International Journal of Architecture, Engineering and ConstructionVol 6, No 1, March 2017, 12-19

The Combinational Connotation of Contract Strategy in

Chinese Public Construction Projects:

A Grounded Theory Approach

Ling Yan∗, Tao Yang and Jiaojiao Deng

School of Management, Tianjin University of Technology, Tianjin, China

Abstract: Contractual and relationship governance mechanisms are complementary, so contract strategy in public constructionprojects is multi-dimensional and involves interaction between both mechanisms. The connotation and formation of contractstrategy for public construction projects in China remain unclear. Based on field interviews of participants in such projects, andusing grounded theory for interview report encoding, this paper builds three dimensions of contract strategy in such projects:contractor selection, contract strategy focus, and problem prevention methods. Eight contract strategies are identified throughtheoretical screening and further analysis for different project phrases and relationship types. Through theoretical analysis andliterature review, this paper identifies two paths for optimizing contract strategy. First, contract theory can be extended toincorporate cooperation and coordination functions. Second, contract planning in the early stage of public construction projectsin China can encourage public clients to view a contract as more than just a means of control, enhancing trust and cooperation,and achieving contract management of partnerships.

Keywords: Public construction project, contract strategy, relational governance, contractual governance, grounded theory

DOI: http://dx.doi.org/10.7492/IJAEC.2017.002

1 INTRODUCTION

From the perspective of embeddedness, contract strategy in pub-lic construction projects can be defined as a multi-dimensionalprofile construct comprising contractual and relationship gover-nance and their dynamic interaction. Existing studies on projectgovernance focus on the dual principal-agent relationship in con-struction projects and ignore the social network organization as-pect. The introduction of embeddedness theory emphasizes theimpact of social relations and social network on subject decision-making and behavior, which promotes the refinement and appli-cation of project governance theory. The mainstream literatureand the practice of public projects also prove that relationalgovernance based on trust and relational norms improves per-formance (Tan and Mu 2008; Caniëls et al. 2012). Contracts arenaturally incomplete, even a very detailed contract cannot easilycover all possible future eventualities involving a project (Caoand Lumineau 2015). However, relational governance can sig-nificantly restrict opportunistic behaviors (Caniëls and Gelder-man 2010). Therefore, contract strategy for public constructionprojects must consider the impact of relational governance oncontract formulation and execution, including its support func-tion.The practice of public construction projects in China common-

ly emphasizes formal contractual governance, while avoiding or

restricting relational governance (Ning and Ling 2013a). Severalmisunderstandings of the connotation of contract strategy exist.First, understanding of contract strategy in public constructionprojects remains static, yet the relationships among the involvedparties and uncertainty in public construction projects are bothdynamic and developing. Second, contract strategy fails to con-sider the complementary effects between relational and contrac-tual governance in the contracting process from the embedded-ness perspective. Improving project performance requires thecombination of both relational and contractual governance (Tanand Mu 2008; Caniëls et al. 2012; Carson et al. 2006). Theideal is to realize an equilibrium between both governance types(Wang and Chen 2006). Therefore, several different combina-tions may exist. Furthermore, in research on knowledge sharingin collaborative R&D projects, Olander et al. (2010) showedthat the relative importance of relational and contractual gov-ernance varied with collaboration phase.

Thus, the construct of contract strategy in public construc-tion projects in China is incomplete, and the role of relationalgovernance needs to be considered. First, we conduct explorato-ry analysis of the connotation of contract strategy to identifystrategy types based on grounded theory. Second, from the per-spective of context, we analyze the causes of contract strategytype, and define the external system and project environmental

*Corresponding author. Email: lingyantj@163.com

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factors that affect the formation of combinations of relationaland contractual governance. Finally, we clarify that contractstrategy optimization requires promotion of the equilibrium ofgovernance mechanisms in the process of contracting. Our find-ings are based on analysis of contract strategy in public construc-tion projects in the Chinese context, and clarify that interactionbetween contractual and relational governance is associated witha dynamic and combinational contract strategy. These findingssupport the effective embeddedness and application of relationalgovernance in contract strategy for public construction projects.

