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Using Game Theory to Negotiate Win–Win Payment Terms between Contractors and Subcontractors
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Effective cash flow management has become crucial for projects and stakeholders given the wide payment-related problems and financial risks encountered in the construction industry worldwide. Previous studies mostly addressed cash flow and payments from the perspective of a specific stakeholder, resulting in an imbalanced cash flow management culture that is further intensified by the power asymmetry of the top-down payment decision-making process. This research proposes an adaptive decision support framework for evaluating and negotiating payment options in construction projects while incorporating the individual and collective financial roles of stakeholders. The framework is comprised of three modules for data acquisition, payment simulation, analysis, and negotiation, as well as decision support. It integrates agent-based simulation, data envelopment analysis, and game theory for a multi-level study of project performance while capturing the driving forces of stakeholders in payment negotiations. A case study project is used to demonstrate the framework implementation under varying payment conditions and interest rates. The results provide quantitative profiles of stakeholders to identify incurred charges, balanced payment conditions, and suitable compensation. Finally, the framework can be utilized by stakeholders and jurisdictions to move towards enhanced contractual arrangements that alleviate economic and financial risks with the informed collaboration of its entities.
Late payment is a recurring issue in the UK construction industry. Whilst the existence of the problem is well known, there is a dearth of quantified evidence on the extent of the problem from a subcontractor point of view. This research sought to quantify the extent of late payment and late release of retention and their effects on construction subcontractors in the UK. A research design including the analysis of payment data of 30 selected projects (355 payments) from a case study subcontractor and a supplementary questionnaire survey with 21 subcontractors were used to investigate the issues. Late payment was observed in most of the case study subcontract projects (77%) and nearly half of the payments (46%), suggesting it is common practice. Statistical analysis showed that whilst there was no statistically significant link between payment delay and contract sum, subcontractors are likely to experience longer payment delays in projects with a higher number of payments. It was found that the late release of the second half of the retention posed an even significant problem to subcontractors, with a considerable portion of the income (upwards of 2.5%); sometimes the entire profit, being held up for nearly two months from the due date. The findings highlight that whilst the regulatory and contractual measures over time have sought to address the issue of late payment, it remains a prevalent issue and that subcontractors often fail to rely on such measures. This necessitates subcontractors to factor late payment into their cash flow planning. The authors suggest that the recent and proposed initiatives such as the Project Bank Accounts, central retention deposit scheme, smart contracts offer potential to mitigate payment delays.
Cash is the lifeblood of construction projects. According to the Public Procurement Act 2007 of Nepal, contractors can receive 20% of the total contract amount as advance payment to start the work and progress payments during the work to continue. However, the claim of these cash requires certain obligations to be fulfilled. The challenging matter for the continuation of work is the utilization of such cash to be managed in the planned way. How contractors manage the cash in the construction project is a question these days since many construction projects have time and cost overrun in Nepal. To find the answer to this question interview and document analysis techniques have been used for data collection and analysis. The study has concluded that contractors have to develop the cash flow forecasting ability to manage the cash in the construction projects in the Nepalese context.
Recent statistics reveal substantial increase in late payments cases from 18% to 27%; with over £30 billion unpaid invoices to UK contractors. Furthermore, 82% of overdue invoices are monies owed to subcontractor by tier-1 main contractors. Indeed, tier-1 contractors are deemed to be the main elephant in the room despite various contractual, government and private initiatives designed to curb late payment menace. Yet, there is little research concerning use of Alternative Payment Method (APM) to leverage tier-1 contractors paying subcontractors’ invoices promptly. The aim of this study is to assess the use APM to enhance pragmatic and sustainable payment practices between tier-1 contractors and subbies. The research question is: what are the industry specific factors that influences unfair payment practices and how can alternative payment method help to leverage fair payments to subbies? The study adopted sequential exploratory design type of mixed method supported by questionnaire and structured interviews. The study population are drawn from experienced industry stakeholders including clients, contractors, designers, professionals in addition to use of computer simulation to validate proposed APM model. Initial findings reveal an optimism bias tendency of most subcontractors agreeing to lengthened and unfair payments terms induced by Tier 1 contractors. The study identified over five industry and business specific influential factors that encourages tier-1 contractors to clinch to unpropitious late payment practices. In specific terms, there are overwhelming evidences that APM has significant potential to minimize late payment in the UK construction industry if there is political, business and legislative will to implement the model.
The interactions between the different parties in construction projects are dictated by the contractual terms governing their relationship. The largest portion of construction work is undertaken by subcontractors who execute on average 70%-90% of the work. Thus, the contractual relationship between general contractors and their subcontractors is of paramount importance. The contractual relationship between contractors and subcontractors is referred to as back-to-back or risk shifting when obligations and responsibilities are passed from the contractor to the subcontractor. Most previous research efforts focused on the development of frameworks that aid main contractors in the selection of the most optimal subcontractor(s) as well as help general contractors work with their subcontractors and manage their subcontracts. This paper provides a comparative study that is focused on the back-to-back relationship between main contractors and subcontractors under the standard design-build forms of contract. As such, a multistep methodology was utilized. First, the authors analyzed and compared the back-to-back provisions as stipulated by three standard design-build forms of contracts in the US. Second, the authors incorporated law cases to have practical perspectives on the main causes of disputes on each aspect of the back-to-back relationship between general contractors and their subcontractors. Third, the authors highlighted the implied advantages and disadvantages of each of the contracts under investigation from the perspective of the project's best interest. Fourth, the authors developed a checklist and set of suggested practices that enable contract administrators to handle their projects more effectively and efficiently. The outcomes of this research study will promote effective management of the back-to-back relationship between design-builders and their subcontractors in design-build construction projects. In addition, it is perceived that the recommendations resulting from this study could fill contractual gaps in the existing standard subcontract agreements.
