level down is obtained by detailing each of the first-level blocks and so on. We refer to systems for the first level and subsystems for the second level (a mechanical subsystem, a telecommunications subsystem, an electrical subsystem, etc.); • finally, the last level (six levels of decomposition are generally required in complex projects) contains the individual work packages.

S

SATELLITE MISSION

S00

S01

S02

S03

SATELLITE

LAUNCH

GROUND OPERATIONS

S024

S025

LAUNCHER

STATIONS/ CENTER

S021

S022

S023

MECHANICAL

TELECOMS

ELECTRICAL

INTEGRATION TESTS

S0231

S0232

S0233

S0234

CELLS

POWER SUPPLY

TELEMETRY

VHF ANTENNAS

S04

QUALITY/ RELIABILITY

Example Work Breakdown Structure. Source: Adapted from Chvidchenko (1990)

S05 COORDINATION

S026

PLANNING

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The Project: A “Brave New World”. . .

For advocates of the BOK, the detailed analysis of the contractual services, or scope management, is the very raison d’être of project management and can be summarized as follows, “first, what needs to be done; second, who is going to do what; third, when the actions are to be performed; fourth, how much is required to be spent in total, how much has been spent so far, and how much has still to be spent . . . Central to this sequence is the Work breakdown structure (WBS)”.14 Why Do Projects Have a Modular Structure? Herbert A. Simon recounts a parable of two watchmakers, Hora and Tempus, who both made complex objects composed of a large number of elements (luxury watches) and who were both frequently interrupted in their work. The fine watches made by Hora and Tempus consisted of about 1000 parts each. Hora had designed his watches in such a way that “he could put together subassemblies of about ten elements each”. Tempus, on the other hand, had to reassemble the parts from scratch after each interruption, and so it took him on average 4000 times longer to complete a watch. Hora prospered, while Tempus ultimately lost his shop.15 In a way, we could say that modularity is a necessary condition for the survival of organizations in a risky environment. The modularity of the products combined with the modularity of the organization designing the products allows standardized interfaces to be used, which reduces development costs.

3.2.1.1 A Complex Structure It is obvious that the WBS of a large project will have a hierarchical tree structure. The whole is greater than the sum of its parts

Complexity theorists, of whom Simon16 is certainly one of the least speculative representatives, tell us that the tree structure is the ultimate complex form. It is made up of a large number of components with a multitude of interactions between them and gives rise to unpredictable behavior, “the whole is greater than the sum of its parts”. In the complex systems literature, it is generally accepted that the wide diversity of components in a system can lead to the emergence of properties that none of the

14

Morris (1994), op. cit. From Simon (1996). 16 Simon, who described himself as a “monomaniac”, was in fact a polymath and is considered one of the founding fathers of artificial intelligence. After winning the Turing Prize in 1975, he was awarded the Nobel Prize in Economics in 1978 “for his pioneering research into the decisionmaking process within economic organizations”. 15

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individual components possess, making it more difficult to understand, model, and control the system. Finally, various research studies have shown that the actual interdependencies between system components are frequently much greater than allowed for in the management of the system, often based on diagrams and trees. These interdependencies are often significantly underestimated, as they are not formalized in their entirety. Empirically, most complex systems observed in nature reveal a (hierarchical) tree structure. For Simon, this complexity does not solely relate to technical systems, there are evidently physical tree structures that are described spatially as well as social tree structures that are defined by the intensity of their interactions (which is the case–albeit on a small scale–for the organizational breakdown structure and the links with the various stakeholders). In Practice

Properties of complex systems • New properties emerge that no single element of the system possesses in isolation; • Their behavior is “undecided” compared to systems whose behavior is considered determinable; • There are many interdependencies between their component elements; • The whole and the parts are dynamically linked; • There are causal links so intertwined that the “outputs” become uncontrollable; • They are self-organizing; • They are unstable; • The perceived reality is incomplete. ◄

3.2.1.2 A Squadron of Butterflies... In terms of decomposing a technical tree structure, some authors observe that when the various branches are developed using an identical operator, we obtain something close to a fractal structure.17 What interests us here is that, structurally, there are plenty of explanations for certain types of chaotic behavior. In a complex system, it is in practice almost impossible to predict the future of a given level from lower-level interactions, especially since these interactions vary over time. Sensitivity to the initial conditions of the non-linear system created by the project architecture means that detailed schedules–applied to deterministic systems–are not 17 Fractals are well suited to modeling all kinds of organizational hierarchy because the problemsolving process is more or less the same, regardless of the level at which it occurs. In the human dimension, “it should reduce the hubris of the top and the anxiety of the bottom”. (See Hall III 1998, pp. 565–572).

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exploitable in most complex programs. For complex projects, traditional tools cannot deal with events on the horizon, or even in the medium term. For example, as soon as it is released, the PERT network is challenged by the slightest exogenous event, while detailed planning (Gantt chart) is merely a graphic representation of future expectations. “A Gantt chart is more a reflection of what happened last week, and what someone hopes will happen next week.”18 The first phase of a project, for example, is a period of intense discussion between customer and supplier. The contract is incomplete and there are many sources of ambiguity, which unavoidably give rise to modifications known as design changes. Regardless of the industry, changes often arise after the contract is signed because the parties frequently make design changes in the contract performance phase. These design changes are usually the result of failing to fully define the project due to lack of time, the introduction of new ideas by engineers, or changes in the project environment such as the issue of new standards. “Good Engineer” Syndrome “Designers have the tendency to search for the perfect solution and not always for the solution suitable for the system. They never finish.”19 Complexity is hard to define, but most people think they know it when they see it.20 In our search for complexity, we might be tempted to see complex systems everywhere, as soon as a sequence of actions escapes our understanding. This observation may give rise to all sorts of metaphorical aberrations21 (how many butterflies have been blamed for all the ills of the world after recklessly flapping their wings?). We need to look at the consequences. There is a squadron of potential “butterflies” in every contract, and it may take only a few flaps to move from order to chaos.22

18

De Meyer et al. (2002), pp. 60–67. Söderlund (2002), pp. 419–430. 20 Some cases leave no room for doubt. To carry the technical documentation for a Boeing 747, for example, we would need. . . a Boeing 747! 21 Simon (1996) saw fit to specify in the preface to the third edition of his book, that “It will appear that the devotees of complexity (among whom I count myself) are a rather motley crew, not at all unified in our views on reductionism.” In the 1960s, meteorologist Edward Lorenz had presented a surprising image of his “strange attractor” in the shape of butterfly wings. Lorenz, however, attributed the origin of this metaphor to his 1972 conference paper, “Does the flap of a butterfly’s wings in Brazil set off a tornado in Texas?” 22 To find out more about the butterfly effect and chaos theory, you can watch the video at the following URL: https://www.youtube.com/watch?v¼fDek6cYijxI. 19

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A “Flapping of Wings”: Small Causes, Big Effects Complex systems are also characterized by the management of information flows. In a ship conversion contract,23 one of the actions involved installing several new bulkheads of differing fire ratings, indicated using a color coding corresponding to their degree of protection (blue-red-green). It was only when the Coast Guard inspected the ship that anyone noticed the bulkheads were all grey coded: the shipyard had distributed copies of the plans–initially prepared in color–in the form of black and white photocopies. Everything had to be changed at the last minute, leading to a delay in delivery.

3.2.2

An Observation: The Risk of Overrun

3.2.2.1 A Consequence of the Method’s Success We have seen that project management has relatively quickly become the dominant tool, meeting with great success in all fields. From a strictly statistical point of view, an increase in the number of projects necessarily leads to an increase in the failure rate, as resources remain limited. There may therefore be an irreversible trend stemming from this generalization of the method. The First Overrun “The young magistrate (Herod, son of Atticus), observing that the town of Troas was indifferently supplied with water, obtained from the munificence of Hadrian 300 myriads of drachmas for the construction of a new aqueduct. But in the execution of the works the charge amounted to more than double the estimate, and the officers of the revenue began to murmur, till the generous Atticus silenced their complaints by requesting that he might be permitted to take upon himself the whole additional expense.”24

3.2.2.2 The Particular Characteristics of IT Projects Project drift can take different forms: performance shortfalls, development or operating cost overruns, or commissioning date delays, all of which lead to return on investment issues. According to the Standish Group, which publishes a study on the success rate of IT projects every 2 years in its Chaos Report, the field of software development is particularly prone to such drift. While this indicator has improved over the years, it is 23

Fisher (2012), pp. 87–95. Edward Gibbon, The Decline and Fall of the Roman Empire, 1962, Vol. 1, p. 28. (Reported by Peeters and Madauss 2008, pp. 80–89). 24

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estimated that only 16% of projects meet their initial objectives on time and within budget (9% when projects are carried out by large companies). What’s more, while we might hope for a learning effect over the years, the main causes of project failure remain dispiritingly predictable: incomplete or unclear specifications, lack of user involvement, changing needs, lack of executive support, etc. In Practice

Why are IT projects so “different”? • Unlike civil engineering projects, anything seems possible because they are not subject to the laws of physics; • Their complexity is difficult to assess compared with engineering projects; • They have intangible inputs and deliverables; • They are strongly dependent on stakeholder expertise; • They are often designed to accompany organizational change; • The argument that each project is “unique” is invoked more often than usual; • They are sensitive to Brooks’ Law, where adding resources to a project that is behind schedule only adds to the delay. ◄

3.2.2.3 Escalation of Commitment Who hasn’t fallen into the trap of watching a pointless TV series and all the while thinking, “It’s complete trash, but I’ve spent too much time on it now not to know how it ends. . .”? This time already consumed, which economists would define as a sunk cost (the investment “sunk cost trap”),25 partly explains the extent of the overrun on some major IT projects. The project’s promoters, believing that they have already invested too much to abandon the project, choose to continue, even if this means bearing the brunt of exorbitant deviations. The Taurus project is an iconic example of such behavior. Escalation of Commitment in IT Projects The Taurus project was launched in 1986 with the aim of computerizing transactions on the London Stock Exchange. Its cost was initially estimated at £6 million and the project was expected to take 3 years. The various stages that punctuated the project speak volumes about the ensuing debacle: (continued)

25 To learn more about sunk costs, you can watch the video at the following URL: https://www. youtube.com/watch?v¼AFPgxIJHxsE.

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• the project stalled until 1988; • by the end of 1989, the budget had been revised up to £50 million with an end date of October 1991; • in November 1989, Peter Rawlins was appointed chief executive of the exchange; • in June 1990, a contract was signed with supplier Vista Corporation on a “time-and-materials” basis; • in January 1991, new legal and security constraints emerged; • after many successive postponements, the project was finally abandoned in March 1993. The exchange had spent £80 million, while future users had lost a total of £400 million. Peter Rawlins resigned. At the beginning of the project, the technical solution chosen was so complex that one observer noted, “It was like starting to plan a dinner for two and finishing up with sixteen.”26 Why did the parties involved wait so long before shutting down the project for good? The explanation is simple: no one wanted their name to be associated with killing the project.

3.2.2.4 Megaprojects In a long series of articles, Danish scholar Bent Flyvbjerg examines the reasons why decision-makers systematically exceed their budgets and miscalculate project revenues. According to him, the origin of these discrepancies is to be found in the combination of two phenomena. The first is cognitive in nature: the optimism bias (which we will discuss again later), namely the predisposition of individuals to overestimate their chances of success; and the second, no less important, is political pressure. For Flyvbjerg,27 potential additional costs are systematically underestimated. This assertion is based on an empirical analysis of very large road and rail projects, where actual costs sometimes far exceed initial estimates (up to 196% for the Boston Big Dig, an underground highway megaproject). This is despite the implementation of management techniques notionally considered to be incontrovertible.28 Flyvbjerg notes that over a period of no less than 70 years (determined by data availability), the accuracy of cost forecasts has not improved. For example, the average overrun for major rail projects is 45% in constant prices. He argues that the cognitive hypothesis of optimism bias is not sufficient to explain such consistent errors, decade after decade, when logically, the individual can and should learn from

26

Keil and Montealegre (2000), pp. 55–68. See, for example, Flyvbjerg (2006), pp. 5–15. 28 For more information on the question “Why Do Megaprojects Fail?”, take a look at the following video: https://www.youtube.com/watch?time_continue¼14&v¼H0WunaC_jsk. 27

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experience. He therefore deduces that estimates may be deliberately adjusted to respond to political pressures.29 Past Excesses “The execution of armament programs has frequently been marked by significant cost overruns; a situation repeatedly criticized by the Court. In the past, this drift was sometimes due to voluntary underestimation: having zero margin was supposed to put ‘pressure’ on the protagonists (armies, technical services, industry) to curb subsequent drifts. In the eyes of the chiefs of staff concerned, this situation of underestimating resources also had the advantage of facilitating the launch of programs that were particularly important to them.”30 According to Flyvbjerg, public decision-makers and managers should never rely blindly on the estimates submitted to them, but should instead introduce tighter controls. He recommends applying a method known as “reference class forecasting”, which simply involves using the information available on actual costs incurred in the past for comparably sized projects with high capital requirements. Three steps are necessary: • identify a relevant reference class (e.g., construction of a railway network); • collect statistical data for the reference class (e.g., actual track costs per mile) in order to make an initial forecast; and • amend the forecast if the optimism bias is judged to be particularly pronounced, based on the information available on the project to be launched. This method, which is becoming increasingly widespread in the United Kingdom and Denmark, should help managers to move towards a more realistic assessment of costs. An Intentional Distortion of Reality “You did well, Bernardo, in lying to us about the expense involved in the work. If you had told the truth, you could never have induced us to spend so much money and neither this splendid palace nor this church, the finest in all Italy, would be standing.” According to the accounts of Pius II, described in his Commentaries, Bernardo Rossellino considerably exceeded the budget allocated for construction of the Cathedral and Papal Palace of Pienza. For more information on “Follies of Infrastructure: Why the Worst Projects Get Built, and How to Avoid It”, you can watch the video at the following URL: https://www.youtube.com/watch?time_ continue¼304&v¼gEXWULGEvs8. 30 From the annual public report of the Cour des comptes, the supreme body for auditing the use of public funds in France (Cour des comptes (2010), Rapport public annuel, La documentation française, authors’ translation). 29

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3.2.2.5 Difficulties Accepting the Method’s Limitations The standard method, as we will call it, could reasonably be questioned in the light of such failures. However, while successes are considered to stem from routinely applying the principles defined above, failures are at best analyzed as a reflection of the need to push back the boundaries by enhancing traditional project management tools. However, this approach does not always lead to the hoped-for successes. Performance conditions will be significantly affected by the complexity of contractual arrangements and the constraints imposed by a new and uncertain environment, as is often the case in major projects. Qualifying the outcome of a project as a success or failure is actually rather tricky. The perception of project failure depends on the performance indicators used in the evaluation, on the project phase considered (development phase or performance phase), and finally on the type of project (civil engineering or R&D). In addition, what is perceived as a failure for some will be seen as a success for others: an architect will label a project a success based on aesthetic and conceptual criteria, an engineer will consider technical performance criteria, and an investor will rely on value creation criteria. Let’s take a closer look at the reasons that may explain this situation.

3.3

The Human Factor: Heuristics and Cognitive Bias

Project management is a fertile breeding ground for new flexible forms of work organization, implemented using a project-network approach. The managerial literature is keen to highlight the figure of the “connexionnist” manager–mobile, flexible, available, charismatic, and enthusiastically shouldering one project after another. To complete the picture, however, we need to integrate two essential factors into this alluring construction: (a) high exposure arising from the transverse nature of the function and (b) the difficulty of breaking away from intuitive processes, which are often sources of error.

3.3.1

The Need to Take “Soft” Factors into Account

3.3.1.1 An Unspoken Pressure The project manager is part of these dominant professional models, which themselves reflect an implicit standardization in which transversal frameworks are “claimed and amplified by the actors”.31 The degree of commitment generated by this standardization affects the morale of project managers, who may end up gambling their career on the fate of their project 31

Courpasson (1996), pp. 239–256.

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(they may even spend up to 20 years on the same contract, in other words, half of their professional career!). The Psychological Dimension of Delays Research in human resource management has been relatively quiet regarding the feelings of distress that can affect individuals in a project-based organization, perhaps because this phenomenon runs counter to the dominant discourse. It was not until the early 1990s that a study was published on the psychological dimension of project delays. It examined the psychological consequences of the successive postponements of the launch of the spacecraft designed to study Jupiter (Galileo), delays due in part to the Challenger accident. It normally takes 4-5 years to complete a project of this magnitude. The project officially began in 1977 with a planned launch date of 1982. A series of events pushed back Galileo’s launch to 1984, then to 1985, then to 1986. It finally launched in 1989. Each of these delays meant a complete redesign. The consequences on the morale of the engineers were considerable, with some sinking into depression, “When I started out, I was going to stay on this project till it was over. Spending 17 years on a project is a long, long time. I may not now. But I’m going to stay until some key milestone. I will stay through launch. I will stay through the first Earth encounter. I will stay until we’re on a trajectory to Jupiter. Something.”32

3.3.1.2 A Discipline Focused on the Performance Phase The discipline, under the influence of the model advocated by the PMI, is centered on the performance phase of the contract and the notion of uncertainty is carefully avoided. This comes at a price, because the social model of project management involves questioning time and space. Transient elements, the asynchronous nature of activities, and the virtualization of interactions between fragmented teams reign supreme, especially in international projects. Without calling into question the positive effects of projects on company performance, some specialists nonetheless weigh up the idealistic discourse associated with project management that propagates the “myth of the good fortune to be gained from project-based work”. They use powerful testimonials to explain the key collateral risks that can weigh on team members: (a) over-involvement and commitment at the individual level with a gradual shift from high motivation to burnout; (b) destabilization of professional identities due to the transversal approach, which inhibits the transmission of expertise; and (c) an increasingly precarious professional career path where workers who commit to a project have no choice but to join

32

Golden (1994), pp. 463–511.

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51

another project when the first one comes to an end, effectively becoming fixed-term contractors within their company.33

3.3.1.3 A Complex Causal Chain Counter-Intuitive Models The standard project management method is essentially based on planning (management-as-planning). It draws on a simple control method similar to the thermostat model, requiring small-scale corrective actions, as if the project were detached from its environment. Which practitioner has not dreamt of an island of order in an ocean of disorder? This ideal remains a myth, as shown by various post-mortem project analyses performed using systemic modeling, which have identified effects that are at times counterintuitive and which highlight positive feedback loops as sources of instability.34 This explains why corrective actions are often far from effective, sometimes even making the situation worse. On a lighter note, this is illustrated by a series of empirical “laws” such as Brooks’ famous law, with its “mythical man-month” (based on observations of IT projects), which has endured since its publication in 1975, or Parkinson’s Law, which is specific to large organizations. An Illustration of Parkinson’s Law: Project Apollo “First you start out with a small organization and call it Apollo . . . As you expand that organization you have more and more staff people and you have more people thinking up reasons why there’s a need for a report. So, pretty soon you get hit with directives, some from top management and some from every level. Many of these directives require comprehensive reporting. We’ve got a lot of people who think it would be real nice to have this report or that report. . .”35

The Importance of “Soft” Factors “Soft” variables also need to be included in the causal chain. These variables do not have a fixed definition, but include human factors such as team morale, planning pressure, mutual trust between parties, and so on. The typical scenario is as follows: repeated changes during the design phase reduce the motivation of the design team, which in turn reduces productivity and leads to an increase in the error rate. A measurable cause leads to measurable effects, 33

Asquin et al. (2010), pp. 166–172. For example, sometimes when a decision is made to accelerate a project as a result of an unforeseen event, the cure can be worse than the disease. See Williams (2005), pp. 497–508. 35 Wilemon and Cicero (1970), pp. 269–282. 34

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but the causal chain involves a series of human or behavioral factors, which are by nature difficult to quantify–our so-called soft factors. Reduced Productivity Labor costs can account for up to 40% of the direct capital cost of large construction projects. It is therefore essential to maximize the productivity of these resources. A study of seven projects in Hong Kong36 showed that the impact of demotivating factors on teams is far from negligible, reaching 13.6 man-hours per week on certain construction sites. Behavioral variables focus on learning and social processes, but they are not modeled in conventional methods. Only 1% of project managers attribute the difficulties they encounter to purely technical causes, yet human and behavioral factors receive scant attention because of their subjective nature and the fact that their initial impact remains local.

3.3.2

Cognitive Factors

3.3.2.1 The Use of Heuristics Project managers are faced with a dynamic environment where time is short and resources are scarce. To make matters worse, they are also in a situation of incomplete information. The speed of reaction to events is essential. Project managers therefore make extensive use of a number of quick and easy rules known as heuristics.37 These everyday “rule-of-thumb” decisions can affect projects. They frequently lead project teams to underestimate costs, to become overly confident that agreed deadlines can be met, and to overestimate cash flow/revenue forecasts. One example is anchoring, which occurs when an external number that is often unrelated to the question at hand significantly influences a numerical evaluation, creating bias. Anchoring explains why people rely too heavily on the first information they receive. A famous example cited by Amos Tversky and Daniel Kahneman38 is the wheel of fortune that they rigged for the purposes of an experiment with their students at the University of Oregon.

36

Ng et al. (2004), pp. 139–146. Heuristic methods (the same root as the Greek expression eureka) can play an effective role in solving complex problems that, in most cases, would require more than a lifetime to solve correctly. For example, even the “simple” problem of choosing an outfit would take more than 40 h without heuristics! 38 Tversky and Kahneman (1974), pp. 1124–1131. 37

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The Wheel of Fortune Groups of subjects were asked to estimate the percentage of African countries in the United Nations. The experiment took place in the presence of a “wheel of fortune”, numbered from 0 to 100. The subjects were firstly asked to comment on the value indicated on the wheel by indicating whether their estimate was higher or lower, and were secondly asked to adjust their estimate upwards or downwards with reference to the number on the wheel. The median estimates were 25 and 45 for groups that saw values on the wheel of 10 and 65, respectively. This heuristic explains the importance of the initial values revealed during negotiations

3.3.2.2 Optimism Bias When we adjust an evaluation by referring to a given state of affairs, we are responding to anchoring. Predicting the future from the present involves two processes that are commonly used in project management: (a) in terms of planning, we will make a prediction based on the probability of each of the tasks making up the activity network and (b) when assessing the loss arising from a complex system, we will base our assessment on the probabilities of the elementary events. Tversky and Kahneman refer to these processes as “conjunctive events” and “disjunctive events”, respectively. Conjunctive events are based on the chain of events that makes up a process or plan. Even if the probability of meeting the deadline for each of the elementary activities is high, the overall probability of success is considerably reduced (remember that a PERT network can comprise 10,000 tasks). By anchoring our evaluation on the probabilities of the elementary events, we overestimate the project’s chances of success and the likelihood of meeting the deadline. Disjunctive structures are associated with risk. In a complex system (e.g., a nuclear power plant), although the probability of an individual component malfunctioning is low, the overall probability of failure remains high at the system level. If we consider the structure of contract networks, it is clear that individuals tend to underestimate risk. We are therefore exposed to a sort of “scissors effect”, in which contractual risk is generated through the negative combination of an inability to plan (and a resulting exposure to penalties) and an overly optimistic assessment of contract network coherence (particularly in terms of contractual protection). Excessive optimism pushes us to overestimate our abilities. A survey of a population of one million students showed that 70% considered themselves to have above-average leadership abilities, compared with 2% who considered themselves to be below average. The results were similar for athletic performance and interpersonal skills (seen in this light, the industrial world should be populated by

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brilliant, healthy, and entertaining people).39 In practical terms, this translates into a tendency to underestimate costs and deadlines. A400M: “Underestimated” Complexity “Commenting on the delays to the A400M military transport aircraft, Louis Gallois [former EADS CEO] admitted that the group had ‘completely underestimated the complexity of the aircraft’. And it wasn’t only EADS– suppliers, OEMs, and customers had done the same thing. In addition, he recalled that the A400M was meant to be developed in six-and-a-half years, although new aircrafts are never developed in under 10 years. He implicitly acknowledged that EADS’s mistake had been to agree to develop and sell a complex military aircraft on the basis of a commercial contract with a fixed price and civil certification, and not on the basis of a military-type contract that incorporates a certain amount of risk and less stringent military certification . . . In the meantime, the CEO of EADS entered into close negotiations with OCCAR40 and client nations, because a confidential clause in the contract stipulated that in the event of a delay of more than 14 months on a contractual milestone (in this case the first flight), customers could drop out of the program. Hence EADS’s eagerness to renegotiate the contract and the potential payments and compensation it would need to offer as interim solutions to the capability disruptions of its military customers.”41

3.3.3

The Illusion of Control

Newly appointed project managers are frequently convinced that their project is unique and completely different from all others, that their previous experience (often acquired on a simpler project) is a guarantee for future success, and that a culture of “challenge” is unavoidable, with a risk of the activity being rejected due to a lack of funds. These factors fuel the search for arguments to justify low project cost estimates. Seven arguments reappear more or less systematically:

39 Like those found at NASA: “The individuals who become NASA managers have ambition, intelligence, and an ability to organize and lead people in performing complex technical tasks.” (Prince 2002, pp. 7–12). 40 OCCAR: Organisation conjointe de coopération en matière d’armement, the Organisation for Joint Armament Cooperation. 41 Extract from the journal Air & Cosmos, No. 2155, 2009.

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55

• inheritance of past projects: it’s just like the last program; • capitalization of experience: we’ve learned our lessons and we won’t make the same mistakes; • reuse: we’re going to use the equipment we developed for another program, there’s no need to modify it;42 • optimizing resources: we can do it ourselves without using subcontractors; • self-fulfilling prophecy: budget estimates that are set too high will be selffulfilling; • unvarying requirements: the program’s requirements are fixed and we know how to manage these demands; and • the illusion of a fixed price: our subcontractors have made a fixed-price commitment that protects us from claims. These assertions are continually repeated in projects, but rarely deliver the expected results. In their review of a number of “exemplary” failures, Dan Lovallo and Daniel Kahneman adopt a joint approach that combines strategic research and psychology. In their opinion, decision-makers are too often victims of what psychologists call the planning fallacy. Decision-makers have an inside view of planning43 and cannot benefit from the experience provided by a simple statistical analysis of past results for comparably sized contracts (outside view). The Planning Fallacy The following anecdote encapsulates the difficulty of planning. Daniel Kahneman was involved in a project to develop a new curriculum (for the study of judgment and decision-making under uncertainty!). The project was conducted by a team of academics and teachers. At a progress meeting, around 1 year after the launch of the project, Kahneman asked his colleagues to take a slip of paper and note down their estimate of the time required to complete the work. The range of estimates was between 18 and 30 months. He then turned to one of the team members (an expert) and asked him to recollect the time that comparable projects had taken to reach completion. Awkwardly, and after a long silence, the expert responded that not all of the teams he could recall had actually completed their project, in fact, 40% had given up. He added that, “Of the remaining, I cannot think of any that was completed in less than seven years, nor of any that took more than ten.”44

42 Note that the loss of the Ariane 5 rocket on June 4, 1996 was caused by the reuse of a piece of software that was effectively “useless”. 43 This is no mean feat given that an activity network can comprise more than 10,000 tasks. 44 Kahneman and Lovallo (1993), pp. 17–31.

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3.3.3.1 The “Rational” Choice of Not Assessing Risk The PMI considers risk management to be a key discipline. Risk situations are those where the consequences of the decisions we have made depend on risk events whose probability of occurrence is known. To assess risk, we use the expected utility criterion, which assumes that any decision problem can be reduced to a probability distribution, as in a game of chance. But risk comparisons cannot be used to take into account individual risk behavior in the real world. The notion of expected utility has therefore been extended to the case of unprobabilized uncertainty, which, in turn, has been rapidly called into question by experiments showing the systematic violation of certain axioms These statistical processing difficulties are compounded by other factors. A study carried out in the UK on software development projects showed that when faced with a trade-off between the cost of risk assessment and the actual risk involved, a third of project managers simply chose not to perform risk analysis. What is particularly worrying is that, once again, there is a clear denial of uncertainty, “it was found that, in some cases, project managers responsible for the management of risk acted to reduce anxiety among customers and other stakeholders by not confronting them with uncertainties and risks. In other words, they ‘concealed’ or ‘denied the presence’ of risk. This was either purposeful (they would make a decision not to mention specific, project-related risks) or unconscious (they did not dwell on the presence of risk, thereby not having to mention it as an issue). Their unwillingness to mention risk relates to the temptation to give people the answers they want to hear, and to give the impression of certainty or a perception of a safe and predictable world.”45

3.4

Conclusion

Following its institutionalization, project management has experienced an unprecedented expansion in all areas of industry, services, and associations. Management methods, adopted and widely disseminated by the PMI, appeared in the 1950s and 1960s and have been gradually refined, although they ultimately leave little room for uncertainty. This poses a fundamental problem for contracts involving a high degree of innovation. While it is relatively well accepted that problems can arise during the performance of a contract, every effort is made to keep this uncertainty to a minimum. Beyond the legitimate need for security, the signed contract should meet the criteria of predictability established by a mode of management totally focused on performance, in other words the contract should be “complete”. Although the methods derived from pragmatic engineering knowledge are not in doubt, it is clear that resources are not unlimited and that project actors are faced with both an information overload and urgent deadlines. 45

Kutsch and Hall (2009), pp. 72–81.

References

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A tendency to overestimate our abilities, combined with the illusion that we can genuinely influence events, explains the fact that we generally attribute successes to our own actions, whereas failures are always considered to be the result of external events. However, problems can arise at any stage of a project, even if everything went well at the start. The hierarchical tree structure of projects, which is structurally complex, needs to incorporate human factors (soft factors), whether cognitive or cultural, or even reduced to industrial culture. The next chapter will show that the inherent complexity of contracts, the bounded rationality of the actors, and information asymmetry are three additional factors that make it impossible to design a complete contract. We will also highlight empirical studies to show that consideration of social norms and individual behavior significantly influences the outcome of the contract (stakeholder perceptions and contract economics). We therefore need to consider a strategy-as-practice approach to focus on actions linked to daily practices. This principle will be used to define a management tool designed to instrument new value-creating routines.

References Asquin A, Garel G, Picq T (2010) When project-based management causes distress at work. Int J Project Manag 28(2):166–172 Chvidchenko I (1990) Gestion des grands projets. Toulouse, Cepadues Courpasson D (1996) Les normalisations managériales entre l’individu et le modèle professionnel. Revue d’économie industrielle 75(1):239–256 De Meyer A, Loch CH, Pich MT (2002) Managing project uncertainty: from variation to chaos. MIT Sloan Manag Rev 43(2):60–67 DiMatteo LA (2010) Strategic contracting: contract law as a source of competitive advantage. Am Bus Law J 47(4):727–794 Engwall M (2003) No project is an Island: linking projects to history and context. Res Policy 32 (5):789–808 Fisher KW (2012) The impact of contracts on ship design preparation. J Ship Production Design 28 (2):87–95 Flyvbjerg B (2006) From Nobel Prize to project management: getting risks right. Project Manag J 37(3):5–15 Gaddis PO (1959) The project manager. Harv Bus Rev:89–97 Golden GY (1994) On the way to jupiter: psychological dimensions of the Galileo Mission. Soc Stud Sci 24(3):463–511 Hall AD III (1998) The fractal architecture of the systems engineering method. IEEE Trans Systems Man Cybernetics-Part C Applications Rev 28(4):565–572 Kahneman D, Lovallo D (1993) Timid choices and bold forecasts: a cognitive perspective on risk taking. Manag Sci 39(1):17–31 Keil M, Montealegre R (2000) Cutting your losses: extricating your organization when a big project goes awry. Sloan Manag Rev 41(3):55–68 Kutsch E, Hall M (2009) The rational choice of not applying project risk management in information technology projects. Project Manag J 40(3):72–81 Lenfle S, Loch C (2010) Lost roots: how project management came to emphasize control over flexibility and novelty. California Manag Rev 53(1):32–55

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Morris PWG (1994) The management of projects. Thomas Telford, London Ng ST, Martin Skitmore R, Lam KC, Poon AWC (2004) Demotivating factors influencing the productivity of civil engineering projects. Int J Project Manag 22(2):139–146 Packendorff J (1995) Inquiring into the temporary organization: new directions for project management research. Scand J Manag 11(4):319–333 Peeters W, Madauss B (2008) A proposed strategy against cost overruns in the space sector: the 5C approach. Space Policy 24(2):80–89 Prince F (2002) Why NASA’s management doesn’t believe the cost estimate. Eng Manag J 14 (1):7–12 Sapolsky H (1972) The Polaris system development: bureaucratic and programmatic success in Government. Harvard University Press, Cambridge Scherer FM (1964) The theory of contractual incentives for cost reduction. Q J Econ 78(2):257–280 Simon HA (1996) The sciences of the artificial, 3rd edn. MIT Press, Cambridge Söderlund J (2002) Managing complex development projects: arenas, knowledge processes and time. R&D Manag 32(5):419–430 Tversky A, Kahneman D (1974) Judgment under uncertainty: heuristics and biases. Science 185 (4157):1124–1131 Wilemon DL, Cicero JP (1970) The project manager–anomalies and ambiguities. Acad Manag J 13 (3):269–282 Williams T (2005) Assessing and moving on from the dominant project management discourse in the light of project overruns. IEEE Trans Eng Manag 52(4):497–508

. . . That Cannot Be Fully Protected by a Contract

4

What does this tell us about contracts? First, that conventional planning tools offer no guarantee of success in an uncertain environment. Even the most sophisticated management methods rarely take into account the structural complexity of projects. They also struggle to capture human factors, which are behind the sometimes colossal overruns observed in large projects. In practice, design changes invariably affect the performance of long-term contracts, making renegotiations inevitable. The contractual problem is therefore an issue of ex post adaptation (i.e., after signature) rather than ex ante planning (i.e., before signature). There is effectively a clear division of labor between the drafting/ design phase of the contract and its performance. The type of contract chosen will determine the governance structure. The vast majority of contracts are variants of two contrasting forms: fixed-price contracts1 and cost-plus contracts. In the first case, the sales price is defined when the contract is signed and remains fixed, regardless of any difficulties encountered during performance. In the second case, the parties agree on the supplier’s margin, which will be maintained in all circumstances. Incentive contracts offer a middle ground between these two models by providing for risk sharing, taking into account moral hazard2 and the parties’ degree of risk aversion. In a perfect world, where information is complete, the parties will be relatively indifferent between the different types of contract (fixed-price versus cost-plus). In the previous chapter, we saw that project management methods assume that individuals are perfectly rational and that the future is probabilizable (it is only For example, “lump-sum turnkey” (LSTK) contracts. Insurance companies, in particular, worry about moral hazard since the insured party may be tempted to bypass the necessary risk-reduction precautions because it has taken out an insurance policy. In some cases, an insured party may even intentionally provoke a loss in order to obtain access to funds. More broadly, moral hazard relates to the potential for cheating during the contract performance phase, facilitated by the fact that it is impossible to anticipate all the situations that may arise during the life of the contract (situation of contractual incompleteness). 1 2

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3_4

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risky).3 Work can be broken down into batches, which should allow for all eventualities. The contract is complete, there are no uncertainties, no surprises, no conflicts, and management is limited to updating tasks in an environment where probabilities are predefined. Unfortunately, projects are structurally complex. Their technical content is profoundly uncertain and is rarely fixed when the contract is signed. In addition, when making their predictive calculations, individuals fall prey to cognitive biases, such as anchoring, optimism bias, and the illusion of control. In reality, the contract will be incomplete.

4.1

Contracts and Renegotiation

Projects are complex, but so are contracts. We cannot anticipate every eventuality and so our contracts will be incomplete. Each party will seek to limit the impact of unanticipated events in order to maximize its investment. Renegotiations during the performance phase will be unavoidable, which renders final stipulations such as “this contract may not be amended, in any way whatsoever, except by the mutual written agreement of the parties, duly dated and signed by them” ineffective. The following table4 illustrates the parameters likely to influence the project owner’s choice of contract type. Note, in particular, the differences between fixedprice and cost-plus contracts, in terms of clarity of scope and risk control: Choice of contract Type of contract

Key considerations Well-defined scope of work Domestic/ international project Project size, cost Change management Cost/schedule Owner resources Contract incentives Fact-track schedule

Cost reimbursable A

Lumpsum I

Continuing services agreement A

Program management A

Partnering agreement A

I

I

A

A

A

I A

I I

A A

I I

A A

I I I I

I A I I

A A A A

A I I I

A I I I (continued)

3

The notion of risk must be distinguished from that of uncertainty. It is possible to attribute a probability to a risky event, which is not the case for uncertainty (the unprobabilizable nature of uncertainty makes it impossible to model such an event). 4 Batavia (2001).

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Type of contract

Key considerations Contractor resources Contractor experience Cost/schedule reporting Risk allocation Market condition Owner control in managing the project Project uncertainties

Cost reimbursable I

Lumpsum I

Continuing services agreement I

Program management I

Partnering agreement I

I

I

I

I

I

A

I

A

A

A

A A I

I I A

A A A

A A I

A A I

I

A

A

A

A

I ¼ Important consideration for this type of contracting arrangement A ¼ Factors applicable to the contracting arrangement

Dividing the contract into lots awarded to different suppliers, in order to determine the respective scopes and the interfaces between the actors, will influence the efficiency of the entire subcontracting chain and will be a determining factor in the project’s success. EPC Contracts EPC (engineering, procurement, and construction) contracts are complex contracts between a project owner and an EPC contractor, in which the contractor designs, builds, and puts into service a work on behalf of, and in accordance with the technical specifications drawn up by, the project owner. The project owner will take final delivery of the work once it complies with all the technical criteria defined in the specifications. The EPC contractor is in charge of design and manages the technical interfaces between the various participants. It supervises the key technical phases such as assembly, testing, and industrial commissioning, through to final delivery. The EPC contractor also provides contractual guarantees including: • guarantee of compliance with the planned performance schedule; • performance guarantee; and • guarantee of proper operation for a 12-to-24-month period after the commissioning date (when work is officially transferred). EPC-type contracts are generally in “turnkey” form and may follow the contract templates published by the following organizations: (continued)

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• the International Federation of Consulting Engineers (FIDIC); • the Institution of Civil Engineers (ICE), which has published a series of contracts that aim to prevent disputes, known as New Engineering Contracts (NECs); and • the International Chamber of Commerce (ICC), which has published a Model Contract for the Turnkey Supply of an Industrial Plant (2003) and a Model Turnkey Contract for Major Projects (2008).

FIDIC Contracts The International Federation of Consulting Engineers (FIDIC) is an international professional organization representing the consulting engineering profession. FIDIC publishes standard form contracts, primarily for the construction industry, which are widely used in international construction projects of varying sizes. These contracts are recognized for their balanced allocation of the parties’ obligations and responsibilities. They are model turnkey contracts presented as lists of clauses, which set out the respective obligations of buyer and seller. The parties must, however, remain vigilant when implementing the clauses, which place significant responsibility on the shoulders of the consulting engineer (see above). FIDIC has published a series of “books”: • The “Red Book” for civil engineering projects, which generally use unit price contracts; • The “Yellow Book” for contracts for the construction of plant and designbuild facilities and works contracts in general; • The “Silver Book” for turnkey projects in which the contractor bears almost full responsibility for design and construction, including for various unforeseeable events, such as adverse soil conditions; • The “Gold Book” for design-build-operate projects, which envisages a construction phase in line with the Yellow Book model followed by an operation and maintenance (O&M) period; • The “Green Book” for small-scale projects. The FIDIC books have been translated into numerous languages and are available from their website (http://fidic.org/).

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63

Co-contracting Operations In co-contracting operations, different entrepreneurs or companies combine their submissions by creating a “temporary business partnership”. The co-contractors may be jointly or severally liable: • jointly responsible co-contractors: each contractor is liable to the company for the whole contract; • severally responsible co-contractors: each contractor is liable to the company, but only for the batch of services assigned to it.

4.1.1

Characteristics of the Contract

4.1.1.1 Contracts Are Complex Too Clauses That Cannot Be Interpreted Independently of One Another In the previous chapter, we saw that projects are structurally complex. To complicate matters, the contract (for the project) also possesses all the characteristics of a complex system. Christophe Collard and Christophe Roquilly5 distinguish two forms of complexity that arise in the legal sphere: • informational complexity, relating to the amount of information to be processed; and • computational complexity, which is qualitative in nature and relates to the difficulties of processing this information (interpretation and prioritization). Contracts are not immune to these two forms of complexity. They contain numerous clauses that are interconnected in different ways and that cannot be interpreted independently. Interdependencies can quickly become inextricably entangled, even within a single contract article. Just take a look at the following example to get a picture of what this can mean.

5

Collard and Roquilly (2010), op. cit.

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. . . That Cannot Be Fully Protected by a Contract

A complex structure. Source: Brander and Lupu (2008), p. 61. Reproduced with the permission of the National Contract Management Association (NCMA)

A Non-existent Metric How should we measure the inherent complexity of a contract: can a “thicker” contract be considered more complex than a “thinner” one? Should we measure the number of clauses, weighting them according to their enforceability? It is now accepted that there is no direct relationship between contract length and cognitive load (i.e., the difficulty faced when attempting to understand the contract). Nevertheless, there is definitely a limit beyond which the parties will no longer be able to process information without error. This limit, which depends on each person’s experience, is obviously difficult to determine, but what is certain is that the stress generated when reading a contract is directly related to the mental effort required to analyze it.6 The Limits of Analysis: An Experiment William Bentley MacLeod7 recounts a series of laboratory experiments, presented by Philip Johnson-Laird,8 that were designed to test the limits of human reasoning through logical implications. The following syllogism was proposed: (continued) 6

Hagedoorn and Hesen (2009), pp. 818–847. MacLeod (1996), pp. 788–810. 8 Johnson-Laird (1983). 7

4.1 Contracts and Renegotiation

• “None of the authors are burglars. • Some of the chefs are burglars.” Six out of twenty subjects came to one of the following incorrect conclusions: • “None of the authors are chefs. • None of the chefs are authors.” Only seven of the twenty subjects proposed the sole correct implication: • “Some of the chefs are not authors.” MacLeod uses Venn diagrams to illustrate the various possible solutions:

Possible models for syllogism. Source: MacLeod (1996), p. 793. Reproduced with the permission of John Wiley & Sons

Fortunately, there are no repercussions arising from this example, but we can easily extrapolate the difficulty of dealing with all the clauses of a real contract. Imagine linking the previous proposals to real contractual clauses: • Article 1: none of the authors are responsible. • Article 2: some of the chefs are responsible. The lawyers would have fun with that!

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4.1.1.2 Contracts Are Incomplete The various alternatives for each clause are not chosen independently. The multiplicity of clauses and their interrelationships mean that the contract is unquestionably an “endogenous” source of complexity. When we combine this with the bounded rationality9 of the individual, we can see that it is impossible to devise a contract capable of covering all contingencies and of counteracting the parties’ opportunism. The contract will therefore be incomplete. An incomplete contract is a contract where we do not know in advance how the performance phase will play out. It will be even more “incomplete” if its negotiation cost is high, which is often the case for long-term contracts. “In the real world, negotiating a contract is a costly affair, involving executive management and lawyers. It requires careful study of each clause and of the potential impact of each contingent event on the relevant variables and thus on the performance of the contract. There inevitably comes a time when the efficiency gain obtained by considering a new and unlikely contingency no longer justifies the cost of considering it. The contract will then be signed without taking this contingency into account. The inability or unwillingness of the courts to verify ex post the value taken by certain variables is another reason for incomplete contracts.”10 In Practice

Why you should prepare a contract • • • •

It will be easier to convince a judge on the basis of written proof; Interpretation of the agreement will not vary over time; Signing a contract gives importance to the commitments made; and The notion of breach of contract can be established and the consequences determined in advance. ◄

The incompleteness of contracts is a key concept for justifying the existence of a set of contractual and institutional provisions.11 The reasons most commonly given for this incompleteness are: the existence of unanticipated contingencies (such as technical modifications or changes in standards), drafting costs (mobilizing battalions of lawyers is certainly not easy to justify), and the excessive costs of performing complete contracts (contract administration and dispute-handling costs).

9 The notion of bounded rationality was introduced by Herbert A. Simon. It refers to the limited ability of individuals to process information in uncertain or complex situations. It does not, however, mean that they behave irrationally. 10 Salanié (1994) (authors’ translation). 11 For more information on incomplete contracts, take a look at the video at the following URL: https://www.youtube.com/watch?time_continue¼2&v¼021nbExAoAk.

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A Source of Contractual Incompleteness Real contracts are written in natural language. Contingencies are typically linked to events (for example, achieving a technical milestone) that generate actions. This can be a source of contradictory instructions and of incompleteness.12 What should we do if our contract includes the following two clauses? • Clause 1: if there is an earthquake, take action a; • Clause 2: if there is a fire, do not take action a. We will not detail the various contract theories here. They accord differing levels of importance to the notion of incompleteness and specify different origins for its existence.13 In practice, it is sufficient to accept that contracts are incomplete.14 In Practice

A classic case: the 1975 French law on subcontracting Logic is defined as the science of valid reasoning. Legal proceduralist Henri Motulsky considered that the demonstration of a “subjective right” could only be achieved by using syllogisms (well-known since antiquity, a syllogism is a form of deductive reasoning whose foundations were laid by Aristotle). However, the formal constraints posed by syllogism have led legal logicians to suggest other forms, notably propositional logic. The latter leaves aside the internal structure of statements and focuses more on their articulation. In an extremely simplified way, such a reasoning can be represented as follows: “if p then q” or “p implies q”. Let’s take the example of Article 3 of the French Law of December 31, 1975 on subcontracting:15 “Article 1: An entrepreneur who intends to perform a contract or agreement using one or more subcontractors shall, at the time of entering into and throughout

12

Heller and Spiegler (2008), pp. 875–888. In transaction cost theory (see box on the following pages), incompleteness stems from the assumption that individuals exhibit bounded rationality: it is not possible for them to predict all future contingencies. In the theory of incomplete contracts, incompleteness arises from the costs of drafting the contract and the judge’s inability to verify a portion of the information that is observable (i.e., measurable) by the two parties. The judge’s inability to evaluate the investment variables may even justify the parties’ failure to prepare a complete contract. 14 As noted by some authors, even William Shakespeare provides us with unexpected but “brilliant lessons about commitment and interpretation of an incompletely specified contract” in The Merchant of Venice. (See Dixit 2005, pp. 205–219.) 15 Mathieu (2015). This law pursues a twofold objective for the legislator: (a) to ensure the protection of the subcontractor and guarantee that it is paid for its work and (b) to fight against the practice of hidden subcontracting. Its public policy character means that it cannot be ignored by foreign companies. 13

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the term of the contract or agreement, have the project owner approve each subcontractor and the terms of payment of each subcontract. Article 2: When neither the subcontractor nor the terms of payment have been approved by the project owner as provided for in the preceding article, the entrepreneur shall nevertheless be liable to the subcontractor but shall not be entitled to invoke the subcontract against the subcontractor.” Using the formalism of propositional logic, this gives the following: Article 1 requires the entrepreneur to present the subcontractor (p) and to obtain approval of the terms of payment (q). Rule “r” may therefore be written as r ¼ p Ʌ q. A sanction may be applied if “r” is not respected, i.e.: Ø r ¼ Ø p V Ø q. Article 2, on the other hand, only corresponds to the case where neither p nor q are respected, in other words Ø p Ʌ Ø q. The conclusion of this logic exercise is that the law is poorly drafted. No penalty is provided for in the event that the entrepreneur simply fails to present the subcontractor, nor in the event that, having presented the subcontractor, it fails to have the terms of payment approved by the project owner. The article is therefore incomplete. ◄

4.1.2

A de facto Renegotiation

Contract economics, perhaps by denying the notion of contractual incompleteness, has primarily focused on limiting, if not actually eliminating, renegotiations. The theory tells us that everything can be predicted before signing and that there is an appropriate response to any eventuality. Nothing justifies negotiation, apart from the initial contract itself. On the other hand, experience shows the performance of real-life contracts, especially long-term contracts, to be an uninterrupted series of renegotiations, relating variously to technical specifications, deadlines, quantities, or prices. The concept of renegotiation has only recently been accepted in the legal framework of the private law contract, despite renegotiations being routinely employed to resolve performance difficulties. The impact of these renegotiations is not only economic. The governance of the contract is also profoundly affected, with fixed-price contracts becoming de facto cost-plus contracts. After their renegotiations, the parties will sign amendments to the initial contract. These amendments may be simple adjustments (for example, changing the name of one of the parties or incorporating new standards). In practice, however, changes can be more far-reaching. Fixed-price contracts are often renegotiated to correctly reflect actual costs or to incorporate schedule updates, through change orders, for example, which are used if contractual milestones need to be realigned because the project has fallen too far behind schedule.

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In Practice

Managing amendments • • • •

Any additional work must be set out in an amendment; The amendment should be governed by the terms of the basic contract; Beware of attempts to introduce a waiver of past claims; and In the event of disagreement on principle or on the terms of the amendment, do not hesitate to make a claim. ◄

Renegotiation along the way is even more likely when exit costs (transaction costs) are high: problems identifying an alternative contractor, mobilization delays and a learning curve that are incompatible with the project schedule, complex reversibility, etc. As a result, rather than opting for an uncertain exit, the parties frequently accept amendments that maintain an unstable balance, on the grounds that the alternatives have prohibitively high exit costs and risks.

4.1.2.1 Evolution of the Balance of Power Over the Life of the Contract The balance of power between the parties is far from static, as shown in the figure below:

Negotiating stengths of the contractor and the client over the life of the contract (“Following contract award, the happy pair begins the “honeymoon” phase when all is sweetness and light and the contractor is anxious to please. At this time it is not unknown for the contractor to carry out little tasks of extra work for free, tasks for which, later on in the contract, it will most certainly seek payment.” (Whitticks 2005)). Source: Whitticks (2005), p. 189. Reproduced with the permission of Elsevier

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During the pre-contract phase (bid period), the customer will have several offers from contractors at its disposal and will be able to keep them in a more or less latent state of competition in order to obtain additional functionalities at lower cost.16 The contractor logically considers that it is in a weakened position in relation to the principal. Let’s take the example of a manufacturing company seeking to restock a critical component. After issuing a request for proposal (RFP), it receives responses from several suppliers. It has bargaining power, as it can make peer-to-peer comparisons. After signing the contract with the end customer, the company still has the possibility of negotiating “free” deliveries until it is in turn obliged to sign a contract with its selected supplier, so as not to jeopardize its production plan. The situation is reversed when the contract is signed because the astute supplier, who is able to exploit the lock-in situation, sticks as closely as possible to the technical content in order to demand additional financing for potential spec changes requested either by the customer or by its own supplier. It now has the negotiating power, at least until the customer considers that this could damage the financial balance of the project as a whole. This situation is particularly common in large IT integration projects where the balance of power benefits the integrator: • the customer’s financial exposure (it bears the costs throughout the integration phase) is high (if the project is abandoned, it will have to write off most of the costs incurred); • the value-in-use of the developments is low, given the complexity of reusing them; and • the cost of exiting and having a third party take over the project is prohibitively high. The customer therefore finds itself dependent on an “inescapable” integrator for months on end, with no economically viable alternative. As the contract progresses, the party with the most exposure may at some point conclude that the asymmetry is not in its favor and may devise maneuvers designed to provoke renegotiation. Equally, the advantaged party may seek to maintain or even increase its beneficial asymmetry.17 So which maneuvers reveal opportunistic behavior?

16 Its position will be even stronger if it is an institutional client. In this case, its representative, having no real negotiating capacity of its own, will be obliged to fully comply with a body of mandatory rules, such as the EU Public Procurement Rules. The paradox, already noted by Schelling (1960), is that “the power to constrain an adversary may depend on the power to bind oneself”. 17 In a Deloitte Consulting study of 25 firms from a range of industry sectors, one in five explicitly identified a loss of bargaining power to the vendor as a major source of risk. (Source Deloitte Consulting (2005), Calling a Change in the Outsourcing Market: The Realities for the World’s Largest Organizations).