2 LITERATURE REVIEW

Practices in supply chains, PCP arrangements, industrial projectprocurement, family business governance and vertical trans-actions within industrial chains have shown that contractualand relational governance can coexist and their combinationimproves performance. Wuyts and Geyskens (2005) studiedwhether the appropriate configuration of contractual and re-lational governance can reduce opportunism, promote satisfac-tion, and enhance contextual performance. Roehrich and Lewis(2014) emphasized that the combination of contractual and re-lational governance might increase the effectiveness of effortsto counteract project complexity in PCP agreements. In com-plex procurement projects in the Norwegian oil and gas industry,Caniëls et al. (2012) found that relational governance only ben-efitted project performance when accompanied by contractualincentives and control systems. Accordingly, based on relativeeffect, four combinations of governance mechanisms exist: weakrelational-weak contractual, weak relational-strong contractual,strong relational-strong contractual and strong relational-weakcontractual.Researchers also identified the dynamics of the complemen-

tary effects of contractual and relational governance. Poppoand Zenger (2002) confirmed the complementary relationship be-tween contractual and relational governance, and noted that thecomplementary effect was dynamic. To verify the dynamics ofcomplementary effect, scholars interested in R&D collaborativeprojects, as well as IS service and IT outsourcing have carriedout in-depth studies. Based on study of buyer-supplier R&Dcollaborative projects, Olander et al. (2010) reported that therelative importance of contractual and relational governance var-ied in different project phases. Cao et al. (2013) led explorationof the equilibrium of contractual and relational governance inIT service outsourcing, and found that equilibrium was reachedthrough a four-stage evolutionary process. The four stages are:relational governance → contractual governance → relationalgovernance (flexible procedure) → equilibrium of governance.From a process perspective, Huber et al. (2013) revealed thedynamic and intertwined relationship of contractual and rela-tional governance in IS outsourcing. The complementarity andsubstitution of governance mechanisms are better understoodas temporal states than as stable properties, so the relationshipbetween complementarity and substitution fluctuates.In public projects, researchers pointed out that the two gover-

nance mechanisms had a complementary effect on project gov-ernance performance. Zheng et al. (2008) further confirmed thedynamic interaction between contractual and relational gover-nance in PFI projects, with each mechanism following a differentdevelopment path in the process of project implementation. In

studying the impact of governance mechanism on constructionproject performance, it is found that the complementary effectbetween mechanisms resulted in a dynamic development process.Thus, the development trajectory of contractual and relationalgovernance changes from one project phase to the next, pro-viding strong empirical support for the dynamics of governancemechanisms.Because only the coexistence of contractual and relational gov-

ernance is effective in the management of public constructionprojects, we should coordinate governance mechanisms at dif-ferent times rather than incorporating governance mechanismsin each dimension for separate application. Consequently, stra-tegies that combine governance mechanisms are necessary. Inpublic construction projects, government owners should considerthe Chinese context in developing contract strategy, and shouldconsider the complementary effect between mechanisms from theperspective of embeddedness and dynamics to perfect the con-struct of contract strategy. Then, we need to clarify the state andspecific indications shown by relational governance throughoutthe process of contracting, and promote the selection and appli-cation of governance mechanisms in contract strategy in publicconstruction projects.

3 RESEARCH METHODOLOGY

3.1 Research Method

Grounded theory is a qualitative research method that empha-sizes inductive analysis of data by open coding, axial coding,and selective coding, and that focuses on conceptual frameworkor theory formation. Little research exists on contract strategyin public construction projects in the Chinese context, and thereis also a lack of related literature and theories. Thus, groundedtheory is a rational choice in this study because it uses induc-tive analysis to refine basic theory on a field from practical data,builds and perfects the theoretical system.Therefore, based on the Chinese context, this research investi-

gated public construction projects in China using field interviewsand questionnaires. Based on the investigation, we arrangedproject information captured in the form of interview reports.Based on analysis of the interview reports, we obtained client at-titudes towards contractual and relational governance, as well asthe interplay between the two governance mechanisms. Throughanalysis and using grounded theory, we built the formation mod-el for contract strategy where a complementary effect betweencontractual and relational governance exists.