The process of negotiation can be analyzed considering some scientific issues (e.g. psychological, sociological). When a construction subcontract is negotiated, as it is a business
activity, the rational choices should be considered more than other factors influencing the decisions of the negotiating parties. A game theory supports rational decision making based on calculations, expected values and strategic choices. An experiment was carried with the participation of the students of Civil Engineering Faculty. Five different games were prepared. The students started playing with the “nature”. Then the probabilities of the “nature” strategies were introduced. Finally, they played three one-on-one sets of repetitive games. The results prove that knowing the needs of the opposite player (knowing his/her possible strategies) leads to a win-win result where the score of both players is maximized. The experiment and its result are analyzed in the paper. The multiple negotiations, and then multiple cooperation of a general contractor with the same subcontractor on construction projects is an often case. These parties
discuss the rules of their cooperation formalized in subcontracts several times. The typical image of a general contractor’s need is a low price given by a subcontractor. In fact, it is only one of the needs. Moreover, it is not a rare case where the flexibility of engagement on a building site or a high number of equipment units or favorable terms of payment are desired by a general contractor more than the low price given by a subcontractor. A subcontractor’s standing can be
different too. They can search for profitable cooperation or they have to provide work for some brigades not to have them unengaged. They can afford long term payment or they have to be paid in advance. The experiment proves that disclosure of the needs (strategies) by negotiating parties leads to the achievement of higher gain for both of them (when the game is repetitive). The paper sets the basis for modelling negotiations of a construction subcontract based on a game theory.
Payment is the lifeblood of construction projects. However, steady fund flow is rare in construction projects. This paper focused on a quantitative evaluation of the impact of payment delays at the two links (i.e., from owner to general contractor and from general contractor to subcontractor) on the progress of a construction project. A hybrid research method combining the interpretative structural modeling (ISM) method and system dynamics was used to simulate the complex relationships between a payment delay and project progress. Four distinct payment policies are quantitatively simulated to reveal the impact of payment delays at the two links on the progress of a construction project. The results show that shortening the payment period at the two links in the payment chain will accelerate the flow of funds and relieve the burden on contractors in providing advance funds in terms of amount and duration, making them powerful measures to ensure smooth progress. The other three payment policies require that the subcontractor provide large sums of advance funds for lengthy periods to ensure smooth project delivery.
The approach used by construction companies to determine bid prices is an element of their strategy used to win jobs in competitive tenders. Such strategies build upon an analysis of the contactor’s potential and capabilities (am I able to deliver? am I eligible to participate in the tender?), and the analysis of the economic environment, including the expected behavior of competitors. The tender strategy sets out both the guidelines and the procedure in deciding whether or not to bid as well as the rules for determining the price. The price, on the one hand, should be high enough to cover expected direct and indirect costs as well as risk-adjusted profit. On the other hand, it needs to be low enough to be considered most attractive (typically: the lowest) among the prices offered by the competitors. The paper focuses on the price definition component of the bidding strategy. It provides a brief overview of the existing methods that support bidding decisions by comparing their demand for input and limitations in practical applications and presents a simulation-based method supporting the determination of the profit ratio. This probabilistic method assumes the existence of a positive correlation between the prices offered by the competitors. Its application is illustrated by means of a numerical example. The outcomes of the simulation prompt the amount of the profit margin that maximizes the expected value of the contractor’s profit.
Schelling proposed that payoff-irrelevant cues can affect the outcome of tacit bargaining games by creating focal points. Tests of this hypothesis have found that conflicts of interest between players inhibit focal-point reasoning. We investigate experimentally whether this effect is reduced if players have imperfect information about each other's payoffs. When players know only their own payoffs, they fail to ignore this information even though it cannot assist coordination; the effects of payoff-irrelevant cues on coordination success are small. When no exact information about payoffs is provided, payoff-irrelevant cues are more helpful, but not as much as when conflict is absent.
Subcontracting has been a worldwide practice in the construction industry. It enables the construction enterprises to focus on their core competences and, at the same time, it makes complex project possible to be delivered. Since general contractors bear full responsibility for the works carried out by their subcontractors, it is their task and their risk to select a right subcontractor for a particular work. Although subcontractor management has been admitted to significantly affect the construction project's performance, current practices and past research deal with subcontractor management and scheduling separately. The proposed model aims to support subcontracting decisions by integrating subcontractor selection with scheduling to enable the general contractor to select the optimal combination of subcontractors and own crews for all work packages of the project. The model allows for the interactions between the subcontractors and their impacts on the overall project performance in terms of cost and, indirectly, time and quality. The model is intended to be used at the general contractor's bid preparation stage. The authors claim that the subcontracting decisions should be taken in a two-stage process. The first stage is a prequalification – provision of a short list of capable and reliable subcontractors; this stage is not the focus of the paper. The resulting pool of available resources is divided into two subsets: subcontractors, and general contractor's in-house crews. Once it has been defined, the next stage is to assign them to the work packages that, bound by fixed precedence constraints, form the project's network diagram. Each package is possible to be delivered by the general contractor's crew or some of the potential subcontractors, at a specific time and cost. Particular crews and subcontractors can be contracted more than one package, but not at the same time. Other constraints include the predefined project completion date (the project is not allowed to take longer) and maximum total value of subcontracted work. The problem is modelled as a mixed binary linear program that minimizes project cost. It can be solved using universal solvers (e.g. LINGO, AIMMS, CPLEX, MATLAB and Optimization Toolbox, etc.). However, developing a dedicated decision-support tool would facilitate practical applications. To illustrate the idea of the model, the authors present a numerical example to find the optimal set of resources allocated to a project.
Subcontracting is a common practice in the modern construction industry. The performance of construction projects will be adversely affected if the relationships between main contractors and subcontractors are not properly managed. Therefore, the relationships between main contractors and subcontractors are becoming more and more important to the success of construction projects. Based on a comprehensive questionnaire survey in the Hong Kong construction industry, the relationship between main contractors and subcontractors was studied. Main contractors in the local industry can be classified into four clusters according to the nature of their relationship with subcontractors, namely, adversarial, coopetitive, collaborative, and partnering. Furthermore, the impact of these relationships on main contractor competitiveness and the critical factors affecting collaborative/partnering relationships and main contractor competitiveness were also explored. The findings of this research reveal that good relationships with subcontractors are positively and advantageously associated with main contractor competitiveness. A long-term partnering relationship, based on win-win principles, is more likely to benefit both parties in construction practice.
