DEPARTMENT OF TECHNOLOGY MANAGEMENT AND ECONOMICS DIVISION OF SERVICE MANAGEMENT AND LOGISTICS CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden 2021 www.chalmers.se Report No. E2021:070 Innovation through Early Contractor Involvement A comparable case study of Swedish infrastructure projects and their contractual disposition Master’s thesis in Design and Construction Project Management TOM BERGSTRÖM 1 REPORT NO. E 2021:070 Innovation through Early Contractor Involvement A comparable case study of Swedish infrastructure projects and their contractual disposition TOM BERGSTRÖM Department of Technology Management and Economics Division of Service Management and Logistics CHALMERS UNIVERSITY OF TECHNOLOGY Gothenburg, Sweden 2021 Innovation through Early Contractor Involvement A comparable case study of Swedish infrastructure projects and their contractual disposition TOM BERGSTRÖM © TOM BERGSTRÖM, 2021. Report no. E2021:070 Department of Technology Management and Economics Chalmers University of Technology SE-412 96 Göteborg Sweden Telephone + 46 (0)31-772 1000 Gothenburg, Sweden 2021 i Innovation through Early Contractor Involvement A comparable case study of Swedish infrastructure projects and their contractual disposition TOM BERGSTRÖM Department of Technology Management and Economics Chalmers University of Technology SUMMARY The use of Early Contractor Involvement (ECI) has gained increased attention in the construction industry as a means to remove the separation of projects’ design and construction, thus integrating the contractor’s expertise and knowledge in early planning and design work. The benefits seen thereof are numerous, including an improved time- and cost certainty, improved risk management and improved buildability. Another benefit commonly acknowledged is a larger opportunity for and increased innovation, yet current studies of the ECI-concept and its links to innovation have given little attention to how the projects’ contractual disposition affects innovation. Thus, this study has investigated this seen knowledge-gap through a qualitative comparable case study of two current ECI-projects within the Swedish infrastructure sector. Moreover, the study has also in a broader perspective investigated the perceived benefits and hindrances seen through ECI- implementation, as well as the challenges seen through the use of target cost principles and economic incentives. Focus has been placed on the projects’ initial planning and design phase and empirical material was gathered from interviews with both projects’ respective client and contractor organisations. The most notable benefit seen through ECI- implementation was the integration of the contractor’s expertise in planning and design, thus allowing considerations of the contractor’s input in both decision-making and design development. The hindrances to achieving all ECI-benefits were concluded to stem primarily from the lack of equal commitment and the lack of a compromising attitude among the projects’ participating organisations, primarily grounded in accustomed client and contractor roles. These cultural aspects were also seen to create challenges in the projects’ target cost processes, in which client and contractor interests pre target cost agreement were seen to stand in conflict with one another, hence creating large difficulties in reaching agreements which both parties perceived as fair. The difficulty in equating the client and contractor’s economic interests in the planning and design phase was also seen as impeding an increased level of innovation in both projects, and when paired with a lack of economic incentives for innovation efforts, instead created unwanted incentives as to hide innovative solutions till post target cost agreement at which the contractor was also economically reimbursed for such efforts. . Keywords: Early Contractor Involvement, infrastructure, target cost, incentives, innovation. ii iii Acknowledgements I would like to express my sincere gratitude to my academic supervisor at Chalmers, Petra Bosch-Sijtsema, and my company supervisor at Veidekke Entreprenad, Maria Östman. Both Petra and Maria have with great engagement and expertise supported me throughout the entire thesis process and have provided both extensive and elaborate feedback which I have valued greatly. I would also like to thank the interviewees from the two studied projects for their interest to participate in this thesis study and for the valuable insights they have provided which lay the foundation for the study. Lastly, I would also like to acknowledge Veidekke Entreprenad in allowing me to develop this thesis under your supervision and guidance. iv v Table of Contents TABLE OF CONTENTS ............................................................................................................ V LIST OF TABLES.................................................................................................................... VII 1 INTRODUCTION ............................................................................................................. 1 1.1 Background ..................................................................................................................... 1 1.2 Aim and research questions ............................................................................................ 2 1.3 Delimitations .................................................................................................................... 2 1.4 Composition..................................................................................................................... 3 2 THEORY .......................................................................................................................... 4 2.1 ECI definitions and implementation ................................................................................. 4 2.2 ECI benefits, success factors and hindrances ................................................................ 5 2.3 Reimbursement of contractors in ECI-projects ............................................................... 9 2.4 Innovation through ECI .................................................................................................. 12 2.5 Theoretical lens – Agency theory .................................................................................. 15 3 METHOD ....................................................................................................................... 17 3.1 Research approach and design .................................................................................... 17 3.2 Empirical data collection ................................................................................................ 18 3.3 Data analysis ................................................................................................................. 19 3.4 Quality of research ........................................................................................................ 20 3.5 Ethical aspects .............................................................................................................. 21 4 CASE INTRODUCTION ................................................................................................ 22 4.1 Project A ........................................................................................................................ 22 4.2 Project B ........................................................................................................................ 23 5 FINDINGS ..................................................................................................................... 24 5.1 Benefits and hindrances of ECI implementation ........................................................... 24 5.1.1 Project A ...................................................................................................................... 24 5.1.2 Project B ...................................................................................................................... 26 5.1.3 Summary ..................................................................................................................... 28 5.2 Challenges created by target cost principles and economic incentives in ECI- projects .......................................................................................................................... 28 5.2.1 Project A ...................................................................................................................... 28 5.2.2 Project B ...................................................................................................................... 31 5.3 Linking ECI, contractual disposition and innovation ...................................................... 33 5.3.1 Project A ...................................................................................................................... 34 5.3.2 Project B ...................................................................................................................... 36 6 ANALYSIS AND DISCUSSION .................................................................................... 39 6.1 What benefits and hindrances are seen behind the implementation of ECI- projects? ........................................................................................................................ 39 6.2 What challenges does the use of target cost principles and economic incentives create in ECI-projects? .................................................................................................. 43 6.3 How are ECI-projects and their current contractual disposition affecting innovation in projects? ................................................................................................... 50 vi 7 RECOMMENDATIONS ................................................................................................. 54 7.1 How can economic incentives be used to promote innovation among contractors during the design phase of ECI-projects with target cost contract principles? ............. 54 7.2 Other recommendations and aspects to consider for future ECI-projects .................... 56 8 CONCLUSION .............................................................................................................. 58 8.1 Limitations ..................................................................................................................... 60 8.2 Suggestions for future research .................................................................................... 60 BIBLIOGRAPHY ..................................................................................................................... 62 APPENDIX A – INTERVIEW GUIDE ...................................................................................... 65 vii List of Tables Table 1 Benefits of ECI-implementation ...................................................................... 6 Table 2 Interviewees for Project A. ............................................................................ 19 Table 3 Interviewees for Project B. ............................................................................ 19 Table 4 Compilation of project information for Project A......................................... 22 Table 5 Compilation of project information for Project B. ........................................ 23 Table 6 Benefits from and hindrances to ECI-implementation in Project A & B. ..... 28 1 1 Introduction This chapter aims to outline the master’s thesis contextual background and provide a review of the thesis’ aim, research questions, and delimitations. 