3.2 Research Design

In China, public construction projects are fixed-asset invest-ment projects invested by state-owned funds (including state-owned enterprises). Accordingly, the Chinese public construc-tion projects selected for investigation in this paper mainlycomprise five urban infrastructure projects, including subwayprojects, new university campus construction projects and petro-chemical projects. The research group follows three principleswhen determining project location: (1) high level of economicdevelopment and perfect industry regulation; (2) massive publicinvestment and a large choice of projects; (3) previous coopera-tion with the research group (to facilitate data collection).

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3.2.1 Interview Outline

Semi-structured in-depth interviews have three main purposes,as follows: first, to understand the relationship between clientsand contractors in the existing market pattern of public con-struction projects macroscopically; second, to identify client’sattitudes towards the contract and cooperation among the par-ties; third, to recognize the development of the relationshipsbetween the clients and contractors in different phases. The in-terview questions are divided into three levels (Table 1).

3.2.2 Interviewee Selection

To ensure data accuracy, reliability and originality, the mainmeans of data collection is a field interview supplemented by aquestionnaire. The principles used to screen interviewees are asfollows: (1) Effectiveness. The interviewees should have partic-ipated in contract planning and execution in public construc-tion projects and be familiar with the process of contract draft-ing; (2) Representativeness. The interviewees should be famil-iar with actual contract execution and the difficulties in con-tract control; (3) Feasibility. Completion of the interview shouldbe possible within time and budget constraints. The intervie-wees comprise clients and their representatives associated withgovernment-invested public construction projects. Table 2 showsthe basic information of interviewees.

3.2.3 Reliability and Validity

In the design of the interview, the screening of interviewees basedon focus group ensures the accuracy and effectiveness of the in-terview results, as shown in Figure 1. We contacted the in-terviewees by e-mail and telephone, and introduced the aimsand an interview outline. To win the trust of interviewees, wepromised that the data would be used only for research purpos-es. To ensure the effectiveness of the interviews, we conductedinternal training of the participating researchers. Each interviewinvolved three individuals, the interviewee, the interviewer, anda third person responsible for recording the interview content.After each interview, researchers who had not participated inthe interview organized the records to avoid subjective judge-ments affecting the results. We then let the interviewees checkthe summarized interview data to ensure accuracy. Finally, wefinished the interview reports.Research data are obtained from multiple sources, and the in-

terviewees come from different departments and positions in dif-ferent companies. The interviewees include organizational he-ads, departmental heads, contract department managers andclerks and general staff. After each interview, the intervieweesneed to complete a structured questionnaire that includes sec-tions dealing with attitude to relationship, relational behaviorand project performance. Additionally, the interviewees pro-vide bidding documents and contracts on the typical completedproject to be used for our research. Multi-angle and multi-sourcedata satisfy the triangle test, thus ensuring the effectiveness ofthe research.

3.2.4 Theoretical Saturation

When the data are mined adequately and no new categories areidentified, the theory will tend to be saturated. Testing for the-oretical saturation is essential to ensure reliability. By analyzing14 labels from four remaining interview reports, we find no new

categories, and also find no supplement to the main categories.Therefore, we can ensure the credibility of the model built bygrounded theory, and can also ensure the saturation and credibil-ity of the theory. We select a total of 22 samples, which satisfiesthe condition that the test of theoretical saturation should use20-30 samples (Fassinger 2005).

4 MODEL ESTABLISHMENT

Guided by grounded theory we followed three steps. The firststep is open coding. In the encoding process, we extract thewords of interviewees as labels to form the initial concepts, with18 interview reports being used to build the model, while theremaining four are used to test the theoretical saturation. Thesecond step is axial coding. This aims to filter out the maincategories related to our research. By identifying the relation-ship and logic order between the concepts and categories, wecluster similar concepts and form a collection. By examiningthe 45 concepts and 12 categories and combining them with thebackground of public construction projects, we finally form threemain categories and six subcategories of contract strategy froma project management perspective. Finally, the third step isselective coding. The purpose of selective coding is to find themain “clue” by researching the internal relations of the availableinformation, then determining the core categories that can covermost of the research results to gradually improve the researchframework. The researchers can choose one of the available cat-egories or refine the existing categories, then abstract the corecategory. Given the content of this study, we define the corecategory as “contract strategy in public construction projects”.Using this coding analysis based on grounded theory, we build

three dimensions of contract strategy in public constructionprojects in the Chinese context: contractor selection, the fo-cus of contract strategy and the method of problem prevention.The three dimensions correspond to the key nodes in the wholeproject process. The construction of contract strategy is immea-surable and abstract, and the dimensions are also invisible. Onlythe items used to measure the dimensions are observable index-es, and these indexes are used to guide the measurement of therelation behaviors. We can then conclude the formation modelof the contract strategy throughout the contracting process ofpublic construction projects.