In the construction industry, competitive bidding has long been used as a method for contractor selection. Because the true cost of construction is not known until the completion of the project, adverse selection is a major concern. Adverse selection is when the winner of the contract has underestimated the project's true cost. Thus, the winning contractor will most likely earn negative or at least below normal profits. The winner's curse is when the winning bidder submits an underestimated bid and is thus cursed by being selected to undertake the project. In the multistage bidding environment, where subcontractors are hired by a general contractor, the winner's curse may be compounded. In general, contractors suffer from the winner's curse for a variety of reasons including inaccurate estimates of project cost; new contractors entering the construction market; minimizing losses in case of recession of the construction industry; strong competition within the construction market; differential opportunity costs, which can affect the behavior of contractors; and the intention to win the project and then remedy the losses through change orders, claims, and other mechanisms. Using a game theory approach, this paper aims to analyze - and potentially reduce - industry exposure to the effects of the winner's curse in construction bidding. To this end, the authors identify the degree of the winner's curse in two common construction bidding environments; namely, single-stage bidding and multistage bidding. The objective is to compare the aforementioned two construction bidding environments and determine how learning from past bidding decisions and experiences can mitigate the winner's curse. To this end, and through defining the relationship between the construction bidding and auction theory, the authors utilized a three-step research methodology that involved (1) presenting the symmetric risk neutral Nash equilibrium (SRNNE) as an optimal bid function; (2) developing simulation models for single and multistage construction bidding processes; and (3) analyzing the results of the simulation models, which is based on an actual dataset of projects provided by the California Department of Transportation. This research demonstrated that the majority of general contractors and subcontractors suffer from the winner's curse in both single-stage and multistage bidding environments. Moreover, from a winner's curse perspective, the multistage bidding environment incurs more losses than the single-stage bidding environment. However, through learning from past experiences, the multistage bidding environment provides contractors with a better opportunity to avoid the winner's curse if compared with the single-stage bidding environment. This research should be beneficial for the profession to better understand the bidding decision-making processes. For future work, cooperative game theory can be applied with the integrated project delivery principles to help all associated parties mutually achieve their project objectives.
Great numbers of traders from different specialisation makes construction industry is a complicated and unique industry. To overcome the demand on special expertise, advanced equipment, and huge investment cost, letting out work to subcontractors has been a norm in construction industry. Nevertheless, large presence of subcontracting poses challenges to contractors, client and their project management teams to manage such a large, diverse and fragmented group of subcontractors. Success of a construction project is essentially depending on the ability of general contractor to select the appropriate subcontractor during bidding process, and the sufficient management of subcontractor during construction. This paper served as a summary of literature review done on types of subcontractor, problems generated by subcontractor, and current proposed methods to enhance the subcontracting practice.
Cash flow impacts all aspects of the construction project implementation process. Cash shortages can lead to project failure and business bankruptcy. Researchers have studied cash flow in the context of scheduling, project delay, business failure, and forecasting. However, negative cash flow trends and patterns themselves have not been closely examined. This paper investigates negative cash flow trends and patterns and their impact on construction performance. To this end, the study reviews financial and scheduling data for 40 ongoing projects in the Dubai area and selects four projects for in-depth analysis. These projects represent the main categories of the Dubai construction industry in terms of type, budget, and business. Three elements of project cash flow are analyzed: (1) actual cash disbursements; (2) cash receipts; and (3) accumulated cash flow. Results of data analysis indicate that there was negative cash flow for 30 to 70% of project duration in each of the selected subject projects. The high shortage values ranged from two to four times the average monthly expenses. The study also investigated how some contractors are able to reduce the extent and amount of negative cash flow on their projects and complete them as scheduled by rescheduling construction activities on the basis of cash flow availability. The study shows that the amount, duration, and distribution of negative cash flow are critical factors in construction performance. Finally, study results underscore the essential need to plan for cash flow in all phases to ensure a successful and profitable project.
Unlike the traditional price-focused lowest bid (LB), the best value (BV) tendering process selects the contractor that offers a product or service that is most beneficial to the procurement entity in various aspects. Existing pricing models, including cost-based probabilistic models and market-based neoclassical microeconomic theory, were developed for LB. Very few operational models exist for BV tenders due to the difficulty of measuring the price differences with respect to the variance of product or service quality. This paper proposes a price elasticity of quality (PEQ) model that provides useful tools to measure the PEQ of a product or service offered by contractors in a tendering process. Based on the proposed model, a bidding zone is suggested for the contractor in light of competitiveness and profitability. Two working examples are used to show the applicability of the proposed method.
Subcontractors have a significant role in the construction industry. Through involvement at different levels, subcontractors may undertake up to 90% of the total value of large construction projects. Due to the lack of systematic relationships and communication among different parties involved in construction projects, many beneficial opportunities such as short-term partnering may stay hidden and unknown during the course of projects. Although partnering is well documented in the literature, quantitative approaches have not been common for determining the value of partnering and developing practical methods for allocation of its benefits. In this study, we discuss how subcontractors can benefit considerably from joint resource management in construction projects. We present a short-term partnering case in which subcontractors form an alliance, agreeing to put all or some of their resources in a joint pool for a fixed duration of time and to allocate the group resources using a more cost-effective plan. Cooperative game theory is suggested as the basis for fair and efficient allocation of the incremental benefits of cooperation among the cooperating subcontractors. First, a resource-leveling model is used to build subcontractors' characteristic functions for all possible subcontractors' coalitions. Then, various cooperative game theoretic solution methods are applied for allocation of cooperative gains among the subcontractors. Finally, to ensure that the identified allocation rules are applicable and stable in practice, acceptable allocations are identified using various stability analysis methods. Results show that considerable savings can result from full cooperation among subcontractors based on group rationality as opposed to individual rationality.