1.1 Background In recent times, the use of collaborative project management models and collaborative contracting have gained increased traction within the world of construction as a mean to combat the industries fragmentation and the thereby seen adversarial nature of contractual relationships (Lahdenperä, 2012). Moreover, these models and contract types have also been implemented in order to remove the separation between project design and execution which is commonly seen in single-stage procurement (Eadie & Graham, 2014; Mosey, 2009; Rahmani, Khalfan & Maqsood, 2013). The benefits of such models have been shown to include better risk management, increased productivity, cost and time savings as well as better consideration of the contractor’s expertise in project design (Kadefors & Eriksson, 2014; Lahdenperä, 2012; Mosey, 2009; Volker, Eriksson, Kadefors & Larsson, 2018). One project delivery model which aims to join the aspects of increased collaboration with that of an increased integration between project design and execution is Early Contractor Involvement (ECI). ECI is a concept which sees that a contractor is procured at an earlier stage than in single-stage procurement as to facilitate their contribution of construction knowledge and experience in the development of the projects planning and design (Eadie & Graham, 2014; Laryea & Watermeyer, 2016; Song et al., 2009). Through the involvement of the contractor in the early design phase, one aims to integrate the design and execution phases of projects, thus striving away from the common approach seen in the construction industry where the contractor is appointed solely for the construction phase (Mosey, 2009). The projects are commonly divided into two phases; phase 1 which entails planning and design, and phase 2 which is constituted by the project’s execution and hand-over (Mosey, 2009; Rahmani et al., 2013). It has been shown that the integration of construction expertise, which the contractor has, provides the largest benefits at an early stage of a project’s timeline and that one otherwise inhibits opportunities to solve questions of constructability and the development of innovative solutions in projects (Edwards, 2009; Lahdenperä, 2013). The ECI-concept can further be seen to ensure that a complete project organization is created at a time when the potential to influence the project’s design is the largest and where changes to the design have the smallest impact on the project’s overall costs (Kristensen et al., 2015; Rekonen & Björklund, 2016). Other benefits seen through the use of ECI include reduced preparation time for projects, greater cost certainty, larger possibility for value engineering, and better collaboration between client, consultant, and contractor (Laryea & Watermeyer, 2016; Mosey, 2009; Nichols, 2007; Scheepbouwer & Humpries, 2011). 2 One particular benefit which is well documented in current literature of ECI- projects is the project delivery models ability to facilitate and increase innovation in projects. Some authors attribute this to stem from a better and more collaborative relationship between project participants (Mosey, 2009; Nichols, 2007; Song et al., 2009; Volker et al., 2018) while others attribute it to the integration of contractor knowledge and expertise in early design phases (Eadie & Graham, 2014; Lenferink et al., 2012; Walker & Lloyd-Walker, 2012). Of particular importance here are also the findings by Lenferink et al. (2012) and Volker et al. (2018) who argue that in order to maximise the innovative outcome from the use of ECI, one must ensure that the contractor is involved at a time when there is still room left for innovations to take shape as such room is seen to become smaller the longer the planning and design processes continue. Noteworthily however, there is limited research which has aimed to investigate how the level of innovation and the subsequent innovation outcome are affected by the contractual composition that the ECI project delivery model is created through. In other words, how are aspects like a project’s reimbursement model and collaborative arrangement shaping innovation in ECI-projects. This existing gap in literature constitutes the point of departure of this study. Moreover, the study will focus on phase 1 of such projects, the planning and design phase, as the possibility to develop and implement innovations at this stage is seen as larger compared to the subsequent phases of a project. 1.2 Aim and research questions The aim of this thesis is to investigate how the contractual disposition of ECI- projects in the Swedish infrastructure sector affect the perceived level of innovation in projects. Moreover, this thesis aims to assess what benefits and hindrances the implementation of an ECI project delivery model has, as well as to investigate the current use of reimbursement models in such projects. The thesis will through two case studies present the empirical material necessary in order to fulfil these aims. The hereby following research questions will be answered: - What benefits and hindrances are seen behind the implementation of ECI- projects? - What challenges does the use of target cost principles and economic incentives create in ECI-projects? - How are ECI-projects and their current contractual disposition affecting innovation? - How can economic incentives be used to promote innovation among contractors during the design phase of ECI-projects with target cost contract principles? 1.3 Delimitations The thesis will be delimited as to solely address projects which has employed an ECI project delivery model within the Swedish infrastructure sector. Moreover, the study will focus on the planning and design phase of these projects, thus not considering the projects’ execution phases. The empirical material will be 3 constituted by two case studies involving qualitative interviews with contractors and clients. 1.4 Composition The paper proceeds as follows. First, it gives an overview of ECI as a concept, the dissimilarities seen in current definitions and current implementation ways and methods. Moreover, reimbursement models used in ECI will be presented alongside a brief overview of innovation in construction, after which an account of innovation in ECI is made. Then the used methodology and presentations of the two cases will be introduced, before the section of findings and analysis are accounted for. Finally, conclusions are drawn and presented. 4 2 Theory This chapter aims to give the reader an explanation of concepts and theory that are used in this thesis. Theory regarding ECI, and its current use as a collaborative contract arrangement will be presented, together with success factors and hinders for ECI-implementation. Continuing, the currently used reimbursement models for ECI-projects will be accounted for before theory regarding innovation in construction, and ECI-projects impact on innovation, are presented. Lastly, the thesis’ theoretical lens based on agency theory is introduced. 2.1 ECI definitions and implementation The implementation of ECI as a project delivery method varies between different parts of the world, and so does the concept’s meaning and interpretation (Rahmani et al., 2013), the aspect which unifies the understanding is however the contractor’s involvement in the design phase. Song et al. (2009) simply define ECI as the involvement of a contractor in the design of a project, implemented through the use design-build (DB) contracts rather than design-bid-build (DBB) contracts. Thus, one has integrated the contractor’s expertise in the design development which is seen to improve information flow and construction schedule performance. Lenferink et al. (2012) and Valkenberg et al. (2008) on the other hand do in their studies of road projects define ECI as the involvement of the contractor in the planning stage as for the contractor to offer their input in route determination of the road. Nichols (2007) define ECI as “a partnering approach in which the contractor is appointed at an early stage of project development to assist in planning, assessing buildability and cost estimating.” (pg. 31). Another definition commonly referenced in the current ECI-literature is the one presented by Walker and Lloyd-Walker (2012) in which they also present different models of ECI. They see ECI to be a comprehensively usable concept which can start in the business development phase of a project and which can last until the project completion and handover phase, but that is unified around the understanding that one aims to involve a contractor in a project’s planning and design phase as to allow for their expertise and advice to be considered. Continuing, the authors view ECI as possible to implement solely in the business development phase or the design phase, or it can be implemented as a continuous process through the design and execution phases. A proposition is made that ECI can be implemented by a range of approaches that could include traditional DBB, DB, management contracting, project partnering and project alliancing. The deciding factor behind which approach to use in the ECI-implementation is also reasoned to be dependent of the level of commitment between parties that is desired as to balance questions of best-for-project and home-base performance primacy. One of the most widely used implementations of ECI, thought to have originated out of the British standard contract PPC2000, is through a two-phase procedure where the contractor is procured in the preconstruction phase of the project and where an option exists for the contractor to continue with the project’s construction (Mosey, 2009; Kadefors & Eriksson, 2014). In the first phase, the contractor is to jointly with the consultants and client define the project and assist 5 in design development up until a point where the project’s cost estimate or budget is agreed and an agreement for the continuation of the project is reached (Mosey, 2009; Rahmani et al., 2013; Kadefors & Eriksson, 2014). If such an agreement is reached, the contractor will continue with the project execution and hand-over phase, but clients often include a go/no go decision gate in these contracts which enables them to exit the contract if the contractor is not deemed suitable for the continued work or if a sufficient level of collaboration has not been reached (Walker and Lloyd-Walker, 2012). This implementation method of ECI also commonly sees the development of a target cost for the project alongside the design development, this target cost is then used as the baseline price for the project which also allows for the use of economic incentives (Rahmani et al., 2013). 2.2 ECI benefits, success factors and hindrances Benefits: Through involving contractors in the early stages of the planning and design stage, one gains the benefit of integrating the contractor’s knowledge of construction projects at a time when the impact on project success, including time, cost and quality, are the largest in the project timeline (Laryea & Watermeyer, 2016; Nichols, 2007; Song et al., 2009). Moreover, one integrates the actor who is ultimately responsible for the construction operations, hence one can improve the designs buildability and create early opportunities for value-engineering as well as provide earlier input on project risks as to manage them more successfully (Eadie & Graham, 2014; Rahman & Alhassan, 2012). Through creating an integrated team at an earlier stage than other projects, one also increases the opportunity of better inter-organisational relationships and increased collaborative exchanges (Rahman & Alhassan, 2012; Volker et al., 2018). The benefits seen by the implementation of ECI in projects are extensive, the hereby following table, Table 1, has been compiled to show benefits which are reported in contemporary literature of the ECI-concept and its implementation. 