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Detecting Opportunistic Strategies

Strategic opportunism exists when one of the parties deliberately pursues its own self-interest in order to maximize its potential gain. In order to achieve its objectives, it will have no qualms about misleading the other party or hiding information, and may even deliberately break its commitments, whether relating to the letter or the spirit of the contract. Opportunism often stems from a well-thought-out, planned strategy, with the aim of acquiring maximum value from the exchange. There are different forms of opportunism. One of the most recent summaries is that of Kenneth Wathne and Jan Heide,18 who identify four types of opportunism: • passive opportunism, when one of the parties evades its obligations; • a second form, also passive, when one of the parties refuses to adapt to new circumstances; and • two active forms of opportunism, in cases of violation or forced renegotiation. For these authors, opportunism may also manifest itself in the violation of relational norms. In other words, they consider the parties’ failure to respect informal rules established during the relationship to be a type of opportunistic behavior.

4.2.1

A Threat of Opportunism Throughout the Whole Contract

Key moments mark the life of the contract: negotiating the contractual clauses, signing the contract, performing the work, and, finally, closing the contract. Opportunistic actions can taint the parties’ relationship in each of these periods: • ex ante opportunism, which may appear before, or when, the contract is signed; • ex post opportunism, which may arise after the contract has been signed. In both cases, the opportunistic behavior will not be blatant since, by definition, it goes against the ideology of virtuous cooperation. The contracting party, concerned with preserving its margin (and sometimes its assets), will therefore focus on identifying the problem as soon as it arises.

18

Wathne and Heide (2000), pp. 36–51.

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An Inventory of Opportunistic Maneuvers Until the early 1990s, large construction contracts were not particularly conducive to cooperation. James Zack is most certainly an expert on the topic, as seen in his 1993 article “Claimsmanship: Current Perspective”,19 in which he unveils the tactics employed by the parties (contractor and project owner). Zack’s message is straight to the point: “Claimsmanship is generally defined as the art or practice of making and winning claims by questionable expedients without actually violating the rules.” He lists 11 opportunistic “claims games” commonly practiced by contractors on public projects: Game no. 1

Claimsmanship type Bidding games

2

Bid your claims

3

Reservation of rights

4

Project float claims

5

Delayed early completion claims

6

Accelerated delay claims

7 8

Loss of productivity/ efficiency claims Total cost claims

9

Cardinal changes

10

DBE (disadvantagedbusiness-enterprise) claims

Example The contractor draws up its offer on the basis of a low-cost material in order to obtain a competitive advantage and renegotiates if the customer makes the slightest adjustment request. The contractor voluntarily shrinks its margin to win the contract, hoping to “recoup” its margin from change orders obtained through claims. Valuing financial claims at the very end of a contract in order to negotiate all variances without attempting to determine causality. The contractor asserts that the float relating to the critical path belongs to it and allocates all delays (and cost overruns) to the customer. The contractor contends that it would have finished earlier if the customer had not forced it to revise its schedule. It claims the difference. The contractor claims the costs of acceleration for the full acceleration period, even though it only utilized part of the time allocated. The contractor claims for loss of efficiency or productivity suffered due to the customer’s actions. One of the most common forms of opportunism: the contractor claims the difference between its actual costs and its initial cost estimate (excluding amendments agreed by the parties). The contractor claims that the changes required by the customer were so extensive that the work no longer corresponds to the terms of the initial contract. The contractor shifts the responsibility for delays and/or faults to the subcontractors that the customer “forced” it to use.

(continued) 19

Zack (1993), pp. 480–497.

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Game no. 11

Claimsmanship type “Hail Mary” change order

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Example “Desperate” maneuver where a contractor waits for a change order at the end of a project in a last-ditch attempt to recoup its losses.

Although Zack invokes the theoretical benefits of bringing the issue to light, he reflects the mood that prevailed before the publication of the Latham Report, issued just one year later, in 1994. (Sir Michael Latham promoted “partnering”, a collaborative management method designed to ease relations between stakeholders.)

4.2.1.1 Ex ante Opportunism Opportunistic actions can occur at any time during the life of the contract. In the negotiation phase, before the contract has been signed, opportunism manifests itself in the form of dishonest behavior, which can arise because the under-informed party is only imperfectly aware of the characteristics of the informed party. This information asymmetry,20 known as “adverse selection”, was popularized by Akerlof for the secondhand market.21 The Strategy of “Buying-in” The need to win new contracts sometimes pushes contractors to submit unrealistic tenders in order to gain an advantage that will enable them to exploit a lock-in situation or negotiate more favorable terms for the production phase. In addition to the criticism that can be leveled at compliance with a code of conduct that falsely encourages the establishment of trust, this opportunistic strategy of “buying-in” can prove fatal for both parties. Pre-contractual declarations are therefore crucial and should not be treated lightly. In this respect, reading the preamble to the contract, which should be carefully drafted, will shed light on the intentions and “spirit” of the contract, and can be referred to later in when managing the contract during the performance phase.

20

Information asymmetry exists when one party knows facts that the other does not. The most famous example of the question of adverse selection is without a doubt George A. Akerlof’s article on the sale and purchase of used cars, “The Market for Lemons: Quality Uncertainty and the Market Mechanism”, The Quarterly Journal of Economics, Vol. 84, No. 3, 1970, pp. 488–500. 21

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Lulu’s MBA Satellite television operator British Sky Broadcasting Limited (BSkyB) signed a contract on a time and materials basis with American company Electronic Data System (EDS) for the installation of a customer relationship management (CRM) system for its call centers. The project, initially budgeted at £48 million, started in November 2000 and was expected to last 18 months. It actually took six years to complete, cost £265 million, and ultimately gave rise to one of the IT industry’s longest and most expensive court cases. The trial lasted five years and the ruling was delivered in January 2010. The costs of the lawsuit for each of the protagonists were estimated to be at least £45 million and BSkyB was awarded £318 million in damages (of the £712 million it had claimed as compensation for the direct costs incurred and the economic damage from lost earnings). In his (extensive) 468-page ruling, the English judge found that EDS’s tender had included fraudulent misrepresentations about its ability to deliver the project. BSkyB had been misled, allowing it to seek redress. For example, managing director Joe Galloway, who had been in charge of the negotiations, knew that it would be impossible to meet the deadlines and furthermore lied about his qualifications, thus totally destroying his credibility. He claimed to have obtained an MBA, which was revealed to be a fake when Lead Counsel for BSkyB demonstrated that his dog, “Lulu”, had obtained the same certificate online but “with a higher score”!22

Opportunistic Avoidance Although it may appear counterintuitive at first glance, failing to succeed may be of interest to an opportunistic party. The party may be attempting to obtain information at a lower cost, delaying a decision to suit its own needs, or simply creating an alibi to justify the failure of negotiations (“I really tried everything!”) without taking direct responsibility. Bogus negotiations typically produce excessively stringent requirements, unacceptable pre-conditions, or nonsensical requests: for example, a union striking to obtain lower hourly wages or a customer demanding a higher price from its supplier. . . It can be very difficult to detect this strategy23 because it is not clearly displayed and always remains close to the breakpoint. In addition, “opportunistic avoidance” does not necessarily rule out a negotiated outcome, meaning that an unanticipated agreement may ultimately become a genuine opportunity.

22

Verner and Abdullah (2012), pp. 866–886. On this topic, see Wallihan (1998), pp. 257–268 and Wallihan (2003), pp. 207–214. The author gives several examples from diplomacy and everyday life. 23

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In the same vein, it is possible to manipulate the other party by displaying willingness to conduct a “principled negotiation”24 (the source of the famous win-win situation), with the aim of using the opposing party’s adoption of these principles to weaken it. The “Bid Your Claims” Strategy for Construction Contracts Given the competitive environment for civil engineering contracts, which is exacerbated in periods of recession,25 contractors may often be tempted to reduce their margin to win contracts, hoping to “recoup” their margin from change orders obtained through claims. The Opportunist “I do find quite frequently when I go on a site that the poor wretched foreman, who has no access to contract drawings and things that may be filed away in a safe, is just building from the wrong drawings. How is he to know? [However,] I for one would not be put out if I found my foremen working to a set of drawings totally different from the contract drawings. I would start sharpening my pencil and think of all the extras I could claim as a consequence. It is on these items that we make our money.”26 This “bid your claims” strategy presumes that the contractor is able to assess its chances of success at the start of negotiations. A number of authors have attempted to develop models to determine the benefit of manipulating the initial margin without affecting profitability at close-out. The opportunistic bidding behavior (OBB) model27 provides a detailed description of the way this strategy is implemented by contractors. Although it is not made explicit in official company procedures, this strategy is perfectly assimilated by the actors. It comprises three distinct stages: • the contractor first reduces its bid by an amount D to increase its chances of being selected; • the contractor issues a claim of value V with €V ¼ C + f (where C is the cost of the renegotiated work and f the expected profit). There are then two options:

24 In reference to the best seller by Roger Fisher and William Ury, Getting to Yes: Negotiating Agreement Without Giving In. 25 In construction bidding, contractors who underestimated project cost and bid less than the realized project construction cost face the problem of adverse selection. Adverse selection results in what is known as the winner’s curse—see Ahmed et al. (2016), pp. 1–9. 26 Cited by Rooke et al. (2003), pp. 167–174. 27 Mohamed et al. (2011), pp. 93–107.

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– either the parties negotiate and the profit recovery is rf where r takes a value between 0 and 1, or – the project owner rejects the claim and the loss to the contractor is -D-C; • if the parties negotiate, the value obtained can reach €(q1.q2.rf) (where q1 is the probability that a claim occurs and q2 is the contractor’s ability to manage the claim administratively and to defend its position). The condition for justifying this approach is that the amount of the claim must be greater than, or at least equal to, the “agreed” reduction: € ðq1 :q2 :rf Þ  D Of course, this estimate must be extended to all potential claims.

Flow chart of OBB model. Source: Adapted from Mohamed et al. (2011)

The appeal of the OBB model is that it allows us to question the relevance of a strategy based primarily on the contractor’s ability to regain a favorable position. In this sense, it is an excellent way to analyze the contractor’s contract management ability. If the customer can produce detailed specifications and drawings without error, then the likelihood of a claim occurring (q1) will be reduced accordingly. Similarly, assessing the contractor’s ability to support the claim (q2) involves six criteria (ability to identify opportunities, timeliness in notifying claims, establishment of legal grounds, documentary support for the claim, presentation of the claim, negotiating skills of its representatives).28

28

See Chap. 7 for a framework of the contractor’s ability to support and manage claims.

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Claimsmanship: A Ransom Demand The new Hong Kong International Airport, finally inaugurated on July 6, 1998, has the unusual characteristic of being built on an artificial island, created using fill materials. The construction site, one of the most imposing in the world, is around 15 miles from Hong Kong, at the southern tip of an archipelago. Political factors played a decisive role in the delayed opening of the airport: the project was announced in October 1989 by the British governor at the time, David Wilson, but he had failed to consult Beijing. The extremely tense Sino-British negotiations lasted five years, delaying the start of the project. In 1997, the civil engineering contractors claimed HK$1.6 billion from the Airport Authority (only nine months after having obtained additional financing of HK$1.9 billion), without the case being fully substantiated. Needless to say, it felt like a ransom demand. The Airport Core Programme (ACP), the largest infrastructure project in Hong Kong’s history (which included the international airport) generated no less than 20,923 claims on a portfolio of 152 contracts. The causes were always the same: delays in site availability, design changes, and unanticipated new certification requirements.

4.2.1.2 Ex post Opportunism The Risk of Under-Investment: Contractual “Hold-ups” If the contract were complete (i.e., if all contingencies could be considered before signing), there would be no point wasting time and energy drafting clauses designed to resolve conflicts that would have no chance of arising, or even renegotiation clauses since, by definition, there would be nothing to renegotiate. We have seen that contracts are in fact not complete, since they do not mention all the contingencies that may occur during the performance phase. In large projects, investments in transaction-specific assets are the source of a very particular potential conflict due to a dependency effect: the hold-up problem, where each of the parties seeks to appropriate the profits of the transaction. Sources of quasi-rent (amount that one of the parties can “extract” during negotiations without it being profitable for the other party to break off the relationship and look for another partner) for seven types of specific asset. After Chang and Ive (2007) Type of specific asset Physical asset Site

Example Car assembler and car body manufacturer Ore mining company and steel plant

Vulnerable party Car body manufacturer Steel plant

Source of quasi-rent Impairment of investments (stamping machines and dies) if the assembler decides to change source Transport and inventory costs linked to finding alternative suppliers (continued)

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Type of specific asset Dedicated asset Human resources Temporal specificity— timing Temporal specificity— space Process specificity

Example Integrated circuits manufacturer and IBM Salesperson and marketing company Contractor and its supplier

. . . That Cannot Be Fully Protected by a Contract

Vulnerable party Integrated circuits manufacturer Marketing company Contractor

Source of quasi-rent Excess capacity if the production line is not in use Costs of product-specific training if experienced salespersons leave the company Opportunity costs caused by delivery delays

Cargo sender and carrier

Cargo sender

Opportunity costs caused by delay while finding a replacement cargo carrier

Project owner and contractor

Project owner

Costs of restarting the work with a new contractor

This opportunistic behavior is based on two key ideas: the first is that there is a shift in the balance of power in favor of the contractor once the contract has been signed and the second is that the parties must invest in transaction-specific assets (i.e., not reusable outside the transaction), making the parties dependent on one another. These two ideas are central to transaction cost theory, particularly the significance of transaction-specific investments. Transaction Cost Theory Transaction cost theory posits that the parties seek to minimize the total cost of exchange. Transaction costs have two distinct origins: • ex ante: the costs of negotiating, drafting, and implementing the contract; • ex post: the costs of the structure controlling the contract’s progress, renegotiation costs, and the opportunity costs of capitalizing assets such as guarantees. Oliver Williamson29 distinguishes three factors that influence total cost: (a) asset specificity, (b) frequency of exchange, and (c) uncertainty. For projects with highly transaction-specific assets (with higher redeployment costs), the optimal governance structure will be closer to the integrated firm model. At a minimum, the parties will only agree to invest on the basis of a contract whose duration is equivalent to the life of the assets. For Williamson, asset specificity is the main attribute of the transaction. Work on opportunism systematically uses the transaction cost framework because, for Williamson, the individual is by nature opportunistic. The individual will be even more opportunistic since the contract is incomplete (it is impossible to specify all of the parties’ obligations).

29

Williamson (1979), pp. 233–261.

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When parties enter into a long-term contract, transaction-specific investments are often required to bring the project to fruition. These investments are specific in the sense that they only have value within the contractual relationship and cannot be redeployed to another use. If one of the parties decides to renegotiate the terms of the transaction because it considers them unfavorable, it will behave opportunistically by failing to make the planned investments and will hold the other party (which has already committed itself) “hostage” by threatening to break the contract if the terms are not revised. Here are a few example maneuvers (on the contractor side): • the contractor refuses to rectify defects found during performance; • the contractor claims for additional financing by threatening to go bankrupt; • the contractor is behind schedule but refuses to accelerate unless it is compensated for overtime; or • the contractor identifies design errors and overvalues the cost of correcting them. A Hold-up Case: The Channel Tunnel We saw in Chap. 3 that project complexity can give rise to modifications or design changes. Consider the case of a contractor that adopts a strategy that is observable (i.e., measurable by the parties) but that is not verifiable by a judge. As soon as it appears that a customer change order or missing information is likely to have a significant impact on its work, the contractor will alert the customer in writing that it “lacks the necessary information” to implement the change order and that “severe repercussions” are likely for the project, i.e., the schedule and indirect costs. The contractor makes sure to add that it “will do its utmost to reduce the impacts” if it can obtain rapid agreement from the customer. This strategy allows the contractor to avoid putting itself in a visible position of breach of contract. This would be the case if it unilaterally decided to discontinue the project, an option that is generally contractually prohibited. The contractor therefore puts its customer in the position of having to negotiate extensions of contractual milestones and additional financing. In addition, the contractor is careful to display cooperative behavior in the hope of eliciting judicial benevolence in the event of litigation. To limit the consequences of a delay (which are usually more serious on the customer side), the customer must ultimately negotiate the financial terms of the design change. If they do not reach an agreement quickly, the contractor will have a good chance of invoking the lack of information received to justify its delay to the judge, thereby avoiding paying damages. To conclude, the more time-pressured the customer, the weaker his or her bargaining power will be. The ultimate alternative for the customer would be to change suppliers. However, the parties are fully aware of the implications (continued)

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and this scenario is very rare during a project’s performance phase. The customer therefore has to decide whether to accept a negotiation as quickly as possible or whether to engage in litigation while trying to convince the contractor to continue the work at an acceptable pace. Two scenarios coexist: either the contractor threatens to stop work (the customer responds by announcing that it will terminate the contract) or it threatens to postpone the work if its financial claims are not met. The first scenario is low frequency and high risk, while the second is more frequent but low risk. These two possibilities are reflected in the generic term “process specificity”, which should be understood as a type of transaction-specific asset. This means that the costs incurred are not merely capital investments, but that the customer is also “held captive” by the subcontractor through a lock-in effect. In the case of the Channel Tunnel, negotiating power clearly shifted from the customer Eurotunnel to the Transmanche-Link (TML) consortium after the contracts were signed in 1987. During preliminary negotiations, the design was not complete and the emergence of new safety requirements enabled TML to pursue a sustained opportunistic strategy to obtain financial compensation.30

Strategic Delays The probity transaction was put forward by Williamson to take into account the specificity of certain transactions relating to State sovereignty: “foreign affairs, military, intelligence, fiduciary provision, and probably the judicial system”. In contracts for this type of transaction, the public entity’s dependency is linked to the fact that failure to achieve the technical or scheduling objectives imposes costs on the public entity that far exceed the overall project budget. If a contractor declares that it is unable to meet technical or scheduling objectives, it can hold the project owner hostage simply by waiting for a new contractual arrangement to be agreed or, as a last resort, by threatening to terminate the contract. For example, if a contractor delays a development contract for a defense system, it threatens the entire program. This type of “wait-and-see strategy” is likely to succeed because of the project owner’s investments in transaction-specific assets or because of its commitments in other program contracts.

30

Chang and Ive (2007), pp. 845–855.

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81

A “Wait-and-See” Strategy For example, a contractor tasked with producing equipment to be integrated into a defense system that was under development declared that it would be unable to meet the required technical objectives. It then adopted a “wait-andsee” strategy. Resolving these difficulties would involve an additional cost of €40 million for a contract worth €350 million. The project owner was completely dependent on the planned technical objectives being achieved and accordingly agreed to pay half of the additional cost (€20 million) in order to break the deadlock. If it had not agreed, the delays across the whole program would have generated more than €100 million in additional costs (well above the initial cost difference).31

Strategic Prosecution Safer Than the Lottery!

Going to trial can be extremely expensive. Why would one of the parties take legal action32 when, on the face of it, the case has little legal value? Take, for example, frivolous claims, which can be lucrative if the defendant pays compensation despite there being no legal basis for the threatened claim. The defendant, wanting to avoid a spiral of conflict, prefers to surrender. To illustrate this phenomenon, jurist Chris Guthrie33 conducted the following experiment with two groups of law students, with members of the first group playing the role of plaintiff and members of the second group playing the role of defendant. Subjects in the plaintiff group could either accept a settlement of $50 or take a 1% chance of receiving $5000 after trial. The defendant-subjects had to decide whether to pay $50 to the plaintiff or face a 1% chance of paying $5000 after trial. It is easy to verify that the plaintiff-subjects had the choice between two options with identical expected values: a sure deal of $50 or a judgment in their favor valued at $50 (1%  $5000 + 99%  $0) ¼ $50. Likewise, the defendant-subjects’ two options were reduced to a certain payment to the plaintiff of $50 or an expected posttrial payment of $50 (1%  $5000 + 99%  $0 ¼ $50). Economic theory predicts that both groups will either be indifferent to the two options (risk neutrality) or will prefer a negotiated settlement (risk aversion). Guthrie actually found that 62% of the plaintiff-subjects preferred trial (the risky option), while more than 80% of the defendant-subjects opted for a negotiated settlement (risk aversion).

31

Oudot (2013), pp. 59–83. Once one of the parties repeatedly calls on the judicial system, its reputation for systematically going to court makes its threat credible. 33 Guthrie (2003), pp. 1115–1163. 32

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The conclusion is as follows. The plaintiff overestimates its chances of success and negotiates aggressively. The defendant, on the other hand, faces a low risk, but with significant consequences. It overestimates the probability of defeat and agrees to pay the amount claimed by the plaintiff to protect itself from the risk of going to court. In this type of situation, actors following a strategic prosecution approach may obtain greater gains than their statistical calculations would lead them to expect. A Bitter Settlement for Eurotunnel’s Chairman In April 1994, following the settlement agreement to resolve outstanding disputes arising from the Channel Tunnel contract, the Eurotunnel Chairman stated, “We’ve paid £100 million more than we think they’re entitled to, but it saves us a fortune in legal costs and means we won’t have friction in the future.”

The Paradox of Incompleteness as a Resource

Being able to extort an agreement also relies on the judge’s inability to establish liability. This hypothesis is, we recall, one of the foundations of the theory of incomplete contracts, since a key source of incompleteness is the contract’s nonverifiability by the judge. This may lead one of the parties to issue a frivolous claim (i.e., its claim is weak) based on the principle of judicial blindness. This strategy is typically found in international engineering contracts. Frivolous claims are more likely to be thwarted when arbitration rules are based on English law where the losing party bears all the costs (in contrast to the United States or Japan where each party must bear its own expenses). Looking for the Mistake One of the major risks for large projects is escalating commitment in a deficient project (see the previous chapter). Modern project management processes make it very difficult to pull the plug, even when there are warning signs of failure. Several causes can be cited, such as the existence of sunk costs or the dominance of groupthink (as we saw in the previous chapter with the Taurus case, nobody wanted their name to be associated with killing the project). Also, if one party defaults first, this provides an excellent opportunity for the other to “break” the contract. An Aborted Software Contract In 1997, software company AMS signed a US$53 million contract with telecommunications service provider Bezeq to develop a new computer (continued)

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system. Two major milestones (Core Releases or CRs) were planned: the first (CR1) was to be delivered in September 1999, the second (CR2) six months later, in March 2000. In August 1999, Bezeq terminated the project, claiming breach of contract. Not a single line of code had been delivered. Bezeq’s direct loss on the case was estimated at US$20 million (AMS’s loss was not disclosed). What happened? The technical specifications had been prepared three years before the start of the project, during the RFP phase. The client did not have a clear idea of its needs, the vendor, on the other hand, sought to reduce the technical content of the project (scope) to be closer to existing solutions. The project therefore had all the ingredients for a financial dispute, although this in no way justified termination, especially if the telecoms market was of strategic importance to the vendor. In fact, the answer stems from an interview given by the AMS CIO as early as 1998 when he announced that AMS wanted to diversify away from the telecoms market. With the combination of an expected loss and a strategic shift by the vendor, it was clear that the project was doomed to failure. The only way out for the parties was to wait for an opportunity to signal a breach of contract, which Bezeq did in July 1999 under the pretext that AMS had failed to deliver a design document within the contractual deadline.34

4.3

Managerial Implications

The balance between profit and cooperation is precarious. Enlightened self-interest explains a continuum of behavior from opportunism to cooperation. The latter is maintained because the partners focus on exchanging relational signals, which depend on the time horizon and on the interorganizational network to which the contractor belongs. The contract and the interorganizational network are complementary, with the network providing a kind of substrate (embedding) on which to establish a purely formal contractual relationship.35 In this limited horizon, the contractor’s myopic opportunism may encourage it to modify its plans in an attempt to enjoy short-term profit at the expense of long-term value creation (sustainability of the business). As in the previous case, it will then be difficult for the contractor to pursue a relationship with its client because it has violated the relational norm. Furthermore, the contractor also risks losing legitimacy in the eyes of potential future partners.

34 35

Natovich (2003), pp. 409–419. See, in particular, the work of Chaserant (2003), pp. 163–186.

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4.3.1

. . . That Cannot Be Fully Protected by a Contract

Managing Contractual Risk

4.3.1.1 Who Bears the Risk? In a fixed-price contract, the risk is borne by the supplier, while in a cost-plus contract it is borne by the customer. Comparison of fixed-price and cost-plus contracts. After Bajari and Tadelis (2001), pp. 387–407 Party bearing the risk Incentives for quality Administrative rigor Parameter to minimize Documentation efforts Flexilility for change Conflict level

Fixed-price contract Contractor Weak Weak Costs Significant Low Potentially high

Cost-plus contract Customer Strong Strong Length Low High Low

A good contract normally provides a clear allocation of risk. In principle, each risk should be allocated to the party best able to control its effects. However, if the issue is not dealt with upstream (risk dilution strategy, for example with a risk transfer clause, insurance, or financial guarantee), then negotiations will center on passing the “hot potato”, with strategies focusing on “passing it on to your neighbor”. Misunderstanding the boundaries of liability systematically leads to conflict and is at the root of most of the claims and disputes that emerge when performing a contract.

4.3.1.2 Reduce Ambiguity We have seen that cognitive load affects contract design and that the “risk owner” has limited resources, even if only in terms of time. A pilot study36 showed that even an internationally recognized standard-form contract (a lump-sum construction contract) could be interpreted differently by the various parties. On rereading, the level of ambiguity inherent in the drafting was such that the parties could not agree on the assignment of their respective responsibilities. A “Badly Constructed” Clause One of the essential functions of a contract is to assign the rights and obligations of the parties. In practice, this means that each party assesses its level of risk accordingly. In one contract, for example, it was stated that a “separate price” would be submitted for the installation of a generator set. (continued) 36

Hartman and Snelgrove (1996), pp. 291–296.

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For the customer, “separate price” meant that the price of the generator had been “broken out” from the lump sum for information purposes. The contractor, on the other hand, understood that the generator price was in addition to the base price, i.e., not included in the quotation. The case (which went to arbitration) showed that three possible conclusions could be drawn from the contract: • the customer bears the risk (pays the additional costs); • the contractor bears the risk (pays the additional costs); or • the risk is shared since the word “installation” merely covers installing the generator, not purchasing and installing it. In this case, the arbitrator ruled in favor of the contractor, who was given the benefit of the doubt, since the contract had been drawn up by the customer.

In Practice

How can we reduce ambiguity? • Ensure that the identity of the parties is legally correct; • Specific conditions take precedence over general conditions; • Handwritten references take precedence over printed text (provided they are signed by the parties); • Carefully list definitions to facilitate understanding when performing the contract; • Ensure that all acronyms are well defined; • Avoid words that have multiple meanings; • Avoid qualitative or subjective acceptance criteria such as “fit for purpose” or “to the owner’s satisfaction”; • Avoid jargon; • Use short sentences; • Avoid double negation in a sentence; • Avoid the passive form; • Avoid redundancy; • Avoid Latin expressions; • Write numbers as words and (numerals) in brackets; • Remember that the conduct of the parties when performing the contract gives clues as to how they have interpreted the obligations; • Consider how the judge, who is not an expert, will interpret the contract. ◄

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4.3.1.3 Complete a Risk Register Always bear in mind that the party that drafts the first version of the contract, be it the customer or the contractor, will essentially seek to protect its own interests.37 Good contractual risk management therefore involves a certain number of tasks that may appear trivial at first sight: • • • • •

read the contract; understand the resulting obligations; assess their impact; determine the level of risk you are willing to accept; and implement a risk monitoring process. The first point seems obvious, but it merits repeating, especially if we are dealing with a partner we already know. It could be dangerous to assume that the contract is completely identical to the previous ones—what if new clauses have been slipped in here and there? The second point involves two types of requirements. Firstly, legal and contractual obligations (e.g., does the contractor need a particular certification?) and secondly, operational requirements (e.g., delivery deadlines, WBS coding, scheduling software, number of CDs to be handed over for documentary deliveries, etc.). Deadlines for written notice to the other party in the event of difficulties are particularly important, as failure to respect them often results in the loss of any chance of financial compensation. There is a risk of hearing, “We’re sorry, but you failed to notify us of your claim within the contractual deadline (although it was in response to a request from us!). We understand, but there is really nothing we can do for you. . .” Once the requirements have been identified, there are two possibilities: either the risk is within controllable limits, or it must be transferred (negotiated) to a third party (subcontractor or insurer). In the last step, the performance phase will be assured if everyone is fully aware of their obligations. Setting up a risk register, and keeping it up to date until the end of the contract, will be essential.

Example Risk Register Risk no.

37

Date Description

Probability of occurrence P (%)

Cost (€) C

Overall value (€) V¼P3C

Impact on schedule

Risk reduction actions

Status

A survey of Canadian construction companies, generalizable across many international projects, indicated that over 70% of civil engineering contracts are written by the project owner and are non-negotiable—see Zaghloul and Hartman (2003), pp. 419–424.

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In Practice

How to complete a risk register • • • • • •

Allocate an identification number to each risk; Assign it a probability of occurrence; Value it in euros; Determine the impact on the planning schedule; Indicate the action taken to reduce the risk; Estimate the cost of “mitigation”, which should not be greater than the benefit (reduction in the value of the risk), otherwise a risk acceptance strategy will be desirable; • Update regularly, specifying the status and the cost of action. ◄

4.3.1.4 Key Risks We can classify the risks associated with fixed-price contracts into three broad categories: (a) project risk, (b) legal and financial risk, and (c) subcontracting risk. This section makes no claim to completeness. Reducing Project Risk Project risk stems directly from the options chosen to meet the requirements defined by the WBS (definition of work, availability of resources). The project actors (project manager, contract manager, etc.) are responsible for precisely determining the division of tasks and the responsibilities, risks, and information flows: • clearly define contractual deadlines and the roles and responsibilities of each person; • establish regular communication and conduct weekly briefings; • involve the project manager during the pre-contract phase; • ensure an efficient handover between pre-contract team members and performance phase team members; • share lessons learned; • clearly inform all internal stakeholders how information will enter and leave the company; • specify a sign-off path; • designate points of contact (as few as possible); • avoid garbled messages; • be aware of the informal nature of e-mails; • collect all e-mail exchanges; • encourage team members to use a day book; • note the details of all significant telephone conversations; • organize archiving; and • arrange for electronic storage.

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In Practice

Some errors to avoid • Failing to commit the resources required to meet the technical milestones; • Ignoring the requirements of the contract: for example, failing to mention that the people named in the document are no longer assigned to the project; • Forgetting to consider the spirit of the contract and the context in which it was negotiated: during the negotiations, each of the parties had to make concessions. It is important to appreciate what these concessions related to, as these elements are likely to resurface when performing the contract. Tips for drafting deadline clauses • The contact’s performance schedule should be consistent with the complexity of the project; • The schedule must include margins for contingencies; • Use the format “T0 + duration” rather than a schedule with calendar dates; • Check that the suspensive conditions allowing the contract to enter into force have been lifted: contract notification (versus contract signature date), payment of deposit, administrative authorizations, etc.; • In the schedule, define the milestones to be met by the client; • Provide for cases of extension of the contractual performance deadlines in function of the constraints and the specific environment of each project (bad weather, strikes, etc.); • Identify key milestones subject to payments for delay and monitor them regularly. ◄

4.3.1.5 Reducing Legal and Financial Risk The risk of legal and contractual non-compliance should be a major concern. A forward-looking approach must focus on risks that could affect the company’s profitability or even its assets. A good knowledge of the applicable regulations will be needed to support the executive team. This is particularly relevant for public regulations and intellectual property. For complex international transactions, a thorough knowledge of contract law, including international and comparative law, is not always available in-house. In such cases, the company will need to cooperate with external counsel. Important points: • • • •

ensure that requirements are consistent (baseline consistency); explicitly exclude what is not included in the offer; specify a validity period for the offer; establish a contract compliance matrix as soon as the commercial offer has been submitted; • ensure the offer complies with the rules of the applicable legislation;

4.3 Managerial Implications

• • • • • • • • • • •

89

don’t forget that once accepted, the offer becomes a valid contract; prepare documents at the outset to be ready for a potential audit; negotiate a liability limit; avoid expressions subject to individual interpretation such as “fit for purpose”; ensure that acceptance criteria for technical and acceptance milestones have been specified; set the dates by which the client must provide deliverables; include the right to suspend work and claim interest if payments are delayed; ensure that costs have been established in accordance with the WBS; price the project taking into account risks with a high probability of occurrence; define a document sign-off cycle and deadline; and ensure that there is coverage for insurable risks. “Fit for Purpose” Judgment of the United Kingdom Supreme Court of August 3, 2017 in the proceedings between MT Højgaard A/S (respondent) and E.ON Climate & Renewables UK Robin Rigg East Limited and another (appellants) [2017] UKSC 59: for an offshore wind project in Scotland, where MT Højgaard (MTH) was the contractor for the client E.ON Climate & Renewables. The contract stipulated that “The design of the foundations shall ensure a lifetime of 20 years.” Parallel to this requirement, the contract required compliance with an international standard known as J101. However, the standard included a value “δ”, which was later proved to be wrong by a factor of 10! By scrupulously following this standard, it was impossible to produce foundations with a lifespan of 20 years. But that is exactly what MTH did. Right from the start of operations, the foundations were found to be non-compliant. They had to be reinforced at a cost of €26 million. The question in this case was therefore, “who should pay the cost of the remedial works”? MTH or its customer E.ON? When the matter was heard at first instance, the judge ruled in favor of E. ON. The Court of Appeal subsequently overturned this judgment and declared that E.ON was solely liable, as MTH could not be held liable for the breach in the contract since it had scrupulously respected the specified standard. The Supreme Court ultimately overturned the appeal judgment to uphold the original decision, stating that the standards should be considered as minimum requirements. It ruled that MTH was fully responsible for rigorously defining the means to achieve the objective it had agreed to (a 20-year lifetime).

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In Practice

Some errors to avoid • Ignoring the bidding rules: submitting a bid in the wrong currency, replying without being on the bidders list; • Failing to optimize cash flow: starting work one year before the first payment, agreeing to be paid only when the project owner has been paid; • Accepting pay-when-paid clauses; • Ignoring the order of priority of contract documents; • Failing to negotiate liquidated-damages clauses; • Underestimating the importance of acceptance procedures. ◄ Liquidated-Damages Clauses Liquidated-damages clauses are designed to compensate for the contractor’s failure to deliver the results it agreed to achieve (missed deadlines, underperformance, budget overruns, etc.). They allow the parties to fix in advance the amount of compensation that will be due if a contractual obligation is breached (non-performance or poor performance), in lieu of a judicial assessment of damages. They compensate for damage suffered and should incentivize good behavior from the party that will be required to pay compensation if it defaults on the contract. There are several types of compensation payments: payments for delays, for technical issues (non-compliance with performance conditions), for performance issues, etc. Compensation payments stem solely from non-performance: they are therefore automatic, and it is not necessary for there to have been damage (or to prove the damage suffered). The payments do not relieve the obligor of its obligation to comply with the provisions of the contract. Potential liquidated-damages ceilings are distinct from the overall liability ceiling, which applies to the total damage suffered.

In Practice

Applying liquidated-damages clauses: points to note • Failure to apply the clause may lead to lax behavior from the contractor or may distort the terms of the consultation (competitive imbalance); • Repeatedly failing to apply the clause may set a precedent; and • The amount of compensation must be a sufficient deterrent for the contractor, but must remain proportionate to the damage suffered. ◄

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Acceptance Procedures Acceptance attests to the proper performance of the services provided for in the contract and the delivery of the necessary contractual and regulatory documentation. It is a unilateral act. However, the acceptance procedures must be carried out in the presence of all the parties involved. Acceptance can be express, tacit, or judicial and has several effects: • by signing the acceptance report, the customer declares that it accepts the work (the supply) with or without reservation; • it ends any compensation payments for late delivery and marks the starting point of the legal and contractual guarantees; • it records the transfer of the risks of damage to the work (supply); • it purges apparent defects and non-conformities; and • it triggers the payment of the balance of the price (if defined in the contract).

4.3.1.6 Reducing Subcontracting Risks Subcontracting is a process whereby one company, using a pre-determined set of specifications, entrusts another with the task of carrying out a portion of work on its behalf, for which it retains final economic responsibility. The subcontractor has no direct liability toward the ultimate project owner. The contracting firm, on the other hand, remains liable toward the project owner for the subcontractor’s negligence or other failures. In Practice

Key points and practical advice • The main contractor is responsible for its subcontractors, both administratively and toward its customer; • Check the prerequisites: administrative situation, submission of certificates, insurance, and guarantees; • The customer may (under certain conditions) request a copy of the subcontracting agreement; • Check the obligations to be passed on to subcontractors (“back-to-back” concept); and • Specific case regarding the transport of goods (French Gayssot Law): “A carrier that has not been paid by its principal may, under certain conditions, claim payment for its service from the shipper or the consignee.” ◄ In order to manage subcontracting risks, the subcontractor must obviously have the technical and commercial capability, and the creditworthiness, to perform the

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work entrusted to it. Several centuries since it was penned, Vauban’s “Letter to Louvois”, which illustrates the dangers of lowest-price tendering, remains timely.38 Letter to Louvois “My Lord, There lie tail ends of works these last years that find no end and that will ne’er find their end, and all this, My Lord, doth flow from the confusion spread by the plentiful discounts hid within your works. Because ’tis certain that all these dissolutions of contracts, broken words, and renewals of awards only serve to attract to you as Entrepreneurs all those wretches who are but dithering procrastinators, along with the rapscallions, and the ignorant, and drive away all those of honorable character and in possession of such faculties as are needed to command an Enterprise. I say moreover, that they delay the works and make them vastly more costly, which is all the worse since these much-desired discounts and goodly contracts are but imaginary. And ’tis all the more so with an Entrepreneur who loses as with a man who drowns–he will seize hold of all he can. And the Entrepreneur who seizes hold of all he can will not pay the merchants who provide him his materials. And he will be found paying a poxy wage to the workers he employs and swindling any he can–having taken only the worst ones in any case since they give themselves cheaper. He will use only the measliest supplies, will quibble o’er everything, and is always to be found protesting in the loudest of voices of his harsh treatment at the hands of this one or that one. Herein lies reason enough, My Lord, for you to open your eyes to the imperfection of this conduct: leave it then and in the name of God, restore good faith, give the real price for the works, and do not refuse an honest salary to an Entrepreneur who will discharge his duty, for ’tis sure to be the most economical arrangement you can find.” Vauban, July 17, 1683. The following precautions should be taken with regard to subcontractors: • • • • •

beware of premature commitment; anticipate the reaction of the firms that were not selected; ensure that flow-down clauses are in place; only flow down those clauses that are strictly necessary; ensure that obligations are acceptable;

38 The Marquis de Vauban, engineer, military architect, urban planner, hydraulic engineer, and essayist (appointed Marshal of France by Louis XIV) was often in conflict with Louvois, the Superintendent of the King’s Buildings, particularly regarding the fortifications of Belle-Île, which were unfinished because Louvois had imposed unskilled contractors. (Authors’ translation.)

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• ensure that there is a designated person in charge for each of the obligations; and • prepare an escrow agreement for software source codes and, more generally, for manufacturing records. Ensure That Flow-Down Provisions Do Not Undermine Your Rights Take an example where the prime contractor’s contract with the ultimate client requires the prime contractor to waive its rights in the event of delay (a nodamage-for-delay clause). If the contract between the prime contractor and its subcontractor passes down this provision then the subcontractor, by agreeing to this flow-down provision, can obtain no compensation for schedule slippage not of its own making.

In Practice

Some errors to avoid • Interfering in the subcontractor’s internal management (risk of active interference); • Accepting documents without ensuring that this does not modify the obligation to meet all contractual requirements. Preventing the risk of active interference Active interference involves instructing the contractor to alter its planned approach (method, materials, resources, etc.), thereby creating confusion between the roles of project owner and project manager. If this occurs, there is a risk that the contractor will invoke active interference, either to claim a price supplement or to shift the blame to the project owner if the product is defective. According to case law, by interfering, the project owner has taken risks that it must assume if any damage occurs as a result of its choices. To be labeled as active interference, the following two conditions must be met: • an affirmative, intentional act during the project must be proven (active interference cannot result from simple nonparticipation); and • the recognized competence of the project owner in the field in question must be established (proof of the project owner’s recognized competence being at the contractor’s expense). From a practical point of view, the project owner should ensure: • that it gives no instructions on how to carry out the services, leaving the initiative to the contractor, without interference, insisting on its “expert” role; and • that it refers solely to contractual documents, without creating new requirements. ◄

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4.3.2

. . . That Cannot Be Fully Protected by a Contract

Avoid the Element of Surprise

If the individual were perfectly rational, he or she would, by definition, be able to anticipate the likelihood of the other party’s every move and would not be affected by surprise events. As this is far from being the case, the individual must accept errors of judgment,39 especially if one of the parties “switches” from cooperative behavior to behavior designed to extract concessions. The problem with “strategic surprise” is that it is a rare but destructive event, not only from a short-term economic perspective but also in terms of the long-term level of mutual trust. Anticipating this risk requires us to monitor behaviors that may herald opportunistic intentions. A sudden deviation from the mode of communication established during previous exchanges should alert us to the possibility of strategic surprise. Such deviations may be perceived as anomalies, but several questions nonetheless arise: Is it a deliberate intention to extort financial compensation? To prepare a litigation file? Or is it simply an accident? Every industry has its own standards of behavior. Adherence to these standards provides a benchmark for signaling strategic shifts. In the civil engineering field, for example, a subcontractor that agrees to take over last-minute changes without immediate compensation is probably already preparing for a subsequent negotiation in which it will attempt to regain the advantage. The value of behavioral norms is that they can establish a link between routine actions and opportunistic actions. There are two variables to consider in managing the surprise effect: (a) the suddenness of the change in attitude and (b) the contrast between the victim’s expectations and the new intentions revealed by the opportunistic party’s actions.

4.3.2.1 Underestimating Risk With only limited information at its disposal, it will be difficult for the contractor to assess the other party’s actual intentions. The contractor will be forced to make its decisions on the basis of a small sample of comparable cases. The contractor is therefore likely to make estimation errors (see box on the law of small numbers), leading it to underestimate the risk, especially if there have been false alerts in the past. The Law of Small Numbers When they attribute the same information content to small and large samples, individuals are applying the “law of small numbers”, which violates the law of large numbers. A typical example is a driver who has been accident-free for a small number of years. Out of exaggerated confidence, he may be tempted to relax his prevention efforts and reduce his insurance coverage.40

39 40

Lampel and Shapira (2001), pp. 599–611. Tversky and Kahneman (1971), pp. 105–110.

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The heuristic of the statistical law of “small numbers” increases the risk that managers will underestimate changes in the other party’s intentions. In addition, behavioral decision theory indicates that judgment errors increase under time pressure when there is little data available. The risk is further amplified in a social network context. As Mark Granovetter,41 a promoter of “new economic sociology”, puts it in his analysis of embeddedness, “The more complete the trust, the greater the potential gain from malfeasance.” For example, an opportunistic partner may use participation in an R&D endeavor to benefit from accelerated technological learning. Although creating a joint venture would appear to be a more stable organizational form than a simple bilateral agreement, it in fact further increases the profits of betrayal compared with those of cooperation. The role of signals, whether tangible or intangible, in maintaining cooperation has been stressed repeatedly. The first of these is, of course, the very act of signing the contract, which is a positive signal.

4.3.2.2 Detecting Weak Signals The next analogy is not for the faint-hearted! A frog thrown into boiling water will immediately try to get out. However, if the water is at room temperature, the frog will stay there. It will even be quite comfortable as the temperature is gradually increased, while it is slowly boiled alive. . . This parable is a good illustration of what can happen to a contractor who, lulled into a false sense of security, pays insufficient attention to the signals sent by the other party, which has in fact opted for an opportunistic strategy. The “weak signals” theory, first articulated by Igor Ansoff, has found many applications in strategic planning, intelligence, and financial market analysis. Ilmari Nikander and Eero Eloranta from the University of Helsinki propose applying the principle to project management. In a project environment, there are stimuli (signals), which can be analyzed from an information theory perspective. Projects involve a continuous flow of events from which the human observer can extract information. This information becomes increasingly clear as more signals are received and as problems become truly tangible. Their idea is to develop the usual methods of risk management by adding an element of anticipation based on the processing of weak signals emanating from the project itself. These signals can be of any nature: attitudes, behavior, content and form of the contract, documents, etc. These early warnings are of real interest in the first 20% of the project.

41

Granovetter (1985), pp. 481–510.

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Examples of Weak Signals “You are a subcontractor to a prime contractor. The prime contractor is a little nervous about what information you might present during a technical interchange meeting where the customer will be represented, and therefore wants to review all material before meeting. On Tuesday morning, the customer’s project manager calls your project manager and asks him a question. On Tuesday afternoon, the customer’s project engineer calls your project engineer and asks him the same question.”42

In Practice

Trouble ahead: early warning signs • • • • • • • • • • •

Sudden change of tone in correspondence; Extensive use of notifications (for delays, default, changes); Minutes issued without the agreement of the other party; Rebuff from the subcontractor; Resistance by the subcontractor to document a change and to provide a reasonable breakdown of the quote; Slow handling of nonconformities; Refusal to integrate milestone slippage into the published schedule; Frequent changes to the project management team; Significant changes in the senior management team; Significant cash flow mismatches and/or announcement of losses on completion; Breakdown of communication between stakeholders. ◄

4.3.3

Trust

Contracting with someone is already an act of trust. Williamson,43 in the context of commercial relationships, considers trust to be “redundant” and potentially “misleading” in that it conceals the reality of a decision-making process based on “calculative economic reasoning”. Nonetheless, when it comes to cooperation, trust is central. Trust is the belief that the other party’s behavior will be in the long-term common interest of both parties and not in the short-term interest of one. It will be ruined as 42 43

Nikander and Eloranta (1997), pp. 371–376. Williamson (1993), pp. 453–486.

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soon as opportunistic behavior is detected (“behavior drives trust”). As one businessman put it, hopefully at the extreme end of the spectrum, “People will do business with you because they think you will not kill them when they have difficulties.”44 In a context of uncertainty, it contributes to the formation of expectations based on the reaction of the other party and helps to lighten the governance of the contract by limiting the supervisory and coercive mechanisms required. This in turn reduces the cost of writing the contract. Signing a contract is an even stronger act of trust since both parties know, without really admitting it, that the contract is incomplete and that they remain vulnerable. They are therefore betting that each party will respect its commitments without exploiting the loopholes. This is a positive signal. In addition, companies often publicize their contract signings, indicating strong commitment on their part, since it is their reputation and credibility that are at stake in these public communications. A second dimension of trust thus comes into play with social embedding, which refers to the parties’ past history with a risk of exclusion from the professional group as punishment for opportunistic behavior. The “Spray” of Trust45 In 2005, a group of researchers at the University of Zurich gave an oxytocin spray to certain players of a “trust game”. The game involved entrusting a share of capital to partners who, in return, were supposed to share the dividends. Players who had been given the hormone proved to be more trusting (they invested more) than those who had been given a placebo.

4.3.4

The Partnering Solution

4.3.4.1 A Situation of Structural Conflict The notion of partnering has its roots in the 1960s, but it was in the 1980s that the approach gradually became established in response to what genuinely resembled a situation of “war” between the parties, particularly in the construction sector. The customer-contractor relationship is in fact often likened to the “prisoner’s dilemma”, an unstable mode because each party has an interest in pursuing a strategy of conflict.

44 45

McMillan and Woodruff (1999), pp. 637–658. Kosfeld et al. (2005), pp. 673–676.

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The Prisoner’s Dilemma The obligatory “prisoner’s dilemma”—a game that Hungarian-American polymath John von Neumann, one of the founding fathers of game theory, found “intellectually provocative”—was created in 1950 by two RAND researchers, Merrill Flood and Melvin Dresher, and then formalized by the mathematician Albert Tucker for the needs of a conference at the request of the Department of Psychology at Stanford University. Two suspects are arrested by the police following a misdemeanor and are questioned in separate rooms about a past robbery, without being able to communicate (this is very important). The investigator offers each of them the following deal: if suspect A accuses suspect B, but suspect B remains silent, then suspect A will released immediately (zero years in prison). If A does not accuse B but is betrayed by B, then suspect A will be sentenced to the maximum penalty (ten years). If neither accuses the other, both are released for lack of evidence (but after one year due to the recent misdemeanor). Finally, if they betray each other, they are both sentenced to five years. Both suspects have two options: cooperate or go it alone. Each of the suspects adopts the following reasoning: “If I betray my accomplice and he doesn’t betray me, I’ll walk free (and I get a year back). If I betray him and he also betrays me, I’ll be sentenced to five years (but that’s better than ten). My pure self-interest is in all cases to defect.” His accomplice employs exactly the same reasoning. They therefore arrive at an uncooperative solution {Accuse, Accuse} and so betray each other. This dilemma demonstrates that the egocentric pursuit of self-interest conflicts strongly with cooperation. As one executive said at the time, “You have to understand that the life cycle of any decent-sized project will always be seven years: one year to design it, two years to construct it, and four years to litigate it.”46 Since then, it is fair to say that all professional associations, particularly in the United States and in civil engineering, have participated in a vast movement to bring this attitude to light and to break with the self-fulfilling prophecy of emerging litigation.

4.3.4.2 Is There a Definition of Partnering? “Partnering” may mean different things to different people, and simply compiling the definitions would take up half of this book. An original approach is provided by Johan Nyström,47 who turns to the concept of “family resemblance” as developed by philosopher and logician Ludwig Wittgenstein. 46 47

Reported by Manley et al. (2007), pp. 3–11. Nyström (2005), pp. 473–481.

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Family resemblance is based on the idea that it is the use of an expression that guides meaning. A set of words refers to the same concept if the words share, not common properties, but a certain family resemblance. Wittgenstein uses the “game” metaphor to explain this notion. Concrete and abstract elements form coherent sets, but it is not possible to say exactly what underpins this coherence. For example, what is the relationship between tennis and chess, or a role-playing game? Applying this logic, the components that characterize partnering can be grouped together in such a way that they form a kind of flower where “trust” and “mutual understanding” are by far the most important features.48 These two components are necessary, but not sufficient, which amounts to defining partnering as “something” that calls for trust and a mutual understanding of objectives, but which is also enriched by a number of other elements such as the existence of regular meetings, social activities, even a contract. . .

The relational contract (RC) sunflower model. Source: Yeung et al. (2011), p. 234. Reproduced with the permission of Elsevier

The “Sunflower Model” was extended to define the concept of relational contracting (RC) in construction (see Yeung et al. 2011, pp. 225–239).

48

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Trust will be all the more important in the partnering relationship if the contract is especially incomplete or involves frequent renegotiations. However, trust does not pre-exist; it appears spontaneously from the benevolence of the parties or develops with repeated interactions to create a spirit of cooperation. The Emergence of Cooperation In the 1980s, Robert Axelrod,49 professor of political science at the University of Michigan, raised the question of cooperation in a context of ongoing interactions. He organized a series of tournaments of various possible strategies for the prisoner’s dilemma described above, but in iterative form. He invited a number of participants from a variety of game theory backgrounds (economics, psychology, sociology, political science, and mathematics) to design computer programs to be played against one another and against themselves. Contrary to expectations, of the 14 strategies deployed, the winning strategy was the simplest. It was called “TIT FOR TAT”. TIT FOR TAT cooperates on the first move and then systematically opts for the strategy its opponent used in the previous move.

In Practice

How to play your cards right according to Robert Axelrod • – – • – • – – • –

Don’t be envious: unlike a chess tournament, a contract is not a zero-sum game; and the other party’s success is a prerequisite for your own success. Don’t be the first to defect: it pays to cooperate as long as the other party is cooperating. Reciprocate both cooperation and defection: overdoing the punishment risks escalation; but on the other hand, not fighting back risks exploitation. Don’t be too clever: TIT FOR TAT is a transparent strategy, easily understood by the other party; and – actions speak louder than words. ◄

For some, the partnering relationship must be formalized in a contract, while for others, it is primarily a consensual process that loses its substance once the parties are bound by a legal agreement. A realistic approach to ensure that objectives are shared is to establish a contract and then supplement it with a charter. Finally, in addition to legal issues, partnering also raises various non-legal issues, which may be difficult to resolve. For the legal issues, we note the question of the 49

Axelrod (1984).