Nowadays, conflicts between the involved parties in projects are common. So a useful decision making method should be considered for a better decision. Game theory approach can be used as an efficient framework in decision making about some problems and conflicts in construction projects. The aim of this paper is to find the best outcome in conflicts for every player (party) according to his opponents’ decision. Two game theory structures have been discussed here, Prisoners’ Dilemma and Chicken Game. Two types of probabilistic conflicts during the construction project have been discussed based on these two games and the results highlight the applicability of the game theory application in construction projects’ dispute resolving. The study also is resulted that application of the chicken game and prisoners’ dilemma game is so helpful for analyzing construction management problems.
Certain risks are inherent in all construction projects. These risks are faced by all parties involved in a project - owners, contractors, designers, suppliers, etc. However, the more important role the parties play in the development and successful completion of the project, the greater risks they have to carry. Such parties are the owner and the contractor who conclude a contract to carry out construction works. Shifting the risk onto one of the parties to a construction contract agreement is inequitable and unreasonable. Equitable allocation of risks among parties is very important. Analysis results shows that in the area of risk allocation between construction parties many research is done and work is still ongoing, the most work in this area is done by scientists of China, USA, Australia and Great Britain. Although, on the one hand, relevant studies emphasise equitable risk allocation, on the other hand, the task of proper allocation of risks among parties is placed within one party only, i.e., the owner. This automatically "programmes" improper risk allocation results. According to the author, risk allocation among the parties to a construction contract agreement should invoke cooperative game theory which application for the aforementioned purpose is the object of further research of the authors. (C) 2012 The Authors. Published by Elsevier Ltd.
The way that contractors in Ghana establish a bidding price, and include allowances for risk in their prices is investigated using unstructured interviews and documentary analyses. The contextual nature of tendering practices suggested that there may be differences in approach between countries. Therefore one objective was to test whether there are systematic differences between the approaches in different places. Seven contractors were studied to ascertain how they put together a price, and how risk apportionment influences price. Most of them established their bidding price by building up prices for labour (14%), plant (9%), materials (45%), overhead (15%) and profit (10%). The main determinants of price seemed to be the actual direct costs; level of competition; delivery time of the project; payment regime; and clarity of tender documents. Risk allowances of 5-7.5% were included in the profit margin of some bill item prices. This was based mainly on the direct judgement of the quantity surveyors who calculated the price, based on their intuition and experience. No formal and analytical risk models were used. Indeed, none of the contractors indicated any knowledge of published risk models. The contractors" risk allowances seemed to be guided by concerns about competition and winning the job rather than the true cost of risk. Thus, looking at the three systematic processes of formal risk management, it cannot be concluded that contractors in Ghana practice formal risk management, although it is clear that they do take account of risk when pricing their work.
Purpose
This research aims to develop a blockchain smart contract–enabled framework to resolve power imbalance problems in construction payment.
Design/methodology/approach
This research adopts a design science research method to develop the blockchain smart contract–enabled framework. The authors then develop a prototype system. Finally, the authors evaluate its performance in solving power imbalance-induced payment problems.
Findings
The results show that the prototype system can resolve power imbalance problems in construction payment by allowing project participants to make transparent and decentralized decisions that are self-enforceable by blockchain smart contracts.
Research limitations/implications
This study provides theoretical explanations for how blockchain smart contracts can resolve power imbalances in construction payment; based on that, it proposes a novel blockchain smart contract–enabled method to rebalance the power of stakeholders in construction payment. Thus, it contributes to the body of knowledge on blockchain technology and construction payment.
Practical implications
This study moves beyond a conceptual framework and develops a practical blockchain smart contract system for resolving power imbalances in construction payment, strengthening construction project members' confidence in using blockchain technology.
Social implications
The proposed blockchain smart contract–enabled solution helps mitigate negative social impacts associated with late payment and non-payment. Furthermore, the research maximizes trust among participants in payment processes to inspire collaborative culture in the construction industry.
Originality/value
This paper introduces a novel blockchain smart contract integrated method, allowing project stakeholders to resolve power imbalance problems in construction payment through decentralized decision-making.
Purpose
The UK government has elaborated the effect of late payment on the economy, with its impact on the construction sector being particularly pronounced. This paper aims to evaluate the late payment epidemic that persists within the construction industry, specifically analysing the effectiveness of government-led voluntary payment initiatives.
Design/methodology/approach
A mixed philosophical lens is adopted that incorporates both pragmatism and post-positivism to examine the late payment phenomena. Couched within deductive reasoning and a case study strategy, a questionnaire survey was conducted to elicit responses from one-hundred construction professionals. Elucidating upon respondents’ perceptions of the UK’s late payment epidemic, a comparative analysis was undertaken of upstream (main contractor) and downstream (subcontractors/suppliers) contractors through Cronbach’s alpha, descriptive statistics, independence chi-square test, Kruskal–Wallis test and Mann–Whitney U test.
Findings
Emergent findings reveal that in practice, the monitoring and enforcement of government-led voluntary payment initiatives has been unprosperous with numerous contractors being forced to adopt indefensibly poor and punitive payment practices. Survey responses and extant literature substantiate and underscore the industry’s need to strengthen voluntary government-led payment initiatives. To create a responsible payment culture, any future code created should be mandatory and enforceable as a self-regulating approach has failed dismally. The work concludes with practical additional measures that could be introduced to create a responsible payment culture and promote ethical trading within the UK construction industry.
Originality/value
This paper constitutes a novel vignette of, and reflection upon, contemporary practice in this area of construction finance and serves to emphasise that very little has changes in the sector despite numerous UK government led reports and interventions.