6 Table 1 Benefits of ECI-implementation Benefit Author Contractor’s input in design Eadie & Graham (2014), Nichols (2007), Rahman & Alhassan (2012), Song et al. (2009), Volker et al. (2018) Improved buildability Eadie & Graham (2014), Song et al. (2009), Volker et al. (2018) Improved risk management Eadie & Graham (2014), Rahman & Alhassan (2012), Song et al. (2009), Walker & Lloyd- Walker (2012) Improved project delivery Eadie & Graham (2014), Rahman & Alhassan (2012) Low tendering costs Volker et al. (2018) Improved relationship & collaboration Nichols (2007), Rahman & Alhassan (2012), Volker et al. (2018) Higher potential for and/or increased innovation Eadie & Graham (2014), Lenferink et al. (2012), Nichols (2007), Song et al. (2009), Volker et al. (2018), Walker & Lloyd-Walker (2012) Time savings Laryea & Watermeyer (2016), Lenferink et al. (2012), Nichols (2007), Song et al. (2009) Cost savings Eadie & Graham (2014), Laryea & Watermeyer (2016), Song et al. (2009) Improved cost and time certainty Eadie & Graham (2014), Lenferink et al. (2012), Nichols (2007) Success factors: As for the factors and conditions for a successful implementation of ECI as a concept, Wondimu et al. (2018) identify six different success factors in a multiple case study performed on 11 bridge construction projects procured by the Norwegian Public Roads Administration. These factors can be summarized as follows: 7 1. Timing of ECI application: one must ensure that the contractor is involved at a stage in planning and design where there is time to make a difference and influence the design outcome, yet one must simultaneously balance the time of involvement as to not increase costs unnecessarily and provide too big contractor impact. 2. Risk distribution: a fair distribution of risks between client and contractor is important, this may otherwise result in significant risk markups by the contractor and risks are also seen to commonly create conflicts between parties. 3. Project owner’s competence: procurement and implementation of ECI is a demanding process for the client, it requires deep knowledge of procurement and contracts, but also a high technical knowledge and competence as to scope out and assess deliverables and end result. 4. Appropriate compensation: the contractor must get fair reimbursement for their contribution and work throughout the whole project, one might otherwise risk a lowered interest and eagerness to participate and contribute to design in the early stages. 5. Qualification of the contractors: when procuring contractors, the client must ensure that the other parties possess the necessary qualifications to complete the works and to offer design input. 6. Trust: the trust between contractor and client is seen of importance both as to ensure the contractor’s confidentiality regarding corporate secrets and to maximise the output of the relationship through increased openness and increased contractor input thereof. In another case study of ECI-projects, Laryea and Watermeyer (2016) present a series of success factors for ECI implementation. Like Wondimu et al. (2018), the two authors also see the experience and skill of the contractor as important, as well as the importance of a knowledgeable client. As contractor one must have the capacity and collaborative attitude as to contribute to the project’s design through optimisation and value-adding, while one as client must be capable of specifying requirements and managing the project’s outcomes which is of particular importance in the procurement stage. Moreover, Laryea and Watermeyer (2016) emphasise the importance of collaboration as to realise the benefits of ECI, thus one must create a contract which reflects this importance, and which encourages knowledge-sharing, transparency, and risk sharing. Interestingly, and in contrast with the findings of Wondimu et al. (2018) and Laryea and Watermeyer (2016), Rahman and Alhassan (2012) do in a questionnaire study of a contractor’s perception of ECI find a client’s technical knowledge to be less important than other issues faced in ECI-projects (ranked 15th out of 20). In doing so, the authors however make the reflection that this can cause an overreliance on the project’s consultants and contractor. Moreover, the authors find relationship, trust and commitment-related issues to be of utmost importance in ECI-implementation, ranking above issues concerning a lack of knowledge, thus more relational aspects can be seen to be key in the contractual implementation. 8 Hindrances: Apart from the above presented success factors, multiple authors have found hindrances and obstacles which one must address when implementing ECI as to maximise the gain thereof. Mosey (2009) divides these hinders into three different categories in his extensive review of the Early Contractor Involvement concept: project-specific, procedural, and personal obstacles. The project-specific obstacles include the lack of feasibility for ECI in smaller and simpler projects with limited complexity as well as for project’s where clients solely wish to be involved in stating performance requirements and thus maintaining an arms-length relationship with the contractor (which is common practice in DB-contracts). The procedural obstacles on the other hand reflect the difficulties clients may face in procurement with constitutional or regulatory constraints, e.g. as in the case of procurement selection for value or for lowest price, as well as concerns of increased transaction costs through the need to create additional agreements or contracts between parties. The third and final category, personal obstacles, concern hinders which depend on the project participants personal attitude towards the project delivery model. Apart from mentioning the industry’s conservatism as such a hinder, Mosey (2009) also notes the need for functioning personal relationships and personal chemistry as an aspect which can pose to be a hinder if lacking. Similarly, Rahman and Alhassan (2012) highlight drawbacks which are more relational and personal in nature. The authors emphasise the need for equal commitment and the importance of a compromising attitude from all project participants in the collaborative arrangement that ECI is, without such efforts a successful collaboration is not seen to be reachable, thus hampering the creation of a win-win situation for all project participants which is an important aim of the project delivery model. Continuing, the authors see a lack of continuous and honest communication between project participants, and the inter-relational trust that is created through it, to be a common hinder for successful ECI- implementation. Rahman and Alhassan (2012) emphasise that such a lack of communication and trust may lead to situations where one compromises a common benefit due to commercial pressure, in doing so creating adversarial behaviour and compromising the needed win-win attitude. One of the major hindrances which Nichols (2007) recognized in his early study of ECI-projects in the UK, also connected to the previously discussed relational aspects, is the need for culture changes among the project participants. In doing so pointing to the need for inter-organisational collaboration and the cultural hinders which accustomed mindsets and roles pose to such collaboration among both contractors and clients. At the time, Nichols (2007) also recognised the novelty of the project delivery model to be a hinder to ECI-implementation in the UK. One should however note that the concept today is widely spread in the UK, yet similar findings are still being reported in studies in other countries, for example in Norway as presented by Wondimu et al. (2018). The authors uphold a lack of experience, a lack of awareness regarding the importance of ECI and a lack of familiarity with ECI-approaches to be hinders to full ECI-implementation in their studied projects. 9 2.3 Reimbursement of contractors in ECI-projects The two-stage process where contractors are involved in project’s both in the planning and design phase as well as the construction phase, allows for multiple reimbursement models to be used. Mosey (2009) sees this two-stage pricing process as accepting several different pricing models to be used in the project’s construction stage, in doing so mentioning the use reimbursement based on lump sum, cost reimbursable or target cost with or without gain/pain-share incentives. Continuing, Mosey (2009) recognises the use of cost plus contracts as possible, yet emphasise that they will only be appropriate where the client has other means of motivating the main contractor to minimize its expenditure. Rahmani et al. (2013) mentions numerous implementation methods and their different use of reimbursement models. In the UK, client’s often make use of jointly prepared target cost as the basis for a pain/gain share formula in ECI-contracts as to motivate the contractor to assist with the most economical delivery option (Nichols, 2007; Rahmani et al., 2013). In Australia, contractors are involved in developing design, planning, and preparing a cost estimate jointly with the project team, after which one submits a lump sum offer for phase 2 which is adjusted according to risks identified in phase 1. In New Zealand, the contractor and client negotiate a fixed price for each stage before work commences (Rahmani et al., 2013). Target cost contracts: The use of target costing in ECI-projects is as previously mentioned a widely spread practice, where contractors are commonly involved in the planning and design phase as to prepare a cost estimate for the project’s construction and completion (Rahmani et al., 2013; 2014). The target cost is prepared jointly with the project’s client and consultants, often as to facilitate the use of open-book accounting in the project’s construction phase (Rahmani et al., 2014). Moreover, the premise of the contract generally lies in an agreed target price for the entire project and is thus agreed before construction commences. Mosey (2009) explains how this process allows for work packages completed in the project’s design development to be accurately priced alongside the continuous development of the design. The project’s detailed design is however commonly seen to be developed after target cost agreement, yet instances where target cost has been agreed after detailed design has proven to provide more accurate pricing (Nichols, 2007). During the planning and design phase, contractors are commonly seen to be reimbursed according to a cost reimbursable scheme using consulting fees (Laryea & Watermeyer, 2016; Mosey, 2009). Through jointly preparing the project’s target cost, one aims to facilitate knowledge-exchange between the project participants and ensure that all information is “on the table” in order to prepare an as accurate price as possible, hence the parties’ inter-organisational transparency is key (Mosey, 2009). Moreover, through involving the contractor in the project’s budgeting process, one can better facilitate cost risks created by the large uncertainties which exist in early stages of projects. Thus, one can counteract situations where contractors are forced to add substantial risk premiums to their tenders and situations where the contractor needs to claim extra in order to ensure their profitability (Mosey, 2009). Continuing, through involving all contractual parties in the cost estimation 10 process one can provide better cost certainty and greater cost control during the construction phase (Mosey, 2009; Nichols, 2007). Lenferink et al. (2012) and van Valkenburg (2008) also emphasise that the use of ECI and target costing enables cost estimates to be checked for feasibility at an earlier stage in the planning process. This is seen by the authors to be of particular importance in infrastructure projects where issues regarding the underestimation of costs and the overestimation of benefits are common. The process of jointly developing a target cost does however require greater input from the client than what can be seen in other projects with competitive tendering (Mosey, 2009). This is also recognised by Nichols (2007) who sees that clients can become over-reliant on contractors and consultants in cost estimation due to a low level of experience and expertise of the process, hence one as client has limited ability to review and challenge the other parties’ assumptions and estimates. The use of economic incentives connected to the target cost through sharing of cost over- and underruns is common in ECI-projects, and it allows for increased alignment of client and contractor interests in the project’s construction phase (Bröchner, Eriksson, Kadefors, Karrbom Gustavsson & Lind, 