Power of Incentivization in Construction Dispute Avoidance

Abstract

Perception of unfairness stems from disproportionate risk allocation and power distribution. In traditional design-bid construction projects, it is common to find employers shifting all risks to the contractor. Another imbalance is the substantial power difference between these two parties. Most conditions of contract allow employers’ agents to exercise unilateral final decision-making authority. The feeling of being treated unfairly is, in fact, a contributing factor in construction disputes. Incentivization may offer an avenue to address this imbalance and consequently reduce the occurrence of construction contract disputes. This paper examines the use of construction incentivizations in moderating the gaps in risks and power between employer and contractor during the construction stage of projects. The function of incentivization in (1) reallocating risks; (2) increasing investment in relationships; and (3) patching perceptions of fairness is discussed. Incentivization can be used to reinforce relational governance by narrowing the gap in risks, responsibility, and bargaining and sanction power. A proposed conceptual framework presents the function of incentivization in minimizing construction disputes. A case study illustrates the propositions. It is further recommended that a mutually acceptable norm of profit distribution be established as an integral part of incentivizations so that a perception of fairness can be restored. Such an incentivization arrangement could enhance dispute avoidance.

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