The increasing complexity of construction projects combined with the inefficiencies in conventional construction management techniques has led to unnecessarily elongated payment cycles and other payment problems which can adversely affect the performance of projects and involved stakeholders. The rising concerns around construction payment problems have led to the introduction of prompt payment legislation in various jurisdictions worldwide with the common objective of increasing cashflow down the construction pyramid in a fair and reasonable manner. While prompt payment legislation aims to alleviate payment problems, their impacts and challenges remain unclear. In light of this, the main objective of this paper is to investigate construction payment problems, their common root causes, impacts, and potential mitigative options. Moreover, the paper also provides a critical review of prompt payment legislation introduced and implemented in different international jurisdictions for addressing the timeliness of payment in the construction industry. This review was followed by an analysis of the challenges in the implementation of such legislation as well as recommendations for effectively addressing them. Finally, this research can be utilized as a valuable resource for various jurisdictions who wish to address construction payment problems by introducing and effectively implementing prompt payment legislation.KeywordsConstruction payment problemsLegislation and challenges
Contractors frequently outsource their work to subcontractors. Because of the intense competition in the construction industry, contractors are constantly looking for ways to reduce bid prices. This paper outlines a negotiation strategy whereby the contractor requests lower prices from subcontractors in exchange for shorter payment lags. Even before receiving payment from the owner, the contractor agrees to pay subcontractors. While prompt payments lessen the financing costs for subcontractors, lower subcontractor prices lower the contractor's bid price. In contrast to the industry standard of "pay-when-paid," this new payment offer of "pay-before-paid" signifies a paradigm change. In order to assign project work packages to prospective subcontractors based on their provided prices for specific payment-lag alternatives, a Genetic Algorithm (GA) optimization model is developed. The GA model's objective is to decrease the contractor's bid price. The scalability of the GA model was established through solving large-size problems.
Outsourcing works to subcontractors has been a common practice in the construction industry. Because of the high competition in this industry, contractors always seek opportunities to reduce bid prices. This paper presents a process of negotiating win-win payment terms wherein the contractor offers shorter payment lags and in return solicits subsidized prices from subcontractors. Subsidized prices enhance the contractor's bid competitiveness while prompt payments reduce the subcontractors' financing costs. This provision, referred to here as “pay-before-paid”, represents a paradigm shift as opposed to the industry prevailing provision of “pay-when-paid”. A Genetic Algorithm (GA) model is proposed to assign project work packages to subcontractors based on the subsidized prices offered for contractor's predefined payment-lag options to minimize the contractor's bid price. Benchmarking the GA against the exhaustive enumeration proved the robustness of the GA. In addition, the scalability of the GA model was established by solving large-size problems.
Game theory provides a rigorous mathematical approach to evaluate and predict stakeholders' interactions. Even though the construction industry is rich with encounters among its stakeholders, construction engineering and management (CEM) research lacks a thorough investigation of game-theoretic applications. This paper presents an overview of the current game-theoretic models in CEM research , aiming to enhance the understanding of the applications of game theory in analyzing CEM strategic interactions within multiple application domains and project delivery systems (PDSs). The authors analyzed 87 CEM peer-reviewed publications employing game-theoretic models between 1998 and 2019. The analysis accounted for CEM application domain, involvement of stakeholders, PDS addressed, and type of game theoretic solution used in each publication. The authors performed a Social Network Analysis (SNA) of the current game-theoretic interactions, identifying literature trends and gaps to be addressed in future research. Unlike traditional literature review methods, SNA provides a quantitative approach in analyzing the existing body of knowledge. Research findings demonstrate the contributions of game theory in seven CEM applications (conflict resolution; bargaining and negotiations; allocation of cooperative benefits; governance and supervision ; evolution of cooperation and trust; construction bidding; and risk allocation). Through SNA, the highest degree centrality levels were found in Owner-Contractor games in the context of CEM bidding, conflict resolution, as well as bargaining and negotiations. SNA also revealed the need for further investigation of interactions among CEM stakeholders within PDS other than the traditional Design-Bid-Build and Public-Private-Partnerships. Moreover, games featuring strategic alliances and supply chains of multiagents can provide more adequate reflections of actual interactions.
Subcontract practices are commonly applied in construction projects when the activities are enormous and require certain subcontractors who specialize in their fields. Subcontractors work for a main contractor under separated contracts from the main contract. However, subcontractors are often affected by problems between the main contractor and project owner. Problem of late payment by the owner to the main contractor is the problem that directly impacts the subcontractor. The disadvantage is due to the clause in subcontracting known as conditional payment that arranges a subcontractor’s payment after the main contractor is paid by the owner. This problem is often experienced by subcontractors in the Indonesian construction industry. This study is conducted in order to understand the cause and effect of conditional payment practices in Indonesia. Following a literature review, 22 cause factors and four effects are established and developed into a questionnaire. The questionnaire was distributed to subcontractors in some cities in Indonesia. Data is analyzed using frequency index. The result of the analysis indicates that the most frequent factor causing conditional payment is the subcontractor’s inclination to avoid dispute. Subcontractors try to maintain long-term working relationships in order to sustain their company, which becomes the main reason for entering into a conditional payment agreement. The analysis also shows that the effects of conditional payment are subcontractors’ cash flow and performance. Interestingly, cash flow difficulties experienced by subcontractors are instigated from the owner’s financial problems, which affects contractor’s cash flow. Consequently, contractors compensate subcontractor’s work with installments. This research provides potential underlying reasons for the practices of conditional payments in Indonesia’s construction industry.
Game theory (GT) is a mathematical tool to help different parties involved in an interaction (i.e., game) predict the outcome of their actions. Complex interactional situations may arise as a result of dispute resolution cases. There are various types of alternative dispute resolution (ADR) approaches such as arbitration, conciliation, and mediation. Mediation is an informal way of solving conflicts or disagreements among two or more parties and involves of a neutral third party as the mediator who helps facilitate and settle the disagreement. Prisoner’s dilemma and chicken game are the two GT models that are the focus of this research to be explored as a decision support tool in mediation. This study investigates how these models can be used to predict the conflict outcomes for all parties and their consequences on each party’s interests in different scenarios where a mediator is involved. Two case studies on conflicts between different parties involved in construction projects are presented. In these case studies, the role of the moderator in resolving the conflict based on GT models is described. Results indicate that GT can be an extremely useful tool to help make decisions about the outcome of different actions in conflict resolution scenarios.