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enforceability of a partnering charter and the notion of good faith. The practical implications are perhaps more palpable. They include: (a) applying the approach from the very beginning of the project, (b) making a genuine, long-term commitment, and above all (c) resisting the temptation to refer to the contract from the very first mishap. Good Faith, an Obligation? The principle of good faith fundamentally influences contract law: the parties have an obligation of good faith and a duty of loyalty, which implies a minimum degree of cooperation to enable the contract to be performed effectively. The project owner therefore has an obligation to facilitate the performance of the work, and in particular to communicate all the elements in its possession that are likely to influence the performance of the contract, at the risk of being held contractually liable if it does not do so. However, the requirement to cooperate is subject to certain limits in order to avoid disrupting the division of obligations when performing the contract and to avoid hindering the performance of the other party. In the event of non-performance, the parties also have an obligation to mitigate damage. As a general rule, this obligation is limited to making “reasonable efforts”, which requires less commitment than the notion of “best effort”. Failure to comply with this obligation may prevent the party that considers itself entitled to compensation from obtaining compensation for losses that could have been avoided.

4.3.4.3 Resisting Temptation A Continuum of Contractual Relationships Partnering is a type of cooperation scheme and can be seen as a means of neutralizing the opportunism inherent in incomplete contracts, thus reducing risk. It can be likened to a “relational contract”, which will be defined in the following chapter. In the continuum of contractual relationships, partnering is the most personalized connection.

4

Contracting relationship continuum. Source: Cheung et al. (2003), p. 334. Reproduced with the permission of Elsevier

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Partnering can be used to solve the problem of non-cooperation as long as it is in each party’s interest for the relationship to continue (with a renewal of the contract or a new contract). There also needs to be a credible threat of termination from each party. It provides a framework for the parties to develop a relationship of mutual trust.

The Risk of a Spiral of Conflict Whenever projects involve significant financial stakes or technological spin-offs that can be appropriated by one of the parties (spillovers), whether legally (through intellectual property clauses) or through the disclosure of files, the relationship will at best be defensive, or more likely conflictual. We have to avoid a destructive chain of events, such as the temptation of attacking the other party, which can be compounded through a process of interacting expectations such as: “He thinks we think he thinks we think. . . he thinks we think he’ll attack; so he thinks we shall; so he will; so we must.”50 Is It Really Partnering? A British engineering company entered into a partnering agreement with an Australian power plant supplier for the construction of five identical power stations. The fixed price for each power station was set at £26 million. The contractor succeeded in delivering the first one for only £22 million, providing a saving of £2 million for each of the parties. Conclusion? This figure then became the benchmark price for the subsequent plants, which put the contractor under enormous pressure. The concept of partnering actually generates an “organizational paradox” because it is subject to inherent contradictions. For Neil Alderman and Chris Ivory, partnering oscillates between close cooperation and a “discursive smokescreen”.51

4.3.4.4 The Positive Impacts of Partnering Figures are scarce. This is probably due to the difficulty of measuring the share attributable to related components such as openness, dispute handling, etc. Estimates—where they exist—indicate a maximum cost saving of around 10%. One of the most documented cases relates to the project to extend Hong Kong’s Tseung Kwan O railway line.52 The project was exemplary in the sense that all the traditional tools were used: workshops, newsletters, a range of entertaining teambuilding activities (karaoke, boat trips, etc.).

Schelling (1960), op. cit. Alderman and Ivory (2007), pp. 386–393. 52 Bayliss et al. (2004), pp. 253–263. 50 51

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An “Incentivisation Agreement” (IA) was signed midway through the project to clarify responsibilities and set a target cost. This reduced the level of uncertainty and the contractor was entitled to a portion of the savings achieved compared to the initial budget. The following graphs show that, after the IA had been signed, the number of claims reduced considerably, the certification rate of invoices suddenly recovered, and the time taken to resolve claims miraculously accelerated.

Claims raised by contractor. Source: Bayliss et al. (2004), p. 260. Reproduced with the permission of Elsevier

Certified amount out of submission. Source: Bayliss et al. (2004), p. 260. Reproduced with the permission of Elsevier

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Time to resolve claim. Source: Bayliss et al. (2004), p. 260. Reproduced with the permission of Elsevier

4.4

Conclusion

It would be unrealistic to think that everything is set in stone once the contract has been signed. Without seeking to reduce the importance of the (often intense) pre-signing activity associated with shaping the contract, the contractual problem is above all that of ex post adaptation: “The litmus test for successful management should not be whether the project was free of change orders and claims—few projects would pass that test—but, rather, if change orders and claims were resolved in a timely manner to the benefit of all the parties and the project.”53 Contracts are complex, but above all they are incomplete. Given the need for transaction-specific investments, the problem of contractual hold-up is certainly the most emblematic opportunistic behavior. The contracting party, anxious to preserve its interests, will have no choice but to renegotiate the contract. Traditional risk management methods cannot identify the strategic risk associated with an opportunistic partner. This risk is particularly important since the parties’ acceptance of the contract’s incompleteness is a signal. This signal is essential, since it indicates the trust that existed between the parties before the contract was signed, but it is also potentially costly if misplaced trust leads to significant losses. Partnering is often presented as a solution for moving from a purely confrontational approach to a more cooperative relationship, with this more or less acknowledged objective being instrumental in reducing the level of claims and thus the financial uncertainty of the project. Aside from the generally glowing case studies on the concept of partnering, there is very little literature on the fundamental 53

Cox (1997), pp. 24–29.

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mechanisms implemented in partnering relationships, if only because the expression does not have the same meaning for everyone. Is partnering really the solution? The answer is far from settled. Once the spirit of camaraderie from the last team-building session has faded—as fleeting as the problems of the project are real and urgent—the partners quickly rediscover their hostile reflexes. In the next chapter, we will look at the processes that encourage individuals to commit to a contract and cooperate. We will see that the contract plays a different role in different phases of the project and we will propose “action guides” to reduce contractual risk. We will then go on to define active contact management.

References Ahmed MO, El-adaway IH, Coatney KT, Eid MS (2016) Construction bidding and the winner’s curse: game theory approach. J Constr Eng Manag 142(2):1–9 Alderman N, Ivory C (2007) Partnering in major contracts: paradox and metaphor. Int J Proj Manag 25(4):386–393 Axelrod R (1984) The evolution of cooperation. Basic Books, New York Bajari P, Tadelis S (2001) Incentives versus transaction costs: a theory of procurement contracts. RAND J Econ 32(3):387–407 Batavia R (2001) How to maximize project success with the right contracting strategy. In: Proceedings of the PMI Annual Seminars and Symposiums, September 7–16, 2001, Houston, Texas, USA Bayliss R, Cheung S-O, Suen HCH, Wong S-P (2004) Effective partnering tools in construction: a case study on MTCR TKE Contract 604 in Hong Kong. Int J Proj Manag 22(3):253–263 Brander J, Lupu A (2008) Bringing contracts alive: contract management with knowledge management tools. Contract Manag:54–62 Chang C-Y, Ive G (2007) Reversal of bargaining power in construction projects: meaning, existence and implications. Constr Manag Econ 25(8):845–855 Chaserant C (2003) Cooperation, contracts and social networks: from a bounded to a procedural rationality approach. J Manag Gov 7(2):163–186 Cheung S-O, Ng TST, Wong S-P, Suen HCH (2003) Behavioral aspects in construction partnering. Int J Proj Manag 21(5):333–343 Cox RK (1997) Managing change orders and claims. J Manag Eng 13(1):24–29 Dixit A (2005) Restoring fun to game theory. J Econ Educ 36(3):205–219 Granovetter M (1985) Economic action and social structure: the problem of embeddedness. Am J Sociol 91(3):481–510 Guthrie C (2003) Prospect theory, risk preference, and the law. Northwest Univ Law Rev 97 (3):1115–1163 Hagedoorn J, Hesen G (2009) Contractual complexity and the cognitive load of R&D alliance contracts. J Empir Leg Stud 6(4):818–847 Hartman F, Snelgrove P (1996) Risk allocation in lump-sum contracts–concept of latent dispute. J Constr Eng Manag 122(3):291–296 Heller D, Spiegler R (2008) Contradiction as a form of contractual incompleteness. Econ J 118 (530):875–888 Johnson-Laird PN (1983) Mental models. Harvard University Press, Cambridge, MA Kosfeld M, Heinrichs M, Zak PJ, Fischbacher U, Fehr E (2005) Oxytocin increases trust in humans. Nature 435(2):673–676 Lampel J, Shapira Z (2001) Judgmental errors, interactive norms, and the difficulty of detecting strategic surprises. Organ Sci 12(5):599–611

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MacLeod WB (1996) Decision, contract, and emotion: some economics for a complex and confusing world. Can J Econ 29(4):788–810 Manley TR, Shaw WH, Manley RC (2007) Project partnering: a medium for private and public sector collaboration. Eng Manag J 19(2):3–11 Mathieu M-L (2015) Logique et raisonnement juridique. Paris, Presses Universitaires de France, collection “Thémis droit” McMillan J, Woodruff C (1999) Dispute prevention without courts in Vietnam. J Law Econ Organ 15(3):637–658 Mohamed KA, Khoury SS, Hafez SM (2011) Contractor’s decision for bid profit reduction within opportunistic bidding behavior of claims recovery. Int J Proj Manag 29(1):93–107 Natovich J (2003) Vendor related risks in IT development: a chronology of an outsourced project failure. Technol Anal Strateg Manag 15(4):409–419 Nikander I, Eloranta E (1997) Preliminary signals and early warnings in industrial investment projects. Int J Proj Manag 15(6):371–376 Nyström J (2005) The definition of partnering as a Wittgenstein family-resemblance concept. Constr Manag Econ 23(5):473–481 Oudot J-M (2013) Renégociation des contrats de défense : le rôle des aspects informels. Innovations 3(42):59–83 Rooke J, Seymour D, Fellows R (2003) The claims culture: a taxonomy of attitudes in the industry. Constr Manag Econ 21(2):167–174 Salanié B (1994) Théorie des contrats, Paris, Economica, coll. “Économie et statistiques avancées” Schelling T (1960) The strategy of conflict. Harvard University Press Tversky A, Kahneman D (1971) Belief in the law of small numbers. Psychol Bull 76(2):105–110 Verner J-M, Abdullah L-M (2012) Exploratory case study research: outsourced project failure. Inf Softw Technol 54(8):866–886 Wallihan J (1998) Negotiating to avoid agreement. Negot J 14(3):257–268 Wallihan J (2003) Reverse bargaining: some oddities that illustrate the ‘Rules’. Negot J 19 (3):207–214 Wathne KH, Heide JB (2000) Opportunism in interfirm relationships: forms, outcomes, and solutions. J Market 64(4):36–51 Whitticks E (2005) Construction contracts - how to manage contracts and control disputes in a volatile industry. Gulf Publishing Company, Houston, Texas Williamson OE (1979) Transaction-cost economics: the governance of contractual relations. J Law Econ 22(2):233–261 Williamson OE (1993) Calculativeness, trust, and economic organization. J Law Econ 36 (1):453–486 Yeung JFY, Chan APC, Chan DWM (2011) Defining relational contracting from the Wittgenstein family-resemblance philosophy. Int J Proj Manag 30(2):225–239 Zack JG (1993) Claimsmanship: current perspective. J Constr Eng Manag 119(3):480–497 Zaghloul R, Hartman F (2003) Construction contracts: the cost of mistrust. Int J Proj Manag 21 (6):419–424

5

The Contributions of Experimental Psychology

A standard behavioral hypothesis in economics is that individuals are cold beings, pure egoists who systematically direct their actions toward maximizing their individual gain (“cold gain maximizers”). In essence, the individual is the character from the previous chapter, a master in deploying the full range of opportunistic strategies to satisfy his or her deep-seated craving for financial gain. Such individuals have the means to achieve this goal, being convinced that the future is predictable. They express no doubt since they are endowed with infinite computational capacity. Moreover, they have no reason to react emotionally, since economic theory has given them a reason to exist through the model of Homo economicus, a creature that, while not necessarily sympathetic, is at least not plagued by emotions–and is undoubtedly the best asset manager we could hope to find. Homo Economicus Homo economicus (economic man) is a fantasy. The model (initiated by John Stuart Mill and Adam Smith) assumes that individuals act in a perfectly rational manner and exclusively in search of their own self-interest. Over time, the model came under increasing pressure to provide a better prediction of outcomes, and economists moved to the idea that Homo economicus had entered a strategic age that required additional elements such as social relationships, roles, values, norms, and beliefs.1 Until recently, economic theory completely disregarded all psychological or social dimensions, while experimental psychology was hardly an immediate success. Nonetheless, it finally managed to carve out a place for itself, especially after the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economics to Israeli-American psychologist Daniel Kahneman in 2002. 1

Ng and Tseng (2008), pp. 265–286.

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Although empirical research tests have invalidated the predictions of the standard model by means of painstakingly conducted experiments2 (admittedly in laboratories for the most part), mainstream economists have always found it difficult to admit that experimentation could occupy a prominent place in their “science”. One domain where the question no longer arises, however, is the field of financial markets. In the early 2000s, for example, Richard Thaler, a White House advisor and economist closely associated with the development of behavioral finance, recommended that economists study the cognitive system and devote more attention to the role of emotions. Thaler predicts that Homo economicus will evolve into Homo sapiens in the long run, while the degree of rationality granted to agents will depend on the context studied and will integrate the notion of learning.3 It may well be that the future proves him right, at least in a financial markets context, an environment that is very clearly dominated by uncertainty. What about business-to-business relationships and, more specifically, the role of cooperation and incentives in the field of strategic interactions (such as game theory)? What lessons can we draw by applying psychology to contracts, since the former ultimately deals with the human actions that govern the latter?

5.1

A Contract Framing Theory

Chapter 3 showed us that individuals are subject to behavioral biases that need to be considered if we are to explain how management decisions are made. Among the recent works in psychology and sociology describing the mechanisms that determine our decisions, we often come across a phenomenon known as the “framing effect”, which is based on the principle that our perception of a situation depends on the way it is presented to us.

5.1.1

The Importance of Wording

The phrase “make a decision” would appear to imply that we are in total control of the decision-making process. However, behavioral economists show that decisions do not follow a rational path. For example, if we require surgery, our evaluation of the risk involved will be completely different depending on whether we are told that “the chances of survival

2 It could be said, in a somewhat picturesque fashion, that the experiment of Maurice Allais, author of the famous paradox that bears his name, constitutes a “real gem” of economics since it highlights, as early as 1953, one of the primary anomalies of the dominant theory (it confronts its proponents with choices where they contradict their own theory). 3 Thaler (2000), pp. 133–141.

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one month after the procedure are 90%” or if we hear, “mortality is 10% in the month following the procedure”. However, the two assertions are statistically equivalent.4 The most famous illustration of this phenomenon is that proposed by Amos Tversky and Daniel Kahneman,5 who present a choice regarding an epidemiological program to treat an epidemic. The framing effect acts as a filter that only selects part of the information available. An Asian Epidemic Imagine an epidemic that could kill 600 people. Two programs are being considered: • “If Program A is adopted, 200 people will be saved.” • “If Program B is adopted, there is a 1/3 probability that 600 people will be saved, and 2/3 probability that no people will be saved.” A substantial majority of responses were in favor of Program A, reflecting the respondents’ risk aversion. The same problem was then reformulated for a second group of respondents as follows: • “If Program [A’] is adopted, 400 people will die.” • “If Program [B’] is adopted, there is a 1/3 probability that nobody will die, and 2/3 probability that 600 people will die.” Under this formulation, a majority of respondents chose Program B', displaying a risk taking attitude. In violation of the invariance criterion,6 certainty is found to carry greater weight in the decision-making process for gains compared with losses. Thus, the certainty of saving lives steers the choice toward Program A in the first scenario, while the ability to specify the number of deaths is rejected in the second scenario, in favor of the risk-taking Program B'. In a contractual relationship, the framing effect can influence our emotions, our behavior, and our view of the relationship. So a contract with an extension option will be perceived positively, while a longer contract with a termination option will be perceived negatively, even if the two commitments are of equal duration. Take the

4 Perhaps the most notable fact is that physicians are as prone to the framing effect as their patients. By extension, this obviously raises questions about the ability of “experts” to formulate valid conclusions in areas that involve significant investment. 5 Tversky and Kahneman (1981), pp. 453–458. 6 The expected utility hypothesis underlying the rational agent model is based on a system of axioms (accordingly, the way options are formulated should not influence the agent’s decision).

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example of an IT service manager, who admits that when a customer terminates a contract, he takes it as a personal attack, which is not the case if the contract is simply not renewed. The way in which the clauses are formulated will lead to cooperative attitudes–or not. We also know that the contract is incomplete (Chap. 4), as it is simply not possible to list all potential states in a complex environment pervaded by radical uncertainty.

5.1.2

The Sociologist and the Lawyer

Economists are not the only ones to have brought their debates back to empirical ground. Legal thought has been enriched by the contributions of the Law and Economics movement, initially developed in the field of Anglo-American law. Legal scholars Stewart Macaulay7 and Ian R. Macneil consider that relationships are governed by factors beyond the legal rules enshrined in the contract.8 Under the impetus of Macneil, in particular, the general theory of contracts has evolved toward what is known as the relational contract. “It appears that the focus has shifted from the contract’s creation to its performance. While the contract may still be seen as a source of obligations, which is the traditional view, it is now broader than that. Doctrine, which reflects an evolution in the role of the contract in practice, is now focused on the life of the contract after its inception (interpretation, performance conditions, group of contracts, distribution, etc.).”9 Although the relational contract stems from American legal doctrine, there is a convergence with the insights of renowned French authors such as Jean Carbonnier, for example: “At some point, the sociologist has to take the place of the jurist in order to exhaust reality.”

5.1.3

Attention is the Scarce Resource

The framing effect significantly changes our perception of situations and affects the meaning we give to individual contexts. We will act in accordance with our past experiences. However, our attention is limited. As Herbert A. Simon tells us, “attention is the scare resource.”10 It is selective and we can only deal with a limited number of objectives11 at a time, “At the moment you are buying a car, you are 7

Macaulay (1963), pp. 55–67. In his study, the author shows that many business relationships ignore legal norms. 8 For Macneil, marriage is a perfect example of a relational contract. 9 Bouthinon-Dumas (2001), pp. 339–373 (authors’ translation). 10 Simon (1983). 11 To such an extent that the brain can only pursue two goals at the same time, according to two researchers from Inserm (the French National Institute of Health and Medical Research) and the

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probably not also simultaneously choosing next week’s dinner menu, or even deciding how to invest income you plan to save.” Similarly, in a long-term contract, individuals will frame the situation in which they find themselves according to an objective that attracts their full attention, while other goals are pushed into the background, without actually disappearing. This objective, described as “situational”, frames the situation. The other objectives are not totally absent but are pushed into the background in our brains. They do not directly influence our choices and behavior at a given time. Our attention is focused on a few pieces of information, activating certain parts of our memory or brain areas while others remain dormant.12 In a contract, which objectives determine the framing of a situation?

5.1.4

Situational Objectives

We can answer this question using an original approach based on results from sociology.13 The model is based on two observations: the first is that the individual is not capable of discerning all the available data in a situation of choice. To use the image of Laplace’s demon, he does not possess an “intellect that, at a given moment, would know all the forces that set nature in motion”. In other words, his rationality is bounded. The second is that attention is a scarce cognitive resource. Furthermore, because information processing is sequential, the individual only focuses on one objective at a time. Specifically, the individual defines his or her situation according to three “universal” instrumental objectives:14 gain, compliance with norms, and loss aversion.

5.1.4.1 An “Economic” Objective: Gain The first objective is self-evident: the instrumental objective that frames contractual relationships is gain or the pursuit of profit. A rational individual of sound mind has no reason to enter into a contractual relationship that offers no hope of financial École normale supérieure, who placed 32 subjects under functional MRI. Sylvain Charron and Etienne Koechlin, Science, No. 328, 2010, pp. 360. 12 This could be compared to “lover’s judgment”, as shown by the experiment of Bartels and Zeki (2004). Using magnetic resonance imaging (MRI) techniques, they observed that certain areas of the brain associated with the ability to make critical judgments are deactivated in the presence of a familiar image of the loved one. We may be close, in their opinion, to having a neural explanation for the fact that “love makes [us] blind”. . . (Bartels and Zeki 2004, pp. 1155–1166). 13 See, in particular, the works of Lindenberg (1993), pp. 11–38; and those of Chaserant (2003), op. cit., which provide a very detailed description of the deliberative processes that individuals follow when entering into a contractual relationship. 14 More generally, we know from Becker (1996) that physical and social well-being are the two general objectives that all individuals want to achieve. But these objectives do not directly frame decision-making situations. Accordingly, our model uses the three goals: gain, compliance with norms, and loss aversion.

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return. However, numerous empirical observations show that the obligation to cooperate triggers a second objective

5.1.4.2 An “Ethical” Objective: Norms The fundamental component underpinning the contract is the obligation to “work together”. In contractual relationships, there are numerous standards governing collaborative conduct. To confirm this point, we need only look at arbitration case law, which obliges the parties to mutually facilitate contract performance; the lex mercatoria, which refers to the principles of good faith, prohibition, abuse of rights, and fraud; and ethical charters, such as the OECD Anti-Bribery Convention of November 1997, all of which tend to encourage contracting parties to move toward normative behavior. In fact, since the Convention was signed, many countries have adapted their anticorruption legislation, particularly since 2005. In the field of international trade, the normative sovereignty of the contract also reminds us that cooperation presupposes respect for contractual rules, their commitments, and their obligations, despite the temptations of opportunism. Can Ethics Training Improve Cooperation? We already know that studying economics inhibits cooperation.15 This was demonstrated with a prisoner’s dilemma game in which the defection rate of the economics student group was significantly higher than average. Two researchers subsequently wondered whether teaching ethics could have the opposite effect and conducted an experiment to find out. They concluded that an “ethics module” could be used as an antidote to the “adverse effects” of teaching economics: the group that took the module proved to be more cooperative–although there is no guarantee of a lasting effect. . .16 Companies’ contractual relationships do not spring out of the ether. To ensure the survival of their relationships, companies are likely to focus on specific norms and will attempt to control only those behaviors that “increase the predictability of group members’ behavior, avoid embarrassing interpersonal situations, or give expression to the group’s central values.”17

5.1.4.3 A “Hedonic” Objective: Loss Aversion Hedonic psychology, whose influence is present in all human actions, suggests that we react to emotions affectively, cognitively, and behaviorally. Loss situations are situations where the probability of tipping into a hedonic setting is high. Anticipating or experiencing a loss provokes an emotion that 15

Frank et al. (1993), pp. 159–171. James Jr. and Cohen (2004), pp. 53–61. 17 Feldman (1984), pp. 47–53. 16

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generally leads us to immediately frame the situation in terms of prevention or compensation for the harm suffered. This is referred to as loss aversion. Note that a loss may be experienced without any actual reduction in assets because events are interpreted as gains or losses in function of a subjective reference point (the status quo). Specifically, receiving less than expected or having to make an unanticipated effort may, depending on the definition of the situation, be coded as a loss. The same is true for any action that is perceived as illegal or that violates some understanding implicit in a relationship. Loss aversion is particularly important in analyzing the framing of contractual relationships, as losses are given twice as much weight as gains. This explains behavior that appears irrational, such as taking extremely costly actions to prevent or compensate for a loss. When the objective is to neutralize a loss, the costs incurred are not the main focus of attention because they are linked to the sidelined gain objective and therefore have limited weight. There are many examples of lawsuits where plaintiffs continue to pursue their case, despite the legal costs far exceeding the damages they hope to obtain. It is therefore not uncommon to observe that attempts to repair or avoid a loss actually cost more than the (subjective) value of the loss itself. “The Horror of Losing” “The horror of losing may explain why, in 1965, Lyndon Johnson decided to commit additional troops to Vietnam. It may have been an attempt to avoid the certain defeat that withdrawal would have entailed. It was a roll of the dice, coupled with the hope of finding a future way to avoid loss. Napoleon’s attitude in Russia undoubtedly illustrates the same proposition.”18 A hedonistic framework can be very destructive in terms of resources, especially since psychology has shown that we are “risk-seeking” when faced with losses but “risk-averse” when faced with gains. For example, an essential characteristic of Daniel Kahneman and Amos Tversky’s19 prospect theory is that the frustration a person feels regarding a certain loss is much greater than the pleasure associated with a corresponding gain.

5.1.4.4 Framing Dynamics For each situation, the individual therefore has three objectives, one of which becomes dominant and frames the situation. The initial contextual elements (contractual period, cultural determinants, financial situation, etc.) orient the individual toward achieving one particular objective. The other objectives remain “dormant”, so to speak, until the situation evolves to such an extent that the initial objective is no 18 19

From Mnookin (2004), pp. 237–254 (authors’ translation). Kahneman and Tversky (1979), pp. 263–291.

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longer relevant and gives way to another objective that was waiting in the background. This second objective will then provide the new framework. We often run into friends on the street. Our objective will notionally be to act in a friendly manner, applying the full set of rules and expectations that govern friendship. If a friend is in financial difficulty and asks for our help, it is likely that we will agree, provided that our goal is to protect a relationship that we value. We may even offer our friend a coffee (following a well-established social norm). Imagine that we meet this friend a little later and that he or she asks us for help again, and that this happens several times in a row. The objective “to protect our friendship” may ultimately transform into the objective “to save my cash” (gain objective). If our friend confesses to us that our money has in fact been gambled away at the casino, then we are likely to lose our temper, at best (loss aversion). This last revelation may be enough to break a patiently constructed friendship. According to marital relations expert John Gottman, successful long-term relationships are much more reliant on avoiding the negative than on seeking the positive (for a relationship to be stable, positive interactions should outweigh negative interactions by a ratio of at least 5:1!).20 In light of the above, let’s look at how the three situational objectives are established for the contract.

5.1.5

The Three Phases of Contractual Relationships

5.1.5.1 The Contract’s Initiation Phase (Identifying and Complying with the “Norms” Objective) The First Signals When two parties meet for the first time, they enter into lengthy negotiations. During their talks they exchange a wide range of documents, such as legal and technical texts and declarations of intent. They may even propose a “gentlemen’s agreement”.21 The type of contract proposed may reveal information about the proposing party. The party’s temptation to include clauses simply because it can exploit them to its advantage is strong, although this approach risks provoking outright rejection by the other party. A positive signal will be sent if negotiators agree to put aside detailed points of disagreement at the beginning of discussions. Postponing “tricky subjects”, adapting the agenda, and dealing with the easiest points first are all informative. 20

Cited by Kahneman (2011). Justice Vaisey, a British judge, gave a very British definition of the gentleman’s agreement: “A gentleman’s agreement is an agreement which is not an agreement, made between two persons neither of whom is a gentleman, whereby each expects the other to be strictly bound without himself being bound at all.”

21

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The signal will be negative if the financial offer is not estimated at its fair value (this could almost be perceived as insulting). For example, when negotiating a license agreement, the allocation of amounts between the lump sum and royalties will vary according to the level of uncertainty anticipated by the assigning firm. An attempt to license an obsolete technology will be signaled by the lump sum share being high compared with the royalty share. Collaborative Contracts vs. Non-collaborative Contracts Collaborative contracts include language that encourages partnership: • • • • •

“collaborate in the development and execution of strategic business plans”; “align business strategies”; “operate based on mutual trust”; “jointly and openly work to reduce costs”; “good faith discussion regarding nature and extent of each party’s contribution”.

From the supplier’s perspective, non-collaborative contracts employ threatening language, impose penalties for non-performance, and constantly refer to legal terminology: • “substantial use of the term ‘penalties’”; • “supplier shall reimburse opportunity costs of lost revenues”; • “extensive use of the phrase ‘supplier will’ and relatively minimal use of phrase ‘customer will’”; • “supplier will strictly adhere to these terms”.22 The signed contract will necessarily be incomplete since it is not in the parties’ interests to provoke a rejection or reveal negative information. Deliberate incompleteness becomes a relational signal.

Establishing Shared Norms During the first interactions, the agents are confronted with two possibilities: either they already have a shared experience, in which case the history of their past relationship(s) will influence the type of contract chosen,23 or they must establish their own operating norms.

22

Krishnan et al. (2011), pp. 1397–1422. A survey of CEOs conducted by PricewaterhouseCoopers in 2008 showed that more than half of the respondents favored collaborative contracts. 23 Contracts are observed to be more complete when the parties have had a stormy relationship in the past (disputes). See Crocker and Reynolds (1993), pp. 126–146.

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In the first case, the situation is not necessarily straightforward because, as Daniel Kahneman notes,24 the defense of the status quo is a pervasive feature of negotiations, whether they are associated with wage settlements, international talks, or arms control: “The existing terms define reference points, and a proposed change in any aspect of the agreement is inevitably viewed as a concession that one side makes to the other.” This means, in short, that each party will stick to its own position. In the second case, they will need a minimum amount of time to evaluate one another and to define their mode of operation. One party’s behavior tends to induce identical behavior in the other,25 with this behavior becoming the norm of reciprocity. Above all, the parties will refer to this norm to judge adherence to the contract or, conversely, to determine whether its terms have been breached. The risk is further amplified since individuals generally have a preconceived idea of their partners’ motivations. Aggressive tactics are sure to generate an aggressive response and escalate the conflict.26 A Theory of Norms In their 1986 article, Daniel Kahneman and Dale Miller attempt to explain how recurring, unusual events end up being perceived as “normal”.27 “Consider an observer, casually watching the patrons at a neighboring table of a fashionable restaurant, who notices that the first guest to taste the soup winces, as if in pain. The normality of a multitude of events will be altered by this incident. For example, it is now unsurprising for the guest who first tasted the soup to startle violently when touched by a waiter; it is also unsurprising for another guest to stifle a cry when tasting soup from the same tureen. These events and many others appear more normal than they would have done otherwise, but not necessarily because they confirm advance expectations. Rather, they appear normal because they recruit the original episode and are interpreted in conjunction with it.” Thomas Schelling28 indicates that “when norms are created for two parties in the same process, each player’s developing norm influences the other’s. There is a process of genuine learning with respect to values; each side adapts its own system of values to the other’s, in forming its own.”

Kahneman (2011), op. cit. Psychologist Robert Cialdini cites the case of a university professor who carried out an experiment: he sent Christmas cards to a randomly selected sample of strangers. He received a flood of cards in return, with the vast majority of recipients not even attempting to find out who he was. (Cialdini 2001). 26 Loosemore (1999), pp. 177–188. 27 Kahneman and Miller (1986), pp. 136–153. 28 Schelling (1960), op. cit. 24 25

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Once the relationship has been initiated and the norm of reciprocity established, the parties define implicit procedural rules that help to build trust. This trust has yet to be established, since the contract clauses leave open the question of the level of effort that each party will have to make, especially when they contain open terms such as: best efforts, best endeavors, reasonable care, and diligence, which are frequently found in international contracts and are sources of opportunism. In Practice

Some clauses that deserve special attention The following common law clauses merit careful consideration when drafting the contract: Best efforts The “best efforts” undertaking is a clause that requires a party to exercise particular diligence in the performance of one of its contractual obligations. It is generally used in situations where certain parameters are uncertain, for example when our ability to perform the obligation depends on a third party (e.g. customs clearance operations). This type of clause should be handled with care because a contractor could use it to exonerate itself from its obligations: for example, a supplier who had committed to a schedule may seek to exonerate itself from its responsibility for delays by demonstrating that it took all possible steps to avoid the delays or limit their impact. Reasonable skill and care This notion refers to the experience and diligence expected of a professional. It contrasts with the notion of “fitness for purpose”, where the contractor is strictly liable toward the project owner. The underlying question is whether an act or omission constitutes negligence or not. In principle, a “professional” must exercise reasonable skill and care, whereas a contractor is obliged to deliver work “fit for purpose”, i.e., fit for the purpose for which it is intended. “The Contractor shall design, execute, and complete the Works in accordance with the Contract, and shall remedy any defects in the Works. When completed, the Works shall be fit for the purposes for which the Works are intended as defined in the Contract.” The contractor will therefore frequently try to limit its liability to that of a “professional”. Conversely, individuals who undertake to deliver work that is fit for the purpose for which it is intended can only be exonerated from their liability by demonstrating that there has been no negligence on their part. ◄

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5.1.5.2 The Performance Phase (Gain Maximization Objective) Preserving the Contract Economics Contracts for major international projects generally include specific clauses. Such clauses may set out detailed conditions for notifying unforeseen events during the course of the project. This is prime territory for claims and change orders. Claims, which are often misinterpreted, should not be considered as hostile acts on the part of the issuing party. It is important that the parties receive timely information, even if it is unpleasant (which is often the case), to enable them to realign resource or investment needs or to readjust schedules without jeopardizing the entire operation. These notifications, which are provided for in specific clauses in certain standard contracts, such as the FIDIC models,29 mark the beginning of renegotiations. The mechanism is as follows: the first party makes an offer, the second party accepts it–which concludes the negotiation–or refuses it. The latter then makes a counter-offer, which is accepted or refused, and so on. Neither party has an interest in the negotiation continuing, because a “never-ending” negotiation means a lower discounted gain. The standard image is an ice cream that melts over time, with the portion allocated to each of the parties reducing accordingly (for one party, it will be the financial compensation, for the other, the ability to use the proceeds of the contract). The recent case of the Boston underground highway megaproject–the Central Artery and Tunnel project (better known as the Big Dig)–provides an illustration of this sequence of events.30 The prolongation of discussions significantly reduced the negotiable amounts.

29

These model contracts are extremely detailed, compensating for the vagueness of the international legal framework. The aim is to limit the scope of the national law of the country where the site is located, whose rules apply in a suppletive manner. It is estimated that 40% of international construction contracts are based on the FIDIC model. The first edition of this model, published in 1957, was based on an English contract, the English Institution of Civil Engineers model (ICE conditions). The editions are regularly updated and have gradually become international in content while retaining the common law mark. These contracts were not initially drafted by lawyers, but by engineers, for engineers. They also serve as practical guides for the management of construction sites and parties increasingly refer to them in their negotiations. 30 Peña-Mora and Tamaki (2001), pp. 105–121.

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“When the ice cream melts in the sun”. Source: Peña-Mora and Tamaki (2001), p. 120. Reproduced with the permission of the American Society of Civil Engineers–ASCE

However, it is clear that negotiations have a tendency to drag on and on. How can we explain this phenomenon? Negotiating Is Difficult Until recently, the “gurus” believed that in order to negotiate effectively, it was necessary to eliminate emotion. In promoting this quasi-Cartesian injunction to “separate the people from the problem”, the first work that comes to mind is undoubtedly Getting to Yes by Fisher and Ury, which we have already mentioned. Is this really a good idea? Particularly since, according to American neurologist Antonio Damasio,31 we know that emotions often play a positive role in decisionmaking, creativity, and relationship building, which are all necessary when forming an agreement. The dominant theory postulates that the fear of risk is the same whether the individual is in a situation of gain or loss. However, as we have already pointed out, psychology experiments show that the individual is subject to cognitive illusions that hinder a logical analysis of the situation. Daniel Kahneman and Amos Tversky, for example, have shown that choices are evaluated in terms of the gain or loss in relation to a reference point. When presenting his prospect theory, Daniel Kahneman explains that the importance given to losses is much greater than that given to gains, with the degree of asymmetry being twofold. “I think the major phenomenon we observed is what we called ‘loss aversion’. There is an asymmetry between gains and losses, and it really is very dramatic and very easy to see. In my classes, I say: ‘I’m going to toss a coin, and if it’s tails, you lose $10. How much would you have to gain on winning in order for this gamble to be acceptable to you? People want more than $20 before it is 31 For Damasio (1994), “somatic markers” increase the accuracy and efficiency of the decisionmaking process.

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acceptable. And now I’ve been doing the same thing with executives or very rich people, asking about tossing a coin and losing $10,000 if it’s tails. And they want $20,000 before they’ll take the gamble. So the function for gains and losses is sort of kinked. People really discriminate sharply between gaining and losing and they don’t like losing!”32 In short, the size of the cake tends to shrink over the negotiation period. And if discussions also need to address loss allocation, it is easy to see why negotiation is such a difficult art. The “Negotiator’s Dilemma” Fisher and Ury present a narrow vision of negotiation, focused solely on value creation (increasing the size of the cake) and where no attempts are made to claim this value. David Lax and James Sebenius,33 on the other hand, consider that negotiation involves a permanent tension between value creation and the struggle for its appropriation. This tension–the “negotiator's dilemma”–reflects the complexity of the process and disqualifies biased and essentially prescriptive conceptions, such as the so-called win-win approach. To make matters worse, the larger the sums involved, the longer the negotiations take (in the case of the Boston Big Dig, for example, amounts below US$15,000 were negotiated in less than 60 days on average, whereas amounts of US$150,000 took more than 120 days).

The average negotiation time versus the amount at stake. Source: Peña-Mora and Tamaki (2001), p. 119. Reproduced with the permission of the American Society of Civil Engineers–ASCE

Daniel Kahneman, “A conversation with Daniel Kahneman; On Profit, Loss and the Mysteries of the Mind”, The New York Times, November 5, 2002. 33 Lax and Sebenius (1986). 32

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Claims or additional funding requests (changes) should be notified in writing to enable the other party to examine the facts in the light of the supporting documents and to measure the resulting financial impact. Under certain conditions, the contracting party may be allowed to assert its rights provided it gives notice of the cause of the delay within the contractually specified period (e.g., within 1 month). What do we find in practice? Notice Is Often Given Too Late First of all, we inevitably find that things do not go exactly according to plan, resources are scarce, and contractors attempt to avoid conflict. The contractual act of giving notice often takes second place to technical issues. As a result, claims for extension of time or design changes are often submitted late, or are even issued at the end of the transaction when the contractor no longer has the leverage to conduct its negotiations. Mohan Kumaraswamy and Kumaru Yogeswaran34 use a survey conducted in Hong Kong to identify the reasons commonly invoked by contractors to justify their delay in submitting claims. Very broadly, it appears that procedural notification clauses, although provided for in the contract, are not activated sufficiently early. Unfortunately, total claim amounts are often revealed at the end of the project, when financial reserves are already exhausted. Remember that while notifications are (or should be) almost instantaneous, for civil engineering contracts they actually take about 15–25 weeks to process, administratively speaking. In other words, negotiations, even intermediary ones, require relatively laborious contractual follow-up. It is in the interest of both parties for notice to be given as soon as a new fact appears, especially since most model contracts specify a claim eligibility period. Beyond that date, point of appeal! In Practice

The “poor excuses” frequently invoked for missing contractual notice deadlines • • • • • •

34

Overall delays cannot be determined before the end of a project; Priority is given to technical tasks; There are insufficient resources to deal with contractual aspects; There is a lack of detailed information; There are insufficient management resources; There was no obvious link between cause and effect until the delay was detected;

Kumaraswamy and Yogeswaran (2003), pp. 27–38.

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• The contractor wants to avoid conflict and friction with the project owner; • Document management is deficient; • The contractor wants to know exactly how much delay to justify in order to “stifle” the risk of liquidated damages; • The contractor is using the benefit of hindsight to search for events that justify financial compensation; • The customer’s agent (the “consulting engineer” in the case of FIDIC contracts) demands an excessive level of detail; • An internal policy of submitting global claims may delay notice being given; • Site personnel are inexperienced in contract management; or • If experts are involved, they need a minimum amount of time to assimilate the situation. ◄ If it were customary to write a manual of “bad management practices”, the box above would certainly figure prominently.

5.1.5.3 The Contract Closing Phase (Loss Avoidance Objective) Negotiations have a cut-off date. This date is rarely under the control of the teams that participated in the work. The imminence of a final settlement changes both the pace of interactions and the nature of the relationship, which takes on a new twist, moving from a phase of bargaining and continuous bilateral communication to a decision-making situation whose consequences will be most visible in the event of failure. Most signals have already been exchanged. Up to this point, the technical content has been handled by the teams preparing the position paper, or the dispute file, and the decision-makers have been carefully kept aside until the end of the game. This “stratagem” helps to prevent negotiators from feeling psychologically restricted if a solution is hard to find. The responsibility for the final agreement is in the hands of senior management and the task is undoubtedly more political than administrative. The participants do not have time to recalculate the value of reciprocal concessions. In any case, this is no longer the issue, what is needed now is a conclusion to the discussions. In fact, “Much of the skill has already been applied when the formal negotiations begin.”35 Aside from implementing a particular strategic choice,36 the parties are not especially motivated to continue processing information. Although they can still “buy time”, this time is limited and the negotiators want to extricate themselves from an uncertain, complex, and emotionally charged situation. The resources mobilized during the negotiation, which have a significant cost, could be more usefully allocated elsewhere. Schelling (1960), op. cit. Duration is a signal. During the Paris peace negotiations between the Americans and the Vietnamese, the first move in the negotiation game was at the initiative of the Vietnamese, who rented a residence for a period of 2 years. Cited by Raiffa (1982). 35 36

5.2 Is the Contract a Game?

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Is the Contract a Game?

Game theory, originally developed by mathematicians, tells us–unsurprisingly–that individuals are rational, self-centered beings who seek to maximize their monetary gains. So, nothing new so far. . . Experimental studies, on the other hand, show that individuals do not in fact behave like pure egoists (they are even willing to share!), although they have absolutely no qualms about punishing behavior deemed to be uncooperative. How can we explain these “anomalies”?

5.2.1

In Theory: The Quest for Maximum Gain

5.2.1.1 A Player Who Is Still “Rational” For Ariel Rubinstein, professor of economics at the universities of Tel Aviv and New York, the person who coined the term “game theory” was undeniably a public relations genius.37 Who indeed would be attracted by a current of thought entitled “A Collection of Models of Rational Decision-Making in Interactive Situations”? The contract, like any economic model, can be set up as a game if it is assumed that the parties behave as rational agents and make their decisions according to rules. Knowledge of these rules is assumed to be “common knowledge” by the players, because every player knows them, they know that the other knows them, the other knows that they know them... ad infinitum. In other words, “no one should overlook the law”, even its smallest details, and especially not the way its triggers can be used. 5.2.1.2 Putting Ourselves “in the Other Person’s Shoes” Game theory states that every “player” will seek to maximize their payoff. This means anticipating what the other person will do, basing our decisions on our “beliefs” about that person’s behavior. The main difficulty is characterizing the other person’s representation of the situation and being able to put ourselves “in the other person’s shoes”. Once the game has been fully specified, the modeler can retain the relevant game solution.38 Continuing this spirit of mathematical stylization, various authors have attempted to establish contract management models. These models generally focus on determining the best strategy to adopt if the other party implements an opportunistic strategy, such as anticipating claim negotiations to compensate for underfunding in the bidding phase.39 Ariel Rubinstein, Economic Fables, OpenBook, 2012. The archetypal theoretical solution that invokes player rationality alone is the Nash equilibrium (NE) because it leads to a credible negotiated agreement that is a stable equilibrium (players who believe that the others will abide by the agreement have no reason not to abide by it themselves). 39 See, for example, Khaled A. Mohamed, Shafik S. Khoury, and Sherif M. Hafez (2011), op. cit. 37 38

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In Practice: A “Theory” of Players

If the underlying assumption of game theory is the principle that every player is trying to maximize their gain, we have a serious problem. We already know that a player who is supposed to act rationally does not have the means to do so, if only because of the inherent uncertainty over the life of the contract. This does not mean that the player acts inappropriately, but since the contract is an economic and social game, it is clear that the rule of “common knowledge”, which would apply to explicit rules accepted by all, is no longer relevant. It would be difficult to argue the contrary: economists have observed persistent discrepancies between theory and experimental results, as seen in the findings of more than 30 years of experimental psychology research. The hundreds (if not thousands) of experiments–very recently enriched by neuroeconomics–conducted using negotiation games, such as the ultimatum game, confirm the hypothesis that gain is not the only objective. Individuals also attach importance to the notions of equity and reciprocity.

5.2.2.1 The Ultimatum Game To illustrate the above, let’s imagine the following situation. We are offered €100, but we must share this money with a second person according to the following rule: if the person accepts the amount we offer, the money is split according to our proposal. If he or she refuses, then we lose everything and both of us leave with nothing. What will our offer be? For a game theorist, the solution is obvious since the individual is presumed to be perfectly rational and selfish: we will therefore generously offer the smallest amount possible (1 cent!) and the other person will inevitably accept according to the principle that 1 cent is always better than nothing. This game, known as the “ultimatum game”,40 intrigues economists (almost as much as the prisoner’s dilemma) because all experiments to date show that players offer on average 40% of the sum allocated to them. Many opt for a 50/50 fair offer, while unfair offers of less than 20% are rejected on average one time out of two.41 The ultimatum game is the ultimate phase of the renegotiation process in which one of the parties makes a “take it or leave it” offer. The other party, no longer having the opportunity to make a counter-offer, must either accept or refuse. Since the offeror is endowed with superior negotiating power, the only negotiating position available to the other party is the threat of issuing a veto. On reflection, the offeror would be well advised to make a realistic assessment of its 40

Güth et al. (1982), pp. 367–388. Alan Sanfey and his team at Princeton University conducted the first neuroeconomic study of the ultimatum game using a functional magnetic resonance imaging technique that detects areas of the brain where there is increased oxygen flow, a sign of heightened neural activity. They observed that the region of the brain that is activated during low–and accordingly perceived as unfair–offers is the same region that is sensitive to stimuli of pain, anger, and disgust. See Sanfey et al. (2003), pp. 1755–1758.

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proposal to avoid the other party immediately rejecting any offer that is deemed unfair. The Ultimatum Game and a Sense of Fairness The primatologist and ethologist Frans de Waal from Emory University conducted an experiment with Sarah Brosnan in which capuchin monkeys were rewarded unequally for the same task. One monkey clearly expressed its dissatisfaction when it received a slice of cucumber instead of a grape, like its neighbor. It even threw the piece of cucumber away instead of eating it, although it normally loved cucumber. For Franz de Waal, the fact that the capuchin monkey rejected its piece of cucumber resembles the way people turn down an offer in an ultimatum game, even if they get nothing by doing so, meaning that they lose out altogether. Some people see this behavior as irrational because they believe that something is always better than nothing. In any case, this irrational response is not confined to the monkeys–we also feel and see that something unfair is taking place, showing that our sense of fairness has its origin in basic emotions (such as jealousy) rather than in reason.42

5.2.3

The Dictator Game

In a simpler version, called the “dictator game”, the second person has no choice and must accept the offer made. Results show that the offeror generally proposes between 20% and 40% of the sum to be distributed, depending on the experimental protocols. Obviously, the proposal, however small, cannot be rejected. Nonetheless, although the “dictator” is in a dominant position, he or she transfers a sizeable amount.

5.2.3.1 The Trust Game The essential role of trust was highlighted in the previous chapter. In the “trust game”, the first player (Player A) receives a sum of money. This player has two options: take the money and the game stops, or place it with a second player (Player B) who will make it grow. Player B then determines the total amount earned, to be given to Player A, and the share that he or she will keep. In turn, player A can keep this new amount or place it with Player B again. The game takes place over several periods as defined at the beginning of the game. According to the assumptions of game theory, the game will theoretically stop at the initial sequence, with the first player keeping the full endowment. Here again, an “anomaly” can be observed in practice: the vast majority of first players actually 42 Brosnan and de Waal (2003), pp. 297–299. See also: https://www.youtube.com/watch? v¼lKhAd0Tyny0.

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prefer to entrust the original sum to the second players who, in return, return a significant proportion of the sum.

5.2.3.2 Instrumental Fairness In the light of these observations, our first reaction might be to conclude that the players are irrational. But, in fact, these behaviors are those of perfectly reasonable people. The individual is not “irrational”, the rational agent model as presented by economic theory and game theory is simply not adapted to real life situations. A pragmatic approach must therefore seriously consider the existence of issues other than pure profit in contractual decision-making. Experience shows, for example, that when an offer is perceived as unfriendly, it is all the more likely to be rejected, as the party will feel offended by it. In the ultimatum game, the emotional reaction is very strong. However, let’s be quite clear: if an offer seems fair, it is not necessarily altruistic– this would be naïve–it may simply have been made to avoid rejection. The End of the Game in a Risky Situation In the face of risk, contracting parties are found to seek a contractual balance that is perceived to be fair. In a sample of contracts concerning all kinds of equipment (aircraft, ships, vehicles, missiles, armaments, etc.), the parties were found to almost systematically converge towards a 50-50 distribution of additional costs (on average 10% of the initial price) when they were unable to determine their respective responsibilities precisely. This is particularly noteworthy since these contracts systematically transferred the risks to the incumbent.43

5.3

Promoting Active Management

Between the economically desirable and the legally possible, the actual interplay of the actors teaches us that the parties are subject to a framing dynamic through which they implement three instrumental objectives. However, they do not appear to fully control this process, since they often misjudge the timing of contractual acts, for example perceiving an unnecessarily urgent need to give notice of a claim. A party that does not possess the skills to interpret a particular type of contract according to conventional standards (e.g. a manufacturer addressing a civil engineering issue) will be slow to identify the relevant objective and will find itself in a considerably weakened position.

43

Oudot and Ménard (2009), pp. 195–226.

5.3 Promoting Active Management

5.3.1

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Taking Biases into Account

5.3.1.1 Countering the Optimism Bias There is of course no denying the positive effects of optimism when it comes to initiating action, and the goal here is not to curb entrepreneurial spirit. But when looking at the future “through rose-colored glasses”, most people err on the side of optimism. We saw in Chap. 3 that Bent Flyvbjerg’s use of the “external view”, with his “reference class forecasting” technique, can offer an alternative to the bias induced by excessive optimism. 5.3.1.2 Countering Excessive Caution Excessive caution may stem from loss aversion. It can be statistically justified that an occasional loss is almost certain to be financially profitable in the long run. For example, a legal strategy frequently employed, particularly in the United States, is based on the economic calculation of the choice between settlement and litigation. The first option is justified by the costs of litigation, but the second can also be explained by the desire to send a clear signal to potential attackers in order to build a reputation over the long term. According to a prominent law professor, a poor settlement is “like putting out warm milk for a stray cat that meows. . . You get 30 more cats the next night.”44 Building a reputation is a guarantee for the future. It is well known that certain “reputable” project owners, particularly in the civil engineering sector, have understood the principle to such an extent that their knowledge could be considered a genuine intangible asset. 5.3.1.3 A Proactive Legal Approach Under the impetus of the Scandinavian school, a so-called “proactive” approach45 has emerged, based to a certain extent on the vision of Ian R. Macneil. For its promoters, the contract–a genuine management tool–must reverse a purely legal approach that tends to involve the lawyer only in emergencies (the fireman syndrome). To return to the “exotic epidemics register”, traditional management is reactive, like a patient who goes to see the doctor for treatment after contracting malaria, while proactive law considers the disease at its root (draining swamps is the most effective solution for eradicating the disease). Having become a sort of “think tank”, proactive law is part of a very general trend that attempts to re-establish links between contract economics, legal constraints, and ethical considerations; a sort of magic triangle that enables companies “to move toward economic success in an ethical manner”. For example, the relational contract strategy is credited with the success of the Heathrow Airport extension, where the T5 terminal construction opened in March 44 45

Cited by Siedel and Haapio (2010), pp. 641–686. Siedel and Haapio (2010), op. cit.

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2008, having been completed on time, in accordance with the schedule planned 6 years earlier. The Emergence of Proactive Law “The approach specifically called proactive law emerged in Finland in the late 1990s. The first publication relating to the approach was a paper entitled ‘Quality Improvement through Proactive Contracting’ that Helena Haapio presented at the Annual Quality Congress of the American Society for Quality in Philadelphia in 1998.” “The proactive approach to law, sometimes also called proactive law movement, has triggered interest not only by people working in the field of law and regulation but also in other academic and professional areas such as information technology, economics, strategy, marketing and communication, commercial and contract management, thereby fostering its interdisciplinary scope. . . Proactive law seeks a new approach to legal issues in business and society. Instead of regarding law as a constraint that companies and people in general need to comply with, a cost factor, an administrative burden, or – at best – a means to protect one’s own or somebody else’s interests against harmful behaviour of others, proactive law considers law as an enabling instrument to create success and foster sustainable relationships. An objective of proactive law is to use the law as a lever to create value for the company, the individual or society in general.”46

Avoiding a “Bloodbath” “If you try to manage a project of this size as a conventional project, you’d need a line of lawyers, we’d go to court and sue the hell out of each other. Whereas here, there’s a lot of negotiation going on with the client. But, at the end of the day, we’ll be happy because we don’t have this conflict. It’s not adversarial, it’s a good way to work.”47

46 47

Berger-Walliser (2012). Gil (2009), pp. 144–169.