5 THE MODEL ANALYSIS

5.1 Impact of External Environment in DifferentPhases

The relative position of relational and contractual governance re-flected in contract strategy varies in different phrases because ex-ternal environment affects the interplay between relational andcontractual governance in projects.

5.1.1 Consideration of Relational GovernanceConstrained by the Bidding System in the BiddingPhrase

One characteristic of the reform of the implementation methodof public construction projects in China is to introduce compe-tition, build a bidding system, and replace administrative man-agement with contractual management. In Figure 2, a11a21a31,

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Table 1. The set of interview questions

Level Specific question Setting instructionsLevel 1 Does your company tend to adopt strict and detailed con-

tract to ensure the execution or just to appoint somethingin principle so that the later execution can be flexible?What is the reason?

To preliminarily understand the contract strategy ofthe clients to provide the basic idea for the follow-upinterview

Level 2 (1) Has your company ever considered the impact of pri-or and current cooperation on future cooperation underthe bidding system?

To guide the interviewees to state according to in-terview ideas to thoroughly understand the clients’attitude towards relational embeddedness

(2) What is the main basis for solving the adjustingevents in the execution phase? When faced with theevents in absence of an agreement which involve a hugeamount of money and the difficult division of responsi-bility, will you make a compromise for the considerationof future cooperation?

Level 3 Has your organization ever taken part in some harmo-nious projects? What is the reason for good cooperationin your opinion? Is there any innovation in the projects?

To ask the clients to supplement interview content onunder the precondition of basic understanding

Table 2. Basic information of interviewees

Items Amounts ProportionProject types Industrial project 13 59.10%

Civil project 9 40.90%Work post Head of the company 4 18.18%

Head of the department 6 27.27%Clerk of contract department 7 31.82%General staff 5 22.73%

Education background PhD 6 27.27%Postgraduate 8 36.36%Undergraduate 5 22.73%Junior college and others 3 13.64%

The experience for public projects Less than 3 years 4 18.18%3 - 5 years 6 27.27%6 - 10 years 7 31.82%More than 10 years 5 22.73%

Figure 1. The screening process of interviewees based on focus group

a11a21a32, a11a22a31, and a11a22a32 have all adopted opentendering. From the feedback of interviewed clients, contractorselection in public construction projects is always through opentender, although this approach sometimes prevents the clientselecting their favorite contractor. Therefore, public clientsare used to open tendering and price-dominated bidding asses-sment criteria, whereby even well-performing contractors maylose the chance to win further contracts, even from public clientsfor which they are already working (Weston and Gibson 1993).

Open tendering makes it impossible for both sides to main-tain cooperative relationships (Ling et al. 2013). Additionally,public accountability, value for money, transparency (open, eq-uitable and fair competition), propriety/integrity/probity, andconfidentiality impede contractors bidding for public construc-tion projects from gaining competitive advantage through socialnetworks, and the indifference of public clients reduces the en-thusiasm of contractors and consultants (Ning 2014).

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Figure 2. Formation model of contract strategy throughout the contracting process of public construction projects

5.1.2 The Inability to Innovate for Public ClientsRestricts the Use of a Win-win Strategy in theContracting Phases of Public Construction Projects

The “laziness” of public clients leads to their not choosing themost reasonable procurement route according to the best engi-neering practice (Lædre et al. 2006). From the field interviews,some clients may ignore the characteristics of a new project,and simply directly select the previously used contract. Forexample, in Figure 2, the four contract strategies a11a21a31,a11a21a32, a12a21a31 and a12a21a32 usually do not considerthe incentive terms for risk allocation, and only pay attentionto client interests. This can be attributed mainly to two fac-tors. First, public clients are subject to rules and regulations,and cannot innovate and quickly change because standing or-ders, public accountability and probity constraints restrict theirinnovation (Palaneeswaran and Kumaraswamy 2000). The rigidorganizational boundaries of public clients lead to well-definedjurisdictions, responsibilities, and a hierarchy of authority. Suchtraditional bureaucratic systems hinder effective cooperation be-tween organizations. The copious rules and regulations involvedin public projects create large obstacles to the adoption of re-lational behavior, so that public clients become likely to ad-opt formal controlling methods (Ning and Ling 2013b). Second,public clients are restrained by beliefs like “there is no need tochange current approaches/practices that are good enough (oreven better than others)”, or may see the manifestation of a “notinvented here” syndrome that favors locally invented approach-es/practices (Palaneeswaran and Kumaraswamy 2000). Clientsthat are too dependent on strict procedures cannot cope withcontract change and deviation. In engineering practice, the