Cash flow management entails forecasting, monitoring, and controlling practices of the cash inflow and outflow and arrangement of deficits over a project’s duration. This article reveals, through a questionnaire survey, the techniques and practices that construction companies in the Eastern Province of Saudi Arabia follow to forecast and manage cash flow at the project level. The majority of the contractors perform cash flow forecasting for setting a cash flow baseline and determining the proper financing method. They use credit financing for materials, subcontract a good portion of projects, and use company assets and credit financing to pay for equipment and labor.
The financing cost depends on the incoming and outgoing cash flow throughout the project, and can differ greatly from project to project. This study proposes a model that calculates the expected financing cost based on the cash flow forecast. This approach is more realistic than assuming an approximate percentage of the total cost. The proposed model calculates the bid price using an optimized financing cost that is obtained by selecting an optimum combination of available financing alternatives offered by different lenders. The proposed model minimizes financing cost, reduces the bid price, enhances the competitiveness of the bidder, increases the contractor`s negotiating power with a lender by providing an optimum financing schedule, and eliminates the risk of financing surprises during construction. This study investigates the impact of different financing considerations on bid price in three cases to prove the effectiveness of the proposed model.
Despite the huge increase in international construction revenue for Korean construction firms during the last decade, only 8% of the overall international construction revenue has been executed by small and medium-sized construction companies (SMCCs). In addition, Korean SMCCs yields lower profits rather than large construction companies. This is due primarily to the fact that SMCCs, as subcontractors, are generally hampered by lack of financial and technical capabilities, shortage of experience, and lack of information. The low profit eventually affects both general contractors and project performance as a whole. The aim of this research is to create a framework that considers the risks of subcontractors in international construction projects to allow them to create a win-win strategy. The framework considers two perspectives: the level of the subcontractor’s performance and the interface risks between the general contractor and the subcontractor. The performance is assessed using the cost, schedule, and quality of the project’s outcome. By using 77 risks identified as relevant, a correlation analysis is performed to determine the critical risks from both perspectives. The results are found to create a strategy matrix that considers both the degree of partnership and the performance of the subcontractor. This research is expected to support industry practitioners in developing a win-win strategy, which will eventually provide them with successful entry into international construction projects.
In construction projects, overall markup amount needs to be distributed to each activity. Therefore, a unit price for each activity in unit price bid should be submitted including markup and a value of each activity including cost and markup is required by project owners in lump-sum contract. Since distribution of markup can affect a contractor's cash flow, a contractor's profit markup distribution has been of interest to contractors and researchers. Two existing methods for markup distribution are proportional distribution and front-loaded unbalanced distribution. While the proportional markup distribution approach is simple and straightforward, it does not relieve the contractor's financial burden which is transferred from the project owner. While the front-loaded unbalanced markup distribution approach can improve the contractor's cash flow, this approach is regarded as an unethical strategy due to potential additional cost to project owners. Furthermore, a front-loaded unbalanced markup distribution may not be accepted by project owners. This paper presents a new approach to markup distribution which is based on different markup rates among different cost items. A framework for the new approach was developed using an Excel spreadsheet and the Excel solver add-in. The framework is to find the optimal markup rates for cost items, and the optimization problem can be solved by the Excel solver. The framework, furthermore, can enhance understanding and control of the problem solving procedure through visual presentation of variables in the Excel spreadsheet. The proposed framework would be helpful to contractors as an alternative tool for markup distribution in construction projects.
This paper presents a cooperative-bargaining game model for quantitative risk allocation that extends the previous existing system dynamics (SD) based model. The proposed model accounts for both the client and the contractor costs to perform the quantitative risk allocation process. In this research, the behavior of contracting parties in the quantitative risk allocation process is modeled as the players’ behavior in a game. The cooperative game forms at a risk allocation percentage at which the summation of the client and the contractor costs are minimized. A bargaining process is then performed to share the benefit of a decrease in the contractor costs between the client and the contractor. To evaluate the performance of the proposed model, it has been employed in a pipeline project. The quantitative risk allocation is performed for the inflation as one of the most important identified risks. It is shown that using the proposed cooperative-bargaining game model, the percentage of risk allocated to the client is determined to be 100. Hence, the client and the contractor costs are decreased by 3.1 and 3.7 % in comparison to the previous SD-based risk allocation approach, respectively.
Not bidding for a project could result in losing a good opportunity to make substantial profit, improve the contractor's strength in the industry, gain relationship with the client, and more. However, bidding for inappropriate projects may result in large losses or the consumption of time and resources that could be invested in more profitable projects, ultimately even financial failure of the contractor. This dilemma expresses the importance of the bid / no bid decision till it become one of the most critical decisions that have to be made by construction companies. The high complex process is a major characteristic of the bidding decision, which involves a large quantity of objectives and reflection of several internal and external factors. Smart contractors realise the importance of doing initial research and project evaluation before committing themselves to a construction project. This paper reports on-going research aims to develop a framework that can be used as a decision aid for project evaluations at the initial project selection decision phase. The results from a review of the literature concerning the bid / no bid decision are presented, and a conceptual model is developed. The work aims to contribute to the body of knowledge available on project evaluation processes and the research agenda related to enterprise project management in the construction industry.
Trust is crucial for achieving optimum benefits from supply chain integration and collaboration in the construction sector. Yet relationships between main contractors and subcontractors continue to be influenced by issues that promote vicious circles of distrust. This research investigates the trust influencing factors in main contractor–subcontractor relationships on projects. Empirical data was gathered from across four case studies through semi-structured interviews, non-participant observations and document reviews, and analysed using thematic analysis. Findings revealed that the change management process, economic climate, payment practices, perceptions of future work opportunities, job performance and the project-specific context influence trustfulness and trustworthiness of the different parties. The findings also imply that stronger trust in the main contractor's supply chain can only be realised and sustained through promotion of trustworthiness-induced rather than benefit-induced trustfulness.