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Accepting Incompleteness–Preventing Hold-up Risk

5.3.2.1 The Bad News: The Contract Is Incomplete In a framework governed by transaction cost theory–a situation of uncertainty where agents and institutions display bounded rationality–the contract will inevitably be incomplete. The contractual relationship, which presupposes the creation of specific assets, enables the party not owning the assets to engage in hold-up behavior should it so choose. To make matters worse, the judge responsible for enforcing the contract in the event of default does not have access to the necessary information. This combination of incompleteness and the judge’s inability to reach a decision due to a lack of formal evidence therefore constitutes a risk for the company. However, we know that contracts can never be complete. So how can we transform this risk into an opportunity?

5.3.2.2 The Good News: The Contract Is Incomplete! First of all, the answer lies in capturing value from all the written documents available to the contracting party (letters, e-mails, minutes of meetings, etc.), and then in presenting the facts through the lens of favorable contractual clauses. In the next chapter, we will see how this can be achieved in practice. While this is well entrenched in the Anglo-Saxon culture of common law, there may be a culture shock for lawyers trained exclusively in civil law. In an enforcement context, contractual incompleteness, which may be considered a strategic opportunity, opens the door to renegotiation and becomes a source of efficiency. The fact nonetheless remains that agreeing to sign an incomplete contract is an eminently positive signal.

5.3.3

Integrating Complexity

5.3.3.1 We Can’t Control Everything Historically, management science has tended to view complexity from a systems perspective, i.e. considering the organization “as a whole”. It has subsequently reoriented its approach, focusing on the interplay of actors who can often do little but observe the gap between initial intentions and the trajectories ultimately assigned to them. For organizational researchers, the desire to control everything, to impose a normative order, and to normalize behavior often goes against the parties’ intentions, blocking the ability of individuals to manage their operations locally.

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5.3.3.2 We Can’t Break Free from the Past Integrating complexity also means that the organization cannot be isolated from its context and from its past. Mats Engwall48 compares two projects, one relating to a hydropower plant and the other to a power transmission link, in the same Scandinavian company, and notes that success was not found where it was expected. While the first project was carried out making full use of project management concepts and techniques (structuring, planning, and cost control), against all expectations, it was the second–without any real method–that achieved the required level of performance. “Unique project” syndrome cuts the project off from the past and breaks the links with the company’s internal social fabric, despite managerial action being intimately linked to the context in which it is implemented.

5.3.3.3 Developing Local Action We start from a twofold observation: (a) game theory assumes that players are endowed with hypertrophied rationality, and (b) individuals’ cognitive limits encourage them to arrange decision-making processes in such a way that each stage depends on the information available to them locally. Since the late 1980s, in response to the increased complexity and uncertainty of decision-making contexts, a current of thought has developed around the principle of intentional intervention, where interventions are continually reassessed in the light of emerging situations. This approach, which emphasizes local strategic action, generally disregarded in the strategic literature, has notably been studied by Marie-José Avenier.49 According to the proponents of complexity, autonomy gives an organization the ability to choose an area of operation and a behavior within an arrangement that is acceptable to other systems. A complex environment requires the ability to adapt quickly to changing and unforeseen situations, which will be facilitated when there is a high degree of autonomy at the local level. The advantages of an autonomous or decentralized structure have been repeatedly observed. We can distinguish three levels of autonomy: • autonomy of representation (the ability to forge a contextual representation of our own operations); • organizational autonomy (the ability to choose our internal organization); and • project autonomy (the ability to develop our own project). In a project organization, having autonomy at these three levels helps the organization to quickly adapt to new situations. Project managers, who own the risks of their own transactions, must have a clear strategic vision and the necessary authority, so that they are not obliged to systematically call in the lawyers as

48 49

Engwall (2003), op. cit. Avenier (1997), Economica, coll. “Stratégies et organisations”.

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soon as a problem arises. The battle against micro-management and its perverse effects therefore depends on the legal sensibility of operational staff.

5.3.3.4 Establishing Causal Links A Systemic Model A party making a claim must be able to demonstrate the link between the event giving rise to the claim and its effects. Very often they cannot do so and are content to fall back on the following type of reasoning: • Here’s what we estimated. • This is what it actually cost us. • We are claiming the difference. Or else: • Here’s the time period we planned. • This is how long it actually took. • We need to realign the contractual deadlines. Systemic models can be used to establish causal links between a certain number of events and the overruns that can occur on complex projects. The first analysis of this kind was performed by Kenneth Cooper in 198050 using a computer simulation model. It was an immediate success, enabling a claim against the US Navy to be settled. Forensic Analysis Following this success, a team from the University of Glasgow51 has taken up the cause, and for several years now has been carrying out detailed forensic analysis of contracts that have been subject to settlement agreements. These real cases cover multiple fields: aerospace, transport systems, shipbuilding, and civil engineering. The typical scenario is as follows: the client requests extra studies that immediately result in additional research efforts and site visits, punctuated by multiple meetings. The engineers, sucked into these unplanned activities, spend all of their time attending meetings, meaning that labor resources are not allocated to the project in the way initially planned. The resulting loss of productivity must then be compensated by making the engineering staff work overtime (which is significantly more expensive). Customers may also exceed the contractual deadlines for approving technical documents (30 days instead of 15 days, for example). The contractor therefore has to start working on plans that have not been approved, which will inevitably require it to rework its designs, thus introducing engineering delays. In addition, information due from the client may be late, which in turn generates delays and a loss of 50

Cooper (1980), pp. 20–36. Ackermann and Eden (2005), pp. 355–376. A similar methodology was applied to a Channel Tunnel contract, justifying around 45% of the financial claim. 51

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productivity. Finally, new engineers arriving to help get the project back on track need to be trained, which generates even greater delays. This type of forensic analysis of large projects shows that deviations from the original objectives are the result of positive feedback loops and explains that corrective actions sometimes make the situation even worse.

An example cause map for contract slippage. Source: Ackermann and Eden (2005), p. 361. Reproduced with the permission of Springer Nature

When evaluating responsibilities, it must be understood that each actor has his or her own vision of events and that this point of view must be interpreted in the light of post hoc rationalization. Participants accordingly tend to attribute responsibility for delays to the other party. It will be the role of the teams in charge of the analysis to highlight these causal relationships in order to give them a contractual consistency.

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5.3.4

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Anticipating the Change of Framework

The parties approach the contract in a sequential manner by pursuing only one objective at a time (attention is the scarce resource): the situational objective. When we defined the three phases of the contractual relationship–contract initiation, contract performance, and closing–we found that each phase was “driven” by a specific objective: compliance with norms, gain, or loss aversion. Pragmatically, for active management purposes, tasks that have a contractual impact can be more effectively accomplished by considering these instrumental objectives as “action guides” from the moment they are consciously activated rather than merely allocated. From a practical point of view, during the initiation phase of the contract, it is important to determine the parties’ motivations. During the performance phase, the parties should attempt to maximize their positions to strengthen their negotiating power. Finally, during the closing phase of the contract, it is important to limit losses.

5.3.5

Don’t Take Cultural Patterns for Granted

5.3.5.1 Strengthening the Sense of Reciprocal Security Establishing a cultural bridge between the parties should help to strengthen a feeling of reciprocal security, particularly during the pre-contractual period when the parties are faced with conflicting interests: each party wishes to retain its room for maneuver but considers that the other party must provide proof of its willingness to commit itself. 5.3.5.2 Between Stereotypes and the Lure of Universality Intercultural management has become a discipline by declaring that each culture perceives negotiation according to its own pattern. We are told, for example, that a Westerner will identify a Chinese judge as “good” if he or she manages to avoid making a decision, because this will lead the parties to reconcile. We also learn that for an American, the goal is to end the negotiation with a signed contract, whereas for an Asian, signing the contract marks the beginning of the relationship. The “perfect negotiator’s” arsenal would still accord a prominent place to Geert Hofstede’s model (1980), which he built up from a series of surveys conducted on 50 IBM subsidiaries. Hofstede proposes a breakdown of cultural differences along four dimensions: Uncertainty Avoidance, Individualism/Collectivism, Power Distance, and Masculinity/Femininity (taste for material goods versus concern for others). However, a comparative survey of the two communities that worked in the Franco-British Transmanche-Link (TML) consortium between 1987 and 1993 to

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construct the Channel Tunnel52 indicates that although the cultural values of the two groups were as predicted, the behaviors were sometimes the opposite of those derived from Hofstede’s model. The British were found to be “procedural and collegial”,53 while the French were “action-oriented and individualistic”.54 For one British respondent, the sole cultural difference between the two groups could be summed up as follows: “the French never really could understand what a quantity surveyor did that an engineer could not do”. The problem, as we shall see later, is that this makes all the difference in pre-litigation preparations if the contract breaks down. The position of Jeswald Salacuse55 is more nuanced: “understanding the culture of a counterpart in a negotiation is similar to peeling an onion” composed of a skin with four layers: behavior, attitudes, norms, and values. The process of discovery involves a gradual stripping away of the layers leading to the core where the values are found. Individuals frequently only discover these values after signing the contract and after starting the project activities. The survey responses obtained by Salacuse show a generally balanced distribution between those for whom the negotiating goal is the contract (54%) and those for whom the relationship is the real issue (46%) At a time when China is imposing a new world order,56 we cannot afford to ignore the fact that “face-saving” is essential in social relations. However, will reporting bad news, for example about a software project, also cause an American to “lose face”? The most recent Chinese publications show that the country has perfectly assimilated Western management techniques. It should therefore come as no surprise to Western negotiators that the consensus and harmony that they envisaged while perusing the latest best-seller on negotiation are not forthcoming. Chinese companies approach contracts differently depending on whether they are dealing with foreign or local firms. Personal relationships are still predominant in both cases, but carry less weight when Chinese firms negotiate and contract with foreign investors. In other words, Chinese firms are attaching more importance to contracts and the legal framework has become much stronger in recent years.57 Jean-Pierre Changeux claims that the human brain is equipped with cultural circuits. When considering analysis models, such those developed by Geert Hofstede and Jeswald Salacuse, we should not forget that researchers also have their own circuits. It is worth recalling that Hofstede’s field of investigation was IBM, a large North American company, and that Salacuse’s survey population consisted mainly

52

Winch (2000), pp. 807–817. “There are large differences between the Anglo-Saxon and French methods. Anglo-Saxon methods are much more regulated, procedural and more likely to have recourse to the law in cases of conflict.” 54 “The Englishman is more analytical and less pragmatic than the Frenchman. The Frenchman goes more quickly for the synthesis, but without always completely analysing the problem.” 55 Salacuse (1999), pp. 217–236. 56 On this topic, see the collective work of the Cercle Turgot under the direction of Chambon (2010). 57 Luo (2002), pp. 127–151. 53

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of lawyers (which translated into a tendency to favor the formal contract as the negotiation objective). In the general situation, fortunately the most commonplace one, the two groups facing one another in the contract negotiations share a common professional culture. Regardless of their nationality, aeronautical experts, for example, share a professional culture that can be structured and developed during confrontations or partnerships on international programs. They will therefore establish their relationship on the basis of this common professional culture. However, this passageway is not always extended throughout the customer group. Note that in a collectivist culture, the individual belongs to a group (extended family, clan, or organization) and is not able break free from this group.

5.3.6

Pay Attention to Relational Signals

“A friend can become an enemy, and vice versa. My friend returns my friendship. My enemy hates me as much as I hate him.”58 Is it the variation in relational content that causes an agent’s behavior to change? Authors aiming to describe actual transactions frequently point to the importance of signals in ensuring stable cooperation. We have used the framing model to examine the mechanisms for focusing on the three instrumental objectives of gain, compliance with norms, and loss aversion. We also glimpsed the relative instability of framing. Relational signals are all the hints and the tangible or intangible signs that one person conveys when interacting with another. They indicate the parties’ intentions and their level of cooperation.

5.3.7

Have an Intelligible Strategy

5.3.7.1 “Actions Speak Louder Than Words” For the political scientist Robert Axelrod, whose work we discussed previously, there is an important contrast between a zero-sum game59 and a non-zero-sum game. For example, in the case of a zero-sum game like chess, keeping our intentions secret is useful because it allows us to exploit the other player’s flaws. This is not the case in a contract since the other party’s cooperation is beneficial to both parties. The best way to encourage cooperation is to adopt a simple strategy based on the principle that “actions speak louder than words”. Over the last 10 years or so, there has been a growing tendency to consider strategy as being defined in function of concrete actions rather than being based on generic models. The contract management knowledge developed by practitioners is therefore often implicit. Malherbe (2004), introduction to Condillac Traité des animaux [1755] (authors’ translation). A game is said to be “zero-sum” when one player’s winnings are matched by losses of the other, so that the sum of the winnings and losses is zero.

58 59

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The answer to the question “Why do quantity surveyors put so much effort into taking notes?” makes sense when you consider that their mission is to construct strategies that will put the contractor in a favorable position when the time comes for litigation. These professionals are key players in international civil engineering contracts. The procedural culture of common law is fully attuned to an approach based on collecting evidence and documenting contractual performance. Quantity surveyors therefore progressively strengthen the negotiating power of the party employing them.

5.3.7.2 Strengthening Negotiation Power Get into Shape For many people, the mere mention of the role of power in negotiation is paralyzing. The first cause is anxiety. Psychological studies of negotiation show that anxious subjects jump at the first offer (often too low), respond too quickly to counter-offers, and–unsurprisingly– wind up with worse results than they expected. Although it can be costly, taking a step back will give a party effective power, as it avoids becoming bogged down in details or getting caught up in events. In fact, a simple decision-making approach that avoids over-weighing the pros and cons before each move will be beneficial, provided that it is underpinned by a strategy that gets to the heart of the matter (seeing the big picture). A powerful negotiator is able to act “in a less effortful, less deliberate, more heuristic, and more top-down fashion”. This type of negotiator integrates social data and does not get distracted by the first tree that threatens to hide the forest.60 Don’t Underestimate Your Opponent “The first rule is: never, ever, underestimate your opponent. Whenever I am playing at grand master levels, I always, always assume that my competitor is going to see everything I do–even when I plan to make an unexpected move in order to confuse him.” (Garry Kasparov61) Under pressure from the market and institutions, codes of conduct and other ethical charters are designed to induce behavior from the outside. Arguably, the company may have an interest in balancing this pressure by developing its own behavioral culture through a clearly stated contractual strategy.

60

Smith and Trope (2006), pp. 578–596. “Strategic Intensity. A conversation with World Chess Champion Garry Kasparov”, Harvard Business Review, April 2005, pp. 49–53. 61

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The “Beats of a Rhythm” As Language Our understanding of the word “strategy” is based on Thomas Schelling’s Strategy of Conflict in which he argues that strategy is not only concerned with applying force but with exploiting “potential force”. As he notes, “It is concerned not just with enemies who dislike each other, but with partners who distrust or disagree with each other.” In this approach, strategic action is developed by gradually increasing the beats of a rhythm, enabling each actor to observe and appreciate the meaning of changes in attitude, even those of small amplitude. These changes correspond to a dynamic process where the parties reciprocally adjust their positions through change orders and other amendments negotiated during the contract performance phase. The “beats”, whether they are conveyed by notifications, formal requests, or claims, are a form of communication, a language, but with a significant practical impact. Their accumulation irreversibly transforms the game (for example, the accumulation of claims provides information on the level of financial compensation that the contractor wishes to negotiate). As Schelling notes, the incrementalism that is involved in the moves and value systems is significant: “Take for example, a game that involves moving pieces over a board or troops over some terrain. If players move in turn, each moving one piece one square at a time, the game proceeds at a slow tempo by small increments; the situation on the board may change character in the course of play, but it does so by a succession of small changes that can be observed, appreciated, and adapted to . . .”62

Strengthening negotiation power

We have shown that each phase of the contract has its own set of signals: the project initiation phase is guided by compliance with norms, the contract performance phase by maximizing gain, and the final negotiations by loss aversion. The sole purpose of the contract performance phase should be to strengthen the contracting party’s bargaining power.

62

Schelling (1960), op. cit.

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5.3.7.3 A Comprehensible Administrative Process It is highly unlikely that the parties will have the same value system, especially if they do not share a common history. There is therefore uncertainty about their reaction. For Schelling, “Each needs, therefore, to communicate his value system with some truth, although each can also gain by deceiving. While one’s maneuvers are not unambiguous in their revelation of one’s value systems and may be deliberately deceptive, they nevertheless have an evidential quality that mere speech has not.” For example, when a claims administration process is perceived to be fair, the beats of the rhythm can be significant, but they also convey comprehensible information. The intensity of the conflict is considerably reduced and paradoxically contributes to the satisfaction of the victim, even if the outcome is not in its favor.63 It can be observed that even during the toughest negotiations, the actors do not mix up the contractual game and their personal relationships, as long as everyone knows the rules. In Practice

The principles of active management • • • • • • • • • • • •

5.4

Understand the main legal concepts applicable to contract law; Prepare a detailed statement of work; Consider renegotiation to be likely; Implement close monitoring of project activities; Avoid micro-management; Prepare the documentation framework as soon as the contract is signed, paying specific attention to causal relationships; Pay attention during initial exchanges with the other party; Anticipate changes in the other party’s attitude; Renounce cultural stereotypes once and for all; Rely on the power of the written word; Display an unwavering commitment to the implementation of contractual procedures; and Communicate. ◄

Conclusion

The idealized world of Homo economicus is an objective world where full information is available. The players’ sole motivation is the quest for monetary gain, they know the exhaustive list of future states of nature, the decisions they make are “only 63

Aibinu et al. (2008), pp. 681–691.

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risky”, and only the final outcome counts. Of course, it’s not necessarily a good world to live in, but the contracting party cannot claim that “it didn’t know”. So everything is simple. . . Especially since friendship is not essential for cooperation. The real world is very different. The majority of models are based on an unrealistic conception of rationality and the individual has multiple motivations (power, prestige, affect, compliance with norms, etc.). When individuals process information, their reasoning is biased and fails to take into account statistical contributions. Uncertainty is far-reaching and sunk costs have a decisive weight in decisionmaking. In order to make the bilateral relationship between the contractor and the principal intelligible, we need to employ two strong hypotheses: firstly, contractual relationships are “framed”, allowing us to consider situations in which the contract plays a different role. Secondly, there is an asymmetry between gains and losses, which makes renegotiation particularly difficult (even though it is known to be inevitable during the performance phase of the contract). The image of the melting ice cream with its ever-shrinking portions explains the difficulties of this renegotiation process, which would not be the case if resources were expanding. To refer to the contract as a game is extremely comforting when focusing on a negotiation strategy. For example, it is no coincidence that we question the other player’s “game” when faced with an unanticipated movement. The scope of the analogy is not reduced if we accept that cognitive framing can make a contribution to the negotiation model. Indeed, “game theory should benefit from the advances that have been made in individual decision theory by experimental psychologists such as Daniel Kahneman–who was awarded the Nobel Prize in Economics in 2002–and Amos Tversky. Players do reason, but their reasoning is dependent on a specific cognitive framework. They therefore need to consider the situation from the other party’s point of view. . .”64 In the next chapter, we will use the game of go to explain a strategic approach that focuses primarily on strengthening the contracting party’s negotiating power in order to close the contract.

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Bartels A, Zeki S (2004) The neural correlates of maternal and romantic love. NeuroImage 21 (3):1155–1166 Becker GS (1996) Accounting for tastes. Harvard University Press, Cambridge Berger-Walliser G (2012) The past and future of proactive law: an overview of the proactive law movement. In: Proactive law in a business environment. DJØF Publishing, Denmark Bouthinon-Dumas H (2001) Les contrats relationnels et la théorie de l’imprévision. Revue internationale de droit économique 15(3):339–373 Brosnan SF, de Waal FBM (2003) Monkeys reject unequal pay. Nature 425(6955):297–299 Chambon J-L (2010) La Chinamérique – un couple contre nature ? Eyrolles, Paris Cialdini R (2001) Influence: science and practice. Pearson, London Cooper K (1980) Naval ship production: a claim settled and a framework built. Interfaces 10 (6):20–36 Crocker KJ, Reynolds KJ (1993) The efficiency of incomplete contracts: an empirical analysis of air force engine procurement. RAND J Econ 24(1):126–146 Damasio AR (1994) Descartes' error: emotion, reason, and the human brain. Putman Publishing, New York Feldman DC (1984) The development and enforcement of group norms. Acad Manag Rev 9 (1):47–53 Frank RH, Gilovich T, Regan DT (1993) Does studying economics inhibit cooperation? J Econ Perspect 7(2):159–171 Gil N (2009) Developing cooperative project client-supplier relationships: how much to expect from relational contracts. Calif Manag Rev 51(2):144–169 Güth W, Schmittberger R, Schwarze B (1982) An experimental analysis of ultimatum bargaining. J Econ Behav Organ 3(4):367–388 James HS Jr, Cohen JP (2004) Does ethics training neutralize the incentives of the prisoner’s dilemma? Evidence from a classroom experiment. J Bus Ethics 50(1):53–61 Kahneman D (2011) Thinking, fast and slow. Farrar, Straus and Giroux, New York Kahneman D, Miller DT (1986) Norm theory: comparing reality to its alternatives. Psychol Rev 93 (2):136–153 Kahneman D, Tversky A (1979) Prospect theory: an analysis of decision under risk. Econometrica 47(2):263–291 Krishnan R, Miller F, Sedatole K (2011) The use of collaborative interfirm contracts in the presence of task and demand uncertainty. Contemp Account Res 28(4):1397–1422 Kumaraswamy M, Yogeswaran K (2003) Substantiation and assessment of claims for extensions of time. Int J Project Manag 21(1):27–38 Lax DA, Sebenius JK (1986) The manager as negotiator. The Free Press, New York Lindenberg S (1993) Framing, empirical evidence, and applications. In: Jahrbuch für Neue Politische Ökonomie. Mohr (Siebeck), Tübingen, pp 11–38 Loosemore M (1999) Bargaining tactics in construction disputes. Construction Manag Econ 17 (2):177–188 Luo Y (2002) Partnering with foreign firms: how do Chinese managers view the governance and importance of contracts? Asia Pacific J Manag 19(1):127–151 Macaulay S (1963) Non-contractual relations in business: a preliminary study. Am Sociol Rev 28 (1):55–67 Malherbe M (2004) Traité des animaux. Vrin, Paris Mnookin R (2004) Surmonter les obstacles dans la résolution des conflits. Revue française de gestion 6(154):237–254 Ng ICL, Tseng L-M (2008) Learning to be sociable: the evolution of homo economicus. Am J Econ Sociol 67(2):265–286 Oudot J-M, Ménard C (2009) Opportunisme ou équité ? Le cas des contrats d’approvisionnement de defense. Revue française d’économie 24(3):195–226 Peña-Mora F, Tamaki T (2001) Effect of delivery systems on collaborative negotiations for largescale infrastructure projects. J Manag Eng 17(2):105–121

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6

Day-to-Day Management of the Contract

The psychological difficulty of attempting to make a long-term contract work had not escaped the lawyers. After an initial moment of enthusiasm, when the co-contractor is admired and appreciated, comes the early moment of regret, followed by the interminable lowlands of cooling, weariness, even hatred, which can lead to non-performance and lawsuits.1

The purpose of the contract is to align and coordinate the parties’ interests. Previous analyses show that, in addition to the sometimes harsh confrontation of legal methods and cultures, strategic opportunism may emerge in major projects, reflected in the problem of contractual hold-up, as illustrated in Chap. 4. Unsurprisingly, this can create situations of great tension. However, it would be wrong to imagine that closing the contract inevitably leads to dispute. If we accept that the dynamics of the contract bear the seeds of conflict, that the lawyer is not the only custodian of knowledge, and that the purpose of the contract is to create value, then we will be able to reconcile each party’s interests while preserving the relationship, which is an essential condition for future business. The question of whether law is a management tool is not new.2 Recognizing that law has the status of a “science of the organization of interpersonal or intergroup relationships that arise from life in society, where the rules of law are–or are reflected by–behavioral norms” should lead to behavioral components being included in legal support processes. Economics owes a debt to the social sciences. It has borrowed heavily from psychology and sociology. The experimental economics work performed since the 1970s has found applications in the field of behavioral finance, which gained

1

This invitation to search for the close link between the contract and psychology was made by Carbonnier (1978) (authors’ translation). 2 Percerou (1990), op. cit. The author pointed out that for some jurists, this would be tantamount to “downgrading law to the level of organizational science”. # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3_6

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recognition in 2002 with the award of the Nobel Prize in Economics to Daniel Kahneman. The time has come to make use of the results. Building a management method founded on real-life experiences and enhanced with the most recent elements of experimental psychology and sociology will give practitioners the tools they need to manage the contract on a daily basis. This approach adopts a realistic conception of rationality, far removed from that of Homo economicus. This undertaking will have no chance of success if operational managers (engineers and project managers) have to absorb a formalized model that is too complex to be accepted. We will therefore use a metaphorical model to represent this strategy–the game of go, for example. This representation will revive a “mental model” that is efficient and quick to assimilate.

6.1

Defusing Conflict

Chapter 3 showed that, in a project management context, economic actors are confronted with radical uncertainty because they face a future they cannot control. The future cannot be probabilized, and the Work Breakdown Structure (WBS) and its related resources (Organizational Breakdown Structure, OBS) are not sufficient to define future states of nature. The contracts implemented will inevitably be incomplete. The actors will therefore have to resolve conflicts and will constantly need to arbitrate between renegotiations, conducted to maximize gain, and the need to maintain a lasting relationship. To complicate matters, these actions are conducted within the framework of the contractual relationship, which is based above all on the quest for profit.

6.1.1

A Proven Risk

It is clear that civil engineering contracts generate conflict. It is even inevitable. Researchers have taken a hypothetical fixed-price construction contract to show that the probability of a dispute arising (using fault tree analysis) is 100 %!3 The result is indisputable. High-tech projects are no exception to this rule. Analysts of the Apollo program have already noted that contract and conflict are inseparable.4 “There are a number of conflict situations which occurred between the project management organization and the contractors [. . .] which are fairly typical in ‘contractor management’ situations. Disagreements, for example, arising over ‘the scope of a contract’, ‘the value of a 3 4

Cheung and Yiu (2006), pp. 456–470. Wilemon (1973), pp. 282–296.

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contract’, and ‘intent of a contract’ are rather common causes of conflict in contract management situations.”

6.1.1.1 The Fixed-Price Contract, A Framework for Conflict The contract must answer the following seven questions: 1. 2. 3. 4. 5. 6. 7.

Who are the parties? What is the purpose of the contract? What service is to be provided? For which counterparty? From what date, for how long, and within what timeframe? How and under what conditions? What happens if a dispute arises?

The mutual assent between the parties creates obligations that justify the contract’s existence. The subject matter, price, and time elements cover the answers to questions 3, 4 and 5. The last question prefigures what the contracting parties fear most. Claims–formal demands for additional funding resulting from changes, errors, or omissions in contract documents–are a major source of conflict. Suspicion between the parties is mutual. The project owner anticipates that the contractor will not report contractual anomalies detected during the tender response phase since it plans to exploit them at a later stage. To counteract this perceived intention, the project owner will be tempted to draw up the contract in such a way that it is virtually impossible to issue claims, which inexorably leads to dispute. It may also deploy strategies that are detrimental to establishing trust, such as overspecifying or imposing overly strict control rules that create the possibility of being managed “by the contract”. Managed “by the Contract” A project manager for a major engineering company had just taken charge of a site in the Pacific region for the technical upgrading of a power transmission link in a geologically complex area. This was not the first contract his company had won in the area. The project manager therefore focused on the “real” issues at stake: design, system supervision, installation, the risk of earthquakes, etc. The new contract was a fixed-price “turnkey” contract, derived from the FIDIC model. This model, published by the International Federation of Consulting Engineers (FIDIC), is a standard form contract for international construction projects. In the beginning, everything went more or less to plan, at least within the limits of what can be expected when performing such a complex project. The (continued)

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project manager set up his team and spent most of his time planning the project. He was therefore extremely surprised when his team was overwhelmed by a flood of questions from the customer’s agent: the engineer. The engineer’s role is to check that the work complies with the terms of the contract and to take an independent position in the resolution of potential disputes. The FIDIC contract gives this actor quasi-judicial power. In this case, the role had been entrusted to an international consultant. By the end of the project, the file contained 10,000 faxes and letters (compared with the 75 letters exchanged in a previous case). Considerable energy was spent compiling, checking, and modifying the meeting minutes written by the consultant, some of which ran to 55 pages, compared to five pages in the previous case!). The consultant actually appeared to have two objectives: to strengthen his position as a representative and to accumulate technical information for future contracts. This poor relationship affected the entire project, causing delays and demotivating the project team. The end customer was cut off from the project and the project manager was ultimately replaced.5 The previous case illustrates the classic principal-agent problem from the Law and Economics school of thought, where the parties negotiate through representatives who have different motivations from those of their principals. In this environment, the positions of some actors are in plain view, to say the least; although, given that contracts can “drive the parties to crime”,6 such openlyexpressed positions at least have the merit of honesty. There is therefore a latent conflict between the project owner and the contractor. The divergence of interests is manifested with such relentless consistency that even the most jaded screenwriter would be disheartened by the story: the project owner is viewed with suspicion, the contract’s shortcomings are exploited by the parties, litigation costs and anticipated delays are included in the offer, claims are issued. . . Disputes form part of the scenario and the slightest problem is bound to lead to confrontation.

6.1.1.2 The Psychological Roots of Conflict Conflict does not arise out of thin air. It is born of facts, words, and attitudes that are understood, rightly or wrongly, by one of the parties as obstacles to its ambitions. The conflict generates pain that is translated into a desire to inflict reciprocal hardship on the other party. Arbitration specialist Charles Jarrosson tells us that “a dispute does not present itself in legal terms from the outset. Its roots are first of all 5 6

Berggren et al. (2001), pp. 39–48. Jolivet (1998), pp. 19–31.

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psychological (misunderstanding) or technical (malfunction); that is the real substance of the dispute, which will later be translated into legal terms.”7 It’s “the Thought That Counts” Daniel Kahneman et al.8 show that an action that deliberately exploits the dependency of one of the parties will be considered as hostile. For example, individuals will be unwilling to pay a high price on the basis of increased market demand but will accept the transaction without any discussion if the price rise is the only way to save the supplier’s ongoing operations. Imagine a game of ultimatum against a computer. It is clearly difficult to attribute intentions to the computer. Individuals reject low offers from human subjects but rarely reject them when they come from machines. Loss aversion explains how deliberately ignoring norms of reciprocity can lead to hostile behavior, which can become extremely costly for the parties. Signaling a willingness to cooperate therefore becomes a decisive factor.

6.1.1.3 The Search for Agreement Becomes the Main Element of the Conflict Situation Acceptance of conflict is therefore an input to the contractual problem (if there were no risk of conflict, there would be no need for an explicit contract). Remember that any situation of interaction may be represented by an uncooperative game in which the parties’ interests diverge. The following figure illustrates this situation.

Divergent interests 7 8

Jarrosson (1997), pp. 325–345 (authors’ translation). Kahneman et al. (1986), pp. 728–741.

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For Thomas Schelling,9 conflict is inseparable from negotiation: “To study the strategy of conflict is to take the view that most conflict situations are essentially bargaining situations”. Toward “Conflict Management” Conflict management is a relatively new field in the social sciences. Professionals are very concerned about the high cost of disputes. When not nipped in the bud, disputes affect relationships and become ingrained. In the past, the primary goal was to reduce the occurrence and intensity of conflict in order to achieve “harmony”. More recently, it has been assumed that conflict is inevitable. Paradoxically, this path leads to constructive management. For the President of the Paris Center for Mediation and Arbitration, effective conflict resolution must be an integral part of corporate strategy, while litigation risk management remains a key management imperative.

6.2

Redefining Contract Governance

The contract commits the parties to financial amounts that may generate considerable risks. Of course, when anticipating probable project drift, we will not take the straightforward solution of dealing with this risk by means of a simple financial provision–calculated by the most provocative parties according to the principle that the cost on completion will be the initial estimate multiplied by two-times Pi! This approach would be suicidal in a competitive market.

6.2.1

Reducing Financial Risk

The contract is often perceived as a collection of clauses, a “contractual grammar” whose primary function is to limit risks. In Practice

The most frequently-used clauses • Definitions; • Entry into force; • Delivery dates and carriage; 9 Recall that Thomas Schelling was closely involved in strategic arms control issues during the Cold War. In 1960, he published his book The Strategy of Conflict, and was awarded the Nobel Prize in 2005 “for having enhanced our understanding of conflict and cooperation through game-theory analysis”.

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• • • • • • • • •

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Acceptance criteria; Payment terms; Warranties; Liability; Liquidated damages; Intellectual property; Termination for default; Governing law; and Dispute resolution. ◄

In the particular case of a fixed-price contract, the risks will mainly concern price, scheduling risk, non-payment risk, exchange rate risk, performance risk (especially for development projects), country risk, and its corollary–the risk of abusive calls on bank guarantees. Contractual levers ensure that the contract covers these risks while also coordinating the parties. The content and terms of the transaction will be carefully specified (technical specifications, price, payment terms, and schedule) and assurance will be given to both parties that everything is provided for to ensure that the contract is respected (guarantees, liquidated damages, limits of liability, and securities). For the economist, transaction cost theory fixes the terms of the bilateral relationship through a collection of clauses that constitute a pre-established “grammar”.10

6.2.1.1 Content of the Project • Clear technical specifications; • At a fair price; • Which will be paid according to pre-established payment terms; and • In function of the production schedule. 6.2.1.2 Assurance for the Parties • Performance guarantees—liquidated damages; • Technical warranties; • Limitation of liability; and • Performance securities.

10 To mitigate contractual risk, the parties need to implement an effective contract review process before they commit to the contract. This review process should involve (a) preparing a set of guidelines for interpreting the contract, (b) designating a reviewer responsible for identifying problematic language and bringing it to the attention of decision-makers, (c) developing a list of “red flag” and “must-have” clauses that must be avoided, or included, and (d) reviewing the lessons learned on previous contracts. (See for example Walsh 2017, pp. 1–9.)

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The eight business levers presented above shape the project in the most general sense,11 and harnessing them should enable the parties to avoid economic disaster by covering 80% of major risks.12 If one of these levers is not properly addressed by the risk analysis performed during the offer phase, the consequences can be dire and may even cause one of the parties to go under. In Practice

Grounds for exemption from liability In addition to the clauses that limit liability, there are a small number of grounds for exemption (partial or total) from liability: • aggravated damages: a creditor is prohibited from obtaining compensation for damage whose aggravation stems from its own negligence; • force majeure; • the act of a third party (shared liability), in certain cases where the intervention of a third party (other than the parties to the contract, their subcontractors, or suppliers) hinders or renders impossible the performance of the contract; • the negligence of the victim (shared liability), which may be invoked by the party that caused the damage; and • active interference (discussed in Chap. 4). ◄

6.2.2

Taking Contract Dynamics into Account

6.2.2.1 “Procedural” Rules Having a set of grammatical rules, even if they are contractual, does not automatically make you a writer. Although we may avoid economic disaster by examining the contractual clauses with a legal fine-tooth comb before signing, this will not exempt the practitioner from setbacks during performance. These “grammatical” clauses are of course essential, but they fail to take into account the dynamic aspect of the parties’ interactions. The bilateral relationship has a transactional element, but it must also incorporate procedural components designed to adapt the contract to events that interfere with its performance and to ensure that the parties have a shared understanding of this mechanism. These procedural elements are part of a dynamic system and are a useful complement to the transactional clauses defined above. Such additional mechanisms have an undeniably practical value. They govern the relationship and microinteractions during the project and constitute the “conventional arsenal” on which 11

von Branconi and Loch (2004), pp. 119–130. A survey of the most commonly negotiated items in international contracts is regularly conducted by the International Association for Contract and Commercial Management (IACCM). The results indicate that the very first clauses on the list are associated with legal and financial risk management. 12

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project managers will rely to strengthen their initial position or to rebalance a contract that may be unfavorable to them. The previous chapter shows that these mechanisms are unfortunately not always used optimally, often for psychological reasons or due to cognitive biases, which have a definite impact, such as giving notice of delays. The most commonly used mechanisms at the operational level are listed below. They enable the contractor to maintain the profitability of the contract or even to save its business: • • • • • •

document submission and sign-off rules; equipment inspection procedures; triggering of payments; change order/variation orders; dispute and conflict resolution; and notification rules for extension of time. In Practice

Three golden rules for change management Rule 1: Enforce the contract, the whole contract, and nothing but the contract: • refer to the clauses of the contract for each given situation; • strictly adhere to change management procedures; and • systematically transmit the modified schedule to the other party. Rule 2: “Sell” changes as they are made, without waiting for the end of the contract. Rule 3: Document variations from budget in order to build up the presentation of change orders over time. ◄

6.2.2.2 A Recurring Activity The particularity of these procedural components is that they are activated on a recurring basis throughout the contract performance phase. For example, a written notice is issued by one of the parties as soon as an event outside its scope of responsibility occurs (e.g., an unavailable energy source, or a site that is not accessible or that is unsuitable for the work planned). This event could trigger a dispute if it is not dealt with within a reasonable timeframe. In Practice

Some examples of “triggering events” likely to have an impact on the performance of the contract

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Additional work stemming from specification changes; New safety standards; The emergence of new regulatory constraints; Direct or induced interruption of task sequence; Insufficient funding from the project owner; Conflict between contractual documents; Insufficient coordination; Inadequate knowledge of local administrative conditions; Late decisions; Construction site inaccessible; No power source; Equipment or services delivered late by the prime contractor; Acceleration of work due to tightening of the schedule; Deterioration of site conditions (access conditions, dust, etc.); Insufficient storage space; Unfavorable climatic conditions; Procurement delays; “Surprise” strikes; and Abusive inspections. ◄

A modular approach to contracts may meet an operational need.13 Combining structural obligations, defined by transaction cost theory (grammar), with procedural, dynamic rules provides the necessary tools to contain the level of risk and help the parties adapt to exogenous events. Can we, at this stage, conclude that there is no more to be said about contractual mechanisms and that we simply need to turn the cogs? We will see that this is not the case.

6.2.3

Shared Knowledge

6.2.3.1 The Role of Learning The parties are not always aware of the value of procedural clauses when they sign the contract. These clauses often stem from precedents and are integrated into the contract through a learning process. If we look closely, this may be one of the reasons for the supposed predominance of the English in contract management: the case-based approach found in Anglo-Saxon countries, which is reflected in the rule of precedent, shapes contract law incrementally through successive case law decisions. To date, contract theory has been very quiet about the role played by learning. There are two reasons for this: transaction cost theory does not incorporate this notion and the various empirical studies conducted on long-term contracts have 13

Brousseau (1995), pp. 409–439.

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focused on heavy or traditional industries where practices are stable and the learning factor does not play a major role. The following case shows how procedural clauses can appear. The Role of Learning in the Evolution of the Contract Kyle Mayer and Nicholas Argyres14 examined the learning process of two hightechnology firms–California-based Softstar and its Japanese client, referred to as “HW Inc.”,–in a series of eleven contracts covering an 8-year period. They observed significant changes in the structure of the contracts signed by the two companies that could not be explained by changes in the nature of the product since, in all cases, the contracts were for software development. At the beginning of the relationship, the parties formalized their intentions in a contract drawn up by lawyers. They did not immediately grasp the importance of all of the contract’s contingencies or underlying risks, such as misalignments. Their story shows that rather than anticipating problems, they systematically waited until they were confronted with an adverse situation before including the relevant clause in a later contract. The learning process was in fact incremental and stemmed from the knowledge acquired by engineers and managers as they worked through the process. Distinguishing feature: the only elements of the contract that changed significantly were the statements of work (SOWs), which primarily aim to clarify the responsibilities of each party. It should be noted that, although each SOW formed an integral part of the contract and had legal value, the lawyers had little control over its content. It goes without saying that this real-life example cannot be automatically generalized. However, we can draw two lessons from it: the first is that the purely legal part of the contract is relatively immune throughout the entire period of the parties’ economic exchange, whereas the procedural clauses, which form the basis of the day-to-day relationship between the operational players, are constantly adjusted. The second is that these clauses emerge from past experience and individual learning. The previous case, the authors note, perfectly reflects the utility of procedural clauses. Such clauses alleviate conflict and provide a dual alignment. They are often derived from tacit knowledge or routines. Pure analysis alone cannot govern the design of the contract. In fact, without diminishing the lawyers’ contribution, engineers and managers,15 who interact continually during the performance phase, play a predominant role in

14 15

Mayer and Argyres (2004), pp. 394–410. Argyres and Mayer (2007), pp. 1060–1077.

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contract design in order to align procedural clauses that have a technical, relational and, above all, financial impact. This is a key factor in a firm’s competitiveness.

6.2.3.2 Legal Support The need for ongoing legal support does not stop when the contract is signed. Integrating legal aspects into the organizational culture poses a three-pronged problem:16 • providing operational managers with legal information; • persuading individuals that the effort required to “be in compliance” is actually worthwhile; and finally • translating the requirements to be met into concrete operational terms. The legal rules of the contract need to be “decoded” into concrete operational terms.17 Considering the “contract in action” rather than the “contract as submitted to the judge”18 goes far beyond commercial requirements. It offers a simple response to a non-explicit request from the actors to improve emotion management and cognitive abilities. In international contracts in particular, what the contract appears to overlook is much more risky than what it actually says, which introduces uncertainty and stress.

6.2.4

Developing Procedural Knowledge

6.2.4.1 A Laborious Collection Process How can this ex ante knowledge be developed? It is often a question of capitalizing on the knowledge acquired. But is this really effective? Most standards (ISO 10006, CMMI, PRINCE 2, etc.) recommend organizing end-of-contract reviews in order to benefit from past experience. But the truth of the matter is that, in practice, lessons are not analyzed or, if they are, the analysis methods employed are either extremely resource-intensive or too superficial. We set out below some examples from large companies. In the 1980s, the British Petroleum group set up a dedicated “Post-Project Appraisal Unit” whose mission was to prepare internal reports to record the lessons learned during projects. For each project, interviews were conducted with an average of 40 people over a period of 6 months. In the same vein, Boeing created a “Project Percerou (1990), op. cit. We highlight an interesting initiative in the spirit of proactive law for a Finnish contract: Stefania Passera, “Enhancing Contract Usability and User Experience Through Visualization”, 16th International Conference on Information Visualisation, 2012, pp. 376–382. 18 For example, in a case where the parties failed to consider this aspect, a misplaced comma in a service contract ended up costing CAD 1 million! “The Comma That Costs 1 Million Dollars”, The New York Times, October 2006. 16 17

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Homework Team” to avoid reproducing the mistakes made during the development of its 737 and 747 aircraft models. It was active for 3 years. At the other end of the spectrum we find half-page “micro articles”, such as those proposed by sociologist Helmut Willke, which can be stored in a database and accessed via the firm’s intranet. We also note the context-rich “learning histories” proposed by a team from MIT, which are between 20 and 100 pages long and are distributed in debriefing workshops. The most recent large-scale study19 on this topic, a 2008 survey of British, American, and Chinese professionals on behalf of the Project Management Institute, indicates that lack of employee time and lack of management support are the two factors most often cited to explain the limited attention devoted to post-mortem analyses. In Practice

Formalizing lessons learned Lessons learned (LL) is a process that aims to draw lessons from past experience in order to improve future practices. It therefore plays a major role in the continuous improvement loop. In principle, an LL process can be carried out at any time during the contract life cycle (organizing intermediate LLs may be of interest for contracts that span several years or to prepare for a change in contractor). However, the end-ofcontract LL process is particularly important as it takes stock of best practices and failings observed from the contract’s entry into force until its closure. In general, the LL process is structured as follows: Step 1: Describe the LL finding The objective of this phase is to: • characterize/code the finding to allow for further research or trend analysis; • understand the event, whether it is a best practice or a malfunction; and • identify the impacts as clearly as possible (costs, delays, safety, etc.). The description of the finding must be factual and precise, based on verified facts that go beyond the feelings and experiences of the actors, and must specify all the contextual elements. These elements make the LL findings indisputable, facilitating their acceptance by the various stakeholders. Step 2: Analyze the LL finding This phase should allow us to: • analyze the causes that led to the finding; • identify the corrective solutions implemented; and • identify the applicability of the LL analysis.

19

Williams (2008), pp. 248–266.

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The analysis of causes must look beyond the symptoms, going back to the underlying causes: the symptoms reflect the primary causes, which at first glance generated the recorded event (by eliminating the symptoms, the problem is only partially and momentarily resolved); the underlying causes are the root causes at the origin of the symptoms and therefore the sources of the problem. In order to expose these underlying causes, two types of approach are possible: open questioning, for example using the “5 whys” method (a problem-solving method that allows us to go back to the root cause); or the typology of causes approach, which is more directive than open questioning (e.g., an Ishikawa diagram showing the 5Ms: Man, Machine, Medium, Mission, and Management).

Step 3: Propose recommendations for future contracts The recommendations proposed in the LL analyses must address the causes identified in the cause analysis. The impact of the proposed recommendations should also be analyzed in order to estimate the advantages and disadvantages of implementing these recommendations (costs, deadlines, etc.). Step 4: Identify impacts on benchmarks The final step in the LL analysis is to identify the benchmarks to be updated at the end of the analysis: contractor’s obligations, contractual conditions of performance, performance indicators, standards and requirements, standard technical specifications, governance, etc. ◄

6.2.4.2 “Unique Project” Syndrome A second barrier to learning is the limited dissemination of these lessons to teams within the organization. There is a tendency to “reinvent the wheel” with each contract. Because of a lack of time, lessons are ignored, even if they are entered into a database. Storing this knowledge does not offer a viable solution. All studies agree on this point: information placed on the intranet is simply not consulted by stakeholders, who are systematically convinced that their project is unique and that they have nothing to learn from previous projects In this respect, in order to contribute to value creation, contract management–like the legal framework–must be approached with a view to managerial co-construction. “Looking beyond the simple asset-focused and passive approach of the resourcebased view, an organization’s strategic development is increasingly based on dynamic skills (competence-based view and knowledge-based view).”20

20

Aliouat (2011), pp. 215–232 (authors’ translation).

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6.2.4.3 Communities of Practice The solution finally chosen by the experts is not to focus on the results achieved in previous projects but to develop learning about how they were achieved, in other words, to apply procedural knowledge. The lessons are then generic and can be transferred through a community of practice (CoP). Communities of practice can be defined as “spaces both for corporate value creation (by promoting the dissemination of knowledge and know-how and encouraging cooperation between actors outside formal processes and traditional hierarchical patterns) and for the professional development of team members at all hierarchical levels (by strengthening skills, supporting a professional identity, and instilling a shared culture).”21 Communities of practice involve uniting the holders of an expertise–in this case contract management–around a specific skill in the service of a shared ambition. Such systems are no longer confined to work spaces between peers, on the fringes of the organization, but are gradually becoming structured to provide a new way of facilitating and sharing knowledge between professionals. In this respect, the emergence of collaborative tools, such as corporate social networks, portals, and corporate wikis, allows content adapted to different populations and functions to be disseminated within the community of practice. On this topic, we highlight the initiative put in place in France by the Électricité de France (EDF) Group to set up a contract management network made up of several hundred people, managed centrally within the framework of a community of practice, and equipped with tools for sharing know-how and best practices.22

6.2.5

Creating Value

Since contracts are not immune to ambiguity, the parties often have differing interpretations of the terms. New contingencies and requests for technical changes are bound to arise. In a context where performance conditions are subject to unforeseen changes, it is essential that the parties carefully review their contractual framework in order to identify any deviations from the baseline and, above all, to prepare a detailed file, even as early as the tender phase, in order to justify and evaluate these deviations.

21

Natacha Leymarie, conference organized by the WillBe Group on the topic of communities of practice in business: “Les Communautés de Pratiques en entreprises : retours d'expériences et perspectives”, 2017. 22 Beaussaut et al. (2016), pp. 1–24.

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6.2.5.1 Always Ask, “Have We Forgotten Anything?” An Exhaustive Works List (Statement of Work) Disagreements about the content of the services to be provided are at the root of most disputes. The description of this content (i.e., the scope) is found in the statement of work (SOW), which is the reference document for the project’s scope. It must be sufficiently detailed to reduce ambiguity but without becoming overly detailed. We should never forget that the SOW is an integral part of the contract. Two difficulties need to be highlighted: • the contract is generally not sufficiently detailed to transcribe all of the practical performance requirements and obligations into written form. For this reason, contracts, particularly international contracts, sometimes include catch-all clauses such as, “The product must be fit for the purpose intended ”; • the contract is drawn up before the design is fixed and gives only a partial picture of the customer’s requirements. This generates modifications throughout the project, with many points remaining open until delivery. In Practice

Statement of work contents • • • • • • • • • •

Introduction/Overview Background Scope (detailed description of work) Objectives References (relevant documentation) Non-technical requirements Description of tasks Deliverables and acceptance criteria Schedule Progress reviews ◄

The questions to be asked from a contractual perspective are typically: • Is the SOW appropriate for the contract type (fixed-price, cost plus, etc)?23 • Is there a risk of incompatibility between the SOW requirements and the clauses in the “terms and conditions” section of the contract? • Is it clear who does what and with what means? • Are the obligations of both parties well specified?

23 For example, for several years now, airlines have favored Performance Based Contracts (PBC) with services invoiced on a per-flying-hour basis.

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• Are the acceptance/receipt conditions well established? • Is there a required level of effort for completing the tasks? Using EVM to Value Changes Earned value management (EVM), developed in the 1960s, enables accurate performance measurement. Its initial use in US Department of Defense (DOD) procurement systems unfortunately discouraged companies from using it for smaller projects. A first readily-provided explanation is its unwieldiness (the ANSI/EIA-74 standards of the American National Standards Institute and the Electronic Industries Alliance require compliance with 32 criteria). A second, less palatable reason could be related to the conclusions of Bent Flyvbjerg in Chap. 3. Legal Performance Enhancement “There are many ways executives can cook the books, some legal, some not. The illegal ways are becoming less attractive, thanks to recent attention from Congress, the SEC, and other regulatory bodies. But there is a way some executives put a spin on company performance that is no less dangerous for being legal: They endorse, even encourage, optimistic forecasts on major longterm capital projects. We’re talking about big projects like building new factories, implementing IT outsourcing, or decommissioning nuclear reactors– projects that can depress the bottom line for years if they run late or seriously over budget.”24 It is probably not by chance that the US budget has recommended its generalization to all government agencies in the wake of the Sarbanes Oxley Act. Its predictive value is undeniable. Consider a simple example: • A 5-year aircraft development project is valued at $1 billion; the projected budget for the first 2 years is $500 million. • After 2 years, “only” $450 million of expenses have been incurred. • We might at first conclude that actual costs are lower than forecast. In reality, the project has been delayed to such an extent that the corresponding value of the work completed is only $400 million. • In fact, we’re not looking at a gain of $50 million, but a cost overrun of $50 million!

6.2.5.2 Bad News... Will Never Get Better If We Don’t Do Something About it The most important indicator in the EVM method is the cost performance index (CPI): 24

Fleming and Koppelman (2003), pp. 20–22.

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• The CPI is obtained by dividing earned value by actual costs. • For example, if the CPI is 0.8 for a program budgeted at €1 billion and the program is one-fifth complete, the actual cost will be €1.25 billion. • The value obtained is €0.8 for each euro spent. Experience shows that this indicator is very stable for most projects up to around a 20% progress level and rarely varies by more than 10% until the end of the project (it even tends to deteriorate).

6.2.5.3 EVM Justification of Cost Overruns Based on Legal Requirements What can the EVM method contribute to the contract? EVM can efficiently complement claim valuation methods because it draws on the legal requirements of substantiation (causality, reasonableness, source of information, and limitation of additional costs to the subject-matter of the claim). Remember to Collect Evidence An American company claimed US$12 million on 13 contentious issues relating to a fixed-price contract for the design and manufacture of an electronic testing system. The case took 5 years and over $1 million to resolve. The judge eventually awarded $1 million to the plaintiff, which barely covered its expenses. With sufficient evidence (burden of proof), the dispute could have been resolved before the trial and under much better conditions.25 On the other hand, this method only works if project management tools are in place and rigorously implemented. In Practice

The “top ten” reasons why EVM fails26 • • • • • • • •

25 26

Undocumented requirements; Incomplete requirements; WBS not used or not accepted by one of the parties; Incomplete WBS; No integrated plan between the WBS, schedule, and budget; Incorrect scheduling and/or budgeting; No change management; Inadequate identification of additional costs;

Kauffmann et al. (2002), pp. 13–20. Lukas (2008), pp. 1–10.

