To be or not to be: why do transaction partners in construction industry avoid formulating agreements into contract documents?

Abstract

Designing the construction contracts efficiently and effectively is vital for project success since contracts can not only motivate and regulate behaviours in projects, but also plays a crucial part in managing interfirm relationship. In practice, however, transaction partners in construction industry sometimes avoid formulating all the agreements into contract documents, which is contradictory to common logic. The aim of this research is to prove the existence of such phenomenon and to investigate the reasons for why it happens. Both questionnaire and semi-structured interviews were conducted in construction industry in China for data collection since China provides fertile context to explore the research questions. The questionnaire was used to prove the existence of such phenomenon and the interviews were used to explore the logic behind. The results show that in nearly 50% of the construction projects in China, the phenomenon of the transaction partners deliberately avoid formulating some agreements into contract documents exist. Given explanations as for why this happens include: 1) showing trust towards the other partner, 2) reducing risks in transaction, 3) increasing the possibility of further collaboration in the future, 4) bypassing the contract check in their own legal departments, and 5) preventing other competitor companies in the market from stealing technology through the contract documents. A comprehensive understanding for designing contract documents is generated in this research, which will not only help project managers for project success but also provides insights into drafting contract terms.