2015; Lahdenperä, 2012; Mosey, 2009). Through this inclusion of incentives, one motivates the contractor to be innovative and construct the project on budget and is also seen to increase the contractor’s involvement in value engineering as savings are shared between both client and contractor (Laryea & Watermeyer, 2016; Rahmani et al., 2013). Rose and Manley (2012) also highlight that incentive-based payment is suitable when contractors are procured early and involved in the design stage as it can enhance project actors’ motivation for joint innovation work. Moreover, this sharing of cost savings is seen as a strength of the model and enables the contractor to increase their profits (Eadie & Graham, 2014; Nichols, 2007). One major weakness with the model highlighted by Bröchner et al. (2015) is the large importance of a fair target cost as the effects on the contractual parties’ profits and cost risks are large due to potential sharing of overruns. Hence, the authors emphasise the importance of a thorough preparation of the target cost as to ensure that all potential uncertainties are overseen. Other authors also emphasise that solely using incentives as to create inter-organisational efforts to increase efficiency and effectivity does not assure project motivation and performance, but it is rather to be seen as a supporting tool in the development of trust, cooperation, and motivation (Rose & Manley, 2011). Hence, underlying distrust between contractual parties can result in a negative perception of the incentive intention. Other ways to further align the client and contractor’s interests using the same target cost process as explained above is through the use of a fixed contractor fee where the contractor’s profits and central and administrative expenses is fixed as a lump sum rather than a percentage as in cost plus reimbursement (Eriksson & Hane, 2014; Mosey, 2009). This means that reduced project costs will not reduce the main contractor’s pre-agreed return from the project. Bröchner et al. (2015) explain how this provides the contractor with an incentive for cost-saving efficiency and innovation as lowered costs provide the contractor with a larger relative profit, while ensuring an overall low project cost for the client. Continuing, the authors see that the focus on the target cost, and discussions thereof, can be diminished as the cost risks is lower for the contractor compared to incentive- 11 based models. Moreover, Eriksson and Hane (2014) find that the perceived motivational strength of solely an increased relative profit varies between contractors. Target cost problems seen in ECI-projects The specific use of target cost reimbursement in ECI-projects is discussed by Nichols (2007) who finds two distinct problem areas and drawbacks to the UK implementation of target costs with incentives. Firstly, the implemented incentive schemes are seen to not work as intended if the cost estimates which they are based on are not robust and well-prepared, hence emphasising the importance of a fair target cost as also done by Bröchner et al. (2015). Secondly, the alignment of the client and contractor’s interests is achieved first after the target cost has been agreed, in turn meaning that there are inherent difficulties before reaching an agreeable target cost. Moreover, Nichols (2007) finds the contractor’s willingness to ensure a target cost that minimises the risk of cost overruns to be in conflict with the client’s optimistic view on costs and related risks as to get approval for the project. This conflict is further stressed by the contractor’s will to maximize their potential profit. Similarly, Rosander, Kadefors & Eriksson (2020) find the client’s initial budget, with which they gained permission to procure the project, to set the tone for the project participants collaboration as this shapes the client’s expectation of the project and its cost. Moreover, the client’s project management are seen to experience large pressures from their own organisation as to realise the project to budget. Difficulties connected to incentive-contracts also recognized by Volker et al. (2018) in two Swedish ECI-projects where the contractor has perceived the sharing of cost over- and underruns to be more of a cost risk than an opportunity due to the large percentage which the contractor had to assume in the case of a cost overrun. Moreover, this was seen to create an incentive for an inflated target cost as the contractor wished to ensure their profits from the project, something which in turn created distrust of the contractor among the client representatives. Continuing, the authors highlight that the impact of contractual incentives is highly complex and that contradictory effects to the efficiency and innovation that the incentives aim to achieve can occur. Volker et al. (2018) also see that the use of target cost contracts may counteract inter-organisational collaboration due to the aforementioned difficulty in aligning client-contractor interests pre target cost agreement. Additional insight into economic incentives in construction The construction sector has seen a large use of economic incentives as to increase supplier motivation and the belief of its effects are strong (Kadefors & Badenfelt, 2009; Rose & Manley, 2011). Yet their complexity is large and underlying distrust between participants has been shown to communicate negative intentions behind their implementation. In a study of the roles and risks of incentives, Kadefors and Badenfelt (2009) identified three different functions which an economic incentive can adopt in a contractual relationship. Firstly, as to induce extrinsic motivation in the other party’s organisation. Secondly, as a symbol which signals the interest and importance of a particular task or that initiative is desirable, but that can also prove to have negative symbolic effects (e.g. in signalling control and distrust). 12 Thirdly, as creating organisational processes in the project in which communication and jointly preparing and assessing performance is seen to provide opportunities for knowledge-sharing and trust formation, but undesirable processes can also form (e.g. in the form of recurring negotiations). Continuing, Bröchner et al. (2015) highlight three commonly problematic areas with incentive-based contracts that must be addressed when attempting to successfully implement said incentives. Firstly, random and unpredictable factors cannot have too large of an impact on the outcome unless they cannot be controlled within the incentive-scheme as one otherwise may reward a party solely based on luck. Secondly, the incentive must consider all relevant aspects of the outcome and not solely one aspect as suboptimization can take form which compromises these other parts or aspects. Thirdly, the incentive must take into account the impressionability of the supplier as an incentive solely is useful if it provides motivation and changes the supplier’s behaviour as to conform to a desired one. Other than target cost models, a commonly used incentive type is the use of bonuses (Bröchner et al., 2015; Rose & Manley, 2011). These allow the creation of incentives tied to other aspects than solely project economy, thus allowing for aspects like quality, less timely completion, maintenance improvements and customer satisfaction to be rewarded (Bröchner et al., 2015; Eriksson & Hane, 2014; Rose & Manley, 2011). Moreover, this allows the supplier to be economically rewarded if these performance requirements are exceeded hence providing the incentive to deliver an end-product which exceeds the expectations communicated in the contract (Eriksson & Hane, 2014). 2.4 Innovation through ECI The topic of innovation in construction has been extensively discussed by numerous authors, and the industry has commonly been critiqued for its highly traditional nature and consequently lacking adoption of innovations (see e.g. Blayse & Manley, 2004; Harty, 2005; Rose & Manley, 2012). Moreover, what actually constitutes ‘innovation in construction’ has been scrutinized, yet one commonly accepted definition of innovation is the one by Slaughter (1998); Innovation is the actual use of a nontrivial change and improvement in a process, product, or system that is novel to the institution developing the change. This widely accepting definition will be used in this study as to allow for numerous perspectives and insights regarding what constitutes innovation in the specific construction project setting, the reason being that the specific type of innovation (e.g. the ones proposed by Slaughter (1998); incremental, radical, system, architectural, modular) is not within the focus of the study. One distinction should however be made regarding the study’s specific setting in which these innovation efforts take place, it being the project setting where numerous interrelated actors jointly prepare and develop innovations. The aspects of inter-organisational collaboration and increased integration is in construction literature attributed to be a key strategy in fostering and improving 13 innovation in projects (Blayse & Manley, 2004; Lahdenperä, 2012). Moreover, the project-based nature of the construction industry which requires the cooperation and joint efforts of multiple parties in order to achieve success, further emphasises the importance of collaboration to achieve innovation at the project level (Eriksson, 2017; Harty, 2005; Rose & Manley, 2012; Volker et al., 2018). Through integrating multiple project stakeholders and facilitating knowledge and information sharing between actors, one can create an increased openness to innovation and innovative ideas (Lahdenperä, 2012; Mosey, 2009). ECI and innovation The connection between early contractor involvement and a larger potential for and increased innovation has been discussed by several authors. Rahman and Alhassan (2012) attribute an increased opportunity for innovation, and their implementation, to stem from an improved relationship between project participants that facilitates more open communication, knowledge-sharing and inter-organisational collaboration, aspects which are seen to lead to more innovations. Volker et al. (2018) on the other hand see the higher potential for innovation also to stem from an earlier than usual involvement of the contractor and that the duration of the collaboration in the project affects the innovative outcome. Walker and Lloyd-Walker (2012) and van Valkenburg et al. (2008) also see the creative input and inclusion of the contractor in design to be a driver for innovation in ECI projects, while Lenferink et al. (2012) emphasises the importance of also challenging the contractor to actively come up with innovations as of importance and that one solely cannot rely on the inclusion of the contractor as a driver for innovation. Moreover, Lenferink et al. (2012) emphasise that the ECI-implementation must facilitate inter-organisational information exchange and collaboration in order to provide an innovative outcome. As for the innovation outcome of ECI-projects, Volker et al. (2018) find in a case study of projects realised through a collaborative arrangement attribute the use of ECI to have resulted in large design improvements and optimisations which created large cost and time savings, which were deemed to not be possible if the contractor was involved at a later time of the project timeline. Similarly, Rosander et al. (2020) identify in a multiple case study of Swedish ECI-projects four out of the seven studied projects to have seen valuable innovative solutions being added by the early contractor involvement in the planning and design phase, these solutions have provided both cost and time savings or ensured that times have been able to be held. Several authors like Volker et al. (2018), highlight the importance of the time of ECI-implementation as to facilitate innovation in projects. Lenferink et al. (2012) sees the added value that innovations provide to be dependent on providing the contractor with a sufficient possibility to suggest and develop innovation, a