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• Inaccurate assessment of the actual progress of the work; and • A lack of management control. ◄

6.2.5.4 A Change Management Program Change management begins as soon as the contract enters into force. It involves four steps: • if an event occurs that affects its work, the contractor should employ the contractual provisions and give notice to the other party of its intention to present, as soon as it has assessed the effects, the resulting consequences in terms of cost and time in order to negotiate compensation; • it establishes the link with the contract terms in order to demonstrate that its claim is lawful (entitlement) and that it is not responsible for the change; • it then evaluates the change and collects the supporting documents; • it submits all of the details to the other party. There are three categories of change in international contracts. (a) The most common is the formal change order, which substantially alters the terms of the contract, the schedule, or the technical specifications. In this type of amendment, form is as important as substance (for example, there must be no missing signatures, it should be addressed to the right person, etc.). (b) The second is a simple change (also called “scope change”, “constructive change”, or “variation order” for civil engineering contracts), which is intended to respond to changes specific to the life of the contract such as those resulting from incomplete specifications (errors and omissions). (c) Finally, the third category, cardinal change, has a dimensional effect on the project (over 10%). To qualify a major modification as a cardinal change, we need to ask the following simple question (for construction contracts): “Can it be shown that the building was so materially changed that it could not be reasonably recognized as the same building as work embraced in the contract?”27 “Reservation of Rights” In international civil engineering contracts, the contractor’s obligation to give notice within a prescribed period is often not compatible with a detailed quantification of impacts. In such cases, a formal reservation of rights statement will be sent to the project owner: “The compensation and time allowed by this change order do not include any monies or time for resultant changes in the sequence of work, delays, disruptions and/or impacts, and the right is expressly reserved to make claims for additional compensation and time for such prior to any final settlement of this contract.”28

27 28

Cox (1997), op. cit. Cox (1997), op. cit.

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6.2.5.5 Claims Management Identifying Damages Most contracts contain clauses relating to disputes. If a party believes that it is in a position to exercise its rights it must give written notice of its intent to make a claim. There are generally three main causes for claims: (a) performance problems, (b) problems relating to payment or the value of the work, and (c) problems stemming from delays. In Practice

Questions to ask when analyzing a claim file • • • • • • •

Has the subject already been addressed (amendment, transaction)? Are the facts presented accurate? Are the facts presented contractually or legally justified? Is there prescription or limitation? Is the damage justified and argued? Is the stated cause the primary cause? Is the quantification of the damage consistent? ◄

Enforcing your rights Claims are not A way to make a cheap profit Bogus developments Overpriced estimates that will be used to trade concessions Immoral or devious constructions A means of recovering financial shortfalls Selective and bad faith developments Obvious proposals that require no supporting evidence Bargaining arguments based on excessive valuations

Claims are A way to avoid attributing a price to everything A way to avoid paying for nothing An opportunity to conclude a negotiation for trivial overruns without going to trial A solution for modifying the performance schedule A recognized and accepted procedure A response for events that were not anticipated A contractual interpretation of the consequences of these events A way to negotiate additional funding

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The claim mechanism

A dispute arises when one of the parties issues a claim that is rejected by the other and this rejection is not accepted by the issuing party (for construction contracts, claims preparation is handled by experts–quantity surveyors (QS)–key figures in the project who are formally in charge of measuring quantities of materials but who actually construct claim strategies). In Practice

What kinds of damage are claimed? Direct costs: • labor costs, materials required to carry out work within the scope of the contract; • supervision costs, etc. Costs caused by delays: • costs of project-specific personnel and structures (project management office, PMO); • time spent waiting; • time spent demobilizing/remobilizing staff; • extension of guarantee end dates; • opportunity costs on other projects; • impacts of work stoppages; • loss of productivity; • rescheduling the task network, etc. Acceleration costs: • changes to working conditions (e.g., night and weekend); • supervision costs; • specific equipment, etc.

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Indirect costs: • extension of insurance; • additional taxes; • financial costs (e.g., withholding of payment, late release of guarantees), etc. Negotiation costs: • renegotiations with subcontractors; • interviews with direct personnel; • preparation of claim files; • legal fees, etc. ◄

Analysis of Responsibility for Delays Claims generally relate to delays and the parties naturally have differing views on the allocation of responsibilities. The simplest analysis method is to classify delays as excusable delays or nonexcusable delays depending on whether responsibility lies with the customer or the contractor. For more complicated cases, particularly when delays affect the project’s critical path or when the delays are concurrent, we need to employ more sophisticated methods, requiring the use of computer-based tools.29 Delay Analysis Methods Various analysis methods can be used to identify the respective responsibility of the parties for causing a delay. These methods use different points of comparison, so we need to understand their mechanisms in order to assess the underlying logic for the claim and potentially conduct alternative planning analyses. Method As-planned vs. as-built Impacted as-planned

As-planned but for

Collapsed as-built

Procedure This method involves analyzing an overall delay by comparing the critical paths of the “as-planned” versus “as-built” schedules This method measures the impact of delays on the planned baseline work schedule. The various delays are integrated into the baseline schedule in chronological order, showing their respective effects in order to reflect their impact on the schedule as initially planned This method involves integrating the effects of delays incurred by only one party into the baseline work schedule in order to obtain a revised schedule. This date is then compared with the actual completion date in order to deduce the delays for which the other party is responsible The same principle as above but using the as-built performance schedule (continued)

29

See, for example, Alkass et al. (1995), pp. 335–352.

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Method Windows analysis

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Procedure The full project is divided into time windows. The performance schedule is updated to reflect actual performance times and sequences (when the delay occurred) for each window. The remaining activities from the as-planned program are rescheduled, allowing the critical path and a new target completion date to be determined

There are three questions to ask when requesting an extension of time (EOT): • Does the triggering event affect the performance deadline? • Does the contract allow the contractual milestones to be extended in order to complete the work following the triggering event? • Does the contract require an increase in resources to make up the delay?

Who is responsible? Source: Kao and Yang (2009), p. 409. Reproduced with the permission of Elsevier

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The contractor is responsible for non-excusable delays In Practice

Non-excusable delays (examples) • • • • • • • • • •

Underestimating the offer; Making design errors; Failing to coordinate subcontractors; Under-training personnel; Allocating insufficient resources to the project; Inadequate equipment; Procurement delays; Bankruptcy; Performance delays; Quality issues, etc. ◄

Notice must be given for certain causes of delay, otherwise the extension of time request will not be valid. The issue at stake is to reduce exposure to liquidated damages. In Practice

Excusable but non-compensable delays (examples) • Extreme weather conditions (for construction contracts); • Epidemics (e.g., SARS); • Earthquakes, fires, floods (in general, events justifiable under the force majeure clause); • War; • Strikes, etc. ◄ The customer is responsible for excusable compensable delays. In Practice

Excusable compensable delays (examples) • Tasks not included in the scope of work; • Acceleration of work due to unforeseen delays caused by the project owner (e.g., delay in obtaining administrative authorizations); • Site conditions being more difficult than expected from the surveys (for construction contracts); • Problems of access; • Overcrowded and/or non-cleared sites;

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• • • • • • • • • •

169

Emergence of new standards; Incomplete specifications; Excessive requests for information (RFI); Improper suspension of work; Excessive inspections; Improper rejection of contract documents; Delayed decisions; Delay in the supply of necessary equipment or information to the contractor; Late payment or wrongful withholding of payments; Lack of coordination, etc. ◄

An Effective Method for Resolving Disputes Although extremely simple, this delay analysis method has undeniable advantages. For example, for a claim on one contract in a US$500 million water treatment plant project, it helped the contractor to substantiate a 70% delay and a 40% cost overrun compared to the bid amount. After a period of confrontation, the parties were ultimately able to resolve their dispute by analyzing their respective responsibilities, without recourse to litigation.30 Another analysis, in this case of the Korean KTX high-speed rail megaproject, showed that 80% of the delays were excusable, in particular because of the multiple design changes requested by the project owner and the protracted site-acquisition delays at the beginning of the project.31 The effort paid off. . .

Building a Convincing Story Collecting relevant information and valuing the work are the most time-consuming tasks. In general, insufficient attention is paid to archiving. This activity, which at first glance seems trivial, is in fact vital since the teams will be disbanded at the end of the project. The teams on the ground need to be questioned, requiring multiple interviews. This process should not be neglected on the grounds of costs. Questions will first focus on the availability of documents: • Which documents are produced automatically? • How is their content processed? • Does anyone else use similar documents?

30 31

Kartam (1999), pp. 409–419. Han et al. (2009), pp. 243–256.

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In Practice

The documents that help us to retrace the course of events • • • • • • • • • • • •

The contract(!); Notices; Budget allocation sheets; Daily progress reports; Supervisor logs; Meeting minutes; Diaries; Telephone logs; Drawing logs; Project schedules; Correspondence of all kinds; and Photos/films. ◄

The answers can be surprising. Different departments often duplicate the same information. Or they assume that the information is collected by another department, but are not really sure about this. Before preparing a claim, it is worth keeping the following points in mind: • the contractor has accepted all the terms of the agreement. It cannot select the terms that suit it at a given time and under given circumstances; • the contractor is assumed to be experienced, an expert in its field. It cannot pretend to be ignorant or naive; • the contractor must prove its assertions (the other party will undoubtedly try to dismantle the arguments). Presenting the Information In Practice

Example claim structure Cover letter Title page Table of contents and table of figures I. Executive summary II. Statement of facts and findings • Description of the project and the disputed work • Analysis of applicable contract terms and contract law • Description of the original schedule and expectations • Description of progress and problems • Overall analysis and conclusions III. Detailed analysis

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IV. CPM analysis–Summary of delays and schedule impacts V. Computation and summary of damages Appendices ◄ As a minimum, the claim must address the following five themes: • the narrative, which records the facts and highlights causal relationships. It can be presented in table or text form; • the contractual basis (entitlement) for the compensation or re-alignment of contractual deadlines (EOT) requested; • the arguments linking cause and effect with a justification of the right to compensation (for example, a task that could not be started because a design document was not available at a given time. It must nonetheless be proved that everything else was in place to perform the task); • a valuation (quantum) of the impacts; • appendices including supporting documents such as letters and graphical summaries (documentary evidence, charts). In Practice

Tips for presentation • Identify the reviewer and the decision-maker; • Don’t hesitate to contact the reviewer; • Improve the way the request will be perceived by amending the wording (for example: “submitting a change order request” instead of “filing a claim”); • Don’t identify individuals by name; • Don’t invoke the law if the reviewer is not a legal expert; • Pay careful attention to the executive summary, which is the most important part (no more than 10 pages); • Include photographs where possible; • Include the claims of your own subcontractors; • Remember that this is a commercial operation (“sell” the claim); • Write in short sentences • Only carry on writing if you are saying something new; • Ask yourself: how would I react if I received the document? • Avoid leather binding! Which clauses of the contract can you use to build a claim? A few examples • • • •

Prior administrative authorizations; Time limit for document approval; Specification omissions; Applicable standards;

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Performance criteria; Inspections; Notification time limits and procedures; Change orders; Suspension of work; Termination; Extension; Payment; “If and when” clauses; Environment; Cybersecurity; Certification, etc. ◄

Factors for Success The success of the claim depends largely on documentary “traceability” but also on the relevance of the documents (full particulars) and how well they are organized. Technical disputes relating to the construction of airports or hydrocarbon processing plants, for example, may involve hundreds or even thousands of documents. Too Much Paper Impairs Efficiency “Too often do we see extension of time and delay claims submissions containing several lever arch files of these facts with no specific linkage to the alleged events that caused the delay. There may also be a bundle of computer printouts indicating the claimed effects but the causal link is not clearly defined. The referee is expected to find it and often it’s like looking for a needle in a haystack!”32 There are six main reasons why claims fail: • • • • • •

they are too general; the facts invoked are precluded; they do not explicitly refer to the applicable rules of law; they do not indisputably establish the links between cause and effect; they are not based on documented facts; and they are poorly drafted and/or difficult to understand In Practice

Claims: key points 32 Carmichael and Murray (2006), pp. 1007–1018 (quoting Roger Gibson “Analysis of Project Delay – Theoretical or Interrogation of the Facts” TECBAR Review, June, 3–4, 2003).

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• The triggering events and the circumstances justifying the claim must be clearly explained; • The responsible party must be identified (is it the customer, the contractor, or an external event?); • The rules of contract or law on which the claim is based must be specified; • The terms of the contract must be quoted exactly; • No words in the clauses should be underlined (this could be considered insulting to the reader, implying that he or she cannot understand the text); • It must be shown that the contractor strictly observed the contractual procedures; • Causal links must be established; • The delay analysis must demonstrate the impacts on the project’s critical path; and • Evidence must be provided to substantiate the arguments presented and the cost overruns claimed. ◄

6.2.5.6 Are the Claims “Ethical”? The “bid your claims” strategy described in Chap. 4 is often criticized, since it is considered to be “opportunistic”. However, a number of elements need to be taken into account: • the claim must refer to the terms of the contract. For example, the party must give notice of an eligible event within a given period (submission of notice) allowing it the right to compensation for a substantiated amount (additional cost plus profit); • it must be based on facts that are duly recorded, presented, and demonstrable so as to obtain compensation by legal means; • very often a third party determines the parties’ responsibilities: for example, the engineer in FIDIC contracts; • the gain realized on the claim stems from the actions of the project owner or general contractor. The impacts are compensable; and • these additional costs are not directly included in increased risk provisions, which means that the customer is not charged for risks that will never arise.33 In short, claims are perfectly ethical.34

All the more so since, as one official told Bent Flyvbjerg (whom we discussed in Chap. 3), “A budget reserve is to contractors as red meat is to lions, and they will devour it.” (Cited by Kahneman 2011). 34 The findings from a very recent survey of 119 historical financial reports indicate that executives and project owners should consider contractors’ liquidity as an underlying cause of claims activity. See Kim and Skibniewski (2020), pp. 1–36. 33

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Exploiting the Facts and Asserting Our Rights: Practical Advice

The notion of contractual balance is too often based on the assumption that resources are fully available and that there is a balance of power. Instead, reality reveals asymmetries that need be addressed.

6.3.1

Operational Implementation

6.3.1.1 Defining a Business Strategy Summarize Commitments The “kick off” meeting is used to transmit information shared by the players who will be working together to bring the contract to life. Even if it sometimes takes several weeks to really pull the team together, we need to formalize this activity in order to implement the contract. The main points to be addressed: • commercial reaction to the negotiation (tender); • analysis of contract documents and questions/answers; • identification of the project’s technical milestones and the risks of liquidated damages; • list of the main risks; • identification of opportunities; • organization of project team; and • initial indications before approaching the client. The person in charge of the tender must draw up a summary document. In Practice

Example contract summary Contract reference–date of signature Customer name, contact details (telephone, e-mail) Contract value Contract duration Organization WBS Subcontracting plan Payment/billing plan Exercise dates of any options Special requirements (environment, safety, etc.) ◄

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Ask the Right Questions About the Contract • Is the scope properly defined? • What sections of the work can be measured quantitatively? • How are responsibilities defined? • How are the technical interfaces defined? • What are the payment triggers? • Are partial payments possible? • Which milestones are subject to liquidated damages? • Are the procedures well defined? • Are there any clauses that allow for a change in technical content (design changes)? • Are there any clauses that allow contractual dates to be rescheduled (EOT)? • What documents are required to formally close the project (for example, takingover certificate, certificate of completion, etc.)? • Are the acceptance criteria fully defined? • What are the other party’s obligations? Unwritten Obligations: Good Workmanship and Duty to Advise Good workmanship The contractor must not only perform the works in accordance with the contract, it must also perform them in accordance with “good workmanship”, which is considered an implied contractual obligation. Although they are not codified, these rules refer to the usual know-how that the customer is entitled to expect from a professional in its field of activity. They are all the professional practices of a trade that need to be respected so that the works can be carried out correctly. These rules are very diverse (dosage of materials, drying time, how to apply a product, how to fix an object, the need to apply a topcoat on a clean surface, etc.). A job well done is work conducted in accordance with good workmanship practices and failure to observe such practices is therefore a form of misconduct that gives rise to contractual liability. Similarly, the other party to the contract must carry out its obligations with diligence, itself assessed according to the relevant good workmanship practices in force when the work was performed. If the project owner imposes constraints that do not comply with these good workmanship practices, the contractor must exercise its duty to advise (see below). If these constraints are nonetheless imposed on the contractor, it must formulate sufficiently justified reservations to be exempted from these requirements. However, the contractor will then have to demonstrate that the project owner is recognized as competent (technically) and that it actively interfered (continued)

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in the design or performance of the works, or that it genuinely imposed choices on the contractor. Duty to advise With respect to the proper execution of the contract, all professionals, because of their technical knowledge and know-how, have a duty to advise both their customers and the other participants in the project. Failure to comply with this duty to advise engages the responsibility of the professional. The professional cannot intervene without first informing the customer about the nature of the intervention, the technical choices it made or that were imposed on it, the consequences of these choices, and the resulting risks. The duty to advise may be combined with the duty to inform and/or good workmanship practices. The obligation is tacit and does not need to be expressly provided for in the contract or in the quote. It applies upon receipt of the invitation to tender and throughout the life of the contract. This information requirement obliges the contractor to take a genuinely active approach. It must not only answer its customer’s questions, but must also anticipate future issues by drawing the customer’s attention to potential problems that might not have occurred to the customer. For example, the contractor should warn its customer of the risks of defects or faults resulting from errors made before its intervention or from omissions in the documents it has been given. Conversely, the customer must properly inform the contractor and must not deliberately conceal certain elements from the contractor susceptible to influence its choices or its duty to advise.

What Should We Do If the Other Party Rejects the Claim? It is quite common that the other party’s initial reaction is to reject the claim out of hand, to ignore it (which may backfire), or to refute it on substantive or formal grounds (e.g., when the time limit for giving notice has expired). Experience shows that it is worth persisting and that as long as the contract is not closed, the anchoring effect can still be used to conclude the final negotiation (settlement agreement). The pressure must be maintained over several rounds. In short, even the most outrageous claim (provided it is contractually founded) may well succeed if presented repeatedly and with a semblance of innocence.

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In Practice

Recommendations Don’t: • Ignore the issue; • Fail to give written notice of disagreement; • Be swayed by emotion. Do: • Give your opinion in writing; • Continue with your request (if your position is justified); • Give notice within the contractual deadlines. ◄

6.3.1.2 A Behavioral Approach: Some Recommendations35 Fundamental Principles • From a legal and financial point of view, the contract is the only relevant framework governing the relationship between the parties during the performance of the project; • Put everything in writing; • Present arguments rigorously but always in a fair tone. Put Everything in Writing The written word has strategic value in proving the facts before a judge. More than 70,000 letters were exchanged in the Channel Tunnel case. But on the day the tunnel came into operation, there was not a single outstanding dispute relating to its construction (only two disputes were settled by arbitration).

“Offensive” Advice • Know how to say “no” or “yes, but”; • Don’t undertake additional work without an express request from the other party; • Inform the other party of the acts imputable to it; • Invoice on a timely basis; and • React promptly. 35 The authors are grateful to Christian Serdet for allowing them to repeat this valuable advice, which demonstrates that if lawyers play their role of ambassador, of missi dominici, then “the legal culture of a company is not limited. . . to that of the lawyers who respond to its legal demands. It is also, and. . . even primarily, that of non-lawyers.” (Pierre Charreton, op. cit., authors’ translation)

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“Defensive” Advice • Don’t let yourself be intimidated; • Respond to all points raised (without evading them); • Don’t hesitate to assert your rights (but don’t try to defend the indefensible); and • Highlight the resources used to deal with the problem. Advice on Putting Things in Writing • Write directly and with conviction; • Write in a simple manner; and • Address a wide audience, beyond the initial recipients of the text. Advice on Holding Meetings • Organize a pre-meeting with your partners (in the case of a consortium, for example) before meeting the other party (in face-to-face discussions, the other party will instantly see the points it can exploit); • If one of the partners is not prepared to defend a common position, it should not participate in the meeting; • Never participate in an important meeting alone; and • If the other party writes the minutes, review them carefully. Firmly reject the minutes if they do not reflect the content of the discussion. Make your own notes; In Practice

Make appropriate use of minutes of meetings • • • • •

Indicate the list of participants and the circulation list; The wording must be clear and precise; The expected actions must be clearly identified: What? Who? When? The minutes must not call into question the terms of the contract; and The person holding the pen has the advantage. ◄

• Don’t be afraid of silence. If the other party remains silent following a difficult message, resist the urge to break the silence with a concession; • Be very careful about things that are said with a touch of humor; • And it goes without saying–turn off your cell phone. Face-to-Face “Negotiations are managed by word of mouth or by writing. The first method is most commonly employed in the courts of princes; while the second is more often found in treaties with republics, or in assemblies . . . It is more advantageous for a skilful negotiator to negotiate by word of mouth, since this channel provides him greater opportunity to discover the opinions and designs of those (continued)

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with whom he deals and to employ his dexterity, thereby inspiring them to agree with his views, by means of his suggestions and the strength of his arguments.”36

6.3.2

The Metaphor of the Game of Go

6.3.2.1 The Goban: A Breeding Ground for Complexity What strategy should we employ? It is said that the Chinese emperor Shun invented the game of go37 around 2300 years ago to sharpen the intelligence of his “brutal and stubborn” son. The game board is called a goban. The players cannot handle this space by mental calculation alone as the combinations are highly varied and complex (its algorithmic complexity is much higher than that of chess, with a decision tree close to 10600 compared to “only” 10120 for chess). The game involves encircling empty areas on the board to create territories. The players take turns placing the stones on a free goban intersection. Once placed, the stones do not move and the winner is the player with the most territories. Unlike the game of chess, the objective is not to eradicate the other player38 (who, let’s not forget, could be a partner or a client), but to achieve a better result than him or her. In go, victory comes step by step. Commitments are reflected by a succession of often modest maneuvers, where we take care not to destroy the other party. 36 François de Callières, De la manière de négocier avec les souverains, 1716. Jean-Claude Waquet’s critical edition published by Rue d’Ulm/Presses de l’Ecole normale supérieure (2005) under the title François de Callières—L'art de négocier en France sous Louis XIV is certainly the richest and most detailed analysis of the art of negotiation. We note in passing that although de Callières was discovered very early in the Anglo-Saxon world, he remains almost unknown in France. L’art de négocier was revived as far back as 1917 in an English publication, before finally gaining a foothold in the United States in 1963 in an edition prefaced by a diplomat-turneduniversity professor. This publication was well-timed, since the main negotiation programs of the American School emerged at that time–essentially based on game theory and entirely dedicated to the modeling of Homo ludens, the idealized figure of the rational actor, a little playful, certainly, but often imprisoned (to recall the famous prisoner’s dilemma). So our sash-wearing ambassador, a master in the art of sycophancy, has unwittingly become an advocate of the win-win negotiation solutions promoted by the Harvard School. This is where we find him, rubbing shoulders in business administration departments with the newcomers to negotiation for the greater good of management students and business practitioners. (Authors’ translation.) 37 To learn more about the game of go, you can watch the video at the following URL: https://www. youtube.com/watch?v¼QyfWChDhtu0. 38 The game of go employs a strategic approach that rejects the goal of pure confrontation, a strategic approach completely unlike the game of chess, which ends with “the death of one of the kings on a chessboard from which we have modestly removed the corpses . . . humiliated, annihilated”. (Touazi and Gevrey 1994, authors’ translation).

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6.3.2.2 Confrontation Is Not the Goal Go appears to be the game best suited to our vision of the contract. After all, we can consider contract notifications and intermediate negotiations as stones marking the progress of the contract and the positions of the parties. “One of the characteristics of go is that it is as much a game of movement as it is a game of positions, although the stones remain motionless once placed.”39 In a contract, the initial phase is decisive. The parties observe and gauge each other before making their claims. In the same way, go players lay their first stones with extreme care. “In a two-hundred-move game, it is not unusual for the first twenty moves to take half of the game time.” A strategy based on this game limits the perverse effects of micro-management. It reinforces the actions of project managers because the game combines local action and global vision: each stone placed, “while providing a local solution . . . also forms part of the overall game and helps to develop it”.40 There is no doubt that this recursivity between local action and global vision provides a solution adapted to management in a complex environment. Local (decentralized) action allows us to control the complexity of tasks, to maintain the performance level, to better adapt to the environment, and to monitor related activities. The military has long known that a number of decisions must be made locally. In this environment, managers will play the role of integrators. The game of go reflects the three phases we described in Chap. 5 to build our behavioral model: • the first moves are decisive (and may reveal the parties’ motivations); • to attack, we must first of all strengthen ourselves (maximizing our position to reinforce our negotiating power); and • at the end of the game, borders crystallize and territories appear clearly (now is the time to limit our losses). In short, the characteristics of go can provide the founding principles for a business strategy that is simple, efficient, and easy to communicate to the teams. The concepts of the game are conducive to providing “action guides” based on the framing of contractual relations, as we proposed earlier.

6.4

Conclusion

There is a strong desire to redefine the role of the contract, particularly in the engineering and high-technology fields, which are by nature subject to high levels of uncertainty. The contract has several functions, but must in no way be detrimental to the relationship between the parties. This observation is not born of naivety; it 39 40

Marin and Decroix (1988) (authors’ translation). Pierre Guillen in Touazi and Gevrey (1994), op. cit. (authors’ translation).

References

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simply reflects a long-term, commercial efficiency objective. “Contracts are important not only when things go wrong, but also in the development and management of the relationship.”41 In practice, we need to accept that contracts are structurally conflictual but that the parties are able to deploy their assets in such a way that they include both lawyers and engineers from the beginning of the contract. The proliferation of “project structures” raises genuine questions. The project is subject to time constraints, and it will be achieved at the price of organizational learning and of the project manager’s identity. Such project managers effectively become nomads within their own companies, but in a context that requires them to draw on their “professional network”. We note two paradoxes: (a) the project is a transient structure, limited in time, but it is also a long-term vehicle, provided that it is part of a portfolio of activities; (b) the project is, for those who experience it individually, a unique learning opportunity. The end of the project marks not only the end of the work but also the transfer to another, often inexperienced team. It is in fact the cradle and the grave of collective learning. Ultimately, the conclusion is that organizations never learn. Should we leave the project manager to work out how to draft his own strategy? Let’s be clear, profitability is the dominant criterion and the only source of value for the shareholder. The only hope of rebalancing an unfair contract is to implement a dynamic management process, including a well-timed profit maximization phase conducted with ad hoc contractual tools such as extensive notifications. Claims are an inescapable reality in large contracts, especially international ones. The word alone generates a negative response that leads to accusations, counter-accusations, communication breakdowns, polarization of positions, and occasionally lawsuits. It is certainly possible to limit this hostility by using expressions such as “request for additional expenses” or “entitlement to additional compensation”, but this will not change the substance, i.e., recourse to a mechanism that adjusts the contract to deal with its initial incompleteness. In most legal systems, the principles governing the contract entitle the contractor to claim compensation for delays or additional work not of its own making.

References Aliouat B (2011) Droit et stratégie d’entreprise : transformer les ressources juridiques en capacités dynamiques par une réorientation managériale. In: Roquilly C (ed) La contribution des juristes et du droit à la performance de l’entreprise. Lextenso éditions, Paris, pp 215–232 Alkass S, Mazerolle M, Tribaldos E, Harris F (1995) Computer aided construction delay analysis and claims preparation. Construction Manag Econ 13(4):335–352 Argyres NS, Mayer KJ (2007) Contract design as a firm capability: an integration of learning and transaction cost perspectives. Acad Manag Rev 32(4):1060–1077

41

de Jong and Klein Woolthuis (2008), pp. 284–289.

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Beaussaut P, Chekroun D, Tremblay D, Fourcade F (2016) Training of contract managers dedicated to contract performance: the EDF/ESCP Europe initiative. Int Bus Law J 1:1–24 Berggren C, Söderlund J, Anderson C (2001) Clients, contractors, and consultants: the consequences of organizational fragmentation in contemporary project environments. Project Manag J 32(3):39–48 Brousseau E (1995) Contracts as modular mechanisms: some propositions for the study of ‘Hybrid Forms’. Int J Econ Bus 2(3):409–439 Carbonnier J (1978) Sociologie juridique. Presses Universitaire de France, Paris Carmichael S, Murray M (2006) Record keeping for contemporaneous delay analysis: a model for effective event management. Construction Manag Econ 24(10):1007–1018 Cheung SO, Yiu TW (2006) Are construction disputes inevitable? IEEE Trans Eng Manag 53 (3):456–470 de Jong G, Klein Woolthuis RJA (2008) Contract research and high-tech alliances: vistas for future studies. Scand J Manag 24(3):284–289 Fleming QW, Koppelman JM (2003) What’s your project’s real price tag? Harv Bus Rev 81 (9):20–22 Han SH, Yun S, Kim H, Kwak YH, Park HK, Lee SH (2009) Analysing schedule delay of mega project: lessons learned from Korea Train Express. IEEE Trans Eng Manag 56(2):243–256 Jarrosson C (1997) Les modes alternatifs de règlement des conflits : présentation générale. Revue internationale de droit comparé 49(2):325–345 Jolivet F (1998) Management de projet : et si l’on parlait vrai ? Annales des mines – Gérer & comprendre (53):19–31 Kahneman D (2011) Thinking, fast and slow. Farrar, Straus and Giroux, New York Kahneman D, Knetsch JL, Thaler R (1986) Fairness as a constraint on profit seeking: entitlements in the market. Am Econ Rev 76(4):728–741 Kao C-K, Yang J-B (2009) Comparison of windows-based delay analysis methods. Int J Project Manag 27(4):408–418 Kartam S (1999) Generic methodology for analysing delay claims. J Construction Eng Manag 125 (6):409–419 Kauffmann P, Keating C, Considine C (2002) Using earned value methods to substantiate changeof-scope claims. Eng Manag J 14(1):13–20 Kim YJ, Skibniewski MJ (2020) Cash and claim: data-based inverse relationships between liquidity and claims in the construction industry. J Legal Aff Disp Resolution Eng Construction 12 (3):1–36 Lukas JA (2008) Earned value analysis – why it doesn’t work. AACE Int Trans:1–10 Marin A, Decroix P (1988) L’art subtil du management – Le jeu de go comme modèle. Éditions d’Organisation, Paris Mayer KJ, Argyres NS (2004) Learning to contract: evidence from the personal computer industry. Organ Sci 15(4):394–410 Touazi F, Gevrey C (1994) Management d’entreprise et stratégie du Go. Nathan, Paris von Branconi C, Loch CH (2004) Contracting for major projects: eight business levers for top management. Int J Project Manag 22(2):119–130 Walsh KP (2017) Identifying and mitigating the risks created by problematic clauses in construction contracts. J Legal Aff Dispute Resolution Eng Construction 9(3):1–9 Wilemon DL (1973) Managing conflict in temporary management systems. J Manag Stud 10 (3):282–296 Williams T (2008) How do organizations learn lessons from projects–and do they? IEEE Trans Eng Manag 55(2):248–266

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To improve their contract management practices, as proposed in this book, companies need to put in place the necessary resources and conditions (human resources, organizational, etc.). Executives who initiate a contract management process on a collective scale (company, business unit, department, project, etc.) generally begin by using two levers: training and maturity diagnostics. Both of these methods can be used to benchmark existing practices and identify priority areas for improvement. The first group of objectives aims to raise awareness, to understand the profiles and activities of contract management (which are often poorly defined), and to determine the importance of the issues at stake (in relation to the strategic agenda). However, as necessary as they may be, these two methods quickly reveal their limitations: • firstly, training must be given regularly, over the long-term, and with relatively stable teams (to measure its effects). In reality, the results do not always live up to expectations, due to difficulties applying it in people’s daily schedules (especially in the project context) and staff turnover (especially on large projects); • secondly, maturity diagnostics face implementation challenges. While the state of play and findings are often accepted, the pitfalls of implementing contract management are comparable to those faced by all business transformation initiatives: What (reasonable) goals should we set? Which methodological base should we choose (methodological framework)? What should we start with? How fast should we drive the change? What degree of flexibility should we allow between different contexts/projects (“tailor-made” approach versus “one size fits all” approach)? What is the underlying organizational structure? To overcome these difficulties and respond concretely to the challenges of implementing the necessary transformations, executives need to ask themselves the following fundamental questions:

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3_7

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• What tangible performance gains (both qualitative and quantitative) can I expect to achieve by strengthening contract management? • Do we need to set up a specific contract management organization (rather than just processes) to realize the transformation? As with any business transformation issue, the answer to these questions depends on contextual elements specific to each organization. We will therefore attempt to approach the subject by finding concrete answers to the following questions, based on lessons learned, our monitoring work, and benchmarking: • What conditions must be met to justify the establishment of an ad hoc organization, embodied by a contract manager? • How do we measure the return on investment? • What are the impacts on the current organization? How will the distribution of roles and responsibilities within the company be affected? • What hierarchical and/or functional reporting line should we create in the organizational chart? • What is the typical contract manager profile: career path, required skills (technical and behavioral), etc.? • Will we need to mobilize external expertise to support the organization and what input can we expect from this expertise? The purpose of this chapter is to provide the reader with the best practices needed to successfully integrate a long-lasting contract management approach into companies, taking into account the most frequently encountered pitfalls.

7.1

Building Contract Management Ability

A 2003 survey of around 100 European and American companies indicated that for 81% of them, physically finding a contract when they needed it was problematic. More than half had no reliable notification process in cases of proven risk and 61% were not aware of the interdependencies between their different contracts. Despite this, most were fully aware that they were exposed to significant risks.1 We nonetheless highlight very positive developments in awareness, particularly during the period 2010–2015, which has seen the largest groups take ownership of contract management issues by initiating local actions (on specific types of contract) and global initiatives (by establishing contract management organizations or departments). While the situation is evolving toward better ownership of the issue, the maturity of organizations remains uneven and, in our opinion, fragile. Don’t be swayed by the exponential increase in “contract manager” profiles posted on professional social networks or by the marketing power of software

1

Krappé and Kallayil (2003), pp. 3–8.

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publishers. The reality on the ground is still characterized by strong disparities in practices across sectors, between different companies, and even within the same company (from one project to another or from one business line to another).

7.1.1

The Maturity of the Process

“He who does not know where he is coming from, cannot know where he is going” (Otto von Bismarck). Any far-reaching corporate transformation process needs to firstly establish the initial situation, which involves analyzing the maturity of practices, whether this is called a diagnosis, audit, stocktaking, or situational analysis. For biologists, maturity is the level at which an organism reaches full development. In the field of business, maturity models are based on a description of successive stages, characterized by requirements that the company must meet in order to optimize its most critical processes. Such models generally comprise five levels following the principles established by Philip B. Crosby in the 1970s.2

7.1.1.1 Contract Mapping The first step is to catalog and map the company’s contract portfolio: • • • • •

How many contracts are there in the portfolio? What types? What is the average value? How are they distributed (amounts, locations, contractors, etc.)? What is the slippage between the expected margin at signature (book value) and the actual margin, based on historical analysis? • What contract management methods are used?

7.1.1.2 CMM Models We have already mentioned the limitations that arise when attempting to represent complex phenomena as “frameworks”. The first limitation is cognitive in nature and relates to the difficulty of fully translating a complex system into a model using representations that can be visualized, understood, and manipulated. However, from the early 1990s onwards, and with no academic grounding, consultants and practitioners have been developing capability maturity models (CMMs) based on those used in the software development field.3 A notable example

2

Crosby (1979). The Software Engineering Institute was founded in 1984 to improve software development at the request of the US Department of Defense (a study financed by the US DOD in the late 1970s showed that fewer than 5% of projects entrusted to computer subcontractors were delivered within the contractual deadlines with a satisfactory level of quality). 3

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is capability maturity model integration (CMMI), developed by the Software Engineering Institute (SEI) of the American Carnegie Mellon University. The idea is that contract management can be seen as a process in its own right to be implemented and developed within the organization. The first CMM model to be applied to contract management was developed by Rene G. Rendon.4 It comprises five levels of maturity: (a) ad hoc, (b) basic, (c) structured, (d ) integrated, and (e) optimized. These levels are steps for converging toward a mature process, i.e., in line with a set of “best practices”. A 2017 study by the WillBe Group identified 13 maturity models worldwide, the vast majority of which are issued by Anglo-Saxon public or parapublic organizations. These models generally approach business maturity via the following dimensions: process/organization: • Have a structure, organization, roles, and responsibilities been defined to manage contractual risk? • Do policies and procedures frame the contract lifecycle (particularly during the performance phase)? • Are notification and escalation processes in place to prevent claims and disputes? governance: • Do performance bodies and indicators exist to measure exposure to contractual risk (contract reviews, etc.)? • Are the fundamentals of contract lifecycle management in place: documentation, traceability, contract administration, change management, closing, etc.? competencies: • Are the teams aware of and trained in contract management? • Do they have the tools to ensure effective and efficient contract management? • Is this practice recognized and valued within the company? Although quite different from one another, and issued by organizations with diverse approaches, the existing frameworks are all based on the “process & organization–governance–competencies” triptych. This vision can be employed on a macroscopic scale to assess the organization’s maturity with respect to contractual issues.

4

Garrett and Rendon (2005).

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However, this vision appears to have its limits, insofar as it omits some of the most significant factors relating to the project and the contract itself (context, size, complexity, history of relationships, behaviors, etc.). Thus, if adapted to a contract (or a portfolio of contracts), this purely organizational perspective will effectively be unable to assess and anticipate the developments over time and the probable consequences (positive or negative) of a given situation. We therefore propose a more precise, but also more systemic, approach to the factors that are likely to determine contractual performance, applicable within the boundaries of a contract (or portfolio of contracts). This approach to maturity, developed by the WillBe Group, will extend the economic analysis of the sources of value leakage developed in Chap. 2. We recommend isolating a certain number of parameters, selected on an empirical basis (lessons learned), which–taken in isolation or in interaction with one another–can be used to assess an organization’s degree of control over its contractual performance: • • • • • • • • • • • •

type of contract: standard used, contractual architecture, business model, etc.; choice of service providers (project owner, subcontractors, etc.); financial balance (level of profitability or budgetary constraint); level of exposure and distribution of risks between the contracting parties; interdependence between contractors; quality of governance; ability to comply with (or enforce) mutual obligations and quality of performance monitoring; incompleteness of the contract; adaptation to changes in needs, professions, markets, and technologies; relational dimension: links between the parties, mutual dependence, etc.; transaction costs (renegotiation costs, exit costs, etc.); and opportunistic behavior (in particular opportunistic claims by the service provider or customer).

7.1.1.3 Claims We will next need to analyze the organization’s maturity with respect to claims. G. K. Kululanga et al.5 have developed an ad hoc grid to measure the quality of the claims process on a scale of 0 to 4 (from inability to identify a claim to full control).6

5

Kululanga et al. (2001), pp. 309–314. This framework is used to determine the q2 parameter of the Opportunistic Bidding Behavior (OBB) model presented in Chap. 4.

6

7

The five levels of the claims management process. Source: Mohamed et al. (2011), p. 99. Reproduced with the permission of Elsevier

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But we need to remember that neither the ownership of resources nor the existence of processes is sufficient to guarantee performance. “The company must develop an ability to coordinate its different resources and to understand how they interact optimally, especially when these resources are heterogeneous and complementary.”7 A disparate “claims culture” exists in some companies (or sectors), which can lead to reservations about the very act of making a claim, on the grounds that: • it is not usual practice (likened to a contentious posture); and • we want, above all, to preserve the sacrosanct “customer relationship” (which is at odds with the practice of issuing claims).

7.1.2

A Shared Competency

Coordinating our different resources, that’s the challenge! In a series of articles based on real case studies over a long period of time (several years), Nicholas S. Argyres and Kyle J. Mayer8 look beyond processes and address the ability to develop a contractual competence that permeates the entire company. Beyond reproducing theoretical organizational models, or models derived from benchmarks, we recall that it is up to the organization itself to find the formula that allows it to deploy its resources and combine them as effectively as possible with its processes, as well as with its organizational “routines”. Although every company has a formal dimension (organizational charts, processes, information systems and tools, etc.), it also retains an informal dimension (culture, power games, professional identities, behaviors, etc.). The company’s longterm performance is based not only on its strategy, but also on its ability to create coherence between its formal structures and its informal human dynamics. In addition to turf wars and power struggles, complementary contributions from, for example, engineers, managers, and lawyers contribute to what Argyres and Mayer call “contract design capability”. Christophe Collard and Christophe Roquilly9 rename this idea “legal capability”, while retaining its content: “if certain clauses must include detailed explanations of the technology to be designed or transmitted, engineers play a more prominent role than lawyers in drafting the clauses in question. When the clauses deal with the types of skills that each partner in the contract must bring to the project for it to be completed successfully, then managers must ‘take the lead’. If, on the other hand, the clauses deal with the allocation and management of intellectual property rights, then the knowledge and expertise of lawyers must play a key role.”

Collard and Roquilly (2010), op. cit. (authors’ translation). Nicholas S. Argyres and Kyle J. Mayer (2007), op. cit. 9 Christophe Collard and Christophe Roquilly (2010), op. cit. 7 8

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Increasing the interactions between engineers, lawyers, and managers thus plays a role in creating an intangible asset by taking into account tacit knowledge in a dynamic environment characterized by professionalization and increasingly mature practices.

7.2

The Contract Manager Function

Questions relating to the organization of the contract manager function are frequent and, unfortunately, often poorly addressed, since they are dealt with solely from the point of view of the contract manager’s position in the organizational chart. Our approach broadens the analysis by considering efficiency and good governance criteria, as well as the human and cultural dimension essential to the success of any business transformation. We endeavor to shed light on the possible options, avoiding preconceived ideas, by relying on a comparative analysis (benchmarks) of the models employed in the largest organizations. Remember that there is no single or optimal organizational model (we only need to look at the “pendulum” effects in companies to verify this fact): cultural and managerial factors are especially likely to influence the choice of optimal organizational structure, given the importance of the quality of the interactions between the contract management function and other related functions.

7.2.1

Understanding Governance Issues

In any plan to set up a contract management function, the contract’s governance is the primary issue influencing the choice of organizational structure. This seemingly simple question can be summarized as follows: Who in the company is responsible for the proper performance of the contract? More specifically, what are the respective responsibilities of the contract manager, the project manager, and the lawyers? We will now clarify the different organizational structures implemented within companies, with their various advantages and limitations, where applicable.

7.2.1.1 Who Is Responsible for the Contract? Drafting the Contract, a Game of Many Players The contract is the result of cross-fertilization: structured by legal experts, with content provided by operational staff, negotiated by buyers, and “priced” by mixed teams (sales, technical, financial, etc.). Many players are involved before it is signed, each bringing their individual area of expertise, to such an extent that only a small number of people will understand the final signed contract in its entirety–even people involved in drafting individual sections may not understand the contract as a whole.

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This is a complex exercise because each contributor may be tempted to assert his or her own frame of reference, best practices, or (perceived) infallibility, sometimes to the detriment of overall coherence. In fact, drafting a “good” contract implies that all of these contributions, from different academic cultures, terminologies, and areas of expertise, will converge on an agreed choice of wording and on a common interpretation of contractual commitments and possible consequences in the event of a dispute. The Contract, an “Orphan” Object Within Organizations While no one would think of removing the finance team’s ownership of accounting or management standards, or the sales team’s authorship of the sales promotion policy, the contract is somewhat of an “orphan”, torn between several futures. Should contracts remain the prerogative of lawyers? An attractive choice at first glance, as the lawyers are ultimately responsible for guaranteeing the interpretation of the contract or for terminating it, if necessary by legal proceedings, if a dispute arises between the parties that cannot be resolved via negotiations. But what about the vast majority of contracts that, fortunately for the business world, will not give rise to legal action and that must be managed in the best interests of the company? The reality experienced in most companies shows that lawyers do not have the means (human in the first place) to manage contracts operationally, in situations where day-to-day project activities are punctuated by multiple interactions and events (of varying degrees of significance) that must be dealt with in a very reactive manner. Should we give responsibility for contractual performance to the sales representatives (or buyers) who negotiated the contract? Moving from one negotiation to the next, these professionals are generally too busy closing new deals to focus on current contracts or on the minutiae of the performance phase, which requires dedicated teams and more technical profiles. Or what about the operational teams responsible for performing the contract? After all, it seems reasonable to entrust responsibility for the contract to the operational specialists, in charge of carrying out the agreed services over the life of the contract. However, this situation would mean that operational teams, focused on satisfying the customer’s needs and managing the quality/cost/delivery triptych, would also be responsible for managing the acceptable level of contractual risk–but can they really remain objective in the face of the risks involved? Is the Project Manager in Charge? Faced with this situation of imperfect governance, where none of the players instinctively steps up to take sole responsibility for contractual performance, the project manager generally ends up bearing the entire responsibility for the contract’s performance. This is the model most commonly employed by large groups, particularly in the engineering and construction sector. Project managers, regardless of whether or not they contributed to negotiating and signing the contract, are propelled to the role of “guarantor” of contractual performance, including the agreed margin objectives.

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In accordance with the single-responsibility principle, which should guarantee sound governance, the project manager is then bound to the contract “in life and in death”. This is not without risk for the person concerned, as well as for the company: if the project manager succeeds in achieving the objective (notably the margin), the project manager will be rewarded and promoted; if not, he or she may be dismissed. Many project managers will have been in a situation requiring them to apply a poorly negotiated contract, with ineffective contractual provisions, or a contract that is simply incomplete or a source of divergent interpretations. Similarly, many companies will have found themselves in a situation where they have lost confidence in a project manager who has full power, but lacks the objective means to judge the contractual risks involved. Ambiguous Governance As a cross-functional frame of reference, shaped by technical, commercial, legal, and financial teams, the contract occupies a very special place in a company’s operations. Although the contract-drafting phase is a complex exercise that can give rise to multiple and, at times, lively exchanges, this phase defines the stakeholders’ commitments and largely conditions the success or failure of the project. In the end, the contract may be at the heart of conflicting interests, with each participant seeking to limit its responsibility if the performance phase fails.

7.2.1.2 The Role Assigned to the Contract Manager Appointing a contract manager to work on a day-to-day basis may help us to overcome this flagrant organizational ambiguity. So what scope of responsibilities should be assigned to this function? In what way do these responsibilities encroach, or not, on those usually assigned to the project manager? To address this issue, we turn to the work of Henri Bouquin,10 who emphasizes that “responsibility flows from hierarchical trust, not from controlling results. The counterpart of delegation within the framework of the policies and procedures in force is the personal responsibility of the person who has authority and who decides.” In this sense, responsibility for contractual performance derives directly from the scope of the mandate and the level of delegation conferred on the project manager by senior management. As such, the delegations of authority given to project managers, where they exist, help to clarify actual responsibilities. In many cases, the level of delegation on a given contract is total and unlimited, conferring, for example, “the power and authority to act individually, in the name and on behalf of [Company], to discuss, sign any documents, and more generally to do whatever is necessary in this context with [Client] for the [ABC] contract”. 10

Bouquin (2011), coll. “Que sais-je ?”, (authors’ translation).

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The project manager therefore holds the contractual responsibility for a given project. In the same book, Henri Bouquin also discusses two distinct concepts: • “accountability, which means being answerable for our actions and being obliged to explain them, with, in the context of corporate governance, a notion of transparency and traceability that makes it possible to identify who has taken action; and • responsibility, sometimes considered synonymous, but which is in fact significantly broader, relating to the idea of guaranteeing a result (vouching for it), or to the outcome of a judgment, moral or otherwise.” This analysis can be used to understand the distinction between the roles of project manager and contract manager. Although the contract manager assists the project manager in all contractual matters, this does not affect the latter’s responsibility. The project manager therefore retains ultimate responsibility, while the contract manager is “answerable” for the performance of the contract, generally in an autonomous and independent manner, which again raises practical problems of organization and reporting lines.

7.2.2

Choosing the Right Organizational Model

The internal organization choices for the contract management function are naturally strongly influenced by the answer given, explicitly or implicitly, to the previous question of the governance of contract performance. In any event, in large companies, we observe: • great heterogeneity in the organizational models of the contract management role; and • frequent changes in the reporting line of this role within individual companies, indicating a search for more optimal functioning and a certain dissatisfaction as regards the previous functioning of the role. Various alternatives exist, each with its own strengths and weaknesses.

7.2.2.1 What Is the Optimal Position in the Organization Chart? In the vast majority of cases, the contract management function reports to: • the legal department;11 • the operations (or project) department; or • the procurement department. 11

The idea that, in terms of efficiency, the legal/contract functions could themselves be attached to the administrative and finance department is gaining ground. This configuration will not be discussed here.

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Reporting to the “Legal” Business Line The organizational model that tends to prevail in large organizations is to link the contract manager function to the legal department, although this is not always the most natural or the most effective approach, as there are large differences in culture between the two populations. Since the 2010s, ownership of the contract management function has been largely monopolized by the legal function,12 which sees this as: • a way to keep legal risks under control during the performance phase and, in particular, to avoid situations where operational staff are late in signaling issues; and • a way to strengthen its business proximity, and develop a “business partner” culture, beyond its traditional statutory function. It should be recalled that the legal function has undergone a profound transformation in recent years, in the light of a series of internal and external demands: • firstly, it faces increasingly stringent requirements from executive management, who are demanding a change of attitude and operational excellence (the ratio between the cost of lawyers and the service provided) and who readily question the relevance of maintaining certain legal competencies in-house; • in addition, internal clients (business lines) now expect more than technical expertise, and demand a truly qualitative approach to the service provided (quality, responsiveness, flexibility, etc.), a keen understanding of business realities, and a sound risk appetite; • finally, the legal function also faces “challenges” from outside the company, particularly from start-ups announcing the commoditization of (certain) legal skills (through AI and LegalTech) and from society as a whole, where citizens are increasingly demystifying the place traditionally given to expertise, legal expertise in particular. Of course, this connection makes sense if we accept that contractual and legal risks are closely intertwined (see Chap. 2). Lawyers are custodians of legal knowledge. They understand the procedures required to enforce contractual commitments and are therefore responsible for contract management and, as a result, for the contract management function. In this organizational framework (based on the premise that the contract forms an indivisible “whole”), the contract manager acts as a relay between the legal department and the project on the ground. His or her primary mission is to anticipate and prevent possible legal risks (duty to notify) and to exercise, within the contractual deadlines, the clauses provided for the benefit of the contracting party. The contract manager, whose role has a strong operational element, is a user of the legal solution proposed by the lawyer and is also the co-owner of the related risk. However, this connection is not without its problems: as in any

12

See for instance: Chekroun and Thomas (2015), pp. 262–272.

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co-ownership, communication and consideration of the respective cultures are sources of risk.13 It is not uncommon to see legal teams investing in the operational field with highly restrictive reference frameworks, focused purely and simply on reducing legal risk, whereas the company as a whole has to accept a higher degree of entrepreneurial risk in order to achieve its objectives. Linking contract management to the legal function, i.e., ultimately to the legal director, is often achieved pragmatically, at the cost of the relative independence of the two departments. This is often the price to be paid for the successful cohabitation of two populations that, while sharing the same management, have very different attitudes and ways of working: one, driven by legal expertise and the litigation dimension; the other, driven by a more operational, more reactive approach, designed to serve the “business”. Reporting to the “Operations” Business Line Linking the contract manager to the operational departments (project management, operations department, or business lines) is the most common alternative organizational model, particularly internationally. It reflects the view that the contract manager should play a direct and operational role in project management, contributing to achieving the business margin and helping to formulate potential claims. This organizational structure is primarily used in technical environments (engineering, infrastructure construction, etc.), where most of the claims are technical in origin. In this framework, hierarchically linking the contract manager to the project manager raises questions about the segregation of duties: • How can the contract manager maintain an “objective” view of the way a project is being managed, since he or she will report to, and be evaluated by, the project manager? • How can we avoid possible drifts resulting from an all-powerful project manager, who faces no opposition within the project organization? Reporting to the “Procurement” Business Line Several groups have opted for a contract management function that reports to the procurement department, with the aim of maintaining a strong operational link, postsignature, with supplier relationship management and vendor management. This organizational model is characteristic of groups whose contract management challenges are focused on the “buy side” (project owners, major manufacturers, B2C, etc.). It also allows for a segregation of roles and responsibilities. On the other hand, it is less suitable when we need to “flow down” customer commitments to suppliers and implies a more transverse contract management function. 13

Verdun (2011), pp. 243–248.