A typical construction project involves a wide range of disparate professionals, in many cases geographically distributed, working together for a relatively short period of time on the design and construction of a facility. Since organizations are becoming flatter, culturally rich, geographically diverse and intensely competitive, the possibilities for conflict in such environments are greater. Negotiation is an important aspect of a project and plays an important role in resolving claims, preventing disputes, and keeping a harmonious relationship between project participants. Part of any project manager's role as a leader is to recognize conflict, understand the sources of conflict and manage it, and to do this a project manager must be able to understand the basics of negotiation theory and have sufficient competencies to lead in such situations. To address the complex technical and human issues in negotiation, different negotiation theories and models are available which mainly include game theory, economic theory, and behavior theory. Since Game Theory provides, by its very nature, the appropriate tools for the analysis and eventual solution of conflicts of any kind, this paper uses a model based on Game Theory in order to identify the activities that are responsible for the delays in a project and divide the costs among them.
In the construction of most projects, a significant role is played by specialty contractors, also commonly referred to as subcontractors. Despite the importance of subcontractors, little is publicized about the actual process by which subcontracts are initiated, how award arrangements are. made, or how subcontracts are managed. An exploratory study was conducted that focused on this subject. Information was obtained on bidding practices, subcontracting arrangements, administrative practices, payment procedures, and project closeout. The results provide information on various methods used by general contractors to place subcontractors at risk. Bid shopping appears to be a continuing practice in the construction industry, with little recourse for subcontractors. Subcontractors are often contractually required to assume risks that they would not otherwise assume. They are often required to assume all the obligations as stipulated in the contract between the owner and the general contractor, but are not afforded the opportunity to examine it. Payment problems continue for subcontractors, with the practice essentially accepted by subcontractors as being a part of doing business. Suggestions are offered for improving the relationship between subcontractors and general contractors.
A method is presented that determines optimum bids in a competitive-bidding situation where each competitor submits one closed bid. The number of bidders may be large or may be unknown. This method makes use of the previous “bidding patterns” of all possible opposition bidders and in the case where the bidding is on contracts, the estimated probability distribution of the cost of fulfilling the contract. The case where a number of bids are to be submitted simultaneously is also discussed.
Strategic negotiation of subcontracts appears to contain many benefits regarding cost savings, quality improvement, better project time management, and project value enhancement. The primary purpose of the study presented in this paper is to investigate the current and prospective concepts of negotiable subcontract conditions in the Australian construction industry that can alleviate elongated negotiations and attain a win/win result for both contractor and subcontractor. The study first discussed legislative regulations and opinions concerning subcontract negotiation through extensive review on academic literature and Australian Standards including AS 4903 General conditions of subcontract for design and construct and AS 4300 General conditions of contract for design and construct. The study was further developed in the form of a survey, collecting data from 71 respondents (i.e., contractors and subcontractors) from the Queensland, New South Wales and Northern Territory construction industries in Australia. Cronbach’s alpha assessed the reliability of survey responses. The research then statistically analyzed not only critical negotiation factors contributing to project performance based on Fisher’s exact test but also significant differences between contractors’ and subcontractors’ viewpoints to subcontract negotiation by ANOVA testing. The survey results revealed that contractors and subcontractors attain different opinions regarding the fairness of subcontract conditions; however, both parties believed that there were genuine opportunities to improve project performance and value via the negotiation of subcontract conditions using an integrative approach.
Construction is a risky business, and subcontractors often find themselves in financial difficulty, which results in business failure. This paper reports the results of a study undertaken to investigate the primary causes of subcontractor business failure and to identify strategies for preventing failure. Construction industry bankers, bonding professionals, construction accountants, and specialty construction firm owners were interviewed to collect information regarding the primary causes of business failure, to determine if the primary causes varied based on the size of the construction firm, and to identify strategies that company leaders could adopt to prevent these problems and reduce the risk of business failure. There were some external economic factors identified that influence the profitability of a firm, but most of the causes identified relate to the business practices of the company and the lack of an effective business plan. The primary causes of business failure identified were insufficient capital/excessive debt, lack of managerial maturity, lack of early warning measures, increase in project scope, poor billing procedures, failure to evaluate project profitability, unfamiliarity with new geographical areas, and poor use of accounting systems. Based on the results of this analysis, risk management strategies were developed for small, mid-size and large firms.
Purpose – Researchers in supply chain (SC) payment management have long sought to understand how project contractors, project owners, specialist contractors, and suppliers behave in the context of negotiating payment terms that improve contractors' SC cash flow.
Design/methodology/approach – Using a single case study approach, semi-structured interviews with contract and project managers identify behavioral patterns. An analysis of categorical experiments and Spearman's correlation tests on 118 surveys from Taiwanese project contracting corporations generalizes the case findings.
Findings – The findings suggest that payment terms of project owners, specialists, and suppliers have an important impact on contractors' working capital. The findings also reveal that contractors pass project owners' payment terms down to specialists and suppliers, suggesting that contractors' behavior depends on that of the project owners.
Research limitations/implications – This paper generalizes the case findings via surveys, but does not assume that the reported behavior patterns apply to all business enterprises. Future research could triangulate the findings.
Originality/value – This study combines qualitative and quantitative methods to understand how the project owner-contractor-supplier (or owner-contractor-specialist) triad behaves. Particularly, it focuses on an economic sector – real estate and construction – that receives less research interest than processing or manufacturing.
Given the current level of international interest in game theory and its applications in AI and computer science, it seems worth pausing to consider whether game theory actually works. This article considers the evidence available in support of the two most common interpretations of game theory: the descriptive interpretation, which considers game theory as trying to predict actual behavior, and the normative interpretation, which considers game theory as providing advice on how to act optimally.
