Modeling Contractor’s And Subcontractor’s Trust: A System Dynamics Approach

Modern constructions processes rely on the contributions of diverse functional specialists working in inter-organizational teams to design, cost, procure and manage modern construction projects. Moreover, construction companies are increasingly dependent on the organizations; they supply to and buy from, particularly leading contractors who in most cases act as management contractors, subcontracting work in packages to a range of specialist contractors (Constructing Excellence, 2004). The critical importance of subcontracting to the success of construction projects has long been recognized. Gray and Flanagan (1989), in their comprehensive study of subcontracting, concluded that it would account for an increasing proportion of total construction workload. Lead contractors can use specialist contractor’s cash flow as a means of surviving the volatility of the construction business cycle a practice that still causes much tension in the supply chain. Co-operative relationships between and among supply chain partners are crucial to successful supply chain implementation.

According to Hsieh(1998), the benefit of subcontracting is that it not only allows the general contractor to acquire various construction services efficiently from the resource market but also is an effective means of cost control and risk management. Unfortunately, this practice may also pose tremendous barriers to site productivity. Hsieh (1998) attributed that the institutional gaps between the general contractor and the subcontractors are crucial factors affecting site productivity. This is due to the lack of trust and negative attitudes. Moreover, this attitude towards many of the essential requirements of supply chain management suggest that the industry is a long way off being able to align systems and procedures for improved project performance (Constructing Excellence, 2004). The key barriers to develop trust as well as greater integration seem to stem from the industry’s traditional approach of vertically differentiating the construction process, which results in a subordinate position for subcontractors within the hierarchy of relationships forming the traditional design–management– construction process. Consequently, main contractor–subcontractor–supplier relationships are often found to be strained and adversarial (Hinze and Tracey, 1994; Latham, 1994).

Alternatively, poor performance of subcontractor, conflicts with payment generates distrust of the contractor towards the subcontractor. Indeed, the cultural issue of mistrust between the parties has been seen as a fundamental barrier to the increased understanding of each others’ needs and further supply chain integration (Dainty et al., 2001).

Trust is dynamic and either growing or diminishing (Hawke, 1994). It is often associated with situations involving personal conflict, outcome uncertainty and problem solving. It is a prediction and expectation of future events. Varying in intensity, this is the confidence in and reliance upon the prediction (Nyhan and Marlowe, 1997). As trust is the fundamental element for a successful project team and is also varying with time thus it is very difficult to managers to make decisions effectively in order to maintain good trust between team members during several stages of project. Most of the time project participants interpret the team-relationship in one direction and hence make decision without thinking other negative factors that may impact on the team performance. However, the uncertain nature of trust is involved many critical factors which leads to make contractual relationship more complex in respect of maintaining trustworthy environment. Trust can be regarded as glue that fosters cooperation among organizations and different team members and an essential lubricant that helps to complete the project smoothly (Wong and Cheung, 2005). As trust is dynamic e.g. if either one deteriorates, this will have a negative impact on the other, thus a system dynamics model related to trust in creating project team can help to make decisions effectively and encounter the problems related to parties’ relationship as it involves two major characteristics: 1) changes over time and 2) allows feedback. System dynamics model are well suited to representing multiple interdependencies, to deal with dynamics nature and involved in significant feedback processes (Ogunlana et al., 1998).

Ms. Azmeri Rahman made a study which focused in developing a system dynamics model of trust from both contractor and subcontractor point of view in order to experience the impact of factors on trust.

The primary objective of her study was to address the critical issues in developing trust model for effective supply chain integration between contractor and subcontractor in construction industry using System Dynamics Approach. The secondary objectives of the study were specified as follows:

- To identify attributes of trust in a contractor’s and subcontractor’s relationship.
- To develop generic system dynamics model of trust from both of contractor and subcontractor perspectives in order to explain how the factors affect the trust in developing an effective relationship.
- To develop adopted system dynamics models for different construction projects.
- To formulate implementable policies that may accelerate the trust level between the contractor and subcontractor.

Conclusion

The lack of trust between contractor and subcontractor on the adversarial nature of their working relationships has been characterized as a fundamental barrier to the increased understanding of each others’ needs and further supply chain integration. This appears to be preventing the active involvement of supplier companies to the construction process. As trust is path dependence phenomenon, thus it is extremely difficult to capture the behavior of trust in a construction project relationship at a holistic view. Therefore, by adopting system dynamics approach, two generic trust models from both of contractor’s and subcontractor’s perspectives have been formulated in the study to facilitate the contractors and subcontractors easily understanding trust related issues during their contact period.

Permeability, performances, satisfaction, business competency and equitable contract terms enhance trust building, where as bad experiences during interaction, negotiation approach towards conflict and unsatisfactory dispute resolution techniques deteriorate mutual trust between contractor and subcontractors. These are the key factors that have been found during generic model formulation. However, these issues are further influenced by several factors which have been explained briefly as follows.

- Permeability is positively influenced by effective information flow, frequent communication and openness of the contractual parties. Situation ineffective, inaccurate and unorganized information generate work uncertainty, increase rework amount as well as project risk. In addition, changes in project scope also accelerate uncertainty and enhance subcontractor’s claims regarding extension of time and extra/advance payment. Conversely, claim and risk make conflicts among parties which disrupt trust level.