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The Most Common Practice: A Matrix Organization Most companies with a structured contract management function have opted for a matrix-type organization (fixed line + dotted line), aiming to strike a balance between: • the operational dimension of the contract management function; and • the necessary segregation of duties required for risk management and governance. The contract manager is generally subject to a twofold reporting line: • fixed line reporting, usually hierarchical, to project structures (operations or project departments); and • dotted line reporting, usually functional, to a corporate structure (generally the legal department, comprising a service in charge of contract management). This dual reporting line theoretically helps to resolve possible conflicts of interest between the project manager and the contract manager, as these two roles have no hierarchical relationship. Remember, however, that a dual reporting line will not necessarily guarantee cooperation (as seen in the literature on the sociology of organizations). In the mechanistic vision of business, which tends to be fashionable in companies, so-called “power” is the automatic attribute of a position of formal authority. Yet, as Morieux and Tollman14 point out, “People only cooperate when the context of work makes it individually useful for them to cooperate.” We must approach matrix reporting lines in the same spirit, since they frequently only provide an illusion of organizational purity. These limits are also underlined by Natacha Leymarie (WillBe Group), who points out that this type of matrix organization “obliges people to cooperate, on the assumption that universal common sense will lead everyone to comply with the requirement”, whereas cooperation is “not necessarily a natural behavior but a construction (formal or informal) that requires a lot of effort”. Matrix-based functioning, which responds to a visible form of rationality, also affects “human dynamics”, i.e.: • people’s perceptions of their environment; • their representations of each person’s role (in relation to their value systems); and • the impact of these perceptions and representations on their behavior.

7.2.2.2 What Links Are There to Other Support Functions? The contract manager also acts as a relay for some of the company’s support functions. We will focus here on the interactions with the risk management function and the finance department, which are interfaces for the contract manager. 14

Morieux and Tollman (2014). According to the Boston Consulting Group’s Complexity Index, the complexity of the business environment “has increased by a factor of more than six over the last six decades”. In addition, the complexity of organizations, marked by an increase in structures, processes, systems, committees, and decision-making bodies, has increased “by a factor of 35 over the same period”.

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Interactions with Risk Managers Contract managers must establish their legitimacy with the cross-divisional functions in charge of risk management. They act as a point of contact with these functions and set out the company’s risk management approach at the contract or project level, with respect to the contractual risks that may arise or change during the life of the contract. The contract manager is thus responsible, by delegation from the project manager, for identifying, monitoring, and implementing mitigation plans to reduce the risks likely to affect the satisfactory performance of the contract. Interactions with the Finance Department Contract managers play a central role with the finance department given their awareness of the potential financial consequences of contractual risks. They will therefore be closely involved in determining the provision for risks and contingencies, particularly in relation to potential litigation. They will also be frequently required to summarize the progress of contract files and make forecasts on: • the likely occurrence and financial impact of contractual risks (in particular the risk of liquidated damages for late performance); and • the evolution of these risks over time, with regard to the contractual strategy in place. We must also be careful not to transform contract managers into operational management controllers, or even billing managers as is sometimes the case, as this risks diverting them from their core business activities.

7.2.3

Assessing Opportunity Cost and Return on Investment

The decision to set up a contract management function naturally raises the question of opportunity cost: • If we allocate human and financial resources to this activity will we need to renounce other choices that could be more productive for the company? For example, if we want to limit the risk of delays, would it not be better to strengthen the project teams rather than contract management? • Conversely, what hidden costs does the company implicitly agree to bear if it decides not to implement a contract management function? Like any decision to allocate resources, implementing a contract management function requires an assessment of the relationship between: – the costs the company will have to bear, which become certain as soon as the expenditure is incurred; and – the expected benefits, which will generally not be measurable for months or years.

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• Wouldn’t it be better to immediately dispense with the contract manager rather than trying to reduce a future contractual risk, which will depend in part on external parameters (relationship with the client, project events, team skills, etc.)? Paralyzed by an Excess of Rationality If managers are struggling to decide whether to develop the contract management function or to strengthen their project teams, it is crucial they realize that a decision must be taken quickly, even if it is not optimal. The parable presented by French scholastic philosopher Jean Buridan is a classic example. Take a rational, but above all famished, donkey. Place it at an equal distance from two heaps of oats that are identical in quality and quantity. As a perfect logician looking for an optimal solution, the donkey will have no preference for one heap or the other. Its inability to choose will mean that it starves to death. For Amartya Sen, confusing the maximal choice and the optimal choice leads to disappointments that can be irreversible and unattractive for the manager: “Optimization being impossible here, I suppose we could ‘sell’ the choice act of maximization with two slogans: (i) maximization can save your life, and (ii) only an ass will wait for optimization.”15

7.2.3.1 Project Complexity All practitioners agree that implementing a contract management function is only justified for projects of “significant” or “high stakes” complexity. There is no consensus on a definition of project complexity. When asked to define project complexity, most project managers refer to the size of the project, the number of departments involved, the number and type of stakeholders, the location of the work, and the form of the contract. The first attempt to provide a response incorporating the different dimensions of complexity dates back to 1996,16 followed by an exhaustive managerial survey in 2012.17 It’s a sure bet that there will be many others. . . They all agree on one point: criteria based on values (or amounts) are often poor indicators, as projects worth hundreds of millions of euros can sometimes be less complex than others of a lesser amount, not to mention the complexity of the contract itself (see Chap. 4). From the manager’s point of view, complexity can be approached using the following analysis framework: • complexity of the legal arrangements: – number, reputation, and “aggressiveness” of contractors, and – presence or not of consortiums with third party companies;

15

Sen (1997), pp. 745–779. Baccarini (1996), pp. 201–204. 17 Müller et al. (2012), pp. 77–90. 16

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• the size of the project (which brings us back to cognitive limitations relating to people’s ability to manage a large amount of information simultaneously, in a conscious way, in any case): – order of magnitude (less than 10 million euros, between 10 and 50 million euros, above), – number of technical batches, and – complexity of interfaces between participants; • degree of exposure to the customer, in particular: – image risk, – commercial risk, – risk with regard to subcontractors (for example, subcontracting contracts that are not “back to back”);18 • degree of exposure to other members of the consortium, where applicable; • severity of liquidated damages: – liquidated damages for delays, – liquidated damages for performance issues.

7.2.3.2 Company Policy Beyond “objective” criteria, deciding whether or not to set up a contract management function is most often a choice made by senior management and is not a spontaneous decision or one left to the discretion of operational teams. In fact, after having suffered project slippages deemed unacceptable and avoidable after the event, some major groups have resolved the issue by requiring that a contract manager be systematically budgeted during the bidding phase and appointed at the start of the project for the most significant contracts. As a result, major names from industry and the IT world ensure that their offers include the cost of a function intended not only to reduce their exposure to contractual risks, but also to improve their contractual position toward their customers and subcontractors. The company’s contract management policy should, in any case, be defined by the executive committee and be widely communicated within the organization, to both: • demonstrate how seriously the executive management team takes the issue of sound contractual risk management; and • avoid mistrust on the part of operational teams (especially project managers), who will have to learn how to deal with contract managers on a daily basis on projects.

A contract is not “back to back” when the commitments made to the customer are not fully matched by the commitments made by suppliers.

18

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In Practice

Example of a pitfall to be avoided Leaving the choice to the discretion of the teams in charge of submitting the offer The teams in charge of costing commercial bids, who are rarely responsible for the subsequent implementation of projects, frequently fail to include the cost of the contract management function in project implementation budgets. This may result both from over-optimism and a lack of awareness of contractual risks, or even from a temptation to minimize the cost of implementation with the aim of improving the offer’s competitiveness. Similarly, for budgetary reasons, or for fear that setting up a contract manager function will be perceived as an admission of weakness, project managers frequently underestimate the need to set up this type of dedicated project function. The reasons most frequently invoked to justify this “oversight” are that “everything is contractual” or that the contract manager function is already at the very heart of the project manager’s responsibilities. ◄

7.2.3.3 How Should We Measure the Results? The question of measuring the ex post return on investment of a contract management function is a highly complex subject. Groups that have attempted this task have, at best, generated convincing results but at the expense of methodological bias or, in many cases, have failed to persuade their management boards of the results. The Productivity Gains Approach The first analysis method is to measure the potential reduction in the costs of drafting, negotiating, and administering contracts. Given that the contract manager plays a pivotal role in setting up the contract and in the contract management phase (in the performance phase), and taking into account the automation made possible by new technologies, some practitioners have tried to put a figure on the total cost of managing the contract (using a “total cost of ownership” logic), from its drafting to its closure. Based on costs, this essentially accounting-based approach is hampered by its failure to value the associated “business” gains. It provides inconclusive results, and it is usually necessary to complete the analysis by quantifying the costs avoided. The Opportunity Cost Approach In addition to the cost of managing the contract, the contract manager focuses on reducing risks and, with regard to the contracting process, on reducing lead times and automating the process (by aiming for “no touch contracting”). The cycle time of a negotiation and the speed of the contracting process are, in certain businesses, elements that can be valued, at least in terms of their impact on

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working capital requirements (WCR) or the income statement. Accelerating an order or reducing a contracting period deemed incompressible, allows products and services to be delivered more quickly or additional sales to be concluded. Similarly, during the performance phase, issuing a change order and avoiding a claim are elements that can be credited to the contract management function. We can therefore gradually estimate the change in the value of contractual risks “before” and “after” the implementation of proactive contract management. In fact, why don’t we just value the claims issued? We know that in many cases we wouldn’t have been able to issue them if the contract manager had not ensured the traceability of the contractual events. Practitioners therefore quantify, sometimes with a few approximations, the liquidated damages avoided, or the difference between the amount of incoming and outgoing claims, although they cannot always establish with certainty that these amounts stem from the contract manager’s actions. After all, how can we determine what the situation or the financial outcome would have been for a project if there had been no preventive or proactive contract management actions? Faced with this methodological difficulty, we prefer the approach, previously described in this book, of analyzing economic performance drivers (See Chap. 2). Qualitative Benefits Beyond the directly quantifiable and direct gains on a given project, the results expected from contract management can be analyzed on a company-wide scale, in terms of the capitalization of skills and best practices. Even the largest companies see a high loss of knowledge from one project to the next, while the duplication of mistakes already made on previous cases is astonishingly high. In this context, institutionalizing a contract management function helps companies to consolidate a base of knowledge and experience, reducing the risk of the most frequent errors in project management.

7.3

An Emerging Profession

Once a company has decided to set up a contract management function, the question of staffing arises, which is essential to ensure that the function takes shape in line with the company’s desired goals. Many companies do not have a precise understanding of the skills expected of a contract manager, let alone a precise definition of the function. This state of affairs reflects a relative lack of knowledge of the function’s characteristics and its differences compared with related roles, particularly in the legal and operations (or project) departments. In the rest of this chapter, we attempt to explain the profile and skills expected of this professional, as well as the reasons why this function remains somewhat fragile.

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A New Profession

Although it has not yet been institutionalized, the contract manager role has become increasingly professionalized as the financial stakes have risen. In 2019, on the professional social network LinkedIn, no fewer than 8.2 million people had the title of “contract manager”.

7.3.1.1 A Function That Is Now Integrated into Professional Frameworks Positioning the contract manager role in the company’s mapping of its business lines and competencies is a key element for developing the function. The function is now precisely defined in the frameworks of major professional organizations. We are therefore witnessing the beginning of the standardization of the contract manager function. Although the title of contract manager is not yet certified by a recognized initial or professional training qualification, it nonetheless refers to a set of skills and a level of experience validated by professionals. 7.3.1.2 Breaking New Ground The Strong Development of IT Contract Management As discussed in Chap. 3, large IT projects are prime examples of situations where contract management has a role to play: complex projects with multiple stakeholders, a changing business need, a service provider offering a solution that is still in the process of being developed, “ambitious” (unfeasible?) contractual schedules, risks of functional regression compared with the existing system, a client in a situation of strong dependence, service providers with offensive contractual cultures, etc. For the last decade, IT integration contracts have understandably been a natural field for applying contract management techniques. Recent years have only increased the trend, with the emergence of two new segments: • Major outsourcing deals (operation, infrastructure management, third-party application maintenance, etc.), involving long-term contracts (5–8 years) and offshoring. These contracts require tight contract management to enable the customer (who becomes increasingly captive) to control the risk of dependence on its service provider. Many outsourcing operations fail to produce the expected effects in terms of transformation and economic performance. Although service providers generally undertake to transform the customer’s applications in order to generate productivity gains, these productivity gains, although contractual, are very often disputed or are accompanied by new requirements (compensation claims). • Software asset management, which has become a central issue for Information Systems Departments (ISDs). These departments are increasingly faced with a flood of license contracts with different scopes (business, geographical, legal

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entity) and complex and heterogeneous pricing metrics. Combined with a rise in the number of audits and increasingly aggressive behavior from publishers–now the true champions of contractual engineering–groups have implemented compliance initiatives to reduce their financial exposure (often measured in millions of euros). In a 2012 publication entitled Software Asset Management, the Cigref (French Information Systems association) emphasizes that “It is essential to manage these global contracts, as they are the most time-consuming to negotiate and represent the main source of discussions or disputes between publishers and clients.” The large digital services companies and software publishers have played their cards right and have all set up significant contract management structures designed to evaluate discrepancies and negotiate amendments. As a result, the IT sector, like other industries, has gradually become a fertile environment for the development of the contract manager profession.

Development in the Financial Services Sector Since 2015, contract management has also developed in a sector where it was traditionally absent: the banking and finance sector. Under the aegis of a handful of pioneering groups, contract management is gradually becoming established in the banking sector, both in response to regulatory requirements and to economic and operational performance issues. In France, for example, the Société Générale Group initiated the movement by implementing a dedicated contract management function covering the main types of contracts for the outsourcing of essential services.

7.3.1.3 A Function in Search of Visibility In contrast to the situation in the previous decade, contract managers no longer suffer from a lack of visibility, as might previously have been the case, but the function still suffers from a lack of recognition. Contract management is essentially an Anglo-Saxon tradition, originating primarily in the United States and the United Kingdom. International implementation of contract management has drawn on the frameworks and practices developed for major US federal contracts, particularly in the defense sector. More recently, in the United Kingdom, the implementation of public-private partnership (PPP) contracts, known as “PFIs” (Private Finance Initiatives), for infrastructure projects (hospitals in particular), has helped to establish a solid practice of contract management.

Initial and Professional Training That Must Be Established Over the Long Term Although the contract manager role is based on technical and project management skills acquired during initial training (particularly in engineering schools), it relies above all on the professional experience acquired.

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Professional Organizations Contract managers in companies, who until present have been isolated as there were no settings in which they could develop professional relationships, now have various professional organizations that allow them to share their experiences and develop a network outside their own company. Two of the largest professional organizations are:19 • the IACCM (International Association For Contract & Commercial Management),20 an association founded in 1999 that brings together nearly 300 corporate members and 60,000 professionals in 175 countries, more than 40% of whom are from Europe. The IACCM is the only association with a worldwide influence, despite (or due to?) the strong diversity of its members (sectors, functions, locations, profiles) and the topics covered (contract management but also, more broadly, commercial & contract management, trade relationships, negotiation, etc.). In addition to research and publication activities, the IACCM offers certification programs in contract management, and has established a Master of Science (MSc) program in partnership with the School of Law at the University of Leeds (the “International Contract Management” program). • the NCMA (National Contract Management Association),21 an American association that brings together approximately 20,000 members and develops various training and certification programs. In addition to sharing information, the purpose of these associations is to develop a community of practice among contract management professionals in order to standardize knowledge. A Lack of Academic Recognition Does contract management have its own scientific foundations?22 Let’s begin with an observation: there are very few academic publications on contract management. The only international publication in Europe is the Journal of Strategic Contracting and Negotiation, created in 2015 by the IACCM with the aim of producing knowledge, both theoretical and practical. Similarly, the closest fields discussed at international conferences relate to risk management, modeling, or complex systems. 19

Professional organizations are also found in other countries. In France, for example, the AFCM (French Contract Management Association), the leading French organization for contract management professionals, has set itself the task of “bringing together contract managers; actively participating in the development, professionalization, and promotion of contract management; and improving its positioning within companies”. 20 http://www.iaccm.com/. In 2012, the IACCM published a reference book entitled Contract and Commercial Management: The Operational Guide. 21 http://www.ncmahq.org/. The NCMA has developed a “Contract Management Body of Knowledge (CMBOK)” similar to the PMI’s PMBOK. 22 We are referring here to the contract management function. Contracts, on the other hand, clearly benefit from extremely rich theoretical contributions, both in the legal field and in the fields of economics and management.

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Now let’s make a hypothesis: a science-based discipline aims to generate knowledge that facilitates the understanding of observable phenomena. It just so happens that economic science–the field closest to economic and social life–uses theoretical modeling. Economists pose a certain number of hypotheses that, while not always reflecting the actual behavior of individuals, can nevertheless provide predictions (based on falsifiable models). This methodological position is profoundly challenged by behavioral economics: if the models are empirically refuted (as we have clearly demonstrated in Chap. 5 of this book), it is not because of their low predictive power, but because the assumptions on which the predictions are based are false. This has an effect on the nature of the publications associated with the profession (particularly in the area of negotiation). Additionally, such publications often assume that contract management issues are above all legal in nature and that the function’s multidisciplinary nature makes a global analysis impossible. The reality is that academic works dealing with contract management–despite integrating legal constraints–are essentially derived from the economics field in the broadest sense (from neo-institutionalism23 to experimental psychology). It is possible to find well-grounded studies in the literature focusing on the treatment of disputes and claims. There is therefore an established academic tradition, but it is confined to a few authors who–thankfully–base their analyses on reallife case studies.24

The Difficulty of Providing Professional Development Paths One of the most critical challenges facing contract managers is the issue of professional development. As this is an emerging function, even when a department has been set up for it (in the human resources sense), groups find it difficult to attract people to the contract manager function because it is difficult to offer attractive career paths. Although there are numerous individual success stories, the issues of the profession’s attractiveness are well-known: • difficulties offering pathways to project manager functions (such sideways moves are not always valued in companies, what is the point of taking a detour through the contract manager role to become a project manager?); • difficulties providing pathways to related functions given the “hybrid” nature of the profiles involved; and • difficulties “growing” teams (except in the perspective of riskier and/or larger contracts) within the contract management department. 23 For contract practitioners, in particular Anglo-Saxon practitioners, claims and disputes are mainly based on a neo-institutional approach to transaction cost theory. 24 We can cite, for example, William Vidogah (University of Wolverhampton) and Mohan Kumaraswamy, Kumaru Yogeswaran, Sai On Cheung, and David Yates (all from the University of Hong Kong).

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For this reason, contract management departments are unfortunately often perceived as “temporary” positions, as a stage in a career rather than the culmination of a professional career. This situation is undoubtedly positive from the point of view of knowledge dissemination (capillary action), but it inevitably leads to frustrations: recruitment difficulties, the feeling of being a form of internal “breeding ground” for the best profiles, etc.

7.3.2

A Job of the Future

Contract manager: a job of the future? There is no doubt that this is a role with high added value, reserved for qualified and experienced profiles (even if, on this last point, we observe a recent trend toward “juniorization”, which is undoubtedly a result of the difficulties recruiting experienced profiles). But what specific features characterize this role, particularly compared with the skills required for a project manager? Aside from technical skills, which behavioral and relational skills guarantee the proper integration of the function within the company?

7.3.2.1 Specific Skills, Distinct from Those of the Project Manager The fact that an employee was a good project manager does not guarantee that he or she will be a good contract manager. Similarly, there are many examples of good contract managers who have failed in project manager functions. To make this observation more explicit, let’s focus on identifying the main differences in the roles and attitudes of these two actors, in order to highlight the specific nature of their functions. A Strong Operational Foothold Given the contract manager’s close relationship with the project manager, whom he or she supports in all contractual aspects, and the responsiveness required to carry out this mission, the contract manager needs to be extremely involved in the life of the project throughout its implementation phase. The contract manager must acquire legitimacy by demonstrating: • an ability to grasp the contract’s complexity (including the legal and technical aspects) and to understand the nature of the events that punctuate it, distinguishing those that are likely to affect the contract from those that are not; and • an ability to work fluidly and effectively, in a non-hierarchical manner, with the teams in charge of performing the contract, who will provide the contract manager with the information he or she needs to carry out the mission: non-compliance, delays, technical difficulties, additional costs, etc.

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On the other hand, while the project manager has a strong managerial role, as “team leader” or “first in command”, the contract manager must maintain a certain distance from the events of the project. This distance helps the contract manager to take a step back and to analyze a situation or a contractual position objectively and dispassionately in order to find the most favorable arguments and negotiating positions. A strategist and a fine tactician, somewhat detached from the constraints of implementation, the contract manager searches for perspectives different from those of the project manager. It is this complementarity that generates efficiency. A Job for “Seniors” That Values Their Experience It is generally accepted that the profession can only be practiced by an individual with proven technical experience, coupled with at least 10 years of significant experience in project management. It is therefore a profession essentially reserved for “senior” profiles (a term currently used in the business world to designate people over 50 years old), who have acquired both technical legitimacy and proven experience in the management of complex businesses. The contract manager is not a technical expert, a legal expert, or a financial expert, but nevertheless brings a wealth of experience, most often coupled with sectorspecific expertise. In particular, he or she will have significant experience of complex negotiations and of successfully presented claims. However, this conviction goes against the current trend, visible on the main professional social networks, of a “commoditization” of the title of contract manager, now assigned–paradoxically in our opinion–to profiles with less than 5 years of experience (like the title of “project manager”, which no longer carries any significance in terms of grade or scope of responsibility). Strong Legal Awareness In practice, the contract manager function is largely viewed from a legal perspective. In France, for example, this is reflected in certain (conceptually erroneous) translations of the contract manager title, such as “contract lawyer” or “project lawyer”. There is a lot of confusion in this area (sometimes fuelled by press articles or service providers who seek to promote contract management but disregard such distinctions). The media coverage of contract management in the professional press (legal in particular) has undoubtedly also contributed to this semantic and conceptual drift. In reality, the contract manager role should not be confused with that of the lawyer, although the contract manager of course has a good command of the main contractual clauses and a strong awareness of dispute resolution methods (ICC arbitration in particular, for large international projects). On the other hand, the contract manager’s activity extends far beyond administrative (clerical) competencies to reach the operational field, which is not the case for

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lawyers. In general, a solid and fruitful collaboration between lawyers and contract managers is one of the guarantees of contractual performance: • when lawyers intrude on the contract’s implementation phase, they are generally unable to fully understand the project’s technical aspects and constraints because they lack experience in the field; • likewise, when contract managers take the place of lawyers, they quickly face shortcomings in terms of legal knowledge. The strong complementarity between these two functions, which only very partially overlap, depends first and foremost on respect for their individual fields of competence. This requires a certain maturity on the part of those involved. They must be aware of their strengths and limitations, and of the differences in the way they approach subjects–contract managers often have an engineering background, which will affect their underlying approach, even on contractual subjects. A Different Perspective “The instinctive reaction of an engineer to a defect is to ask What went wrong? How do we fix it? The instinctive reaction of a lawyer is to ask Who’s at fault? How can we get them to pay? At the risk of overgeneralization, engineers are practical people who try to solve problems. Lawyers want detailed rules for everything that spotlights disputes.”25

Strong Drafting and Negotiation Skills Even more than the project manager, the contract manager must have an analytical mind and an appetite for performing in-depth analysis, searching for underlying causes, constructing robust and substantiated arguments, and negotiation. A taste for demonstrating the facts supported by good writing skills will be a valuable asset, particularly for preparing and supporting claims files. In practice, the contract manager will be able to give the project manager space to manage the short-term issues (the operational aspects of the contract), while the contract manager will analyze long-term questions (putting events into perspective with regard to the obligations of the contract).

7.3.2.2 A Relational Profession Contract managers are clearly not isolated. They interact as social actors and must integrate stakeholders into their approach in order to legitimize their formulation of a problem and its solution. In addition to hard skills, contract managers must also develop interpersonal skills that enable them to manage interactions with third parties and the company’s hierarchy. 25

Sweet (2008), pp. 367.

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In the organization, a decision-making model will not endure unless it is perceived to conform to the social code that governs the relationships between the individuals concerned. Politics cannot be ignored.26 A Political “Scapegoating” Game In the fifteenth century, Filippo Brunelleschi, a master architect, won the contract for the construction of the Duomo project in Florence. “In 1420 he was given the principal superintendant’s position (project manager) on a trial basis, which did not please him and the matter did not end there. Brunelleschi had a tempestuous relationship with the project sponsors. The craftsmen and the citizens had mixed reactions about his appointment. So a faction appeared before the project sponsors, complaining that they had appointed Brunelleschi too quickly, and that the project should not be managed by one man alone. Florence possessed an abundance of excellent master-builders but Brunelleschi’s appointment gave them no credit. If the project failed, the city might be blamed for giving too much control to one man. The faction suggested the project sponsors to provide Brunelleschi an assistant, named Lorenzo Ghiberti, to restrain his impulsiveness . . . In 1425 Brunelleschi got further control of the project by feigning sickness and demonstrating Ghiberti’s incompetence . . .”27

Knowing How to Communicate with Executive Management Contract managers must have sufficient communication skills to make executive management aware of the challenges of their position and the results they have achieved. They must not only ensure that their actions are visible, but must also relate them to the company’s strategy. How does a contractual strategy fit into the company’s commercial, financial, and legal strategy? Shedding light on and reporting on a contractual strategy is one thing, but positioning it within the framework of the company’s strategy is another. Contract managers must therefore endeavor to demonstrate–for a given project or contract–how their actions contribute to the company’s performance and risk control.

26 See Pinto (2000), pp. 85–91. Although most people do not acknowledge the existence of political games in their organizations, the increased tensions stemming from IS projects inevitably oblige managers to compete for scarce resources and to manipulate political behavior in order to obtain power and to avoid responsibility (see Chang 2013, pp. 57–67). 27 Kozak-Holland and Procter (2014), pp. 242–255.

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Bringing Together a Network of Internal Skills Developing an internal department within the company to bring together a community of practice is an important lever for the professionalization of the function. For example, some groups are developing exchange and in-company training programs, which aim to study practical cases, develop reflexes, and forge a common corpus of skills. These internal network approaches help contract managers to develop a collective identity, beyond individual career paths, and to make their community visible. Developing Exchanges with Lawyers One of the key success factors for contract managers is their ability to interact effectively with lawyers. Each of these two functions needs to respect the other’s specific perspectives and culture to avoid a “battle of the egos”. In this context, all initiatives aimed at developing mutual understanding, experience sharing, and the pooling of skills should be encouraged (upstream exchanges during the tender phase, contract reviews, etc.).

7.3.3

The Contribution of External Consultants

In the introduction to this book, we recalled Herbert Casson’s first “axiom”, which states that “business requires two or more individuals”. Since Casson’s time, the organizational environment for large projects has become considerably more complex and there is a marked tendency to use consultants, who act on behalf of the customer or supplier. Given that most organizations lack contract management resources, companies will probably have to rely on external consulting expertise to bolster their performance in this area. The use of consulting services should not be based solely on a desire to strengthen teams, but should also focus on the acquisition of critical skills, while avoiding outsourcing the responsibilities associated with the function. The dyadic customer-contractor relationship may be distorted if consultants do not have the same interests as the party employing them; although, as Axelrod shows, repeated direct contacts and the “shadow of the future” can induce a form of cooperation that protects against opportunistic behavior. On the other hand, when a third party is introduced, the project environment becomes “fragmented” and the motivations of the stakeholders are not necessarily in line with the overall performance of the contract. To illustrate the potential limitations of this process, Christian Berggren et al. present a series of real-life case studies examining contacts performed by SwissSwedish engineering group ABB, which specializes in energy and automation technologies.28 28

Berggren et al. (2001), op. cit.

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7.3.3.1 Choosing the Right Partner It is very often hard for companies to find lasting partners who are committed to a long-term approach and to capitalizing on their skills. Contract management is an emerging function, mainly practiced by independent consultants, often trained or born in Anglo-Saxon countries, where the profession has seen greater development, driven in particular by major government contracts (defense, security, etc.) or public-private partnership projects. Specialist firms, able to offer reliable and stable resources (as opposed to traditional freelancers, who are generally more inclined to conserve their business knowledge than to transfer their know-how to in-house teams) are relatively rare. The Consultant Builds a “Reputation” In the waste incineration plant example cited by Christian Berggren et al., ABB was in charge of implementing the exhaust control and elimination system. The contract was a turnkey, fixed-price contract. The end-customer, a consortium of municipalities, had appointed an international engineering firm as consultant/project manager. The case was clear cut. The consultant firm instrumentalized the contract: exchanges systematically referred to coercive contract clauses and its behavior was judged to be “hard-nosed”. It was focused on building a reputation. From the equipment suppliers’ perspective, it was clear that paying the consultant on a “timereimbursable” basis was not going to encourage the diligent resolution of problems.

Case where the consultant represents the customer. Source: Berggren et al. (2001), p. 42. Reproduced with the permission of SAGE Publications, Inc.

An Ongoing Confrontation “Arguing with him [the consultant] is like wrestling with a pig in mud–after a while you realize that he likes it.”29

29

Ibid. p. 44.

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Capitalizing on the Lessons Learned Focusing on short-term results is at odds with the need to capitalize on experience. Even where they exist, post-mortem reports addressing the difficulties encountered on previous projects and the solutions provided are never read. They are not considered, one suspects, as the bestsellers of the month and, as one MIT professor put it, “science is universal but technology is local”. If there are no general lessons to be learned, direct contact becomes essential. The major benefit of using external consultants is being able to take advantage of the expertise of the participants involved, which is often multi-sectoral. Beyond technical expertise, the contract manager is a “senior” who has managed complex cases with contractors from different business lines and disputes involving millions or tens of millions of euros. It is precisely this type of experience that gives contract managers significant added value, enabling them to transpose their best practices when applicable. There is, however, one risk, as seen in the case of a thermal generation project involving six suppliers organized in a consortium. The consortium leader used the services of an on-site consultant who had no interest in passing on his know-how:

Case where the consultant represents the supplier. Source: Berggren et al. (2001), p. 42. Reproduced with the permission of SAGE Publications, Inc.

The Consultant’s Confession “ABB Germany cannot learn very much from me and my experience, that is right, I keep my secrets of course. Well, we write a report when the project is finished, but I want to be good at this and I want ABB to be dependent on me. So, I don’t want to teach them too much. [sic]”30

30

Ibid. p. 46.

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7.3.3.2 Managing the Provision of Services In general, an external contract manager can be used without risk as long as the service is properly managed. As with any other consulting service, contract managers should remain in their consulting role and should not replace their customers’ decision-making processes. As such, the implementation of financial clauses known as success fees, which are sometimes requested by customers themselves, can be a major drawback since they risk misaligning the respective interests of the customer and the consultant. For this reason, customers sometimes prefer transactional agreements (expensive but fast) to contentious procedures (long and uncertain), while the consultant may have a financial incentive to recommend an “all the way to the end” approach, to “make the dispute last”. These financial provisions, which may be attractive at first glance but are often counterproductive in the long term, should be avoided at all costs. Consultants, who unfortunately tend to intervene at the end of the contract, when tensions are already exacerbated, must act as “facilitators”, must participate in the development of a non-confrontational culture, and must not walk away from their role as mediators.31

7.4

Conclusion

The organizational choices made regarding the contract management function, which must be determined at an executive management level, are strongly influenced by the answer given to a theoretically simple governance question: Who is responsible for contract performance? Although the contract manager and the project manager share a strong technical culture and extensive experience in project management, the contract manager has a distinct role and develops: • a different, non-hierarchical attitude, characterized by a certain detachment and an ability to put into perspective the events that punctuate the life of the project; and • specific competencies, including strong drafting and analytical skills, and solid experience in the negotiation and claims phases. Similarly, the contract manager’s role should not be confused with that of the lawyer, even in cases where the contract management function is hierarchically attached to the legal department. Although both roles share a common knowledge base and complementary fields of action, the contract manager ensures a more operational mission that requires different skills, experience, perspective, and personal qualities.

31

Jergeas and Revay (2006), pp. 2.1–2.5.

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In any event, the ability of these two functions to interact effectively while respecting their respective differences is one of the key factors in the successful implementation of contract management. Despite very significant developments over the last 10 years, particularly in new segments, the contract manager role is clearly a profession of the future for highly qualified profiles, capable of fully embodying the function and ensuring it a strong foothold in the company’s strategy.

References Baccarini D (1996) The concept of project complexity–a review. Int J Project Manag 14 (4):201–204 Berggren C, Söderlund J, Anderson C (2001) Clients, contractor and consultants: the consequences of organizational fragmentation in contemporary project environments. Project Manag J 32 (3):39–48 Bouquin H (2011) Les fondements du contrôle de gestion. PUF, Paris Chang CL-H (2013) The relationship among power types, political games, game players, and information system outcomes – a multiple-case study. Int J Project Manag 31(1):57–67 Chekroun D, Thomas E (2015) Contract managers in France, training, attachment in the Business Organization, position within the project team. Int Bus Law J:262–272 Crosby PB (1979) Quality is free: the art of making quality certain. McGraw-Hill, New York Garrett GA, Rendon RG (2005) Contract management organizational assessment tools. NCMA, Virginia Jergeas GF, Revay SO (2006) The claims consultant as a peacemaker. AACE Int Transact:2.1–2.5 Kozak-Holland M, Procter C (2014) Florence Duomo Project (1420-1436): learning best project management practice from history. Int J Project Manag 32(2):242–255 Krappé K, Kallayil G (2003) Contract management is more out of control than you think. J Contract Manag 53(1):3–8 Kululanga GK, Kuotcha W, McCaffer R, Edum-Fotwe F (2001) Construction contractors’ claim process framework. J Construction Eng Manag 127(4):309–314 Mohamed KA, Khoury SS, Hafez SM (2011) Contractor’s decision for bid profit reduction within opportunistic bidding behavior of claims recovery. Int J Project Manag 29(1):93–107 Morieux Y, Tollman P (2014) Smart simplicity, six simple rules: how to manage complexity without getting complicated. Harvard Business Press, Boston Müller R, Geraldi J, Turner JR (2012) Relationships between leadership and success in different types of project complexities. IEEE Trans Eng Manag 59(1):77–90 Pinto JK (2000) Understanding the role of politics in successful project management. Int J Project Manag 18(2):85–91 Sen A (1997) Maximization and the act of choice. Econometrica 65(4):745–779 Sweet J (2008) Do engineers and lawyers approach problems differently? J Professional Iss Eng Education Practice 134(4):367 Verdun F (2011) Les conséquences de la définition du risque juridique sur l’organisation de la fonction juridique dans l’entreprise. In: Roquilly C (ed) La contribution des juristes et du droit à la performance de l’entreprise. Lextenso Éditions, Paris, pp 243–248

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How Innovation Can Support Contract Management

The emergence of artificial intelligence appears to be a new and controversial chapter in the history of law, and is often accused of being a futuristic fantasy. But contract managers cannot escape digitalization, since “Code is the invisible architecture structuring everyday life.” New methods and innovations, driven by digital technologies and the emergence of “Legal Tech”, are transforming the skills expected of employees and the way in which contract management activities are performed. In this chapter, we will discuss the role of digital technology in the development of contract management, across various fields of application: • communities of practice, which strengthen collaboration among professionals; • new design methods, such as agile methods and BIM (building information modeling); • new contract lifecycle management (CLM) tools that automate all or part of the contract management process; • legal design (or contract design), a new concept promoted within legal departments; • the impact of new artificial intelligence (AI) technologies; and • the uses and benefits of decision-support tools as applied to contracts, in particular to assess the probability of success when handling a potential claim file.

8.1

Contract Management in the Digital Transformation Era

As mentioned earlier in this book, contract management, whether it is performed by a dedicated organization or department, or whether it is merely considered to be an expertise or “practice”, is confronted with an anchoring problem: • How can we sustainably reinforce ownership of the issues by the actors affected by contract management (whether they are contract managers or not)? # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3_8

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• How can we capitalize on and share a common base of business practices given the diverse profiles, experiences, and contexts (project, geography, type of contract, etc.)? • How can we develop individual and collective skills? These challenges have led the most advanced organizations to set up communities of practice (CoPs), with the aim of uniting contributors, who are often geographically dispersed, around themes of common interest (contract management, claims, delay analysis, etc.). These systems provide visibility and support for the management ambition of developing contract management at an organizational level.

8.1.1

New Mobilization Methods and Communities of Practice

Irrespective of their degree of agility, companies tend to be organized in “silos”, by business line, expertise, or scope. They are often unaccustomed to working in networks, especially when such networks do not strictly correspond to organizational boundaries or hierarchical prerogatives. Communities of practice (supported by new digital tools) can help companies to overcome the challenge of setting up and supporting networked, cross-functional, and truly collaborative operations over the long term. Although they are not a “magic formula”, communities of practice contribute to strengthening the cooperation1 that is essential to any form of innovation (innovation requires mobilizing new skills and forms of intelligence that go beyond the strict capacity of available resources). Far from being simple spaces for sharing between peers, on the fringes of the organization, communities of practice aim to encourage experts (e.g., contract managers) and managers to work together on an ad hoc or more long-term basis. The intention is clear: to promote cooperation between stakeholders, to decompartmentalize, to develop the sharing and capitalization of knowledge, to build a common base (body of knowledge), and to encourage professionalization and mobilization. Although established in the management field in the 1970s, communities of practice have experienced a resurgence of interest with the emergence of digital tools. Collaborative portals, knowledge management and community management tools, and corporate social networks are all vectors that reduce barriers, remove obstacles, and reduce the costs of access to expertise as well as the distance between teams. Equipped and connected in this way, employees are better able to exchange, share, and establish an internal network and thus contribute to the emergence of a visible community.

1

https://www.ted.com/talks/yves_morieux_as_work_gets_more_complex_6_rules_to_simplify.

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8.1.1.1 Sharing Tools Is Not the Same Thing as Cooperating Of course, managing a community of practice is not simply a matter of implementing “community management” actions (no matter how relevant and necessary). Similarly, the mere use of digital tools is not sufficient to guarantee a dynamic community of practice. Poorly developed communities of practice are most often confronted with the question of “meaning”: • Cooperate: Yes, but on what (purpose of the cooperation)? • Cooperate: Why? What’s in it for the company? And what do I gain as a contributor (feeling of usefulness, recognition, etc.)? • Cooperate, but with whom? I find it easier to collaborate with people who are similar to me and when I am sure that no one will try to misappropriate the results of the collaboration. As simple as they are, these three questions are at the heart of the success (or failure) of communities of practice. Orders to “share” or “collaborate”, which are part of management doctrine, face a dilemma: cooperation is demanding—more demanding than working in isolation—since it implies a loss of autonomy or a relationship of interdependence between the people required to work together. We note that, according to the sociology of organizations, cooperation is not a natural form of behavior. As Natacha Leymarie from WillBeGroup emphasizes, “It is a construction, formal or informal, that requires a lot of effort: far from being a simple question of processes or tools, cooperation is about human dynamics.” Cooperation will only be effective if all individuals, faced with the instruction to cooperate, are able to satisfactorily coordinate the following three dimensions, which will guide their behavior: • their perception of the corporate culture (value system, expected or rejected attitudes, etc.); • their representation of their role: Which principles forge my professional identity? What constitutes a “job well done”? How am I useful to the organization? • their assessment of their room for maneuver: How much latitude do I have in this or that situation? Can I continue to do my work “my way”? To cooperate effectively, members of communities of practice need to find reference points that do not distort their understanding of what their relationship to their work and to other community members “should be”. The success of a community of practice is therefore largely based on the management team’s ability to give meaning to the system and to encourage the active and sustainable mobilization of its teams. The communities of practice that “work” owe their success to three factors: • a shared purpose: What are our goals? What mandate did we receive from management? What does our investment mean for the organization?

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• clear rules, particularly with regard to the modalities of engagement in the community (voluntary basis or “compulsory practice”) and with regard to the recognition of collective and individual contributions. On this point, we suggest basing participation in the community on “supervised volunteering”, i.e., volunteers should not invest “à la carte” as they go, but should commit to concrete objectives (deliverables) over a predefined period of time (which is not “permanent”, to avoid the risk of running out of steam); and • tools adapted to the issues and contexts of sharing practices

8.1.1.2 A Foothold in Reality To avoid “disconnected” operations, with no clear mandate or internal visibility, the most advanced communities of practice rely on a combination of digital online tools and physical meetings (particularly in the launch phase), with the latter acting as ritual events that punctuate the life of the community. We stress that these tools need to be adapted to the objectives: tools cannot meet all needs in the same manner. The risk of a mismatch between the tools available to community members and the purpose of these tools cannot be ignored. In this respect, we distinguish different types of collaborative space that, in function of their individual strengths (and without individually providing a universal remedy), can meet the different needs of the members of a community of practice: • portals (Sharepoint, etc.), which provide an entry point to the community and access to information (especially for remote teams); • corporate wikis, which can be used to share benchmark information (frame of reference, best practices, tips and tricks, etc.) based on structured content; and • corporate social networks (Yammer, etc.), which can be used to seek expertise and to deliver “push” communication, most often based on new information. We nonetheless recall the intrinsic limits of corporate social networks, frequently highlighted in the management literature, relating in particular to: • the difficulty of evaluating shared information (some form of expertise is often required before we can understand the information, or we may need to contextualize it to perform a meaningful analysis); • risks associated with poorly controlled disclosure, which may inhibit participants (risk of excessive disclosure, feeling that asking a question is an admission of weakness, etc.); • the lack of a structured framework for managing contributions (the quality of contributions is most often judged by the professional or hierarchical legitimacy of their author); and • difficulties escaping, in these often poorly regulated spaces, from traditional hierarchical protocols (are we obliged to “like” the contribution of a hierarchical superior?). In Practice

Communities of practice: pitfalls to avoid

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• • • • • • • •

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Rushing into decisions (deciding to implement a tool without clear objectives); A lack of upstream framing (objectives, mandate, rules of the game, etc.); Ill-defined objectives that discourage employees; Practices that are not consistent with the company’s culture and usual operating methods; Setting up an overly complicated structure; Insufficient support for change and a lack of recognition; Compartmentalized on-line and off-line systems; and Unenthusiastic and meaningless management communication. ◄

8.1.2

New Project Development Methods: Agile, BIM (Building Information Modeling)

The management methods traditionally employed on large projects require considerable resources, not only for the development itself, but also for monitoring the methodology. The first of these is the so-called “waterfall model”, where activities are developed using a linear approach in which the different phases take place sequentially. Unfortunately, if the final assembly shows that the initial specifications were deficient, it will be too late to resolve the problem. In a second method, called the “V cycle”, the transition from one stage to another is very strictly institutionalized (even ritualized): many documents with contractual value need to be produced and end-of-phase milestones are subject to payment keys.

V-model

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However, in spite of the precautions taken, project development involves hazards and several transitions may be necessary. If tests show that the subset integration is not performing as required, then we will need to go back (to the left part of the V). The more complex the product is, the more expensive these returns will be. Although this method is commonly used for large programs, it has major flaws: it is rigid and failures can be extremely costly.

8.1.2.1 Agile Methods: A Reinvention? Under the impetus of the software industry, new “agile” development strategies appeared in the early 1990s. The philosophy of these lean-inspired methods raises the question of collective meaning in an interactionist perspective (the methods were born out of the 2001 Agile Manifesto, which is regarded as the founding act). Proponents of the agile approach see it as much more than a method and present it as a new way of approaching project management,2 referring to an agile state of mind, an agile philosophy, or an agile culture. The Agile Manifesto (2001) • 1. Rigid processes give way to individuals and their interactions; • 2. Software that is immediately operational is preferred to exhaustive documentation; • 3. Cooperating with the client is given priority over contract negotiation; • 4. Adapting to change is preferable to following a pre-established plan. “We are uncovering better ways of developing software by doing it and helping others do it. Through this work we have come to value: • • • •

Individuals and interactions over processes and tools; Working software over comprehensive documentation; Customer collaboration over contract negotiation; Responding to change over following a plan.” “We follow these principles:

• Our highest priority is to satisfy the customer through early and continuous delivery of valuable software; • Welcome changing requirements, even late in development. Agile processes harness change for the customer’s competitive advantage; (continued) 2 This point could be questioned in light of the Manhattan Project and the first ballistic missile projects, which fundamentally violated the phased project lifecycle approach. Both applied a combination of trial-and-error and parallel trials in order to “push the envelope” (see Lenfle and Loch 2010, op. cit.).

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• Deliver working software frequently, from a couple of weeks to a couple of months, with a preference to the shorter timescale; • Business people and developers must work together daily throughout the project; • Build projects around motivated individuals. Give them the environment and support they need, and trust them to get the job done; • The most efficient and effective method of conveying information to and within a development team is face-to-face conversation; • Working software is the primary measure of progress; • Agile processes promote sustainable development. The sponsors, developers, and users should be able to maintain a constant pace indefinitely; • Continuous attention to technical excellence and good design enhances agility; • Simplicity—the art of maximizing the amount of work not done—is essential; • The best architectures, requirements, and designs emerge from selforganizing teams; • At regular intervals, the team reflects on how to become more effective, then tunes and adjusts its behavior accordingly.” The central idea is to think of implementation as a series of short cycles, each of which brings measurable progress (e.g., the addition of a new function). The new function is integrated immediately and prototyping allows for rapid validation by end users. Agile methods are being deployed in an ever-widening range of sectors, not just in IT projects, but also in most business projects. They typically feature the following characteristics: the customer’s opinion is important (user stories), short-circuit work, an iterative approach, a focus on deadlines (sprints), design of a minimum viable product (MVP), the need for team animation routines (Scrum), etc. The approach is intended to be more flexible than traditional methods. Concretely, agile methods can be used to: • bring about a change in the mindset and model of collaboration with the service provider; and • detect failures and schedule slippages more quickly, by breaking free from the “tunnel effect”. Despite these advantages, it is nonetheless important to implement appropriate contractual clauses in order to keep budget overruns under control. Agile methods do not protect us from budget and deadline slippage. The methodology to be applied in the specific context of the project must be specified. It is not universal and cannot be based solely on the parties’ ability to self-

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organize. Nor does it free the parties from the notions of scope, deadlines, or responsibility. It is therefore advisable to contractually frame the overall requirements and functionalities, as well as the evolution of these functionalities (management of the product backlog). We note that the agile approach requires much greater engagement from the client (this point is often overlooked or underestimated in the decision to launch an agile project), particularly regarding the governance of the project and the client’s obligation to cooperate with the service provider in charge of development: • the functional framework planned at the time of signature may change as the project progresses without the need for an amendment to the contract; and • participants must show greater maturity and accept the idea that the project is “driven” by the budget, by the expected benefits, and by a finite number of sprints. Items not finished after the planned number of sprints will not be completed. This assumption implies arbitrating between the different functionalities as the project progresses, a more engaging approach than simply formalizing a list of reservations in an acceptance form. Before launching a project in agile mode, we need to check the following aspects: • whether the project is suitable for agile methods; and • whether the organization is sufficiently mature to operate in agile mode. Agile Methods and Construction Contracts “It’s helpful to keep agile’s origins in software product development. It may be difficult to apply it in some contexts. For example, if someone makes a mistake on software code, it can be corrected with relative ease. If a mistake is made with the foundation of a skyscraper, it’s much more difficult to adjust that error. Perhaps agile will evolve further to adapt to other contexts in the future.”3

8.1.2.2 New Method, New Problems. . . A consequence of operating in agile mode is that new issues arise in the event of disputes. As each party’s responsibilities are less clear-cut, the contract will have to define the roles very precisely (e.g., for IT contracts: product owner, scrum master).

3

Harpham (2018).

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An Initial Legal Precedent On June 24, 2016, in France, the Nanterre Commercial Court sentenced Macif (the customer) for wrongful termination of a software integration contract and the related license/maintenance contract for a total amount of approximately €1,450,000. Macif had criticized its service provider, IGA Assurances, for failing to deliver detailed functional specifications on time, asserting that the specifications were unsuitable for the needs it had expressed. The parties had nonetheless “moved away from the V-model method for the detailed design and parameterization of the software package, [as well as from] the specification of requirements, [which] was carried out using a methodology known as rapid application development (RAD), based on an iterative approach between the project owner and the prime contractor, implying that the functional designers and user representatives define the application together during design workshops.” With this agile development method, the obligation to collaborate was reinforced for both the service provider and the customer. This was one of the bases of the judgment against Macif, as the poor quality of the specifications could not be attributed to the service provider alone. Similarly, although the contract must guarantee a flexible framework, it must also set out safeguards in terms of deadlines (receipt of deliverables, final milestone) and substance (particularly with regard to documentation). One of the key questions relating to the agile method is the receipt of deliverables: Are deliverables accepted at the end of each sprint as the project progresses? What are the contractual repercussions at the end of one sprint and the transition to the next? Adopting a “done” criterion for IT contracts is probably the most innovative concept from a contractual point of view. Acceptance of deliverables during the course of the project and continuous quality control of the computer code replace traditional integration acceptance procedures. However, agile contracts do not always dispense with an overall final acceptance procedure or an end-to-end approach. In this respect, the contract’s actual agility is sometimes out of step with the agility advocated for the project. When the Customer’s QA Won’t Play Ball “I recall working with a telecommunications company that had been doing some work in agile. They asked me to come in and do an assessment. While interviewing staff and reviewing documentation, I noticed that their burndown charts had a hockey-stick effect. That means that progress is made throughout the project, but nothing was accepted by the customer until the last few days of the sprint. I found out that the quality assurance group would not start testing until all the development work was complete. . . It turns out that the QA group (continued)

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had an unwritten rule that no QA work could be done until all development work was done. It was a waterfall project management concept! Even though the organization had moved to agile and had merged the QA group with the development team, their systems and processes were still using the old way.”4 (David Kollm, Accenture) Similarly, how can we evaluate the workload variations inherent in a change in scope? Do the mechanisms for scoring and weighting functionalities have a contractual value? What are the mechanisms in cases where the customer and the service provider disagree? What happens if, at the end of the planned number of sprints, some functionalities from the product backlog are still unfinished, even after being carried over from one sprint to the next (the functionalities carried over to the last sprints often being some of the most complex)? These questions are generally inadequately addressed during the contract drafting phase and require the utmost vigilance. Finally, the compatibility of agile contracts with a fixed price model (a solution generally used by the Scandinavians) remains a matter of debate. It is accepted that an agile contract can be signed on either a time-and-materials or a fixed-price basis, provided that the fixed price is established based on “user stories” or “sprints” (with a minimum invoicing obligation to justify commitments and/or a carry-over of unused days). A particularity offered by agile contracts is the relative ease with which the customer can redefine its needs and interrupt the project. This unilateral exit option rarely gives the service provider the right to compensation. It is considered to be inherent to the contract’s agility and is an identified risk that should be anticipated. In Practice

Precautions to be taken when drafting agile contracts • As the contract is the sole reference for interpreting the facts, the project’s objectives must be included in the preamble, so that the judge will be able to assess them; • The expected deliverables and acceptance criteria must be precisely defined. (In France, for example, Ordinance 2016-131 of February 10, 2016 introduced a legal obligation for the service provider to offer “a service of quality that meets the legitimate expectations of the parties taking into account its nature, uses, and the amount of the consideration”); • The description of the customer’s obligations should be reinforced, particularly given that the principle of good faith is very much as the heart of contemporary contract law, forming a public policy rule; 4

Harpham (2018), op. cit.