habits of public clients lead them to tend to choose the pre-viously used procurement route rather than considering the pro-curement route most suitable for the project.

5.1.3 Due to a Lack of Client Commitment, ProblemPrevention is More Dependent on FormalInstitutions in the Execution Phase

The loss of government commitment decreases long-term coop-eration, leads to opportunistic behaviors becoming the dominantstrategy for contractors (Yin et al. 2014), and forces clients torespond with strict regulation and control measures, as in strate-gies a11a21a31, a11a22a31, a12a21a31, and a12a22a31. Becauseof the lack of long-term effective and institutional regulationsand constraints on government, government agents can eithercommit blindly or make no commitment in the pursuit of theirown interests. This eventually leads to the absence of effectiveinstitutional commitment, and hence a lack of government com-mitment. In infrastructure concessionary projects, changes ingovernment, the self-interest of government, consumer pressure,a lack of professional assessment, inadequacy of related laws andregulations and uncertainty surrounding concession projects canall cause a lack of long-term government commitment (Chenand Liu 2015). Public clients represent public and national inte-rests, and causal commitment may cause a loss of interest. Dur-ing the interviews, clients’ attitudes towards long-term commit-ment were usually neutral or opposed. The clients were wor-ried about the long-term commitment to contractors involvedin corruption, were afraid of being held accountable, and wereconcerned with the loss of their own interests.

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5.2 The Impact of Relationship Type on Projects

5.2.1 The Contract Strategy under the “Non-contract”Partnership Focuses on Increasing RelationalGovernance in the Execution Phase

The “non-contract” partnership introduces the idea of partner-ship to improve existing project management, as in strategiesa11a2132, a11a22a32, a12a21a32, a12a22a32. In this type ofpartnership, public clients follow open tendering, but consid-er harmonious relationships between project participants in theprocess of engineering project management. In some interviews,the clients require the contract to be strict as far as possible,and that the contract terms reflect their own requirements andprevious experience related to engineering practice. However,the clients’ attitude towards the contract changes from simplyseeking to protect their own interests to also considering cooper-ative relationships. In the process of implementation, the clientsstrengthen communication and coordination, and assist contrac-tors in relation to procedures and systems, to ensure work pro-gresses smoothly. The clients measure project content throughsubordinate departments to understand actual costs and givecontractors reasonable compensation, as in strategy a11a22a32.

5.2.2 The Contract Strategy on the Design of theIncentive Mechanism in the Contracting Phase

In the “contract” partnership, the clients adopt a partnershipcontract directly compiled according to the idea of partnershipfor engineering project management. In Figure 2, the clientsrevise the partnership contract based on consideration of theproject characteristics in the contracting phase under strategya12a22a32. The partnership contract sets out the frameworkof positive cooperation and collaboration among project par-ticipants in the execution phase. This strategy can effective-ly use the resources of project participants, and avoid disputescaused by unnecessary loss, so as to improve the interests of allparties and the efficiency of project delivery. Quality manage-ment and safety management systems are particularly strict inthe petroleum and petrochemical industry. Hence requirementsrelated to company strength, quality, and security system arehigh, as are those related to contractor ability. Therefore, pri-or cooperation experience is particularly important for clientswhen selecting contractors. Suitable contractors should be fa-miliar with the requirements of the management system in thepetroleum and petrochemical industry, and both sides shouldbe able to establish mutual trust, tacit understanding and asmooth working relationship. Since contractors are profession-als involved in dangerous operations, clients should not managethem too strictly. As long as contractors deliver the projectsmoothly, the clients tend to develop a good partnership withthose contractors, bound within a reasonable scope.