possibility which is decreased the longer the project’s planning and design stage proceeds. Similarly, van Valkenburg et al. (2008) conclude “the earlier the start is the more room for innovation is given to contractors.” (p.346). In doing so, the authors highlight that in infrastructure projects, and more specifically in road works, a contractor can often be hindered by planning decisions made at an early 14 stage which dramatically limits the contractor’s flexibility in suggesting innovative suggestions. Therefore, one only provides room for optimisation of technical details at a more operational level, for example in terms of logistics or material choices (van Valkenburg et al., 2008). Volker et al. (2018) also recognise this innovation hinder in infrastructure projects through pointing to the fact that these decisions made during the initial planning stages often create legal restrictions for the project. Other hinders to increased innovation through the implementation of ECI also include a limited timeframe for planning and design work and too large of a cost- focus on the improvements made through innovations by clients (Rosander et al., 2020; Volker et al., 2018). When time is limited, one often sticks to using familiar and existing solutions rather than attempting to develop innovations, a process which is seen as time consuming (Volker et al., 2018). Despite the efforts to incentivise optimisation and innovation through the use of economic incentives tied to a target cost which is commonly seen in ECI-projects, Volker et al. (2018) find that contractors in these projects perceive the lack of incentive for innovation in the planning and design phase to be a hinder. This observation is also made by Rosander et al. (2020) who however emphasise that such incentive structures must be thoroughly investigated before implementation as to not create unwanted and conflicting interests, but rather to support an increased collaborative exchange. Similar remarks are made by Rahmani et al. (2018) who in a study of Australian ECI-projects recognise that the contractual arrangement can create a hinder to innovation. In these contracts a contractor is awarded a DB-contract for the project’s completion, after having completed an ECI-phase where the contractor acts as a consultant. This may then create an incentive for the contractor to hide innovations and improvements to the project’s second phase in which the contractor can be rewarded for them in full. Thus, ensuring that the contribution of the contractor to innovation is presented in the planning and design stage can be challenging. Rahmani et al. (2018) conclude: “As a result, their contributions to the design, the degree of commitment, integration, motivation, skill, teamwork and trust that the contractor is supposed to bring to the project is undermined.” (p.105). 15 2.5 Theoretical lens – Agency theory Agency theory stems from the agency relationship in which one party, the agent, is designated to act for, on behalf of, or as representative for the other, the principal, to complete a task (Eisenhardt, 1989; Ross, 1973). Moreover, the theory takes aim to explain the agency problem that occurs when cooperating parties have different goals and division of labour. Jensen and Meckling (1978) further highlight the generality of the agency problem, in doing so stating: “The problem of inducing an “agent” to behave as if he were maximizing the “principal’s” welfare is quite general. It exists in all organizations and in all cooperative efforts” (pg. 309). Agency theory can however be seen to be based around two problems as done by Eisenhardt (1989). Firstly, it concerns the agency problem that arises when the interest of principal and agent stand in conflict to one another and when it is either difficult or expensive, as principal, to assess and verify the agent’s actions. Secondly, it concerns the aspect of risk sharing between principal and agent when the two parties have varying attitudes to said risk, hence problematic situation may occur when the parties may prefer different actions due to the parties’ respective risk preferences. The point of focus in this thesis is the principal-agent relationship between buyer and supplier, or in the case of a construction project, a client and contractor. Eisenhardt (1989) summarises as follows; “the domain of agency theory is relationships that mirror the basic agency structure of a principal and an agent who are engaged in cooperative behavior but have differing goals and differing attitudes toward risk.” (pg. 59). Moreover, agency theory aims to analyse the contract that is governing the relationship between principal and agent, thus in turn aiming to determine the how to most efficiently govern the said relationship based on assumptions about people, organisations, and information. These assumptions are presented by Eisenhardt (1989) as follows: - People are seen to act according to their self-interest, are limited by bounded rationality, and are risk averse in nature. - Organisations are seen to have partial goal conflicts among participants, are measuring efficiency as the effectiveness criterion of choice, and an inherent information asymmetry is seen to exist between principal and agent. - Information is seen as a purchasable commodity. Moreover, one strand of agency theory concerns the formation of the optimal contract between principal and agent which is seen to either rely on contracting behaviour or contracting outcome (Eisenhardt, 1989). In the case of complete information, when the principal is knowledgeable about what the agent is doing, a contract based on behaviour is the most efficient as the principal simply contracts the said behaviour, and does not wish to needlessly transfer risk to the agent through adopting an outcome-based contract. Yet in the case of asymmetric information, where the principal does not know to a full extent what the agent has done, the agency problem takes place. One particular way in which the agency problem can play out is through what is known as moral hazard. This is commonly seen to simply be a lack of effort from the agent, hence not putting forth the 16 contractually agreed-upon effort for the principal’s tasks (Eisenhardt, 1989). Yet it should be noted that the moral hazard problem can more widely be considered as existing also from the principal’s side, thus not fulfilling potential obligations towards the agent (Eriksson & Lind, 2016). To manage the agency problem in its simplest form, one can as principal either a) through investments into information systems reveal the agent’s behaviour or b) contract the agent based on the outcome of their behaviour, thus aligning the agent’s and principal’s interests (Eisenhardt, 1989). This is however done at the expense of the agent having to assume risk due to inherent uncertainties in the outcome which the agent cannot control. Thus, outcome-based contracts are attractive when outcome uncertainty, and therefore risk, is low and when the cost of shifting risk to the agent is low. Yet when outcome uncertainty is high, one sees increased expenses as to shift the risk to the agent, despite the motivational aspect which an outcome-based contract brings. Moreover, when an outcome is difficult to measure and determine, outcome-based contracts are seen as less attractive, thus favouring behaviour-based contracts. The previous argumentation is based around the assumption that a goal conflict exists between principal and agent, and that the agent inherently is more risk averse than the client due to their inability to diversify their employment (Eisenhardt, 1989). Summarising, Eisenhardt (1989) emphasises two specific contributions for how agency theory can help us better understand organisations and their organisational thinking. Firstly, information is regarded as a commodity which can be exchanged and purchased, hence investments into information systems in order to control the agent’s opportunism are possible. Secondly, agency theory assumes that the organisations have uncertain futures and are faced by outcome uncertainty for all actions, an uncertainty which is be perceived as a trade-off between risk and reward. Hence, this outcome uncertainty, alongside the assumption that organisations inherently have different willingness to accept risk, should shape the contracts between principal and agent. 17 3 Method The following chapter of the thesis outlines the methodology which has been employed for the research process and creation of this master’s thesis. An interview study was conducted with client and contractor representatives from two construction projects as a part of a multiple case study. Apart from the interview study, empirical material has also been gathered through a document study of the two cases respective procurement documents. 3.1 Research approach and design A qualitative research approach was used as to provide opportunity to answer the explorative research questions adopted in this thesis, as qualitative research allows a larger emphasis to be put on the way which individuals interpret their social world rather than through quantification in quantitative research (Bryman & Bell, 2011). Continuing, an abductive process known as systematic combining was adopted (Dubois & Gadde, 2002). This allows for a more iterative process where a theoretical framework and understanding is developed alongside the collection and analysis of empirical data which is one of the strengths of Dubois and Gadde’s (2002) systematic combining. In this process the researcher is creating an apprehension of the studied topic by both theory and concepts from reality simultaneously, existing research and understandings do therefore not limit the researcher in their creation of an understanding of the problem and topic. Dubois and Gadde (2002) further outline one of the strengths of the process as allowing theory which otherwise cannot be understood without a context of empirics as possible and vice versa. Through adopting systematic combining, the study was able to be continuously developed, as well as give room for new perspectives and create a deeper understanding of the subject. A case study approach was chosen as to allow for detailed and intensive analysis of each case as the research aims to investigate the specific contextual factors which affect ECI-projects. Bryman and Bell (2011) highlight that the use of case studies allows for the specific focus on a bounded situation or system and its complexity, hence the thesis’ research questions that focuses on the specific relationships between project organisation and contract justifies this approach. Moreover, the choice to study two projects was made as to allow for further opportunity to explore general phenomenon as well as allows the researcher to compare and contrast the findings from each case (Bryman & Bell, 2011). Through this comparison, one is seen to promote theoretical reflection on the findings of the respective cases as to what makes each case unique and what similarities there are (Bryman & Bell, 2011). The two projects were in turn chosen based on their accessibility to the researcher as is customary in convenience sampling (Bryman & Bell, 2011). The sampling was thus limited to projects that the contractor firm, which the researcher collaborated with for this master’s thesis project, was currently contracted for. However, a series of selection criteria were used as to choose the two specific projects that are the focus of this study, namely that the two projects saw an early contractor involvement, that they employed target cost reimbursement models and that the two projects’ planning and design phases were completed. 