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• Define roles and responsibilities using a RACI matrix, a responsibility assignment chart that specifies who is: Responsible, Accountable, Consulted, and Informed. Responsible: the person who performs the task, for example the prime contractor. Accountable: the person answerable for the satisfactory performance of the work and its delivery. This person delegates the performance of the task to those responsible. Consulted: participants whose advice or opinions must be taken into account, for example experts or future users. Informed: these actors are informed about the advancement of the project or the progress made (no action is expected from them). ◄ Although this undeniably successful way of working has all the appearances of common sense, it may conceal barriers to true agile behavior. A recent survey report published by the Scrum Alliance, an organization with more than 500,000 practitioners, shows that 70% of respondents report tensions between their teams and the rest of the company, which often continues to adhere to traditional methods without openly admitting it. How to Kill an Agile Initiative “I had a project a few years ago that comes to mind. I was using an agile methodology, but one of the executive sponsors was not that big on agile. They hadn’t seen success with agile and they didn’t know if it would work. In practice, this meant they acted as a micro-manager on the project. I was in the position where I was being told what to do, how to run the project and do things that were against the principles of agile. I recall one of the daily standup meetings. Typically, a stand-up meeting lasts fifteen minutes. In this case, a senior manager came in and asked detailed questions of every team member. The meeting lasted an hour. All the details had been captured in our agile project management tool, but this manager still asked for verbal updates and used up a lot of valuable time.”5 (Bob Tarne, IBM)

8.1.2.3 BIM (Building Information Modeling) BIM is different in terms of its status in the construction sector. It has existed for around 30 years. Why the sudden interest in this tool? The answer probably relates to recent advances in computing power, which have made it possible to pool all relevant data around a single model. BIM is a genuine ecosystem that allows us to manage a construction project from its conception to its demolition, bringing solutions to the challenges of energy transition. It is not too far-fetched to estimate that three out of four projects now call for BIM.

5

Harpham (2018), op. cit.

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Description of the BIM Process BIM is a collaborative process for sharing information about the design, completion, and operation of a building at all stages of the project. This activity is carried out using a digital mock-up accessible to all stakeholders. There are several levels of BIM: • Level 0 BIM involves no collaboration as such, it is simply computer-assisted, there is no digital interaction; • Level 1 BIM features digital interaction and a 3D model, but only during the building design phase. The construction phase uses 2D files. Collaboration between the actors is limited; • Level 2 BIM, which is the most common, especially in Northern Europe, allows for greater digital interaction. 3D files can be modified during the construction phase and the various parties involved can work on and develop shared data; • Level 3 BIM allows full collaboration between stakeholders, exchanges and modifications to the model can be simultaneous, and the data can be used during the operation phase. This BIM level features a single file stored on a server. Once the building has been completed, the BIM model, which integrates all modifications or adjustments that occurred during the work, can be used to plan the maintenance of the structure during its lifetime.

Legal Issues Relating to Responsibility Due to the novelty and variety of processes, there is no unified contractual strategy for the use of BIM. The issues become even more complicated when the interactions between the different actors are integrative and need to be concomitant:6 • How are responsibilities defined in the event of an error in the digital mock-up? • Who is responsible for incomplete or inaccurate data? • The digital mock-up contains data protected by intellectual property law. Who owns the mock-up? • Who takes responsibility for entering data and maintaining the BIM? • Who can modify the data and determine which data are accessible? • What level of competence is required by users? • How confidential is the data? In level 2 and 3 BIMs, the question of responsibility mainly affects BIM managers. In charge of coordinating the BIM on a project, they are responsible for process management and administration. They coordinate the submission of individual drawings and integrate them into the digital mock-up. They are also 6

Difficulties increase exponentially with the number of contracting partners. The fact that signatures do not take place at the same time adds to the complexity (public-private partnerships, PPPs, are particularly affected). Negotiations are especially difficult when it comes to implementing an amendment that requires the consent of all parties.

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responsible for data security and the preservation of records (Who submitted what and when? Was it in accordance with the agreed terms?). As they are contractually bound to the project owner, they may have two different levels of responsibility: • their actions are limited to simple management of the IT tool and they do not directly intervene in the works; or • they are involved in the design, assembling mock-ups for the various contributors or establishing interface conflict reports. According to some lawyers, the presumption of responsibility should not apply in the first case. The BIM manager’s responsibility would only be contractual in this arrangement (this would be the case, for example, in the event of a loss of data or if a virus made the IT tool, which the manager had been entrusted with managing, unusable). On the other hand, if managers engage in actions such as preparing conflict reports for the various mock-ups, they could be held liable. To date, very few disputes have arisen from the use of BIM. The collaborative aspect of the tool may positively influence the relationships between actors, while the possibility of detecting problems from the design stage may facilitate the communication of data and the correction of errors.7 The BIM Convention BIM, a collaborative vehicle characterized by its flexibility, nonetheless imposes a certain number of principles that will govern the organization and use of the digital mock-up. This is the purpose of the BIM protocol, which will formalize the rules for the production and management of the BIM and/or business mock-ups over the course of the project. Several solutions are possible to formalize these rules: • either integrate them directly into each participant’s contract, which implies rewriting traditional contractual documents (deed of commitment, special conditions of contract, and standard technical specifications), which can be very cumbersome to set up and negotiate with each party; or • draw up a specific document: the “BIM protocol” or “BIM convention”. The solution developed in the United Kingdom is to implement a BIM protocol, which is often incorporated into the main contract. In Practice

The BIM protocol The Pican Report in France and the lessons learned in countries that have adopted BIM show that most of the difficulties associated with the use of BIM can be resolved with purely contractual solutions. The BIM protocol therefore acts as A recent application used a plugin called the “BIM-Based Claims Management System” (BIM-CMS) to achieve a more transparent and rapid settlement of EOT claims. It was developed in an Autodesk Revit environment. See Ali et al. (2020), pp. 1–16.

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a guidance document for organizing the project and managing the digital mockup. It is part of the main contract and should specify the following elements (non-exhaustive list): • a definition of the terms used, in order to avoid confusion and uncertainty (BIM manager, main designer, digital mock-up, data, etc.); • an order of priority of BIM documents in the hierarchy of contract documents; • the way in which the BIM digital mock-up will be developed and updated during operations; • a description of the BIM manager’s missions and responsibilities; • the parties’ obligations (in particular regarding data exchange conditions: format, frequency); • accessibility conditions (Who has the right to modify the data? Who is authorized to consult the data?); • the intellectual property provisions for the individual mock-ups and the digital mock-up; • user licenses; and • liability limits for the mock-ups produced by the various participants. ◄ The BIM protocol only makes sense if it is enforceable against all the actors participating in the digital mock-up. It must therefore be included in the various contracts and each participant must also ensure that it is enforceable with respect to its subcontractors. In Practice

The BIM Execution Plan The contract’s obligations apply equally to all participants. One solution is to create a separate appendix referred to as the BIM Execution Plan to record the purely technical requirements of the BIM (file formats, the different protocols applicable, etc.). There is no need to design a new contractual network. The BIM can maintain a conventional contract typology without calling into question the overall hierarchical structure. ◄

8.1.3

Contract Lifecycle Management (CLM) Software Packages

The contract management software market has been booming since 2010, with more than 200 Contract Lifecycle Management (CLM) solutions listed worldwide according to a study published by Capgemini in 2018. We will not mention any particular software brand here, so as not to influence the reader (the most renowned players are not necessarily the most relevant given the number of pure player CLM solutions). Readers may also refer to the IACCM

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website, which provides a search engine and comparison of available solutions, published jointly by the IACCM and Capgemini.

8.1.3.1 A Few Markers Generally speaking, CLM software provides solutions that aim to automate the management of the contract cycle (from agreeing the contract terms, through performance, to closing). Gartner gives the following definition: “Contract lifecyle management applications digitize and automate the contracting process to improve the speed, efficiency, visibility and compliance of legal document management across an organization.” More specifically, these solutions aim to: • improve visibility of the contract portfolio and contract risk management; • improve the productivity and efficiency of the teams in charge of managing contracts, avoiding the time spent collecting, manually processing/reconciling, and consolidating information; and • reduce cycle times for the tasks of collaboration and negotiation of contractual clauses (especially in the upstream phases). The CLM Market According to a Gartner study published in December 2018, CLM solutions represent a market of US$400 million, growing at an average of 12% per year between now and 2022, driven by the following trends: • “by 2023, 90% of multinational global enterprises and 50% of regional midsize organizations will have contract management lifecycle solutions in place”; • “by 2023, artificial intelligence will bring 30% more efficiency to the contract negotiation and document completion process in organizations that deploy leading contract management lifecycle solutions”. Gartner also stresses that, “the benefits of CLM solutions include increased governance and control over what is signed, when and by whom. Additionally, these solutions provide the assurance of knowing that the correct contract terms are live at any given time. They provide deeper insights and better visibility across all contractual agreements by analyzing contents and conditions . . . CLM presents a great opportunity for digital transformation, because it is practical, well-scoped, and executable.” We will attempt to sketch a map of the market (remember that these solutions come from publishers with different backgrounds, who have grafted contract management “bricks” onto their original core applications.). The results of these

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developments are obviously influenced by the publishers’ initial business lines. Accordingly, we distinguish four families of solutions: • (large) players in the mature procurement and sourcing segment, who have expanded their (procurement) contract management functionalities by digitizing collaboration, Vendor Management, or Supplier Relationship Management (SRM) processes; • actors from the document management world who capitalize on the power of their recognition (Optical Character Recognition, Intelligent Character Recognition, Automatic Document Recognition), indexing, and text search engines; • publishers in the legal software segment who have recently developed contract management modules, in an essentially compliance-centered approach; and • pure player contract management solutions, often developed by specialized startups, at the cutting edge of technological innovations. Let’s face it, in spite of this profusion of offers, the “best” tool is the one that meets the customer’s specific needs. So far, no publisher has managed to establish the standard software package for contract management (like SAP for finance, for example), which can lead to frustration among less adventurous customers. As with any software package, remember that one of the key issues is integration, particularly with the company’s related applications. The optimal solution will not necessarily be the one that best meets each functionality, taken in isolation, but the one that best integrates into the company’s information system, particularly with its purchasing, finance, or project management software. In Practice

What benefits can we expect from a CLM solution? In summary, CLM solutions meet several types of needs and can be used to: • improve visibility of the contract portfolio: centralization of contractual documents, management of access rights (segregation of duties), monitoring of key milestones (deadlines, etc.), archiving, reporting, and dashboards; • automate collaborative processes and improve governance: rationalization of the contract repository (libraries, clause lists), management of exchanges, monitoring of the negotiation of contract terms (e.g., revisions, redlining), etc.; • manage contractual risks and obligations: management of signature and approval workflows, compliance with standard clauses and management of the underlying risks, monitoring of reciprocal commitments, monitoring of discrepancies and modifications, etc.; and • reduce cycle times and improve productivity and efficiency, thereby reducing contracting process costs and management costs. ◄

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8.1.3.2 From Basic Functionality to the New Horizons of Artificial Intelligence Rather than providing an inventory of the main CLM tools, we will focus here on classifying their standard functionalities in terms of their degree of “commoditization”, taking into account both their generic nature, as seen in the software packages available on the market, and their rate of adoption by customers. We nonetheless note that the degree of maturity in terms of practices within companies, even those equipped with high-performance CLM solutions, remains very disparate. As Gartner points out in the aforementioned study, “many organizations still use CLM solutions primarily as document repositories for tracking metadata and triggering alerts”. But make no mistake about it: CLM solutions are real drivers of productivity and performance. The potential offered by CLM solutions (reinforced by technologies such as Machine Learning, Natural Language Processing, or AI) essentially stems from their analytical dimension (analytics), which, when applied to a significant portfolio of contracts, helps to erase inefficiencies and to bring to light unexplored sources of value creation. “Commoditized” Functionalities CLM solutions initially focused on redesigning the process for putting in place the contract and then on lifecycle management, which is often poorly equipped, with multiple stakeholders. The confusion surrounding the governance of the contract was such that companies had difficulty centralizing their contracts and establishing an exhaustive repository (contracts, appendices, amendments, etc.) that could be monitored (due dates, notice periods, etc.) with an acceptable traceability of interactions (markups, approvals, signature, audit track), guaranteeing stakeholder accountability. The essential functionalities of CLM tools thus relate to the following aspects: • contract repository: the primary functionality of CLM tools is to provide a structured database making available all of the company’s contracts according to predefined search criteria (parties, amounts, dates, etc.). All solutions offer these functionalities, backed by varyingly powerful search engines (full text/ fuzzy logic search, metadata, tags, etc.); • contract drafting: these functionalities enable users to generate contracts (contract authoring, contract building, contract assembly) from pre-established templates (by contract type), composed of duly validated clauses (from a library or a clause list). These functionalities, which help to reduce the dispersion of clauses, can be used to decentralize the drafting of standard contracts to internal customers (in “self-service” mode via predefined forms). This aspect is now one of the most commonly encountered uses; • contract approvals: in an extension of the previous process, the tools now integrate all of the contract validation (approval) processes, including electronic signature of the contract (which, however, generally remains embedded in purchasing tools). The traceability of versions, the origin of changes, deviations from

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standard clauses, and the final approval of business lines (internal customers) are thus automated and governance is improved (delegation of authority); • performance management/SLA monitoring: some solutions, focused on the performance phase, aim to automate the monitoring of performance indicators and to control any discrepancies (alert management, etc.). However, the benefits of integrating these functionalities into a CLM software package are hampered by the heterogeneity of possible indicators and integration with other third-party “best-of-breed” tools (for example, demand monitoring tools as part of a thirdparty application maintenance contract); • financial monitoring: some software solutions offer to manage not only the key aggregated data of a contract (initial value, amount of amendments, etc.), but also detailed financial data (e.g., invoicing, payment management) relating to invoicing tools. Note the risks and limitations, previously mentioned, relating to information redundancy and integration with connected tools such as ERP; and • contract reporting and analytics: all of the CLM solutions offer reporting functionalities to provide a global view of volumes, contract types, and key metrics, and to report this data to internal customers. As mentioned above, the main challenge is the ability to propose indicators that create value for the company. Advanced or Emerging Functionalities In addition to the previous functionalities, we observe the emergence of use cases likely to reinforce the attractiveness (and segmentation) of the CLM solutions market: • obligations management: some solutions have developed automatic functionalities for extracting, chunking, and categorizing clauses, particularly from third party contracts. The objective is to automate the contract review process in order to systematically extract the essential commitments and assign them to the participants responsible for their performance. This functionality is particularly attractive on large contracts, sometimes involving hundreds or thousands of obligations, as it can be used to perform compliance analyses and identify sources of discrepancies and causes of contractual non-performance; • portfolio analysis/risk management: other CLM solutions offer functionalities for scoring and evaluating clauses (and more generally a portfolio of contracts) against an internal repository (contract playbook). It is thus possible to “load” a contract from a third party and benchmark it against an existing one (library of clauses) to identify clauses that are close or almost equivalent and, conversely (using a confidence index), those that deviate significantly. Applied to certain industries such as insurance, these functionalities can be used to identify the most exposed contracts or, prior to signature, to identify the wording to be renegotiated (or which needs to be taken into account in the offer pricing); • artificial intelligence: although artificial intelligence is not a functionality, but a set of technologies, the first applications are beginning to emerge, notably via Natural Language Processing (NLP), which can be used to automate part of the

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contract proofreading/review process. In the short term, AI may make it possible to insource certain activities that had been entrusted to Legal Process Outsourcing (LPO) providers, making them competitive again and opening up a new field for CLM solutions; • smart contracts: finally, some solutions can already be used (provided that they are used jointly within an ecosystem of companies) to record the components of the signed contract on a blockchain (Ethereum, for example), as detailed later in this chapter. In Practice

Natural Language Processing (NLP) Advances in the field of Natural Language Processing (NLP)8 and Machine Learning support the thesis that justice systems are based on syllogism. In an algorithmic experiment performed in 2016 on judicial decisions, when presented with almost 600 cases judged by the European Court of Human Rights, a robot judge delivered the same ruling as the Court eight times out of ten.9 Nonetheless, the two inconsistent cases from this experiment (again) prove Jean Carbonnier right in his admission that “the judge is a man and not a syllogism machine: he judges by his intuition and his sensitivity as much as by his knowledge of the rules and his logic”. This does not, however, mean that the judge is immune to certain of the biases affecting ordinary mortals—the anchoring heuristic seen in Chap. 3, for example. This cognitive bias explains why arbitrators tend to maintain the status quo until the parties come closer to a common position. Far fewer factors contribute to arbitrators’ decision-making processes than they imagine. Their decisions are conservative and relate as much to established situations as to a concern for fairness. Another consequence of anchoring stems from the amount displayed in limitation of liability clauses, which influences the assessment of actual damages. We could also mention hindsight bias, which in contractual matters amounts to overestimating the parties’ ability to have taken into account elements that could not have been known at the time of signature. It is understandable that this bias exists, since the judgment must address the precautions taken with regard to the activity that caused the damage. Inferring that the robot judge would be fairer than the human judge would then be only a small step. ◄

8

NLP from machine learning is now facilitated by Google’s open source distribution of Word2vec software that ensures optimal relevance with keyword searches. 9 Aletras et al. (2016).

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Legal or Contract Design

Let’s imagine participants in a project preparing for a negotiation. They work together on a flipchart to develop a revised schedule and agree on various additions that will generate milestones, represented by red arrows, and a conditional phase shown with a dotted line. Everyone takes a photograph of the collectively developed plan before leaving the meeting. This simple scene illustrates the value of visual methods. There is a vast literature demonstrating the value of graphic approaches in the art of communication. The fields invoked include psychology, cognitive sciences, architecture, and design.

8.2.1

Experiencing Information as a Resource

We have already seen (Chap. 5) that attention is the scarce resource. It is easy to see the mental effort required to read a bundle of documents such as those found in most contracts. If we add the obligation for individuals to communicate and the fact that they are not allowed to ignore multiple solicitations (because of the injunction to cooperate), information is no longer experienced as a resource, but as a constraint. The fundamental problem is the pressure placed on individuals. The Saturation Effect “When we talk about pressure, we can’t help but wonder about the human beings underneath, in this case, the contractors. What is the impact of this mandatory transparency on them? Let us start by imagining ourselves in the place of the person for whom the information is intended, because it seems he should not have to suffer because of it . . . Transparency was designed for his benefit. Yet the message often fails to get through. This failure can be due to very general causes, which are found in all communication phenomena: the saturation effect. If the facilities team installs too many traffic signs, road users will be less attentive. Naturally, users make a selection from this excessive information, if they do not reject it altogether. Users may also be unable to understand the information due to the technical nature of the explanation, even if was provided in the interests of transparency.”10

10

Carbonnier (2001) (authors’ translation).

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8.2.2

235

Improving Readability Without Weakening the Legal Scope of the Contract

Preparing contracts takes time. They often appear to have been drafted by lawyers for lawyers. There can be so much jargon that the term “legalese” is used to describe their esoteric and ambiguous wording. But in practice, these contracts will nonetheless have to be implemented by non-lawyers. To avoid lawyers exclusively addressing one another, we need to “decode” the legal rules and present them in concrete operational terms so that they can be included in operational practices (as noted in Chap. 6). However, as Helena Haapio points out in her book Next Generation Contracts: A paradigm Shift,11 “Contracts are too often designed for lawyers who seek to protect their clients in case of a dispute, not for managers who want their business and projects to succeed.” At the initiative of practitioners (most often from the legal profession), academics, and designers, an ambitious movement has been developed to bring innovation to the legal world, and ultimately to make the law more accessible for the benefit of litigants. Legal design (or, more specifically, “contract design”) was born out of the observation that contract drafting practices had not kept pace with changes in the economic, technological, and social environment. “The look and feel of contracts have not changed much in recent decades, except for the worse, due to their growing length and complexity.” The objective is laudable: to have contracts that are simpler and more visual, accessible, and engaging for the end user. The approach is intended to be resolutely collaborative and multidisciplinary, linking designers, lawyers, and “users” in order to simplify contracts without distorting them and to improve their readability without weakening the precision or exhaustiveness of the clauses and, of course, without altering legal certainty. How can this change in perspective be understood? What can we expect in concrete terms? What are the related risks and limitations?

8.2.3

The Fundamental Mechanisms of Legal Design

8.2.3.1 One Objective: Tacit Coordination (Common Interests)— Schelling’s Focal Point When two or more parties share common interests and seek to coordinate without being able to talk to each other, they must “communicate using suggestive cues and behaviors”. An example we’ve all faced is going shopping with a friend in a mall, but then losing sight of each other. What happens if we have no network or our phone is out of battery? How will we find each other in the crowd? And in this huge building? We will try to guess where our friend will go, while our friend is also 11

Lexpert, 2013.

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trying to do the same. It’s not so easy. This reflection brings us to what experts call “tacit negotiation”. We find a common place imagined by both parties: Schelling’s focal point. Schelling introduced the concept of a “focal point” based on everyday problems. In his most famous experiment, he asked people to imagine a meeting point in a big city without being able to communicate with the other person and without specifying either the time or the place of the meeting: “You are to meet somebody in New York City. You have not been instructed where to meet; you have no prior understanding with the person on where to meet; and you cannot communicate with each other. You are simply told that you will have to guess where to meet and that he is being told the same thing and that you will just have to try to make your guesses coincide.” This is typically a game with a multitude of solutions (a monument, a bar, a square. . .). In the experiment, an overwhelming majority of participants chose the information booth at Grand Central station and almost all of them set the meeting point at noon. Schelling uses numerous examples of this type to demonstrate that in order to coordinate themselves, individuals must build benchmarks for collective action based on cognitive salience. The process implemented calls on “imagination more than on logic; it may depend on analogy, precedent, accidental arrangement, symmetry, aesthetic or geometric configuration, casuistic reasoning, and who the parties are and what they know about each other”.12 Legal Design: Adopting the Principles of the Gestalt Theory of Form— Similarity, Proximity, Continuity13 Schelling was a forerunner in his use of Gestalt theory (psychology of form) to justify the reasons that determine patterns of action. The organizing principles of Gestalt discussed by Von Ehrenfels in 1890 are at the origin of the hidden dynamics of artistic perception. Schelling argues that “Poets may do better than logicians at this game, which is perhaps more like ‘puns and anagrams’ than like chess.”

8.2.3.2 From Alexander to the Contract’s Input Sequence The Notion of “Pattern” How can we predict the order in which one of the parties becomes aware of the contract’s clauses and understands their relative importance?

12 An interesting point to note is that since the purpose of contracting is to arrive at joint consent, the contractual clauses follow a framework of “focal points” that guide the complexity of the parties’ repeated interactions over recursive time. (See Mouzas and Ford 2012, pp. 153–161.) 13 To learn more about the principles of Gestalt Psychology as applied to design, take a look at the video at the following URL: https://www.youtube.com/watch?v¼dk7cXdjX2Ys.

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In his cognitive approach to urban planning, architect Christopher Alexander defines the concept of pattern as a configuration (or motif) linking a solution to a problem in a context. Thus, a recurring problem will evoke a tried and tested solution that is ready to be employed in its particular context. The language of patterns is closely rooted in culture, traditions, and of course precedents when it comes to contracts. Erik F. Gerding,14 a professor at the University of Colorado (but also a practitioner), puts forward a proposition that is not far removed from Alexander: the contracting parties implement a series of patterns, each of which makes it possible to resolve a particular situation that the parties have to face in order to perpetuate their relationship. How “Patterns” Are Born: Repetitions of Terms “We’re going to talk about contract writing, in fact about legal writing in general, because, in the end, laws and contracts are written in a similar way. Legal writing is fairly simple, but it has the disadvantage of being counterintuitive, in the sense that we have not been trained to do it. When you were taught to read and write, you learned not to repeat words too closely together in your text. For contractual writing, the opposite is true. When you use a particular term for a concept, you must always use the same term to refer to the same concept. You can’t suggest things in a contract. You can’t avoid repetition. When a contract is properly written, you can’t read between the lines. A properly written contract is a monotonous contract. It’s quite far from the literary approach you have been trained to use. It’s difficult because it is counterintuitive and not because it requires a particular technique.”15 In these particular situations, which are specific to each type of transaction, patterns (not to be confused with templates) have a heuristic function. They can be used to prepare checklists containing legal and contractual risks, for instance. They also have the advantage of reducing negotiation costs because they are recognized by the parties from the start of discussions (we can interpret the contract quickly since its structure is close to that of contracts that have already been negotiated).16

14

Gerding (2013), pp. 1323–1356. The authors would like to thank Karim Medjad and the CNAM (Conservatoire National des Arts et Métiers) for allowing us to use certain elements from the legal survival kit for international business (“Kit de survie juridique des affaires internationales”) provided on the French online education platform France Université Numérique. 16 This certainly explains the predominance of Swiss law in international contracts. A study of 4400 contracts entered into by 12,000 parties indicates that Swiss law is frequently selected by the parties from the “market” of applicable laws, without them really understanding all the implications (Cuniberti 2014, pp. 455–517). To make matters worse, there is very often confusion between political “neutrality” and the neutrality of the law. This ambiguity, amply maintained by Swiss lawyers, is probably part of that country’s economic arsenal, similar to that waged more 15

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This means, among other things, that their validity may become indisputable. If a particular contract provision is widely used, it may be seen as “too big to fail”— invalidating it would require a review of all similar texts in circulation.17 In Practice

The most common design patterns are in graphic form Legal design can take different forms: diagrams, hyperlinks, posters, comic strips, etc. The six most common models are based on a visual approach. There is no pre-imposed format; it is their repeated use that establishes them as a standard model. We start with the classification proposed by Stefania Passera:18 (a) Timelines—a schedule with milestones; (b) Flowcharts—step-by-step representation of a process; (c) Tables—arrangement of information in rows and columns; (d) Swimlanes—plan specifically designed to show the parties’ roles and responsibilities in columns; (e) Companion icons—synthetic graphic symbols accompanying a text that help users to quickly extract key information; (f) Delivery diagrams—representation of the place, date, and terms and conditions of delivery and of the transfer of risk and ownership (Incoterms are a good example). ◄ However, legal design implies disrupting the traditional order in which contractual clauses appear.

The Boilerplate Concept A definitions section is often included at the beginning of the contract. We need to distinguish between recurring solutions (patterns) and clauses. For example, international contracts always contain recurring clauses. In English law, these clauses are known as boilerplate clauses and can be found in all types of contract. They include the applicable law, dispute resolution clauses, amendment mechanisms, and the so-called “hardship” and “force majeure”19 clauses. Boilerplates can be used strategically—we already saw in Chap. 4 that the party submitting the first text is at an advantage.20 aggressively (and mercilessly) in the United States (on this topic see Ali Laïdi’s book, Le droit Nouvelle arme de guerre économique – comment les États-Unis déstabilisent les entreprises européennes, Actes Sud, 2019). 17 Gerding (2013), op. cit. 18 Passera (2017). 19 Taking the recent example of the COVID-19 virus, it is important to stress that not all domestic legal systems address the notion of force majeure. There is a divergence between civil law jurisdictions, in which the doctrine generally applies, and common law jurisdictions, where the doctrine of force majeure is generally an alien concept. It is therefore advisable for contract drafters to use clear language when defining the events that may excuse deviations from expected performance. 20 Ahdieh (2006), pp. 1033–1073.

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To better understand this principle, consider “the battle of the sexes”, a wellknown scenario in game theory, in which a husband and wife have to decide where they are going to spend the evening. The husband would like to go to a boxing match, while the wife would prefer the theater. Both, however, would rather be together than apart. They have to meet at one of the venues (both shows start at the same time) but cannot communicate. Unlike the coordination game mentioned above, there is a conflict of interest.21 We note that this reasoning also applies to the choice of a standard when two manufacturers want to contribute to establishing a standard, but with a marked preference for it to be theirs.

8.2.4

Making the Contract Visual, Clear, and Accessible

When applied to drafting contracts, the principles of legal design call for visual representation work, focused on the layout of the content and on illustrations (diagrams, flowcharts, swimlanes, timelines, etc.). But legal design is not merely a question of graphic design; it also calls for editorial techniques, which involve: • an in-depth reflection on the granularity of information (layering), designed to present several levels of information (a summary then the detail) and to put into perspective key points and different scenarios (“what if?”), the parties’ respective obligations, and essential milestones, etc.22 Legal design focuses on user experience and aims to isolate aspects relating to exceptional cases (or, for example, provisions relating to dispute resolution processes) in specific sections; and • a semantic overhaul, aiming to simplify the writing style and to avoid excessively long texts, ambiguous formulations, redundancy, and/or repetition of public policy provisions. Plain language contracting, popularized within the US administration,23 is designed to make texts accessible for users, to generate savings (in drafting costs as well as contract administration costs), and to reduce negotiation times. For contracts to be clear and easy to understand, we need to work on both substance (content) and form (visual representation). The following example illustrates some of these legal design techniques:

21

Simply having expressed the intention to buy two tickets strongly induces a solution favorable to one of the two. 22 It is interesting to note that the New Engineering Contracts (NEC) that came into being in 1993 adopted the principle of visual guides. This is the result of their collaborative design. 23 A study analyzing the litigation brought against the US General Services Administration (GSA) for the period 1980–2004 shows that interpretation of contracts was the second most frequent cause of litigation for the GSA. (See Goetz II and Gibson Jr. 2009, pp. 40–46.)

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Example flowchart. Reproduced by kind permission of the IACCM Design Pattern Library and Adam Kahn

A visual approach is even more important when native and non-native speakers are cooperating on a project. On the other hand, this is not the moment to give in to unbridled creativity. Elaborate illustrations are not required; a simple diagram can provide a perfectly effective representation. Remember the 18-month dispute triggered by a simple comma! In 2002, Bell Aliant and Rogers Telecom, two Canadian companies, entered into an intense legal battle that cost more than CAD$1 million. The issue was whether Bell Aliant could terminate the contract by giving notice or whether the contract was “iron-clad” for the entire agreed term. The English version of the contract was the source of this misunderstanding. It suggested that the first interpretation was correct (whereas the French version leaned toward the second): “This agreement shall be effective from the date it is made and shall continue in force for a period of five (5) years from the date it is made, and

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thereafter for successive five (5) year terms, unless and until terminated by one year prior notice in writing by either party.” If visualization had been used in the contract, the source of the potential dispute would undoubtedly have been detected before the contract was even signed.

The two possible interpretations of the termination clause. Source: Haapio (2011), p. 339. Reproduced by kind permission of Helena Haapio and Stefania Passera

8.2.4.1 In Praise of Simplicity Simplicity is the ultimate sophistication. (Leonardo da Vinci)

Remember, however, that the people responsible for drafting contracts were designing structured and modular documents with a solid architecture long before the emergence of legal design.

More Architects! The quality of customer and user experience has become the watchword in the design of any legal service. This is achieved through a set of principles that aim to better reconcile the design and the user by combining simplicity, personalization, and multimodality.24 The quest for simplicity is perfectly encapsulated in the famous aphorism of architect Ludwig Mies van der Rohe, “Less is more.” This view is echoed in Dieter Rams’ statement that “Good design is as little design as possible.” These “laws”, which permeate designers’ best practices and define principles of use and interaction, do not in any way oblige us to renounce the written word—we should not underestimate how hard it is for lawyers to break loose from the text. 24 Legal experience must be multimodal. In the current context of ubiquitous digital technologies, a service cannot be limited to being accessible through a single device.

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The Risks There are, nonetheless, various risks associated with legal design, which were scarcely documented, if at all, before the craze for this phenomenon took hold. One of the major risks is that our choices are often influenced by options pre-determined by third parties. Let’s take an example: the route suggested to us in a superstore is guided by color codes or set paths that aim to maximize our purchases (anyone who has ever tried to veer off-course in an Ikea store will immediately understand what we’re saying here. . .). Legal design begins with a positive vision of a benevolent law, bordering on paternalism. “It is the creator of the legal design who determines when and how the rights of a party or a litigant are made accessible to it. . . or not! It is possible to steer our contractual partner in the exercise of his or her rights. If the site you use to access your contract suggests that you seek compensation for a particular item of damage and provides you with the appropriate form, will you think of asking for compensation for items that are not mentioned?”25 Preformatted legal design then becomes a tool that induces a kind of “soft” incentive, a technique popularized by economist Richard Thaler and legal scholar Cass Sunstein in their critique of the rational agent.26 This technique involves steering behavior toward objectives considered positive by exploiting the natural laziness of individuals, which will push them toward the default option (the so-called “nudging” technique).

8.2.5

Legal Design: Where Do We Stand?

The legal design movement has developed strongly since 2014, notably under the aegis of the Legal Design Lab at Stanford University and the Legal Design Alliance. An eclectic international community, particularly in Anglo-Saxon and Scandinavian countries, is now developing research activities to establish legal design as a new academic discipline, and to encourage its use in companies and organizations, which remain reluctant to rethink their traditional contractual corpus. It also finds a natural field of application in “legal tech” start-ups, which are developing innovative legal services based on user interfaces inspired by legal design principles. We also mention here the following noteworthy initiatives that are currently contributing to the development of legal design: • the organization of international events such as Legal Design Geek and the Legal Design Summit; • an initiative developed by the British government, which, as part of its digitization policy (Government Digital Service), claims to have reduced the time taken 25 26

Dondero (2019), p. 173 (authors’ translation). Thaler and Sunstein (2008).

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to negotiate its procurement contracts, the costs associated with setting up contracts, and the risks of litigation; • the IACCM’s provision, at the beginning of 2019, of a Contract Design Pattern Library in open-source mode, accessible to all and expected to be enriched by contributions from professionals, with the aim of constituting a base of patterns and, more generally, an international standard of recognized clauses noted for their “balance” (fair contracting); and • the initiatives of certain international groups that now see the contracting process not as a necessary evil, but as an integral part of the customer experience and even as a source of competitive advantage, and that are implementing improvement action plans designed to be “straightforward to contract with. . .”.

8.3

The Future of Contracting and New Contract Management Tools

8.3.1

Artificial Intelligence (AI)

8.3.1.1 From the Pre-history of Computing to Artificial Neural Networks With their “Logic Theorist” computer program, Allen Newell, J.C. Shaw, and Herbert Simon established the theoretical basis for what would become the structure of expert systems (ES). The memory resembles a compartmentalized filing cabinet where information is available almost instantaneously. Problem solving then involves looking for a path in a chart with no fuzziness and no gaps, any data not accessible to the system being considered irrelevant: in summary, a “microworld”.27 In Practice

Using Expert Systems (ES) for claims ESs in the early 1990s expressed understanding as heuristic knowledge or simple diagrams such as those used in the analysis of responsibility for delays (see Chap. 6).28 These diagrams can express rules such as “If this condition is met, THEN assign liability.” Each ES must be adapted to its own context to enable knowledge to be exploited in a specific and strictly limited field. An ES is a system where the data (knowledge base) are clearly separated from the program that manipulates them (the inference engine). Developing an ES is a long, delicate activity (taking as long as training a human expert in the task in question). It requires as complete and structured a knowledge base as possible. The first applications were implemented by the US

27 28

This is, as far as we are concerned, a vision of a complete contract, which we know is unrealistic. Riad et al. (1991), pp. 67–74.

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Army Construction Engineering Laboratory in the late 1980s with a system called the Claim Guidance System (CGS).29 ◄ There will thus be as many expert systems as there are microworlds (applications), implementing a vision of intelligence reduced to a process of logical inference. In this model, intelligence is the result of a top-down process that is supposed to tell the system what needs to be done in any given circumstance. The reality is that this approach has not produced the desired results. Problematic Machine Translations Despite the funding of research into top-down, symbolic applications, such as machine translation, attempts to code language have failed to provide convincing results. The following anecdote is often reported to mock the weakness of this top-down approach to AI. The saying “The spirit is willing but the flesh is weak” was translated into Russian and then back into English, giving something along the following lines, “The vodka is strong but the meat is rotten”. What emerges from this example is that a meaningful translation requires both contextual (reference to the situation) and encyclopedic (list of possibilities) knowledge. In this case, depending on the context, “spirit” can be translated as relating to either the soul or to alcohol. Conversely, advocates of bottom-up AI have participated in a revival of artificial neural networks, initiated as early as 1943 by American researchers. The first neuronal learning system was the “perceptron”, developed in 1958 with funding from the US Navy by the psychologist Franck Rosenblatt of Cornell University.30 In the early 1990s, convinced that the best way to create AI was to draw inspiration from biological systems, the most tenacious researchers began to use deep belief networks. Their similarity to biological neural networks means that they are able to spectacularly outperform the Turing-Von-Neumann paradigm of classical computer architecture, with its bottleneck problems and storage limitations.31

8.3.1.2 Overcoming Polanyi’s Paradox “We know more than we can tell.” Polanyi’s paradox32 is probably the best safeguard against the much-heralded disappearance of lawyers and jurists and their

29

Kim and Adams (1989), pp. 249–262. The New York Times wrote that as far as the Navy was concerned, the perceptron would be able to walk, see, write, reproduce, and even be aware of its own existence! 31 On this topic, see the book by Mermillod (2016). 32 In 1966, in his eponymous “paradox”, Hungarian polymath Michael Polanyi explained why machines were unbeatable for some tasks, but completely ineffective for others. 30

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replacement by robots.33 The cognitive effort undertaken by individuals to find their way through the multitude of (often ambiguous) laws, rules, and conventions that impose themselves on practice is not always conscious. In new situations, we do not and cannot fully understand the rules (assuming they exist) that we observe, but we still need to decide and act. Polanyi’s paradox appeared to be an insurmountable obstacle until now: if no entity fully understands the rules by which humans do what they do, how can we create a computer system to imitate them?34 Thunderbolt in the AI world! The decisive breaking point was March 2016. Because of its algorithmic complexity, the game of go was the only game not yet conquered by AI (see Chap. 6). Go is a pure strategy game with more possible combinations than the number of atoms in the observable universe. It is clearly not possible to write a program determining the winning strategies when no human being is able to formulate them. However, Lee Sedol, considered as the best player in the world, a true living repository, and custodian of a game that is “intuitive, unpredictable, creative, intensive, wild, complicated, deep, quick, chaotic” was defeated by AlphaGo, designed by a team from Google DeepMind, a Londonbased company headed by David Silver. Polanyi’s paradox has indeed been overcome. It is fascinating to see that this event goes far beyond a simple graphic revolution35 that may upset ritual and legal equilibria.

Predictive AI for Claims From the first attempts to predict the outcome of a dispute in the 1990s to the use of a multilayer perceptron developed with contractual criteria specific to the construction sector (using a learning algorithm to explore and simulate cognitive abilities close to the human mind), the prospects offered by connectionism are set to revolutionize the way that dispute resolution is approached in decision-making processes. By using claims relating to civil engineering contracts to train a neural network, a prediction success rate in the range of 75-100% was achieved in 2015 (based on 204 claims and

33

Following Richard Susskind’s pronouncement that much of the work of lawyers was obsolete, it was suggested that doctors and lawyers would be replaced by robots, creating growing concern in the legal community. American law firm BakerHostetler, founded in 1916, now uses an AI program named ROSS, developed by IBM on the basis of a natural language search engine, to analyze hundreds of cases, exploiting similarities to increase the chances of success during pleadings. The resulting time savings may be in the region of 30%. 34 McAfee and Brynjolfsson (2017). 35 For Antoine Garapon and Jean Lassègue, “computer writing has the peculiarity of desymbolizing signs even though they are the very place where collective symbolization may actually be possible” in Justice digitale – Révolution graphique et rupture anthropologique, Paris, PUF, 2018 (authors’ translation).

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72 arbitration cases),36 compared with 67% in 199837 (which is only slightly better than flipping a coin).

Beyond Dystopian Deviations We might legitimately ask how AI will be able to substitute for humans when we know that contract theory is based on the idea of a “meeting of minds” between the parties. On a fundamental level, eliminating all human traces from the transaction and rejecting any negotiated consensus may raise doubts about the legally binding nature of the contract, unless the machine is given a legal existence.38 Contract Analysis: When Robots Acquire “Ethics” The automatic processing of contracts could theoretically be greatly facilitated by the fact that they rely heavily on patterns, both in terms of language and structure.39 If we look at contracts, their structure is almost always the same: a title, a preamble, a connecting sentence from the preamble to the clauses, clauses, a date, and signatures. A good way to read a contract is to read it on three levels:40 first, a clause-by-clause reading, followed by a second reading to verify that the clauses are consistent with one another. The first, microcontractual, reading enables us to detect technical imperfections in the text. The second, macro-contractual, reading is used to identify problems relating to the contract’s content. It is the third level of reading that really poses the most problems. It is a reading that can be described as meta-contractual, which should help us to read the areas where the contract is “silent”. Let’s take an example. Isaac Asimov41 is the author of the Three Laws of Robotics, which is used as a reference in most AI-related discussions (excerpt from the Handbook of Robotics, 56th edition, 2058 AD): (continued)

36

Chaphalkar et al. (2015), pp. 1827–1835. Arditi et al. (1998), pp. 75–81. 38 On the other hand, we note that Time magazine has already awarded the title of “Person of the Year” to. . . a machine, while the Chinese company DKV (Deep Knowledge Venture), based in Hong Kong, was the first to appoint an algorithm to its board of directors. In France, law firm Alain Bensoussan has proposed that robots should have an identity as an extension of the social security numbering system, beginning with the number 3 (in the French system, 1 is used for men and 2 for women). 39 Betts and Jaep (2017), pp. 216–233. 40 Karim Medjad (2018), op. cit. 41 Isaac Asimov (1942) in Runaround. 37

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• “First law: A robot may not injure a human being or, through inaction, allow a human being to come to harm. • Second law: A robot must obey the orders given it by human beings except where such orders conflict with the First Law. • Third law: A robot must protect its own existence as long as such protection does not conflict with the First or Second Law.” The algorithmic logic appears implacable at first sight, yet these three laws do not cover all situations. What happens if humans harm other humans? This philosophical question led Asimov to create an additional law, developed by the fictional robot R. Giskard Reventlov: • “Zeroth Law: A robot may not harm humanity, or, by inaction, allow humanity to come to harm.” The first law is therefore amended: a robot may not injure a human being or, through inaction, allow a human being to come to harm, except when this is contrary to the zeroth law. The zeroth law places humanity above the individual. Have we covered all possible situations? The answer is clearly no. What about “replicants”, robots designed with human DNA? What about military killer robots, who kill the bad guys to save the good guys? Which mechanical and biological elements tip us to one side or the other in the era of transhumanism? What is the minimum IQ of a robot (a blender or AlphaGo)? This incompleteness stems from the fact that Asimov could not answer these questions in 1942. We must also add ethical dilemmas. What does harming humanity actually mean? Is it physical harm? Is it psychological? Is there a hierarchy of harm that imposes a tree structure of different alternatives for our decision-making? Do we crash into a child or an old man? Do we run over one person for sure or take the risk of running over five people to avoid this one person?42 (continued) 42

The problem is identical to the so-called trolley problem, which can also be observed in the control (or rather the autonomy) of Google’s self-driving car, if we consider it to be a robot. In 2002, Joshua Greene conducted a study on moral judgment with a group of students. An empty trolley is racing down a slope out of control. On a track below are five railway workers who will be crushed by the trolley. However, there is a way out. In the first version, there is a switch between the trolley and the workers; when hit, it will divert the trolley to another track, where only one worker is working. In the second version, there is no switch, but a footbridge spans the track. There is a heavy man on the footbridge. If he were pushed onto the track, he would stop the trolley and the five workers would be saved. The result of these two actions would be the same: one man would be killed, but five others would be spared. We might expect the answer to these two versions of the dilemma to be the same, but this was not at all the case: while 90% of the students believed that it

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To conclude, although textual analysis successfully performs relatively simple tasks to assist lawyers, we are still far from an AI tool that is really capable of understanding a problem in all its logical, impassioned, psychological, strategic, and ethical dimensions.43

8.3.2

Smart Contracts

The term “smart contracts” was introduced in 1994 by Nick Szabo, a computer scientist, legal scholar, and pioneer of cryptocurrencies and blockchain. The term refers to a computer program, executed on a blockchain (or another medium such as Distributed Ledger Technology, e.g. Corda.), that automatically performs predetermined actions (a payment transaction, for example) when a certain number of conditions are met (parameters). As soon as triggering events occur, the terms of the contract are honored, without any specific intervention or questioning by either party.

8.3.2.1 Intelligent Contracts? Applied to the insurance sector (which already practices parametric insurance, in particular to cover risks of transport delays or non-standard weather conditions), smart contracts would automatically trigger compensation procedures as soon as certain conditions were met (e.g., by guaranteeing solar energy producers against low irradiation over a given period of time or farmers against insufficient rainfall). Since these types of risks are currently poorly covered, smart contracts offer new business opportunities for players in the insurance world (with multiple applications in the fields of transport, agriculture, and more generally any type of weathersensitive activity). They also significantly improve the productivity of the teams in charge of claims management. In addition, the development potential of smart contracts is multiplied by the Internet of Things (IoT), which promotes connectivity and interoperability between devices to such an extent that some see it as one of the most promising applications of blockchain. So, for a contract for the transport of goods (perishable foodstuffs for example), a sensor placed on a product could trigger an automatic compensation procedure, in real time, as soon as the temperature conditions or planned storage times are not respected, offering better traceability for the consumer and significant productivity gains at all links in the chain (customer, supplier, insurer, etc.). was morally permissible to hit the switch, only 10% believed that it was permissible to push the man onto the track. 43 Nonetheless, in a competition between a group of lawyers and an automated contract analysis algorithm, the machine was at an advantage when analyzing non-disclosure agreements (NDAs). On this topic, see the paper by Dondero and Lamon (2018), pp. 2070–2074.

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The primary virtue of smart contracts is therefore their automatic execution (they are self-executing contracts), with no repudiation and no intervention from a third party or from either of the parties to the contract. One of the limitations of smart contracts, however, is immediately apparent in the principle of causality, according to which the same causes produce the same effects. Is it possible to predict all the parameters likely to trigger the transaction addressed by the smart contract, given that traditional contracts are usually limited to understanding consequences (assessment of damages) rather than setting out an exhaustive and deterministic causal tree? We could also question the relevance of the term “smart contract”. The contract does not become more “intelligent” simply because it is autonomous of the parties and hosted on a blockchain. It is undoubtedly the most successful embodiment of Lessig’s famous maxim, “code is law”, since the performance conditions are transcribed into computer language and interpreted automatically. However, we should remember that smart contracts are not really contracts.44 Nevertheless, they remain a powerful automation tool for contracts that are relatively simple, replicable, standardized (in particular contracts where there are no differences in interpretation between different legal systems), of short duration, and with perfectly controlled performance conditions.

8.3.2.2 Standardized Contracts Beyond their technological dimension, smart contracts introduce a major innovation, which diverges from traditional legal culture (and the business model applied in law firms): if code is law, perhaps we can propose the inverse and suggest that “law is code”?45 In other words, can the most common contractual provisions (regardless of the platform on which the smart contract is executed) be expressed in a logical, deterministic, and algorithmic way, arbitrated by machines without human intervention? This forward-looking vision breaks strongly with the traditional legal approach and certainly resonates in the American legal community. Its proponents foresee the forthcoming implementation of a standardized protocol (“unified contract language” or “object based language”) aimed at modularizing the contract drafting process and standardizing the most common contractual clauses. The GitHub platform, for example, claims to have 36 million users (it was bought by Microsoft in 2018 for US$7.5 billion). It is both a platform for developing and hosting code and a community of developers, lawyers, and computer scientists, who will be able to design, enrich, and share software and contractual components. Contracts are still often designed by replicating historical clauses, by following the usual practices of the person drafting the contract, and by reusing and customizing templates, which may not always be entirely appropriate. Few 44

Barbry (2017), pp. 77–80. This questions human input into legal relations, as law is at risk of losing a part of its democratic legitimacy and its guiding social functions (on this topic see Weber 2018, pp. 701–706). 45

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companies really look at the efficiency of the clauses or the allocation of the underlying risks, benchmarking them against best practices. One of the benefits of such pre-programmed contractual components, available in open source, would be to simplify the contract by converging toward “best practice” clauses, forming a market standard, whose robustness could be confirmed by a vast community of users. While the ambition is tempting, it often comes up against the weight of contractual “legacy”: how can we “smarten” a company’s entire contractual corpus, especially when paper contracts contain multiple variations? In Practice

Analyzing a contract portfolio In the book Legal Tech, Smart Contracts and Blockchain (Springer Nature, 2019), Rory Unsworth proposes a seven-step methodology to analyze the content of a portfolio of contracts and, via an incremental approach, to prepare “smarter” contracts that better control risk: • “i. Clause Extraction: . . . Clause extraction can of course be done manually . . . However, there are techniques to do this using computers, and some off-theshelf tools already existing to support this task; • ii. Clause Clustering: Clustering the clauses by theme is an important step in extracting meaning from the corpus. A good high-level taxonomy will allow an understanding of typical contract composition, and of the types of clauses which could be turned into smarter contract clauses; • iii. Importance Assessment and Expert Allocation: Not each theme in the taxonomy will be as important in the area of activity (commercial or otherwise) under consideration . . . A weighting or scoring system, on the right level of granularity can give a good guide to the relative importance of each theme from a risk perspective and/or from the automation opportunity inherent to the topic. On that basis, the available expert resources can be distributed towards the more important themes; • iv. Quality and Scope Assessment: Once the key clauses have been identified, quality assessment is needed—a quality scoring system can be used, or a clustering by mechanism, or (even better) by both quality scoring and mechanism . . .; • v. Book Investigation and Benchmark Creation: Once the existence and the profile (risk, mechanism) of the clauses in the portfolio is known, following the above steps, that knowledge can be leveraged, and can start to give insights. Using very established text mining techniques or tools, the book can be investigated for clauses and answer useful questions such as: in which contracts are which clauses contained? What are the trending clauses and the disappearing clauses? . . . • vi. Automated Contract Review: Benefiting now from an encyclopaedic collection of clauses and some insights into real-life standards, a contracting party can move on to investigate new incoming contracts in a more or less

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automated manner. What they will need for this is a text mining tool applying fuzzy logic coupled potentially with a semantic layer . . .; • vii. Reap Benefits with Self-executing Clauses and Other Advantages: With a catalogued collection of clauses, assessed for quality or triaged by mechanism, and a clear framework to assess the quality of a contract made up of known clauses and unknown clauses, the Digital Contract Optimization process is ready to feed into its final state: self-executing contract clauses . . .” ◄ To conclude, while the scope of application of smart contracts remains limited to date, the convergence of law and technology is likely to open up radical new prospects, such as the possibility of designing more standardized contracts based on standardized clauses and metadata that have been tested by a community of users. The legal community would thus become, like the open source developer community, both a client and a contributor to a standard legitimated by usage and by the community itself.

8.3.2.3 Blockchain Technology—“Displaced” Trust We saw in Chap. 4 that entering into a contract is an act of trust. In the history of commercial relationships, trust has almost always been delegated to third parties, who are intended to represent a form of authority. The cost of this centralized function is both economic and social in function of the size and/or status of the authority. Blockchain, which is primarily used for cryptocurrencies, allows agreement to be reached without this type of central authority. A blockchain can be thought of as a large ledger shared by all the participants who have made exchanges, which cannot be erased, and which is forgery-proof. Blockchain is far from being cost-free (as the content of the ledger grows, block by block, the network cost becomes significant). In addition, it does not do away with the notion of trust but instead displaces it, “With this technology, we transform the qualitative trust that we give to a person or a third party into quantitative trust in a system.”46 8.3.2.4 Smart Contracts Will Always Be Incomplete Smart contracts are therefore protocols that execute pre-programmed operations. Can we assume that all contracts are capable of being “smartened”? The answer is clearly no. Three reasons are put forward by lawyers:47 • business-to-customer (B2C) contracts will be complicated to implement in this form because of their natively questionable clauses; • when confidentiality is required, contracts will clearly not be kept on a public blockchain; and 46 47

Chiesa (2019), p. 53 (authors’ translation). Barbry (2017), op. cit.