- Performance level of subcontractor is directly measured by productivity which is extremely affected by work competency, joint approach of problem solving and adaptability of the subcontractor. Moreover, commitment towards completion of the project and on time resource availability enhances the productivity level positively.

- Satisfaction levels of subcontractor are comprised of complete and effective information and drawings from contractor, win-win negotiation and getting prompt payment from contractor. Problem solving or compromising attitude towards negotiation bring its efficiency. However, forcing attitude of contractor generate adversarial relationship as well as develop conflict between the parties.

- Frequent changes in design and project scopes, induce extra work and decline the business competency of contractor. Moreover, these additional works interrupt the flow of work as well as make the subcontractor to claim for advance and extra payment. Furthermore, claims reduce negotiation efficiency.

When the models have been calibrated for the case study projects, the simulated behaviors and historic behaviors have been found similar as long as relevant parameterizations have been undertaken. This implies that the model is able to simulate the dynamics of the trust relationship between contractor and subcontractor. After observing modified models, the following features have been concluded.

Commitment of subcontractor towards resource availability, work competency regarding technical, managerial and financial aspect and adaptability has been observed major barriers to the sufficient productivity. Knowledge sharing between the parties play significant role for information flow. Poor information and variation of honesty have been found as critical issues in permeability aspect. Making claim by searching contractual loophole has been found another problem, which erode trust level between the parties from contractor’s perspective.

Conversely, a forcing attitude toward subcontractors at negotiation and unfair dealing, especially when paying subcontractors, has been identified as being ways of destroying main contractor–subcontractor trust level as well as relationships. Financial stability of the contractor company has significant affect on business competency of the contractor as well as subcontractor’s trust. Moreover, incomplete drawings, frequent changes of design, lack of frequent communication and transparency in relationship have been identified other major attributes in diminishing trust between contractor and subcontractor.

Recommendations for the improvement of the contractors-subcontractors relationship

To encounter above mentioned problems related with trust, the following recommendations are suggested to the contractors and subcontractors to improve their relationships.

1. The contractor should change their contracting process by shifting from ‘‘Price Only’’ single criterion to multiple performance criteria. This criterion facilitates a competitive contracting process, which requires projects to be awarded to the contractor offering the best combination of price and qualifications, instead of just the lowest bid. Conversely, it is also concluded that subcontractor should give considerations in selection of main contractor based on the reputation as well as business competency of the contractor company.

2. The contractor should consider the subcontractors as internal team and manage as a site employee of the construction firm by putting more emphasis on the job training, project safety systems, documentation and evaluation of work ethics and performance, and team building. Alternatively, subcontractor should pay higher concern in achieving these improvement techniques by including more skilled workers and by reducing frequency of worker switching from site to site, and most importantly, by maintaining higher commitment to the project.

3. The most significant recommendation has been made here for integrating subcontractors into partnering approach. Partnering aims to reduce the adversarialism which is said to be typical in the industry and which has confounded previous attempts to encourage better integration and cooperation between contractual partners. It is also consistent with the general philosophy of partnering, in integrating all key participants and inculcating a common sense of project purpose, commitment, teamwork, and problem-solving. This established need for main contractor-subcontractor partnering must therefore be incorporated in the subcontractor selection criteria and reflected in the selection process itself. The needs to incorporate other non-price criteria in selecting subcontractors can also be addressed by drawing on appropriate approaches from innovative and ‘‘better practice’’ contractor selection methodologies that are also scanned in this paper. Examples include the incorporation of (1) indicators of responsiveness, responsibility, and competency; (2) performance ratings derived from previous projects; and (3) capacity ratings of potential participants.

Her thesis abstract is copied and posted.

ABSTRACT

A general mistrust within the contactor and subcontractor companies has identified one of the significant barriers to derive benefits from true downstream supply chain integration, can further lead to the development of adversarial relationships. Moreover, this kind of relationship is reflected in projects delays, adversarial attitudes, cost overruns, litigation and a win-lose climate. Using the general theory of trust in inter-organizational relations and conducting interviews, this research discusses factors that influence development of trust and cooperation in contractor–subcontractor relationships in construction projects. System dynamics is the simulation method is selected in this theory-building effort, based on qualitative data collected from two projects of a construction company in Thailand. Reference mode which leads to the formulation of dynamic hypothesis of trust is drawn by interviewing parties. Explanation of the changes or dynamic hypothesis is done based on the principles of feedback loop. Two generic models from both of contractor’s and subcontractor’s perspective, focusing on the aspects of trust formation, evolution, and propagation is formulated incorporating the dynamic hypothesis along with the other essential detail of the system relating to the problem being addressed. The simulation experiments show plausible path dependent behaviors with the characteristic asymmetries between trust and distrust described both in the literature as in the case data. Performance, permeability, satisfaction and system- based trust are found to make significant contributions toward parties’ trust level. In addition, the result suggests that the contractor’s trust level is more sensitive towards a wider range of action and behavior of their counterpart than vice versa. However, subcontractor’s trust level relies strongly on both of system based trust and permeability of the main contractor. Three strategic policies such as best value contracting, management of subcontractors as internal team and semi project partnering approach are recommended to stimulate the trust factors as well as cooperative long term relationship. The reliability of the findings is augmented by a confirmatory study with interviews with field experts.