18 3.2 Empirical data collection In qualitative research, Bryman and Bell (2011) see the most widely adopted research method to be interviewing, as it as a method allows for large flexibility in adaptation. The two main types of interviewing that is performed as a part of qualitative research are unstructured interviews and semi-structured interviews, these two interviewing methods allow the interviewee to express their own perspective regarding a topic in a rich and detailed manner (Bryman & Bell, 2011). Moreover, through requiring less structure, the two qualitative interviewing methods mentioned enable the interviewer to depart from the interview guide as to ask follow-up questions and thus the interviewees answers can be explored further. Due to the highly complex nature of the research topic and the qualitative formulation of the research question, qualitative interviews were deemed appropriate in order to allow for data collection with great contextual depth. The interviews were conducted in a semi-structured manner as to ensure that questions regarding the thesis’ topic were covered and answered by all interviewees, but also to allow for flexibility in the way which each interviewee answered. This is according to Bryman and Bell (2011) a strength of the interviewing method, as well as the fact that it allows for new questions to be asked following an interviewee’s answer. An interview guide was developed using the results of an early literature study of scientific papers, journals and books focusing on collaborative contract arrangements, the ECI concept, reimbursement models and innovation in construction. Thus, the questions included in the interview guide followed these four themes as to ensure that each interviewee gave their perspective on the themes’ connection to the respective projects. Moreover, the projects’ procurement material and contracts were used as to provide further background to the cases ahead of the interviews and was also used as to allow for more project specific questions to be asked. The questions were framed in general way as to allow the interviewee flexibility in their answer which according to Bryman and Bell (2011) is needed in semi-structured interviews. The same interview guide was used for all interviews yet directed follow-up questions where pre-prepared ahead of the interview and included in the interview guide as to allow for further scrutinization of the interviewees’ answers depending on their role in the project. The interview guide, translated from Swedish, can be found as an appendix to the thesis (see Appendix A – Interview guide). A total of 11 interviews were conducted, where the interviewees were constituted by current and previous project participants who had been involved in the projects’ planning and design phase. Interviews were held with both client and contractor representatives as the main focus of the thesis is to investigate the contractual relationship between these two parties. The interviewees were chosen based on purposive sampling, this has been done in the respective projects in order to ensure that only suitable candidates who were thought to have relevant insight regarding the research questions and topic were interviewed as proposed by Bryman and Bell (2011). Moreover, the interviewees were chosen based on their role in each project both as to ensure that multiple perspectives of the research topic were gathered, as well as to provide the possibility of comparison between the contractual sides and between projects. Furthermore, 19 this was done to accommodate the time and resource restrains that the master’s thesis project poses on the researcher. The complete list of interviewees can be found below in Table 2 for project A and Table 3 for project B. All interviews were conducted digitally using Microsoft Teams and varied in length between 30min and 1h 20min. The interviews were recorded with permission from the interviewees for transcription purposes and to enable a free dialogue between interviewer and interviewee. All interviews were held and transcribed in Swedish. Table 2 Interviewees for Project A. Interviewee Date of interview Interview length Client’s Project Manager 1 2021-02-23 1h 10min Client’s Project Manager 2 2021-02-23 45min Contractor’s Project Manager 2021-03-03 55min Contractor’s Design Manager 2021-02-22 1h Contractor’s Cost Estimator 2021-03-02 45min Table 3 Interviewees for Project B. Interviewee Date of interview Interview length Client’s Project Manager 1 2021-02-25 1h Client’s Project Manager 2 2021-03-11 40min Partnering Facilitator 2021-02-23 1h 20min Contractor’s Project Manager 2021-02-22 1h 10min Contractor’s Design Manager 2021-02-26 1h Contractor’s Cost Estimator 2021-03-05 30min Apart from the discussed interviews, data was also gathered from each project’s procurement documentation as well as the contracts and regulating documents that are in place between client and contractor. Apart from providing background information ahead of the interviews, this material was used as to describe and provide background to the cases that are presented in the thesis. 3.3 Data analysis There are multiple prevalent methods for analysing qualitative data, one such method which has been adopted in this thesis is thematic analysis. Thematic analysis is an approach for the analysis of qualitative data where researchers systematically search through data to detect themes and patterns (Alhojailan, 2012). It is a highly flexible method that can be adopted for multiple research purposes but allows for rich and detailed accounts of data to be communicated (Nowell et al., 2017). Nowell et al. (2017) also highlight that “thematic analysis is a useful method for examining the perspectives of different research participants, highlighting similarities and differences, and generating unanticipated insights.” 20 (pg. 2). Moreover, thematic analysis provides the opportunity to code and categorise data into themes as to make connections between different parts of said data (Alhojailan, 2012). First, the collected empirical material was interpreted, analysed, and divided into thematic categories in order to make the data more manageable. The categories were developed iteratively upon continuous reviews of the data as well as through adopting thematic categories noticeable in literature of the thesis’ topics. This allowed for comparisons to existing literature and for comparisons of the empirical material in both cases. Through adopting this iterative process, one allows for a large flexibility of interpretations which according to Alhojailan (2012) is a strength of the analysis method. Moreover, through comparisons to the thesis’ theoretical framework, the study has provided the needed consistency and cohesion which is needed to support the study’s empirical claims, as the analysis methods flexibility otherwise can lead to a lack of these aspects as emphasised by Nowell et al. (2017). As a means to further strengthen the analysis of the thematically analysed material, the thesis’ theoretical lens was thereafter employed as to provide further nuance and explanations to the seen findings through in-depth comparisons. 3.4 Quality of research Bryman and Bell (2011), drawing from Lincoln and Guba (1985), describe how a researcher must assess and evaluate both the study’s trustworthiness and authenticity in order to ensure the quality of the study. A study’s trustworthiness is in turn divided into four different criteria (Bryman & Bell, 2011, pg. 43): • Credibility — i.e. how believable are the findings? • Transferability — i.e. do the findings apply to other contexts? • Dependability — i.e. are the findings likely to apply at other times? • Confirmability — i.e. has the investigator allowed his or her values to intrude to a high degree? Firstly, the credibility criterion reflects on the findings’ congruence with reality which is of importance in qualitative research as it is often dependent on perceptions of reality (Bryman & Bell, 2011). The study has been conducted using commonly adopted research methods and practices within the field of construction management research (i.e. multi-case studies, semi-structured interviewing). Hence the research can be seen to have been carried out according to good research practice as noted by Bryman and Bell (2011). Moreover, through performing interviews with both client and contractor representatives in both projects, the thesis’ credibility is further strengthened as it makes use of data triangulation, i.e. through analysing data from more than one perspective (Amin et al., 2020). Yet the most frequently used process for triangulation, methodological triangulation which draws evidence from multiple research methods, has not been used. Thus, the possibility to compensate for a weakness in a specific research method, through the use of another one, has not been realised in this study (Bryman & Bell, 2011). Moreover, purposive sampling was used as to select the study’s interviewees, hence the researchers own bias cannot be neglected. 21 Secondly, the transferability criterion assesses whether a study’s findings are supported in other contexts than the one which is studied (Bryman & Bell, 2011). This is of particular importance in qualitative case study’s that emphasise the scrutinization of contextual factors and their uniqueness as to e.g. provide an explanation to said uniqueness (Bryman & Bell, 2011). Hence, the multiple case study approach adopted in this study inherently makes for poor generalizability. Yet the focus of this study has rather been to provide a detailed account of each case and their context as to provide the ‘thick description’ which is reasoned by Bryman and Bell (2011) as vital in order to increase transferability. Thirdly, the dependability criterion is included as to allow for the assessment and audit of the adopted research methods and overall research process by a third party (Bryman & Bell, 2011). Through continuous communication and feedback with the master thesis supervisor, the thesis’ dependability can be deemed high as guidance regarding research methods has been thoroughly discussed during the full course of the research. Moreover, a peer-review was carried out with another student currently performing their master thesis research, hence further feedback was provided to the researcher. Finally, the confirmability criterion aims to assess the researcher’s objectivity and to ensure that the researcher has acted in good faith and according to good research practice (Bryman & Bell, 2011). Through adopting the systematic combining approach, empirical findings and theoretical insights were gathered simultaneously, hence neither the empirical findings nor the theoretical insights can be seen to have affected the thesis’ analysis and conclusion more than the other. Noted should however by the researcher’s personal involvement in project B, having spent three months working part time in the project before the commencement of the master thesis research. Thus, the researchers own bias cannot be neglected, yet the third-party supervision provided by the master thesis’ supervisor can be seen to have ensured the study’s confirmability as reasoned by Bryman and Bell (2011). As for the authenticity of the study, this has been ensured through managing and describing the thesis’ cases, methods and findings in the most transparent, honest and fair way possible. 3.5 Ethical aspects As to ensure that the thesis has been conducted in an ethically correct manner, measures have been made primarily connected to the thesis interview study. Prior to the interviews, a short description of the study was sent alongside the participation request as to allow for the interviewees to ensure that all participants were made aware of the aim and topics of interest. During the interviews, the study’s adopted methods were described as a first step, and each interviewee was asked for permission to record their answers for transcription purposes. All interviewees have voluntarily agreed to participate, and all material presented in the thesis have been anonymised as to protect the interviewees identities. 22 4 Case introduction The following section presents the two studied cases and provides the necessary background to the later presented findings and discussion. 