6 DISCUSSION AND SUGGESTIONS

6.1 Suggestions for Management

This study will help to change the traditional concept where-by the contractor treats the contract as a legal document andmethod of control, and will also help strengthen the understand-ing and attention of owners with regard to the contract coordina-tion function. Only in this way can the improvement of project

performance be maximized. This study thus hopes to provide atheoretical basis and guidance for project pre-contract planning.

6.1.1 Improving the Multi-dimensional Function of theContract, and Promoting the Embeddedness ofRelational Governance Elements in the Process ofContract Execution

Although a contract is a legal document that defines the rightsand obligations of signatory parties, the latest research on con-tract theory has considered contracts as combining the funct-ions of control, coordination and adaptation (Malhotra and Lu-mineau 2011).The focus of contract strategy should be to improve con-

tract coordination and adaptation functions, add a risk-alloc-ation scheme and incentive clause, and provide an ex-post pro-cessing mechanism for contract execution. Contract coordina-tion can better adapt to the actual situation of a project andcreate a good atmosphere for cooperation. As an important com-plement to the controllability terms in a contract, contract co-ordination can improve contract flexibility and further decreasethe space for opportunistic behavior. Because the governmentemphasizes its own interests, it is difficult to obtain commit-ment from contractors. Therefore, it is necessary to strengthendefault clauses to better enable clients to commit(Chen and Liu2015). This can enhance contractors’ perceptions of fairness andpromote mutual trust and cooperation.Emphasizing explicit contract terms and clear roles and re-

sponsibilities can make clients pay more attention to reasonablerisk allocation and risk compensation. This promotes mutualtrust and cooperation, and so provides conditions for the em-beddedness of relational governance, and promotes governancemechanisms that can help reach an equilibrium.

6.1.2 Improving Relational Governance based on Trustand Cooperation, and Realizing ContractManagement of Partnerships

Rational selection of agents in public construction projects is notsufficient. Contract terms are not set purely based on consid-erations of economic interest, but also designed to create coop-erative organizations (Turner and Simister 2001). Therefore, itis necessary to consider support for realizing contract goals andhow relational governance mechanisms can restrict opportunis-tic behavior (Caniëls and Gelderman 2010). Clients can improvecontractual governance by strengthening relational governance.Specifically, clients hope to restrain opportunistic behavior bystrengthening relational governance to increase trust, promoterisk allocation, and create a friendly atmosphere conducive toproblem resolution. Clients highly value previous cooperationexperience, tend to sign win-win contracts, and encourage con-tractor performance by using coordination, such as working to-gether to solve problems. In highly specialized public construc-tion projects, clients often add requirements such as prior coop-eration experience when selecting contractors. Clients thus canseek familiarity with contractors to ensure projects will be car-ried out smoothly. This can decrease uncertainty of contractors’behavior and decrease the dependence of owners on contracts.Clients can also ensure friendly cooperation by improving mutualtrust and interorganizational management. During cooperation,both sides will pay attention to achieving a win-win outcome.

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Project success relies on the establishment of cooperation. Al-though contractual governance is the core of project manage-ment, smooth project implementation is based on the formalcontract (Rahman and Kumaraswamy 2002). Trust becomesmore effective when combined with a contractual mechanism.Improving trust and cooperation between clients and contrac-tors facilitates the formation of good partnerships. A partner-ship functions best when both sides exercise self-restraint to fa-cilitate smooth project progress. However, if either side failsto exercise restraint or pursues disputes, contracts will play arestrictive role.

6.2 Limitations and Future Research

This study contributes to the research on contract strategy onpublic construction projects in China from the perspective ofembeddedness. Our results clarify the connotation of contractstrategy in public construction projects in China, namely thatit is a profile construct comprising contractual governance, re-lational governance and the dynamic interplay between them.The relationship types and external system environment in thecontracting process influence types of contract strategy. Theoptimal objective of contract strategy is to promote the equi-librium between contractual and relational governance and en-hance project management performance. Future research shouldbe conducted on the following three aspects: (1) discussionof the moderating role of the external system environment onthe interplay between contractual and relational governance; (2)the specific impact path of contract strategy on project manag-ement performance; (3) cross-level research on relational behav-ior in contract strategy in public construction projects.

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