A multivariate competitive bidding model takes into account the correlation among competitors in determination of markup size. However, parameter estimation for the multivariate model is a challenging issue. A simplified, piecemeal style statistical method was proposed for low-dimension problems. However, this method may cause significant estimation errors when applied to complex bidding situations. A refined Bayesian statistical method based on Markov chain Monte Carlo (MCMC) simulation is developed that can be employed in practical bidding problems. To deal with missing values in bid data, a data augmentation technique is integrated in the MCMC process. The proposed Bayesian method is shown through case studies to be robust for complex bidding situations and also insensitive to the selection of the prior models of the correlation matrix. An important feature of the proposed Bayesian method is that it allows a project manager to quantify statistical uncertainties of parameter estimation and their effects on markup decisions. The optimal markup is represented by a posterior distribution which paints a complete picture of the uncertainties involved in the markup size decision.
Subcontractors are very important to the successful completion of most construction projects, yet the many issues involved in subcontracting practice are seldom acknowledged. A literature review indicates that these issues include the timeliness of payments by general contractors, the process of selecting subcontractors, subcontractor bonding, construction insurance, safety issues on the construction site, partnering arrangements with various parties, and productivity issues. A questionnaire survey was administered to subcontractors, general contractors, and construction owners to investigate these issues and to determine the differences in perceptions between the parties. The results confirm the existence of the issues identified in the literature and in addition indicate that (1) the practice of retainage withheld by general contractors seems to be acceptable to many subcontractors unless its magnitude is large relative to the size of the firm; (2) postaward bid shopping by general contractors is sometimes justified, particularly in cases where the scope of subcontract work is modified; and (3) current bonding and insurance practices are adequate unless the additional transferred risks are excessive. Recommendations are made on the basis of the findings to minimize the negative effects of said issues.
In recent past the United States Department of Transportation has implemented a number of changes in regulations regarding federal-aid transportation projects. Some of these regulations are designed to help the disadvantaged business enterprise (DBE) firms and subcontractors in general, by requiring the general contractors to pay their subcontractors in a timely manner. Further, these regulations require that general contractors pay their subcontractors' retainage after the subcontracts are completed, even if they have not received their own retainage from the owner. This paper reviews these new regulations and introduces a financial model for quantifying the effect of these new regulations on the contractors' profit and the cost of transportation projects. The analysis is done using a spreadsheet-based cash flow model that takes into consideration the expenditure curve, the owner and general contractor's payment and retainage policies, front money, finance charge on negative cash flow, and interest income on positive cash flow, and final payment and return of retainage policies. A survey was conducted among contractors in Massachusetts and their input was used to run the cash flow model. The results of the analysis for eight different projects are presented and it is shown that the new regulations, on average, reduced the contractor's profit by 4.35%. It is also shown that the average potential cost increase for transportation projects is 0.14%.
Despite their significant role in construction projects, subcontractors have not been given fair attention by industry researchers. The literature contains very few studies focusing on subcontractors' bidding practices. Subcontractors were contacted via a questionnaire to collect information revealing these bidding practices. This study details knowledge of actual subcontractors' bidding practices including the invitation to bid, bid submission, pre-and postbid negotiation, and the relationship with contractors. The results show that contractors' bid invitations are poorly prepared and contain very abstract information. Upon acceptance, a subcontractor prepares and submits quotations to all inviting contractors just a few hours before the main bid opening time. Some subcontractors attempt to induce contractors to divulge other subcontractors' quotations, but the majority of contractors refuse to release such information. On the other hand, some contractors shop for bids after the award of the main contract. All contractors negotiate with subcontractors after the award of the main contract. Timely payments and price fluctuations are the major elements of the negotiations. Suggestions are presented to contractors and subcontractors for improving subcontractors' bidding practices.
This paper is based on a major survey of tendering practices in the Australian building industry. The material was obtained from interviews comprising a stratified sample of 43 subcontractors representing five trades and four different size groups. The results show that the most important factors affecting subcontractors' bids to general contractors are a good past relationship with general contractors, a reputation for prompt payment, discussions of how the job will be done, planning and supervision of the work and a reputation for finishing projects on time. The majority of subcontractors seek and receive feedback from general contractors regarding the prices that other subcontractors are quoting on or before tender day. However, only the larger subcontractors respond to this feedback by lowering their bids.
Bid decisions by subcontractors are complex due to the uncertainty about many factors affecting their outcomes. This study was able to identify, through a questionnaire survey, many factors characterizing the bid decision-making process. The questionnaire was mailed in August 1995 to 320 subcontractors in Colorado. The results indicate that the contractor's credit history, habit in the issuance of periodical payments, and leadership and capability in planning and managing the project are identified as the top factors that affect a subcontractor's decision to bid for a project. The subcontractor's previous relationship with the contractor, the contractor's capabilities, financial capacity, current work load, and specialty, and the prospect of future business relationships are the highest ranked factors affecting quotation decision. Suggestions are advanced to subcontractors for improving their bidding decisions.
Purpose
The purpose of the paper is to perform bid mark‐up optimisation through the use of artificial neural networks (ANN) and a metric of the selected bid mark‐up's derived entropy. The scope is to provide an alternative, entropy‐based method for bid mark‐up optimisation that improves on the analytical models of Friedman and Gates.
Design/methodology/approach
The proposed method enables the incorporation of bid parameters through the use of ANN's pattern recognition capabilities and the integration of these parameters with a mark‐up selection process that relies on the entropy produced by possible mark‐up values. The entropy metric used is the product of the probability of winning over the bidder's competitors multiplied by the natural logarithm of the inverse of this probability.
Findings
The case study results show that the proposed entropy‐based bidding model compares favourably with the prevailing competitive bidding models of Friedman and Gates, resulting in higher optimisation with regards to the number of jobs won, the monetary value of contracts awarded and the value of “money left on the table”. Furthermore, the method allows for the incorporation of several objective and subjective bid parameters, in contrast to Friedman's and Gates's models, which are based solely on the bid mark‐up history of a bidder's competitors.
Research limitations/implications
While the proposed method is a useful tool for the selection of optimal bid mark‐up values, it requires historical data on the bidding behaviour of key competitors, much like the classic bidding models of Friedman and Gates.
Originality/value
The method is suitable for quantifying objective and subjective competitive bidding parameters and for optimising bid mark‐up values.