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• contracts with strong unknown or unforeseeable elements are even more difficult to transform into smart contracts. The last point is fundamental because it affects property rights and companies’ very existence. What is a firm? What factors determine the level of integration of the firm’s activities? The theory of incomplete contracts stems from these questions. According to the theory of incomplete contracts, the firm is defined as all of its physical assets, the ownership of these assets, and the residual rights of control over their use. The owning party has the right to decide on the use of an asset in cases not specified in the contract. This is the whole point of incomplete contracts: the owner or owners have “residual” control rights that allow them to do whatever they want with the assets that are the subject of the contract as long as it is not contrary to their content.48 Residual control rights are important as they affect bargaining power and can help to avoid contractual hold-up situations. A Case of Integration Triggered by Hold-up In their seminal article of 1986,49 Grossman and Hart show that when the parties to a contract anticipate a renegotiation, the possibility of opportunistic behavior (hold-up) by their partner leads them to underinvest. Each of the parties tries to appropriate the surplus generated by the joint use of assets and they fail to maximize their marginal return on investment. The case most often cited is the vertical integration between the car manufacturer General Motors and its body supplier Fisher Body, which took place in 1926 in the United States and which is typical of a hold-up situation in the presence of asset specificity. Fisher Body had the ability—as the sole supplier with dedicated production equipment that could not be redeployed without incurring costs— to impose a monopoly price on its customer in the event of a change in the terms of the contract (in this case, an unanticipated increase in demand). Under this reading of the events, General Motors had to acquire its car body supplier (Fisher Body) because the latter was engaging in hold-up activities: when demand for cars with metal bodies soared, Fisher Body charged an exorbitant price, out of all proportion with the amount that could be justified by the increase in body production per unit of capital employed. Moreover, Fisher Body deliberately chose to locate its plants far away from General Motors and adopted inefficient production methods to increase its profits while benefiting from a cost-plus contract. The issue of full decentralization as conceived by blockchain comes up against the issue of asset allocation when the contracts that bind the blocks together do not 48 49

Within the limits of the law, of course! Grossman and Hart (1986), pp. 691–719.

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specify what is to be done in the event of excessive concentration. “Smart contracts are interesting and powerful new tools and there will be a place for them, but they don’t address the fundamental problem that keeps companies, as it were, in business. Companies exist in large part because well-functioning complete contracts are impossible to write, not because they’re too difficult or costly to enforce.”50 Finally, “last but not least”, the technology of smart contracts (because it is primarily a technology), overlooks the fact that the parties use the contract as a resource to manage their relationship. The inflexibility introduced by blockchain may “short-circuit” the slowly acquired routines established by usage and law. The first exchanges between parties, such as non-disclosure agreements, which some people may see as pointless, are in fact essential for utilizing contracts as social resources rather than as mere technical artifacts.51

8.3.3

Decision-Making and Dispute Resolution Tools

“[I]n many cases, lawyers lack facts, which explains their reluctance to offer clear advice . . . when it comes to probabilities, they are reluctant to be drawn.”52 This assertion would clearly not change the minds of those who are unconvinced that decision-making models can help reduce litigation. Mastery of operations research (OR) tools can be of great help to the practitioner. The most common methods include decision trees, game theory53 and multiple criteria decision analysis (MCDA),54 in particular the analytic hierarchy process (AHP) introduced by Thomas Saaty in the 1970s. We will start with a very simple case that will allow us to outline these decisionmaking support tools as applied to the settlement of a dispute.

8.3.3.1 Dispute Resolution: A Tiered Approach Most international contracts include two- or three-tier clauses to facilitate the settlement of contractual disputes (e.g., FIDIC). The formulas available for use range from direct negotiation between the parties to arbitration proceedings.

Brynjolfsson and McAfee (2018), op. cit. For Karim Medjad, long-term contracts do not require everything to be answered in advance. It is enough to say how we will respond; there is no need to immediately provide answers. The ultimate example of this type of contract is the company. We can sign a company’s bylaws for 99 years and merely specify that we are going to answer questions by majority rules. 51 Levy (2017), pp. 1–15. 52 Cummins (2017). 53 See for example Faghih and Akhavian (2019), pp. 1–6. 54 To learn more about the MCDA method, you can watch the video at the following URL: https:// www.youtube.com/watch?v¼7OoKJHvsUbo. 50

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Dispute resolution steps. Source: Cheung (1999), p. 190. Reproduced with the permission of Elsevier

To avoid the risk of blocking work and progress as soon as a problem arises, the parties can implement “soft” dispute resolution methods such as a Dispute Review Board (DRB). The DRB may be called on throughout the project to resolve disputes that have already been directly negotiated by the parties. Mediation is employed at the end of the project and often appears to be a preliminary step to arbitration. By bringing their dispute to a mutually agreedupon mediator, the parties can obtain an experienced professional’s opinion on their dispute. The mediator will submit a settlement proposal to them and the dispute can be settled at this stage. Mediation is always conducted confidentially. It can take the form of a mini-trial. Of the boilerplate clauses discussed above, the arbitration clause is probably one of the most widely used in international trade. The proliferation of arbitration centers attests to their proponents’ belief that arbitration has a bright future ahead of it. Arbitration is often presented as a private justice system in which the awards handed down at the end of the proceedings have the same authority of claim preclusion as state judgments. Although the advantages of arbitration compared with state proceedings used to be regularly highlighted (cost, speed, and confidentiality), they are now increasingly rarely mentioned. Arbitration finds itself criticized for “procedures unsuited to the dispute in question; a luxury court with three arbitrators whose agendas are sometimes incompatible with each other and with those of the law firms defending the parties; arbitrators who mimic national courts by multiplying procedural orders; calling witnesses for disputes that do not require them; inappropriate use of post-hearing briefs, often revealing that the proceedings

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have been poorly managed over time, leading to late questions from the arbitral tribunal; and deliberations that drag on and on.”55

8.3.3.2 Formulating the Problem Let’s take the case of a local contracting party A in dispute with its prime contractor B, a multinational company with a sound financial base.56 The dispute relates to a cost overrun linked to additional demands that were not fully “tracked” by the project team. A estimates the cost overrun to be €8 million. The problem is that in the file put together by its claim manager, A cannot find one essential piece of evidence: proof that a notice of claim was issued within the contractually prescribed claim notification period. If A decides to go down the litigation path, there are two possibilities: (a) its file is sound and it is able to prove B’s responsibility—it then has an 0.8 probability of achieving a gain of €8 million; or (b) its file is ripped apart by B’s contract manager who has noticed the lack of proof that the claim was sent—A will get absolutely nothing (the probability in this case being 0.2).

Litigation A vs. B: Decision Tree. Expected value of the “decision to litigate” branch: (0.8  8) + (0.2  0) ¼ € 6.4 million. Expected value of the “decision to negotiate a deal” branch: €2 million. Source: Adapted from Celona (2016), p. 39

What is the best approach—litigate or do a deal? Litigation is very tempting. The expected value is €6.4 million for the litigation branch compared with €2 million for negotiation. But A can also lose everything. It might be crucial not to commit at this stage. As seen before, A can access a number of mechanisms to settle its dispute, including:

55

Kessedjian (2018) (authors’ translation). For those frustrated by the brevity of this example, we strongly recommend Hagel (2017). For complex cases, one of the most commonly used software tools is TreeAge Pro. 56

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(a) litigation, (b) arbitration, (c) mediation, and (d) negotiation. How should it choose?57

8.3.3.3 Choosing the Settlement Mechanism—The Analytic Hierarchy Process (AHP) Widely used in various fields, including economics, ecology, industry, and more generally risk management, AHP is unique in that its methods are similar to human decision-making mechanisms,58 namely decomposition, judgment, and synthesis. It has the immense advantage of managing both qualitative and quantitative criteria. To illustrate how the method works, let’s take the example of our dispute. The overall objective of the problem is to choose the settlement route that will be most favorable to A. We consider eight criteria, namely: (a) the duration of the procedure, (b) the cost of the procedure, (c) its flexibility, (d) confidentiality, (e) the ability to preserve the relationship, (f) enforceability, (g) the degree of control of the various stages, and (h) the possibility of involving a neutral third party. The following figure illustrates the hierarchical structure of the problem.

For more information on the topic “Build a Simple TreeAge Pro Legal Model”, take a look at the video at the following URL: https://www.youtube.com/watch?v¼AefhJzTp3V4. 58 Saaty’s method takes into account the limits of short-term memory information processing, which were quantified as being around seven items, plus or minus two, (7+/-2) by the psychologist George A. Miller (1956). 57

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Dispute resolution: structuring the choice problem (prepared with Web-HIPRE software)

It is easy to understand that establishing a comprehensive comparison table of alternatives (settlement method), determining the relative value of each alternative in relation to the aggregation of the model hierarchy, and calculating the total aggregation to state the final decision cannot be done by hand.59 There are a number of software packages on the market, the best known of which is Expert Choice, developed by Thomas Saaty and Ernest Forman in 1983.60 The situation for A is as follows: as a party to the contract, it is primarily concerned not to get bogged down in a procedure whose outcome it cannot predict, since the costs are probably directly related to the duration of the procedure. Confidentiality is of course important, but not as important as flexibility in asserting 59

Readers may refer to the publication of Haugen and Singh (2015), pp. 1–11. For our simulation we used the free software Web-Hipre, provided online by the Aalto University in Finland. 60

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its rights (A does not have B’s legal resources—remember that B is a multinational company). Let’s look at the results of the analysis.

Results of the multi-criteria analysis (obtained with Web-Hipre software)

According to the results charts calculated, directly negotiating with B will be the preferred choice. A’s cash flow requirements and its interest in continuing to do business with B will steer it towards this solution, which is the wisest course of action.

8.3.3.4 Negotiating the End of the Contract: The “Contractual Ballet” The imminence of a final settlement not only changes the pace of interactions, the nature of the relationship also takes on a new twist. It is the culmination of a long process that could be described as a “contractual ballet” of offers, counteroffers, responses, and occasionally overvalued counterclaims if the claims established during performance have not yet run their course. Experience shows that if the negotiators have a genuine drive to succeed, then a mutually acceptable solution can be reached. A memorandum of understanding (MoU) will be prepared followed by a signed settlement agreement.

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In Practice

Settlement Agreement (example structure)61 1. Reference to the contract and parties clearly identified 2. Place and date of settlement and authorized representatives of parties incl. name and title 3. Claims included in a full and final settlement, each clearly identified with reference to letters (especially the notification letter) 4. Claims and issues not included in this settlement agreement 5. Net settlement currency amount in figures and words 6. Payment conditions clearly specified (when, where, and how) 7. Consequences of possible late payment of settlement compensation (interest rate) 8. Conditions for the settlement agreement: – Work to be completed or rectified – Supplies to be delivered – Acceptance of supplies, works, services, and documentation – Obligation to supply spare parts and render services incl. conditions – Delivery schedule – Warranty obligations – Release of financial guarantees – Other conditions 9. Consequences of the settlement agreement: – Global commercial settlement without prejudice to other claims – Confidentiality – Payment amount, conditions, and execution details – Acceptance of supplies, works, services, and documentation – Provisions for handling of potential disputes arising from the settlement – Governing law and dispute resolution provisions – Other consequences of the settlement e.g. remaining obligations under the contract ◄ In this phase of the contract, an endgame strategy can offer a solution: • during negotiation preparations, A and B value their respective positions; • an expensive game of chicken is avoided by the parties, who exchange elements relating to their valuations; • A and B’s lawyers had already quantified the costs of an arbitration during the previous phase; and

61

Adapted from Spiess and Felding (2008).

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• the assumptions used to build hypotheses about the parties’ beliefs are consistent with a one-shot game situation: (a) the number of iterations is small, (b) each player knows the rules, (c) each player knows the value of the other player’s winnings at the end of the game, (d) arbitration is credible in cases of failure, (e) A generally has no intention of going to arbitration, B knows it, A is aware that B knows it. . . In Practice

How to exchange information without making an irrevocable commitment Lawyers often recommend inserting the following type of statement on all documents exchanged: “Without prejudice to the legal and material position of the parties in the litigation—both parties reserve all their rights.” ◄ The information is complete since each player has all the information on the rules of the game, the possible gains (or losses) of each player, the probable strategies and beliefs of the other, and its constraints. It is of course possible for both A and B to consider legal action in the event of total disagreement, but this approach has drawbacks and can be disadvantageous for negotiators in large international projects: • one of the parties will have to accept the courts of the other party’s country or those of a third country. In our case, it is likely that the bargaining power will not be to A’s advantage and that B will impose its choice; • if the court of the selected country operates in a different language, the judge will require “certified” translations by sworn translators, generating additional costs and unavoidable delays in the proceedings; and • the search for evidence may go as far as “snooping” in the archives and files of the opponent or third parties (discovery). Although, during the course of the project, the parties may not necessarily be aware that they are playing a game, the endgame will undoubtedly be closest to the standard model. If A and B reach an agreement, “and if that agreement is credibly self-enforcing in the sense that no one who believes that others will conform has the motivation to deviate, then the agreement will be a Nash equilibrium”.62 The primary reason is the threat of a breach of contract. In this case, contractual arbitration provides the conditions for reconciliation. The mere fact of bringing the dispute before a third party obliges the parties to summarize their positions. According to statistics prepared by the International Chamber of Commerce’s (ICC) International Court of Arbitration, two-thirds of cases are withdrawn before the matter goes to court. “As such, there is proof that the parties often have, even

62

Kreps (1990). Similarly, by using a Claim Decision Model (CDM) based on game theory, a pilot study showed that to “negotiate and settle” was the Nash equilibrium (NE) solution in construction claims (see Ho and Liu 2004, pp. 94–104).

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261

those that appear aggressively prepared for their arguments to triumph before the arbitration court, a more or less un-confessed desire to reach an agreement.”63 A and B have every interest in avoiding a divisive breach of contract, as such a breach would generate uncertainty. With a gun to their head, the parties quickly reach an agreement, which, although not totally fair, remains effective (effectiveness being defined by the sum of the gains expected by A and B).

8.4

Conclusion

Contracts are above all agreements used to define the rules of behavior of economic agents who need to cooperate with one another. If we want to get closer to their primary function, which is to facilitate the emergence of cooperation, empirical studies indicate that contractual regulation is based on three inseparable components: learning, trust, and the threat of a breach of contract. On the other hand, the promised digital methods are so broad and open that we could question whether these three components will continue to apply. For organizational learning, communities of practice are genuine receptacles for individual and collective learning. In terms of trust, it is clear that companies didn’t say to themselves one morning, “Today we’re going to create trust.” There are certainly practical concerns and blockchain cannot address all situations. For our demonstration, we will employ a “thought experiment”—as physicists sometimes do—that is both graphic and tragic: the case is brought to us by the game theorist Anatol Rapoport,64 from Puccini’s opera Tosca. The two protagonists, the singer Tosca and the police chief Scarpia, have made a deal (for the release of Tosca’s lover if Tosca yields to Scarpia’s advances). The contract is therefore clear. What happens? In fact, neither of the parties respects their commitments and both die violent deaths (Tosca by throwing herself from a parapet, Scarpia by being stabbed). The contract clearly existed but there was no mutual trust. Contract and trust cannot be substitutes, they are both necessary. In practical terms, the building of trust cannot be decreed, it is a long process, made up of stages, in which cooperative signals will be continuously conveyed, the first of which is of course the signing of the contract itself. We can’t help but wonder what would have happened had Tosca and Scarpia “sealed” their contract in a blockchain. . . If breach of contract is a deterrent, it is not so much because of the certainty of loss as because of the aversion to uncertainty generated by entering into a new relationship and the ability to value our assets with another partner. This uncertainty, underpinned by considerations of retaliation, can nonetheless be mitigated by a gradation of the costs of breach. For example, in international contracts, the 63

Genton and Vermeille (1998), pp. 131–171. Rapoport (1962), pp. 108–118. The author shows that the opera Tosca exhibits a “prisoner’s dilemma” game structure, which was discussed in Chap. 4.

64

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credibility of the threat of breach is based on a tiered approach to the various dispute procedures (Alternative Dispute Resolution, arbitration, etc.). Litigation and arbitration are costly activities and the time that the parties must to devote to them generates many lost opportunities, which may be recovered with judicious use of decisionsupport techniques. Will everyone agree that this approach will ultimately benefit the parties? It avoids the need for an overly detailed legal analysis, so that once the burden of proof has been established, the lawyer is not the winner: “There is an old story about two individuals who argued about how to divide a fish between them. A passing lawyer was asked to settle the dispute. He did so by awarding the head to one, the tail to the other, while he took the body of the fish as his fee.”65 Finally, human intelligence is not an algorithm. Although, in hindsight, it would be a risky gamble to argue that since algorithms reproduce judges’ biases (these biases being implicitly contained in the data), the adventure could or should end there.66 It’s not that simple. Arthur C. Clarke’s essay Hazards of Prophecy: The Failure of Imagination67 sets out three laws for determining our ability to characterize what is possible or impossible: • When a distinguished but elderly scientist states that something is possible, he is almost certainly right. When he states that something is impossible, he is very probably wrong. • The only way of discovering the limits of the possible is to venture a little way past them into the impossible. • Any sufficiently advanced technology is indistinguishable from magic.

References Ahdieh RB (2006) The strategy of boilerplate. Mich Law Rev 104(5):1033–1073 Aletras N, Tsarapatsanis D, Preotiuc-Pietro D, Lampos V (2016) Predicting judicial decisions of the European Court of Human Rights: a natural language processing perspective. PeerJ Comput Sci. https://doi.org/10.7717/peerj-cs.93 Ali B, Zahoor H, Nasir AR, Maqsoom A, Khan RWA, Mazher KM (2020) BIM-based claims management systems: a centralized information repository for extension of time claims. Autom Constr 110:1–16, Article 102937 Arditi D, Oksay FE, Tokdemir OB (1998) Predicting the outcome of construction litigation using neural networks. Comput Aided Civ Infrastruct Eng 13(2):75–81 Barbry É (2017) Smart contracts. . . Aspects juridiques !. Annales des mines – Réalités industrielles, No. 3, pp 77–80 Betts KD, Jaep KR (2017) The dawn of fully automated contract drafting: machine learning breathes new life into a decades-old promise. Duke Law Technol Rev 15(1):216–233 65

Shubik (1955), pp. 40–54. Artificial intelligence systems are fed data based on past court cases. These data inevitably reflect the biases that exist in society. 67 New York, Harper & Row, 1973. 66

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Carbonnier J (2001) Flexible droit – Pour une sociologie du droit sans rigueur. Paris, LGDJ, Lextenso éditions, coll. “Anthologie du Droit” Celona J (2016) Winning at litigation through decision analysis – creating and executing winning strategies in any litigation or dispute. Springer Chaphalkar NB, Iyer KC, Patil SK (2015) Prediction of outcome of construction dispute claims using multilayer perceptron neural network model. Int J Proj Manag 33(8):1827–1835 Cheung S-O (1999) Critical factors affecting the use of alternative dispute resolution processes in construction. Int J Proj Manag 17(3):189–194 Chiesa MD (2019) Où placer sa confiance ? La Recherche, No. 545, p 53 Cummins T (2017) Need a lawyer? Use a robot instead!. Liquid legal - transforming legal into a business savvy, information enabled and performance driven industry. Springer Cuniberti G (2014) The international market for contracts: the most attractive contract laws. Northwest J Int Law Bus 34(3):455–517 Dondero B (2019) Legal design – Parler de design à propos du droit a-t-il un sens ?, La semaine juridique, No. 4, p 173 Dondero B, Lamon B (2018) Juristes humains contre IA : l’analyse de contrats – A propos de l’étude LawGeex. La semaine juridique, No. 47, pp 2070–2074 Faghih A, Akhavian R (2019) A game-theory approach to construction dispute resolution through mediation. J Leg Aff Dispute Resolut Eng Constr 11(4):1–6 Genton P, Vermeille F (1998) Soft and hard dispute resolution – some remarks and practical experiences regarding mega-projects. Int Bus Law J, No. 2, 131–171 Gerding EF (2013) Contract as pattern language. Wash Law Rev 88(4):1323–1356 Goetz JC II, Gibson GE Jr (2009) Construction litigation, U.S. General Services Administration, 1980-2004. J Leg Aff Dispute Resolut Eng Constr 1(1):40–46 Grossman S, Hart O (1986) The costs and benefits of ownership: a theory of vertical and lateral integration. J Polit Econ 94(4):691–719 Haapio H (2011) Contract clarity through visualization: preliminary observations and experiments. In: 15th International Conference on Information Visualisation, pp 337–342 Hagel U (2017) The value add of legal departments in disputes: making a business case rather than providing pure legal advice. Liquid legal - transforming legal into a business savvy, information enabled and performance driven industry. Springer Harpham B (2018) Project managers at work. Apress, Toronto Haugen T, Singh A (2015) Dispute resolution strategy selection. J Leg Aff Dispute Resolut Eng Constr 7(3):1–11 Ho SP, Liu LY (2004) Analytical model for analyzing construction claims and opportunistic bidding. J Constr Eng Manag 130(1):94–104 Kessedjian C (2018) Diversité, pertinence et efficacité des mécanismes internationaux de règlement des différends en matière économique. Enforcement and Effectiveness of the Law - La mise en œuvre et l’effectivité du droit. Springer Kim MP, Adams K (1989) An expert system for construction contract claims. Constr Manag Econ 7 (3):249–262 Kreps D (1990) Game theory and economic modelling, Clarendon lectures in economics. Oxford University Press, New York Lenfle S, Loch C (2010) Lost roots: how project management came to emphasize control over flexibility and novelty. Calif Manag Rev 53(1):32–55 Levy KEC (2017) Book-smart, not street-smart: blockchain-based smart contracts and the social workings of law. Engag Sci Technol Soc 3:1–15 McAfee A, Brynjolfsson E (2017) Machine, platform, crowd: harnessing our digital future. W. W. Norton & Company, New York Mermillod M (2016) Réseaux de neurones biologiques et artificiels – Vers l’émergence de systèmes artificiels conscients ? De Boeck Supérieur, Louvain-la-Neuve Mouzas S, Ford D (2012) Leveraging knowledge-based resources: the role of contracts. J Bus Res 65(2):153–161

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Passera S (2017) Beyond the wall of contract text–visualizing contracts to foster understanding and collaboration within and across organizations. Aalto University Rapoport A (1962) The use and misuse of game theory. Sci Am 07(6):108–118 Riad N, Arditi D, Mohammadi J (1991) A conceptual model for claim management in construction: an AI approach. Comput Struct 40(1):67–74 Shubik M (1955) The uses of game theory in management science. Manag Sci 2(1):40–54 Spiess W, Felding F (2008) Conflict prevention in project management strategies, methods, checklists and case studies. Springer Thaler R, Sunstein C (2008) Nudge: improving decisions about health, wealth and happiness. Yale University Press Weber RH (2018) Rose is a rose is a rose is a rose - what about code and law? Comput Law Secur Rev 34(4):701–706

9

Conclusion

Guided by Paul Valéry’s maxim,1 “Everything simple is false. Everything complex is unusable”, contractual practice shows that while we must strive to be practical, it would be wrong to ignore the contributions of economic theory, and in particular the latest research in cognitive and social psychology. The contract is marked by renegotiations and its legal autonomy brings together parties who have no choice but to live side by side throughout the duration of their contract. Contractual issues should be given an increasingly important place within companies. Contractual activities involve professionals from a wide variety of backgrounds, including lawyers, contract managers, engineers, and administrative managers. Although decision-making may ultimately fall to a single individual within the organization, their decisions will be informed by the provisions or recommendations of these professionals. The closeness of these functions raises questions for the decision-maker about a particular type of “management situation”, namely contract management in a company. Jacques Girin’s2 definition of this management situation can be summed up as follows, “A management situation arises when participants are brought together and must accomplish, within a given time, a collective action producing a result that is subject to external judgment.” Participants to the contract are individuals who act within material, legal, and ethical (compliance) constraints and who have finite resources and limited cognitive abilities. The notion of cooperation involves a sequence of events specific to the life of the program or project as well as enduring and stable relationships between the actors. Timescales are subject to the length of the project. The result is measured in function of two criteria: the financial outcome of the contract and the quality of the

1

Paul Valéry (1871–1945) was a French poet, essayist, and philosopher and was also extremely interested in the state of modern physics and mathematics. He published a variety of short prose texts, including numerous aphorisms, many of them initially recorded in his Notebooks. 2 Girin (1990), pp. 141–182 (authors’ translation). # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3_9

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relationship with the other party at the end of the final settlement. Judgment does not necessarily imply a legal dimension, but can be decided by the stakeholders (shareholders). This book has aimed to highlight the contributions of the sociology of choice and experimental psychology as applied to bilateral relationships, while preserving the operational logic implemented by contract managers. Although preliminary theoretical studies may appear to be ill-advised or overly subjective, our actions are nonetheless frequently governed by unconscious decisions. It is therefore very useful, from an operational point of view, to provide an overview of the most common attitudes and biases that need to be taken into account if we want to understand, and anticipate, the behavior of the different parties. To reassure those who might fear that this “deconstruction” of process-based culture could be detrimental to the sacrosanct notion of “steering” projects,3 the management model presented is in no way intended to exclude traditional management methods, particularly those promoted by the PMI—it would be quite reckless to claim that the emperor has no clothes when we shop at the very same tailor.

References Avenier M-J (1997) La stratégie « chemin faisant ». Economica, coll. “Stratégies et organisations”, Paris Girin J (1990) L’analyse empirique des situations de gestion : éléments de théorie et de méthode. Épistémologies et sciences de gestion, coordinated by Alain-Charles Martinet. Economica, Paris, pp 141–182

Management methods based on “steering” structures very quickly run into difficulties in complex environments. The metaphor of “steering”, while of interest in relatively stable organizations, cannot be used to implement an irreversible project or program that will likely lead the organization to buckle under its own momentum. Teleology, i.e. when the organization’s members adopt intentional behavior to achieve goals that they themselves define, contributes to the stability of the system. “The limits of a reactive, rather than proactive, strategic action approach, developed according to a predefined schedule, quickly become apparent: in a context of constant change, isn’t there a risk of falling behind if we adopt a reactive approach? An attitude that involves continually re-examining our strategy, by seeking to take advantage of situations as they emerge, seems to us to be more judicious. This philosophy underlies the design of strategic action in complex environments . . . action that is built and evaluated along the way, based on a dialectic goal/ context-specific means.” (Avenier 1997, op. cit., authors’ translation.)

3

Glossary1

Acceleration When a project is delayed and the contractor considers that it is not at fault (the delay was beyond its control), it submits a claim to the general contractor to validate the financing of work performed outside working hours (higher hourly rates) and/or additional resources allocated to the project in order to re-establish the agreed contractual schedule. The general contractor may also request a tighter schedule to respond to a change in the end customer’s strategy. Additional work claim A claim addressed by the contractor to the customer to obtain additional financing for work not provided for in the contract. Advance payment guarantee Bond or guarantee designed to refund the deposit made by the customer in a signed contract. Algorithm A set of operating rules that can be applied to solve a stated problem by means of a finite number of operations. A programming language can be used to translate the algorithm into a computer-implementable program. Alternative Dispute Resolution (ADR) Alternative Dispute Resolution aims to encourage information gathering, to reduce the cost of litigation, and to preserve the quality of the relationship between the contracting parties. It is implemented at the end of the project and often emerges as a preliminary step to arbitration. By bringing their dispute to a mutually agreed mediator, the parties can obtain an experienced professional’s opinion of their dispute. The latter will submit a settlement proposal to them and the dispute may be settled at this stage. Mediation is always conducted confidentially. ADR appeared in the nineteenth century in the United States (court costs were clearly already considered exorbitant!). Amendment Act by which the parties agree to modify or supplement the contract if the parameters exceed certain thresholds. Amiable composition This term means that the arbitrators seek an equitable solution by setting aside, where necessary, a strict application of the law governing the contract. Arbitration The contract indicates, even before any disagreement has arisen, that potential disputes will be submitted to arbitration and that the parties waive the

1

This glossary aims to establish a list of the terms most commonly used in industries such as oil and gas, civil engineering, electronics, and transport, etc. # The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3

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Glossary

right to take their dispute to court. Arbitration is often presented as a private justice system in which the awards handed down at the end of the proceedings have the same authority of claim preclusion as state judgments. Compared to state proceedings, the advantages highlighted include cost, speed, confidentiality, and the search for a solution that satisfies fairness and preserves the economic interests of the parties. Arbitration clause Requires the parties to resolve their disputes via arbitration. Artificial neuron (formal neuron) An artificial neuron is an algebraic function whose value depends on parameters called coefficients or weights. The variables of this function are called inputs and the value of the function is the output. As-built drawings Plans and technical files that represent the project as actually built. Back charge Amount deducted from a supplier’s remuneration to compensate for costs incurred as a result of its actions, because of quality issues (performance problems, unacceptable equipment), or to take into account the authorized sale of items surplus to requirements. Back to back When the conditions of the main contract apply to partners/ subcontractors. Bid bond Bond or guarantee provided by the contractor when submitting its tender to demonstrate the seriousness of the bid. Bidder Contractor submitting a tender in response to an RFP (see request for proposal). Bill of Quantities (BoQ) Mainly used in civil engineering contracts, the BoQ details the estimated quantities of supplies required for the project and serves as a benchmark for measuring variances during the performance phase. Binding Enforceable. Bond (security) Legal and financial commitment to secure the performance of the contract and facilitate the financing of activities (the buyer is protected against the seller’s default and the seller can ensure the financing of its working capital requirement). Breach of contract Violation of contract, failure to perform. Change control Procedure to manage the submission, analysis, and validation of amendments during contract performance. Change order Formal instruction, issued by the customer, instructing the contractor to modify the scope of services provided. Change order closeout form Form signed by the parties to formalize the closeout of each of the accepted changes. Payment is then released. Claim Customers rarely specify their needs in detail and often introduce new requirements, causing frequent problems for the contractor. In such cases, the contractor will advise its customer of its claim for additional financing or time. Contrary to popular belief, claims are not blameworthy and are perfectly accepted by the majority of contract professionals, who have no difficulty in establishing their own counterclaims. Closeout Process of closing the contract.

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269

Cognition Cognition refers to the set of mental processes relating to the acquisition of knowledge, involving memory, language, reasoning, learning, problemsolving, decision-making, perception, or attention. Coming into force When the contract enters into force. Commissioning Preliminary operations conducted when starting up a facility. Conciliation The conciliation process involves a neutral and independent third party whose intervention is limited to informing the parties of their rights and obligations in order to help them communicate with one another to find a negotiated solution that will then be documented in an agreement. Concurrent delay Delays caused by the project owner and the contractor. Often used by the project owner to reduce the contractor’s claims for delay when the schedule no longer complies with the critical path (see critical path method). Connectionism An approach used in cognitive science, neuroscience, and psychology that models mental or behavioral phenomena as processes generated by networks of simple interconnected units. Contingencies Provision for risks. Contract entitlement The right to obtain financing for additional work, interest for late payment, liquidated damages reductions, or any other form of compensation provided for in the contract. Counterclaim Predictable reaction of the other party following the issuance of a claim. Critical Path Method (CPM) Detailed schedule of interconnected tasks that highlights the succession of necessary tasks, with no room for maneuver, from the beginning to the end of the project.Any delay in a critical path task will jeopardize the overall project deadline. Deliverables Project deliverables (products, services) are usually specified in the statement of work. Dependency Dependencies often exist between tasks–one risk can generate another. Dispute Review Board (DRB) Major international projects are organized in different phases, each of which depends on the previous one. In order to avoid the risk of blocking work, and therefore progress, when a problem arises, the parties implement “soft” dispute resolution methods such as a Dispute Review Board (DRB). The process may be initiated throughout the life of the project to resolve disputes that have already been the subject of direct, but unsuccessful, negotiations between the parties. It is often considered to be one of the technical components of alternative dispute resolution. Employer See the definition of “project owner”. Enforcement Effective implementation of contractual obligations. Evidence The documents contained in the litigation file that are required to prove that the claims are based on tangible facts. Extension of Time (EoT) Extension of the contractual deadline. The objective is to reduce the contractor’s exposure to liquidated damages for delays.

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Glossary

FIDIC The International Federation of Consulting Engineers (FIDIC) offers a range of model contracts that are benchmarks in the field of civil engineering. Final acceptance Final acceptance opens the warranty period. It may, or may not, include reservations. Flow down Where the contractor undertakes to pass on a number of obligations from the main contract to its own subcontractors. General (or prime) contractor Natural or legal person in charge of directing the works, and of coordinating and controlling the services. Hand over Process of transferring responsibility between the parties, either for a partial delivery or at the end of the project. ICC International Chamber of Commerce. Issue log A register listing problems that have arisen during contract performance, some of which require change orders. Kick off meeting (KO meeting) The KO meeting introduces the contractor, presents the project participants, clarifies the obligations of the parties, and establishes the rules of operation and communication during the performance of the contract. Letter of intent Outlines the understanding between the parties. Liquidated Damages (LD) Clause that sanctions breaches, generally delays (liquidated damages for delay). Main (or prime) contract The main contract between the customer and the general contractor. The latter has overall responsibility for the project and is in charge of implementing its requirements through a network of sub-contracts. Mini-trial Mediation is always conducted confidentially. It can take the form of a mini-trial, a process developed in the United States in the 1980s. Mini-trials are non-binding. Introducing these clauses into the contract makes them mandatory, so that the parties do not put themselves in a weak position if they wish to enter into negotiations. (The first party to propose a mediation solution may still fear that this could be interpreted as a sign of weakness.) However, it should not be underestimated that the exchange of information in mediation proceedings may undermine confidentiality if the procedure fails to conclude successfully. Multi-criteria aggregation Multi-criteria aggregation aims to synthesize information that reflects different, and sometimes conflicting, aspects or points of view about the same set of objects. It is a crucial element in many evaluation, comparison, and classification procedures used in decision support. Many decision-making issues are multi-criteria. They are characterized by defining a list of potential or “alternative” solutions. Narrative A narrative records the facts that support the argument made in the claim. It can be written in table or text form. In both cases, the events and/or facts generating the claim must be substantiated with evidence appended to the claim file. Non-Disclosure Agreement (NDA) A confidentiality agreement. Notice An obligation requiring one party to notify the other of any failure to comply with its commitments and to request it to correct the effects of this failure as soon

Glossary

271

as possible. This process is very important, the party giving notice must not be seen to be lenient with respect to the good performance of the project. Strict compliance with the procedures for giving notice is a prerequisite for exercising certain remedies or invoking clauses such as “force majeure”. Notice of acceptance Written notice given by the customer confirming that the work conforms to the contract, and that the customer accepts the work, to enable the final payment to be released, where relevant. Notice of completion Written notice given by the contractor confirming that the work has been completed in accordance with the contract. Notice of rejection The customer’s written response to the contractor’s notice of completion when it considers that the work has not been completed or is not in accordance with the contract. Organizational Breakdown Structure (OBS) A hierarchical representation of project resources. Performance bond Bond or guarantee for the satisfactory performance of a signed contract. Principal In the principal-agent model, the agent performs services for the principal in return for a fee. It is therefore in the principal’s interests to implement an incentive scheme via the contract that (pre)disposes the agent to act according to the principal’s wishes. Project owner (customer) The party that defines its needs, places an order, receives the related services, and pays for them. Punch list List drawn up at the end of the project by the general contractor noting the shortcomings and non-conformities that must be resolved before the notice of acceptance can be issued. Quantity Surveyor (QS) This British job title originated in the civil engineering industry. The QS’s role is to evaluate the quantities of materials used during performance, based on plans and specifications. The QS also assesses change proposals. Quantum Value demonstrated to quantify the amount of the claim. Refund bond Advance payment guarantee. Request for change A proposed amendment. Request for Proposal (RfP) Call for tenders. Invitation to tender. Requirement Requirement specified in the contract. Retention Amount withheld from a payment as an incentive for the contractor to complete the work. Retention money guarantee Bond or guarantee issued to the project owner to guarantee that the contractor will continue to fulfill its contractual obligations after receiving final payment in advance. Scope Contractual definition of the services to be provided. Settlement Financial transaction. Side letter A side letter can be used to specify or override certain provisions of the contract. Its confidential nature may raise the question of its legal value, unless

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Glossary

the parties have given the arbitrators decision-making power under amiable composition (see above). Soft law Informal incentive-based requirements such as codes of ethics and compliance programs. Standby time Period(s) during which the contractor’s staff allocated exclusively to the contract are ready to carry out their tasks but cannot begin work due to circumstances attributable to the client. Statement of Work (SoW) Detailed description of the work to be performed under the contract. Sunk cost Costs that have already been incurred and that cannot be recovered. Termination Termination of the contract. Time schedule Contract performance schedule. Variation order See the definition of “change order”. Work Breakdown Structure (WBS) Projects are complex due to the large number of extremely varied tasks that need to be performed. In the same way that a book is divided into chapters, chapters into sections, sections into paragraphs, paragraphs into sentences, and sentences into propositions, the project is divided into numerous components all the way down to the smallest level of detail. This breakdown takes the form of a hierarchical organizational chart–the WBS. The WBS is the basic tool underlying all project management. Work package Project management involves control and decision-making. The smaller the work package, the easier it will be to manage. Working capital requirement (WCR) The working capital investment that is required for the company’s operating cycle to keep running smoothly.

Index of Persons

A Alexander, C., 236–238 Allais, M., 3, 110 Asimov, I., 246, 247 Atticus, 45

B Bensoussan, A., 246 Brunelleschi, F., 209 Buridan, J., 198

C Casson, H., 1, 210 Changeux, J.-P., 136 Clarke, A.C., 262

D da Vinci, L., 241 de Callières, F., 179 de Laplace, P.-S., 113 de Vauban, M., 92

E Étienne Bonnot de Condillac, 137 Euclid, 1

F Flaubert, G., 16 Forman, E., 257

G Galloway, J., 74 Gates, R., 37

Ghiberti, L., 209 Greene, J., 247

H Harold Geneen, vii Herod, 45 Hofstede, G., 135, 136

J Johnson, L., 115

K Kollm, D., 224

L Lorenz, E.N., 44 Louis XIV, 92, 179 Louvois, 92 Lulu (a dog), 74

M McNamara, R., 37, 40 Mill, J.S., 109 Miller, G.A., 256

N Napoleon, 115 Nash, J., 125 Newell, A., 243

P Pius II, 48

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3

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274 Polanyi, M., 244–248 Puccini, 261

R Rams, D., 241 Reventlov, R.G. (a robot), 247 Rosenblatt, F., 244 Rossellino, B., 48

S Saaty, T., 253, 256, 257 Scarpia, 261 Sedol, L., 245 Serdet, C., 177 Shakespeare, W., 67 Shaw, J.C., 243 Silver, D., 62, 245 Smith, A., 109 Susskind, R., 245 Szabo, N., 248

Index of Persons T Tarne, B., 225 Tosca, 261 Tucker, A., 98 Turing, A., 42

V Vaisey, J., 116 Valéry, P., 265 van der Rohe, L.M., 241 Von Bismarck O., 85 Von Ehrenfels, 236 Von Neumann, J., 98

W Willke, H., 157 Wittgenstein, L., 98, 99

Subject Index

A Acceptance, 14, 31, 85, 87, 89–91, 105, 149, 151, 157, 160, 161, 175, 222–224, 259 Accountability, 193, 231 Active interference, 93 Adverse selection, 73 Agile, 215, 219–228 Agile manifesto, 220 Agile methods, 220–222 Ambiguities, 44, 84, 85, 159, 160, 192 Amendments, 13, 68, 69, 72, 139, 163, 164, 203, 222, 231, 232, 238 Analytic hierarchy process (AHP), 253, 256–258 Arbitration, 82, 85, 114, 148, 150, 177, 207, 246, 253, 254, 256, 259–262 Artificial intelligence (AI), 7, 42, 194, 215, 229, 231–233, 243–248, 262 Asian epidemic, 111 Association française du contract management (AFCM), 204 Autonomy, 132

B Balance of power, 69–71 Benchmarks, 190 Bid your claims, 72, 75–77, 173 BIM execution plan, 228 BIM managers, 226–228 BIM protocol, 227 Blockchain, 6, 233, 248–253, 261 Body of knowledge (BOK), 36, 38, 42, 204, 216 Boilerplates, 238–239, 254 Brooks’ Law, 46, 51 Building information modeling (BIM), 215, 219–228

Business-to-customer (B2C), 251 Buying-in, 73–74

C Capability maturity model (CMM), 185–187 Catalog of important correspondence, 30 Cause map, 134 Change management, 153, 162, 163, 186 Changes, 7, 9, 14, 16, 17, 19, 26, 32, 34, 37, 39, 44, 46, 51, 59, 60, 66, 68, 70, 72, 73, 75, 77, 79, 84, 94–96, 105, 112, 118, 120, 123, 124, 135, 137, 139, 140, 147, 153–155, 157, 159, 161–163, 165, 169, 171, 172, 175, 181, 183, 186, 187, 193, 194, 197, 201, 219–222, 224, 231, 235, 252, 253, 258, 266 Chess, 99, 100, 137, 179, 236 Claim management, 32, 164–173 Claims, 16, 22, 26, 28, 30–33, 55, 69, 72, 75–77, 79–82, 84, 86, 87, 89, 91, 93, 104, 105, 120, 122–125, 128, 133, 136, 139–141, 147, 148, 162–173, 176–177, 180, 181, 186–189, 195, 201, 202, 205, 207, 208, 213, 215, 216, 242–246, 248, 249, 254, 255, 258, 259, 266 Claimsmanship, 72, 73, 77 Clauses, 150 arbitration, 254 procedural, 154 relating to disputes, 164 Co-contracting, 63 Cognitive bias, 49–52, 233 Commitments, 10, 12–15, 17, 19, 21–24, 27–29, 32, 46, 47, 49, 50, 55, 66, 71, 80, 82, 92, 97, 101, 111, 114, 140, 174, 179, 191, 192, 194, 195, 224, 227, 230, 232, 260, 261

# The Author(s), under exclusive license to Springer Nature Switzerland AG 2021 A. Brunet, F. César, Contract Management, Law for Professionals, https://doi.org/10.1007/978-3-030-68076-3

275

276 Common law, 119, 131, 138 Community of practice, 159, 204, 210, 216–219 Complexity, 12, 42, 63, 131, 132, 198–199, 206 Complex systems, 35, 42–45, 53, 63, 185, 204 Compliance with norms, 113, 135, 137, 139, 141 Conflict management, 150 Conflicts, 28, 60, 77, 81, 84, 97–98, 103, 118, 123, 124, 130, 139, 140, 145–150, 153–155, 196, 227, 239, 247 Consultants, 148, 185, 210–213 Contract agile, 224 cost-plus, 84 design, 84, 155, 189, 215, 234–243 drafting, 190–191 dynamics, 152–154 end, 258–261 EPC, 61 FIDIC, 62 fixed price, 84, 147–148 framing, 110–112 governance, 150–173 intelligent, 248–249 lifecycle, 14–15 lifecycle management (CLM), 13, 186, 215, 228–233 low margin, 16 managers, 3, 22, 23, 30, 32, 87, 183–216, 255, 265, 266 performance, 15–17 performance drivers, 22 performance phase, 50 risks, 5, 7, 11, 12, 14, 17–19, 21, 27–30, 33, 229 signature, 70 summary, 174 turnkey, 14, 15, 209 variation form, 32 Contractual correspondence, 30, 31 Contractual hold-ups, 77, 78 Cooperation, 8–9, 34, 71, 72, 83, 95, 96, 98, 100, 101, 103, 110, 114, 137, 141, 159, 196, 210, 216, 217, 261, 265 Corporate governance, 17 Corporate social networks, 218 COSO Committee, 18 Cost performance index (CPI), 161, 162 Cost-plus contract, 84, 252

Subject Index D Damages, 21, 24–26, 32, 33, 70, 74, 79, 90, 91, 93, 101, 115, 152, 164–166, 171, 233, 242, 249 Deadline, 88 Decision trees, 179, 253, 255 Delays, 12–14, 17, 22–24, 37, 45, 46, 50, 54, 69, 72, 77–81, 88, 90, 92, 93, 96, 119, 123, 124, 133, 134, 148, 153, 154, 157, 163–169, 171–173, 181, 197, 199, 206, 216, 243, 248, 260 Deliverables, 223 Design patterns, 238, 240, 243 Dictator game, 127 Dilemma negotiator’s, 122 Dispute resolution, 253–255 Disputes, 21, 27, 28, 33, 62, 82–84, 103, 124, 145–151, 153, 160, 162, 165, 169, 172, 177, 186, 191, 203, 205, 207, 208, 212, 213, 222, 227, 235, 238–241, 245, 253–262 Duty to advise, 176

E Earned value management (EVM), 161–163 Efficiency effect, 22 Enlightened self-interest, 83 EPC contracts, 61 Ethics, 114, 246 Evidence, 162 Exemption from liability, 152 Expected utility, 56 Experimental economics, 145 Experimental psychology, 1, 3, 109–141, 146, 205, 266 Expert systems (ES), 2, 243, 244 Extension of time (EOT), 123, 153, 167, 168, 171, 172, 175 External consultant, 210–213

F Fairness, 127, 128, 233 Finance department, 197 Financial risks, 18, 87 Fit for purpose, 85, 89, 119 Fixed-price contract, 2, 84, 151, 162, 211 Flow-down, 92, 93, 195 Framing theory, 110–112

Subject Index G Gains, 5, 8, 11, 26, 30, 66, 71, 73, 82, 95, 109, 111, 113, 115, 116, 120–126, 135, 137, 139–141, 146, 161, 173, 184, 200–202, 217, 248, 255, 260, 261 Game dictator, 127 go, 146, 179–180, 245 trust, 127, 128 ultimatum, 126 zero-sum, 137 Game of go, 141, 179, 180 Game theory, 98, 100, 110, 125–128, 132, 141, 239, 253 Gentleman’s agreement, 116 Gestalt, 236 Good faith, 101 Good workmanship, 175 Governance, 150–173, 190–193

H Heuristics, 49–53, 95, 138, 233, 237, 243 Hofstede model, 135 Hold-up, 77, 79, 80, 105, 131, 145, 252 Homo economicus, 109, 110, 140, 146

I Illusion of control, 54, 55 Incompleteness, 66–68, 82, 105, 117, 131, 181, 187, 247 Intercultural management, 135 International Association for Contract and Commercial Management (IACCM), 12, 14, 152, 204, 228, 229, 240, 243 International Federation of Consulting Engineers (FIDIC), 120, 147 International Federation of Consulting Engineers (FIDIC) contracts, 33, 62, 124, 148, 173 International Project Management Association (IPMA), 38 Internet of Things (IoT), 6, 248 Invariance criterion, 111 Issuing claims, 33 IT contracts, 202–203, 222, 223

K Key Performance Indicator (KPI), 21, 22 Kick off, 174

277 L Law of small numbers, 94, 95 Laws of Robotics, 246 Lawyers, 2, 7, 27, 65, 66, 112, 129–132, 137, 145, 155, 181, 189–191, 194, 207, 208, 210, 213, 227, 235, 241, 244, 248, 249, 251, 253, 259, 260, 262, 265 Learning, 46, 52, 69, 95, 110, 118, 154–159, 181, 231, 233, 244, 245, 261 Legal capability, 189 Legal department, 194 Legal design, 215, 235–239, 241–243 Legal support, 156 Legal tech, 215, 242, 250 Lessons learned (LL), 29, 87, 156–158, 184, 187, 212, 227 Liquidated-damages, 17, 90, 124, 151, 168, 174, 175, 197, 199, 201 Litigation, 1, 27, 79, 80, 94, 98, 129, 138, 148, 150, 169, 195, 197, 243, 253, 255, 256, 260, 262 Loss aversion, 113–116, 121, 129, 135, 137, 139, 149

M Management control, 21, 37 Managing contract risks, 28 Map of contract portfolio, 185 Matrix-type organization, 196 Maturity model, 186 Maturity of the process, 185–189 Mediation, 150, 254, 256 Micro management, 133, 140, 180 Minutes of meetings, 178 Modular approach, 154 Modular structure, 39, 42 Moral hazard, 59 Multiple criteria decision analysis (MCDA), 253

N Nash equilibrium (NE), 125, 260 National Contract Management Association (NCMA), 64, 65, 204 Natural language processing (NLP), 231–233 Negotiation, 120, 138 Negotiation power, 139 Negotiator’s dilemma, 122 Neural networks, 244 Norms, 114

278 Notice, 31, 33, 45, 86, 118, 123, 124, 128, 153, 163, 164, 168, 170, 173, 176, 177, 223, 231, 240, 241, 255 Notice of claim, 33

O OECD Anti-Bribery Convention, 114 Operational department, 195 Opportunism, 2, 66, 71–83, 101, 114, 119, 145 Opportunistic avoidance, 74, 75 Opportunity cost, 197–201 Optimism bias, 2, 47, 48, 53, 54, 60, 129 Organization chart, 193–196 Outsourcing, 9, 10 Overruns, 17, 22, 24, 36, 45–48, 59, 72, 90, 133, 161–164, 169, 173, 221, 255

P Parkinson’s Law, 51 Partnering, 61, 73, 97–106 Patterns, 12, 14, 15, 135–137, 159, 236–238, 243, 246 Phase contract closing, 124 initiation of the contract, 116, 117 performance, 120 Planning fallacy, 55 Polanyi’s paradox, 244–248 Polaris, 36, 37, 39 Political games, 209 Preamble, 73 Pre-contract phase, 70 Prisoner’s dilemma, 97, 98, 100, 114, 126, 179 Proactive law, 7, 129, 130 Procedural knowledge, 156–159 Procurement department, 195 Productivity gains, 200 Program Evaluation Research Task (PERT), 36, 37, 44, 53 Project management, 36, 40, 41 Project Management Institute (PMI), 36, 38, 50, 56, 157, 266 Project managers, 26, 29, 37, 38, 49, 52, 54, 56, 87, 93, 96, 132, 146–148, 152, 180, 181, 190–193, 195–200, 205–209, 211, 213

Q Qualitative benefits, 201 Quantum, 25, 26, 171

Subject Index R Rationality, 57, 66, 110, 113, 131, 132, 141, 146, 196, 198 Reciprocal commitments, 22, 23 Reciprocal security, 135 Reference class, 48 Reference class forecasting, 48, 129 Regulations, 7, 11, 17, 19, 20, 88, 130, 261 Regulatory framework, 18, 19 Relational contract (RC), 99, 101, 112, 129 Relational signals, 2, 83, 117, 137 Renegotiations, 59–63, 68–71, 77, 78, 100, 120, 126, 131, 140, 141, 146, 166, 187, 252, 265 Request for Proposal (RFP), 70, 83 Responsibilities, 12, 13, 15, 19, 21, 24, 27, 31, 33, 62, 72, 74, 84, 87, 91, 104, 119, 124, 128, 134, 153, 155, 166–169, 173, 175, 176, 184, 186, 190–193, 195, 200, 207, 209, 210, 222, 225–228, 238, 243, 255 Responsibility for delays, 166–169 Return on investment, 197–201 Risk contract, 10–12, 28 contractual, 84 control, 27 financial, 150–152 legal and financial, 88 management, 2, 5, 10, 17–20, 22, 28, 29, 34, 56, 86, 95, 105, 150, 196, 197, 199, 204, 229, 232, 256 manager, 197 performance, 17 project, 87 register, 86, 87 subcontracting, 91, 92 Rule of precedent, 154

S Saturation effect, 234 Schelling’s focal point, 235–236 Sector banking and finance, 203 IT, 202–203 Settlement agreements, 82, 133, 176, 258, 259 Shared norms, 117, 118 Signals weak, 95 Situational objective, 113, 135 Smart contracts, 233, 248–253 Soft factors, 52, 57

Subject Index Statement of work (SOW), 140, 155, 160–161 Subcontracting, 6, 61, 67, 87, 91–93, 174, 199 Surprise, 94, 95 Syllogism, 64–68, 233

T Theory game, 125, 259 of norms, 118, 119 prospect, 121 transaction cost, 131 Traceability, 23 Transaction costs, 69, 78, 79, 131, 151, 154, 187, 205 Transaction cost theory, 78 Tree structure, 42 Trust, 51, 73, 94–97, 99, 100, 103, 105, 117, 119, 127–128, 147, 192, 221, 251, 261 Turnkey contracts, 14, 62

U Ultimatum game, 126–128 Uncertainty, 50

279 Under-investment, 77, 78 Unwritten obligations, 175

V Value leakage, 21, 22 Values, 6–9, 20–22, 27, 31, 33, 34, 49, 53, 66, 71, 75, 76, 79, 81, 83, 86, 87, 89, 94, 109, 114–118, 122, 124, 130, 131, 136, 139, 140, 145, 146, 152, 154, 155, 158–174, 177, 181, 185, 187, 196, 198, 200, 201, 206, 207, 212, 217, 219, 220, 224, 231, 232, 234, 255, 257, 259–261 V-model, 219, 223

W Wait-and-see, 81 Weak signals, 95, 96 Winner’s curse, 75 Work breakdown structure (WBS), 40–45, 86, 87, 89, 146, 162, 174