4.1 Project A Project A is a project that entails the construction of approximately 8 kilometres of motorway in the western parts of Sweden for the Swedish Transport Administration (STA). The majority of the motorways route will be constructed on virgin ground and is set to replace the existing road due to its poor capacity and road safety. The project was procured as a two-stage ECI-project based on the Swedish standard contract ABT and the STA’s collaboration model “Samverkan Hög”. The contract was divided into two phases – a planning and design phase entailing the production of the project’s road plan and a construction and handover phase. The contractor’s continuation with the second phase was reliant on the agreement of the project’s target cost that was prepared during the initial planning and design phase. If a call-off agreement between the client and the contractor could not be reached the client had an exit-option which allowed the cancellation of the contract after the planning and design phase. The project’s first phase was undertaken by the second in the second quarter of 2016 and the call-off agreement for the project’s completion was reached in the second quarter of 2020. The project’s target cost was set to 436 MSEK at the end of phase 1. Table 4 Compilation of project information for Project A. Project delivery method Contractor reimbursement Collaborative arrangement ECI based on Swedish standard contract for design- build, ABT 06, with an exit option for the client. The contract for phase 1 included the creation of the project’s road plan as well as other planning and design documents and a jointly developed cost estimation to be used as a target cost. The contract for phase 2 included the completion of the project´s detailed design, construction, and handover to the client. Open-book accounting in use to allow for full transparency of the project economy. Phase 1: Cost-plus reimbursement. Phase 2: Cost-plus reimbursement with a fixed contractor fee equating to 11,81% of the target cost. An incentive system connected to the project’s target cost is in use – exceeding costs split 50/50, savings split 60/40 in favour of the contractor. The fixed contractor fee is set to cover the contractor’s profit, risk, potential costs to remedy errors as well as the contractors general and administrative expenses (in Swedish “CAK”). The project was undertaken according to the STA’s collaboration model “Samverkan Hög”. 23 4.2 Project B Project B is a project that entails the construction of a new water tower located in close proximity to a smaller town on the Swedish west coast. The projects client is a company that is responsible for the provision of water and sewage services to two neighbouring municipalities and that is wholly owned by the two municipalities. The project was procured using the Swedish standard contract ABT and with a collaborative partnering agreement. Moreover, the contract was divided into two phases – a planning and design phase as well as a production and handover phase, where the project’s completion in the second phase was an option that was reliant on a call-off agreement between the client and the contractor. The call-off agreement in turn was reliant on the fulfilment of the jointly determined project goals for the first phase as well as a fully functioning collaboration between the contractual parties as judged by the client. One of the crucial project goals set for the planning and design phase was the development and agreement on the project’s target cost. The project’s first phase was undertaken by Veidekke in the first quarter of 2019 and the call-off agreement for the project’s completion was reached in the fourth quarter of 2020. The project’s target cost was set to 249MSEK at the end of phase 1. Table 5 Compilation of project information for Project B. Project delivery method Contractor reimbursement Collaborative arrangement Design-build contract (ABT 06) The contract for phase 1 included the creation of planning and design documents as well as time schedules and a jointly developed cost estimation to be used as a target cost. The contract for phase 2 included the completion of the project´s detailed design, construction, and handover to the client. Open-book accounting in use to allow for full transparency of the project economy. Phase 1: Cost-plus reimbursement. Phase 2: Cost-plus reimbursement with a fixed contractor fee equating to 10% of the agreed upon target cost. No incentive system connected to the project’s target cost. The fixed contractor fee is set to cover the contractor’s profit, risk, potential costs to remedy errors as well as the contractors general and administrative expenses (in Swedish “CAK”). The project was undertaken as a partnering project. A partnering facilitator was employed by the client to help shape the procurement strategy used when procuring the contractor. This also included developing the project’s contract. 24 5 Findings The hereby following chapter will present the findings made in the two case studies, and they will be presented in accordance with the thesis’ research questions. 5.1 Benefits and hindrances of ECI implementation 5.1.1 Project A Project A - benefits: Contractor’s improved project understanding: The contractor interviewees believe one major benefit behind their early involvement is that the contractor personnel who are involved in the project, and who will continue to be involved throughout the project’s execution phase, will thoroughly know the project, and have a larger understanding to why specific design choices have been made compared to if another project delivery model was in use. The contractor’s design manager shares this perception in stating the following: “We have gotten a much better project understanding compared to if the project was procured as a DB-contract on a completed road plan or as a DBB, we have lost far less information than in a more regular contract, that I am sure of.” – Contractor’s design manager. Moreover, one contractor interviewee highlights the benefit the contractor has been presented as to fully learn and understand these early stages in the road plan process which one as contractor regularly is not involved in. This has provided a large opportunity for organisational learning which can prove useful in future projects, both those realised through ECI but also others. It should be noted that the novelty of ECI as a concept in Sweden, and the fact that project A was procured as a pilot project for contractor involvement in the road plan process, both provide reasons for this as contractors in Sweden have not had the opportunity to be involved at such an early stage. Contractor’s input in decision-making and design: Other perceived benefits which are emphasised by the contractor interviewees which the contractor’s early involvement have provided are a larger sense of security for the client of design choices, specific design input regarding choices of production methods and providing well-founded arguments and input for the temporary land and road use these production methods need. This input regarding temporary land use is also recognised by the client side, who see other benefits to have been the contractor’s ability to provide the client with accurate decision-making material of design choices as well as to provide design input to minimise the project’s need for material transports. Improved client-contractor relationship: Most interviewees from both contractual parties also highlight an improved relationship between client and contractor to be a benefit created by the ECI-implementation. This has facilitated a well-functioning collaboration to form which on the contractor side is seen to 25 have improved joint design development as well as joint problem solving. The contractor’s project manager summarizes it as follows: “I feel that we have had one united project, we have helped each other out, just the way one wants it to be.” – Contractor’s project manager. In contrast, one interviewee on the contractor side reasons that the project organisation has failed in creating a full understanding of the collaborative arrangement and the underlying reason behind the ECI-implementation as to maximise the benefits which can be seen thereof. It is reasoned that all contractual parties involved in project A would have benefitted from a greater understanding of the methods, ideas, and goals which the collaborative arrangement sets out to use and fulfil as this remained unclear. Project A – hindrances: Contractor’s knowledge and impact on early design: The strict road plan process that the planning and design phase entailed in project A was seen to offer limited impact from the contractor’s input. This was seen to be stemming from two separate reasons, that the contractor’s knowledge and expertise of the road plan process was limited and that the knowledge and input which the contractor could offer at these early stages of the process simply were not deciding factors for design choices, especially concerning the route localisation. The time of contractor involvement in the planning and design phase of project A was reasoned by the contractor interviewees to have been too early for themselves to have a real impact, and that the project’s technical consultants who were more experienced in road plan development, thus realised the majority of the design work. Moreover, the matters which the contractor were knowledgeable of, primarily questions of buildability, cost estimation and value engineering, were not seen to impact the route localisation due to the small differences in expected construction costs that were seen between route alternatives. These estimates were prepared at a time where large cost uncertainties still existed, making such input limited in usability. All contractor interviewees do however note that the longer the project’s planning and design phase has progressed, the larger the impact the contractor has been able to have as the detail-level of the design work increased. Client’s lack of understanding of the project delivery model: The lack of understanding of the ECI-implementation and the novelty of the approach was further emphasised by the contractor interviewees who see the client’s technical specialists to be unaccustomed to working collaboratively and with the involvement of a contractor at an early stage, something which has proved difficult throughout the planning and design phase of project A. The technical specialists’ involvement in multiple projects was seen as problematic and had resulted in that the specialists have not managed project A in any other way than the other projects, despite project A’s ECI-implementation and collaborative arrangement. Moreover, the client specialist’s lack of commitment to the collaborative work way made their efforts in the project resemble that of a design contract where a technical consultant is contracted for design development directly by the project’s client. This was evident as changes and additions were administered by the 26 specialists directly to the technical consultant without consulting neither the client’s nor contractor’s respective project management. This can be further emphasised using the words of the contractor’s design manager: “There are numerous people who need to learn what this collaborative arrangement actually aims to achieve” - Contractor’s design manager. Involving contractor’s production personnel early on: Noteworthily, one hinder in achieving a complete early contractor involvement and the benefits thereof has been the contractor’s difficulty in involving personnel who are to execute and build the project at the early planning and design stages. It is argued that the production personnel are unwilling to work with planning and design as they would rather solely work with project execution, and that they thereby prefer to build other project’s during the planning and design phase up until the commencement of the project’s second phase. In project A, the contractor representatives that have been involved during the planning and design phase have been design- and project managers, engineers, and technical specialists as well as cost estimators, whereas representation of site managers and site supervisors has been limited. Further, it is argued that the collaborative output from the ECI-implementation could have benefitted even more from the contractor’s early involvement if such personnel would have been involved to a larger extent, yet design input from these representatives has been enabled through direct questions regarding production methods and choices within the contractor organisation. The involvement of production personnel in planning and design is however simultaneously argued by a contractor interviewee to be a risk if one does not reach the call-off agreement for the project’s execution phase as these personnel oftentimes are involved in other projects, thus early involvement would be done at the expense of another project. 5.1.2 Project B Project B - benefits: Contractor’s input in design: As for the perceived benefits which the interviewees in project B have recognised through the early contractor involvement, is the contractor’s ability to offer design and buildability input which ultimately will see the project’s complex design possible to realise. Moreover, through the contractor’s design involvement, one was able to provide input on desired construction methods and maintain a continuous dialog with the engineering consultants regarding design choices. It is however emphasised by the contractor interviewees that an earlier involvement in the project would have been desirable, as was the intended idea as the contractor was to be procured to be a judge of the project’s architecture competition. This procurement was however revised and adjourned after a documentation error was discovered, in turn resulting in the contractor’s involvement possible first after the architecture competition. The architectural design was thus fixed when entering the contract and left limited room for the contractor to offer input on larger design changes in terms of value engineering or improved buildability. 27 Improved time and cost certainty: Other benefits which are recognised by the interviewees due to the ECI implementation was the contractor’s ability to control the planning and design stage as to ensure that the development of the project’s design became more time efficient as well as being able to offer the client detailed cost estimates of design alternatives when investigating cost reducing measures which was a necessity when the project’s cost estimate was seen to exceed the client’s initial budget. Moreover, the contractor’s inclusion in the design stage and in the preparation of the project’s target cost was seen to support the municipality’s political steering group and their decision to accept the project’s continuation despite the exceeding of the budget. The reason being that more well-founded arguments and cost estimates based on the contractor’s experience of projects were presented. Project B – hindrances: Relational problems hindering collaboration: One hinder which both contractual sides have perceived to have affected the initial planning and design phase is the parties’ difficulty in creating a well-functioning relationship and fruitful collaboration between client and contractor. Both contractual sides give evidence of incidents where the other party was deemed to focus on their own benefit rather than for the projects good, as well as moments where one has not acted in a fully transparent manner. This is seen to at times have created distrust between the parties which in turn has affected the parties’ collaboration and the benefits thereof. Comments are here made on the importance of equating and jointly defining the view of money, time schedules and quality among the project participants, and that discussions as to do so have been common throughout the planning and design phase and were at times difficult. It is however emphasised that the fact that the call-off agreement for the completion of the project was reached shows that the joint project team has been able to overcome the majority of the shortcomings and distrust from the planning and design phase. Imbalance in size and strength of parties: Difficulties stemming from an imbalance between the client and contractor organisation’s respective size and strength, both in terms of project- and construction expertise, were recognised in the project. This imbalance was seen to affect the parties’ respective contribution to the project at times, one specific example being the preparation of the project´s target cost which was prepared solely by the contractor and not jointly which was the initial wish. Moreover, this was seen to create a large reliance on the other project participants from the client, which according to the contractor could be seen to result in an angst of opportunistic behaviour on the client side. A stronger client organisation is also reasoned to diminish the need for excessive audits and controls that were performed by external parties in project B, thus removing these events which the contractor deemed to create distrust. The organisational imbalance is also recognised within the client organisation who sees that a project organisation constituted of participants with more mirrored roles would have benefitted the project, specifically in the development of the project’s cost estimate. On the contrary, comments are however made by the client’s project manager 2 who sees the involvement of the contractor in the collaborative arrangement as one which aims to create a single organisation with all the 28 necessary resources and expertise, instead of having multiple project participants with similar expertise and two complete organisations on their own. 5.1.3 Summary In Table 6, the two projects’ perceived benefits from ECI-implementation are presented alongside the projects’ hindrances to a fully successful ECI-project. Table 6 Benefits from and hindrances to ECI-implementation in Project A & B. Project A Project B Benefits Hindrances Benefits Hindrances Contractor’s improved project understanding Contractor’s knowledge and impact on early design Contractor’s input in design Relational problems hindering collaboration Contractor’s input in decision-making and design Client’s lack of understanding of the project delivery model Improved time and cost certainty Imbalance in size and strength of parties Improved client- contractor relationship Involving contractor’s production personnel early on 5.2 Challenges created by target cost principles and economic incentives in ECI-projects The hereby following section will address the perceived challenges resulting from the use of target costing and incentivization in the respective projects. These findings are presented in accordance with the respective project in which they were perceived. 5.2.1 Project A Project A –Target cost incentives perceived as a cost risk: The inclusion of incentives connected to the project’s target cost was done as a way to create a driver for the contractor to build the project more rationally and cheaply. This potentially positive effect is by the client side emphasised as a large benefit of the reimbursement model, in doing so pointing to the situation in other project’s where the contractor often wishes to push up a project’s cost estimate as a means to earn more. The client’s project manager 2 reasons: 29 “In this case they benefit from it being cheaper, that is great because then you don’t have to worry like you do other times that [the contractor] presents things which makes [the project] more expensive, because now they don’t profit from that – that is positive.” – Client’s project manager 2. The interviewees on the contractor side welcome the inclusion of an incentive as it creates an important motivating factor for the project. It is also believed to be a question of fairness, as one as contractor should have the right to some benefit in the case of improvements to the project, which the client otherwise would benefit fully from. As for the incentive-levels used in project A, the perceptions among the two contractual sides differ. It is argued by the client side that the incentive levels are reasonable as the contractor, who has a larger potential impact on cost underruns, thus has the higher potential gain. On the other hand, the cost-risk of potential overruns is shared equally which creates equal reason for both contractual parties to keep the project’s costs to a minimum. However, the contractor interviewees see this cost-risk to be too large and something which could have a catastrophic effect on the contractor’s profit margins for the project, Moreover, the client’s natural unwillingness to agree to too large of a target cost is also recognised and believed to be something which worked against a swift target cost process, particularly due to the 60/40-split of cost underruns in the contractor’s favour. The interviewees also recognise the inherent incentive for the contractor to push up the target cost as high as possible in order to maximise the gains one can make from these shared cost underruns. This is seen to create a paradoxical difficulty as the client has a willingness and incentive for a cheaper project completion, thus wishing to keep the target cost low. The contractor’s design manager explains his view of this difficulty in finding an agreement between client and contractor: “The biggest risk in a collaborative contract is that you do not manage to equate your views, then you are done. We do not have an incentive to lower the target cost but [the client] has every incentive to lower it.” – Contractor’s design manager. Project A – Client budget shaping cost expectations: As previously mentioned, the work in the planning and design phase entailed the creation of the project’s road plan that also was to be used as the basis for the development of the project’s target cost, a target cost which was to decide whether a call-off agreement for the option to build project A could be reached. The process of reaching an agreement did however pose to be a problem due to the two contractual sides different views of what the project was to cost. As part of the project’s tendering documents, an early cost estimate was included that was prepared by the client organisation. The estimate was prepared using very rough prerequisites and with a large number of uncertainties and unknowns still remaining as the project’s planning and design phase had not yet commenced. This is highlighted by the client’s project manager 1 as follows: 30 “We did not know where the road was to be routed, but we knew that it was to go from point A to point B but not the route in between, but I had together with a cost estimator prepared an estimate for what it should cost.” – Client’s project manager 1. Yet when the project’s planning and design phase commenced with the contractor and consultant, and the expected costs were seen to overshoot the client’s budget, the two contractual parties experienced difficulties in equating their views of these costs. The different view of project costs is proposed by the contractor side to stem from the different levels of detail that the contractor and client use when estimating and assessing costs, a process where the contractor’s estimate is seen as more detailed than the client’s that is reliant on generalizations to a larger degree. Project A – Preparation of target cost done by a single party: The client’s project management had initially expressed a wish to employ an alternative cost estimation process in the project where representatives from both the client and contractor were included, yet the result from this process was discarded by the client as it was deemed to be unrealistic as it far overran the client’s initially prepared budget. This created a situation where the contractor was made responsible for cost estimation in the project, work that was later controlled by the client. Thus, through not creating the cost estimate jointly and through having vastly different views of project costs from the start, this creation of a joint understanding of the project’s expected costs were difficult. This was seen bo