March April 2010 CMAdvisor - 19

Professional Practice Corner
Incentives to Promote Collaboration
By CMAA College of Fellows
All contracts involve incentives. The choice is not between having incentives or not, it is about which incentives operate on the project team members and how to frame those incentives to communicate what is important to the owner. Consider the conventional GMP contract, often used in a CM‑At‑Risk environment. When subcontracted work on GMP projects is competitively bid, the low bidding subcontractors are given incentives to price their work with a suboptimal margin in order to win the bid. This in turn gives the subcontractor economic incentives to recoup some of that lost profit through change orders or claims. For most IPD projects, the owner seeks to avoid these traditional incentives to adversarial behavior by procuring on the basis of qualifications, and using negotiations, target value design and an incentive program to get value‑for‑ money from the project team in an environment of good will and collaboration. An effective incentive program focuses on a few key areas (e.g., cost, schedule, quality, safety, customer satisfaction) that comprise a “successful” project as a whole, keeping these areas in balance so as not to skew the project inadvertently towards one area. Use incentives wisely for areas of project performance where participants normally need added motivation and to create a complementary set of incentives that keep key project goals in balance. Most people are not solely motivated by money. Social science posits that project participants have basically two types of motivation: economic and intrinsic. Economic motivation arises from compensation terms while intrinsic motivation arises from the performer’s own internal values and preferences. Financial incentives can motivate a performer, but only when he or she feels that the payout is worth the effort. Intrinsic motivation, on the other hand, often provides performers with non‑economic reasons to perform beyond the bare minimum a contract requires. In situations where one normally acts as a result of intrinsic motivation, providing economic incentives for that same behavior can displace the intrinsic motivation, sometimes with adverse results. However, contract incentives generally do not undermine intrinsic motivation when: • The incentive is implemented in a way that makes performers responsible for the means and outcome of their performance. This reinforces their autonomy and helps satisfy the need for self‑determination. An incentive should not be too prescriptive. • The principal and performer discuss the results in person. Face‑to‑face communication signals the principal’s respect to the performer, and thus reinforces autonomy and self‑esteem. Discussing performance also gives feedback that allows for improvement. • Performers participate with the principal in setting goals. By involving the performer in the formulation of project goals, the principal enhances the performer’s sense of autonomy and communicates respect for the performer as a collaborator. Moreover, it is important to consider who participates in the incentive program, and to what degree. Projects may include some participants in the award fee program, but not in the painsharing/gainsharing program. Or they could have different award fee programs for different types of project players. Not all project players have a significant effect on the outcome of a project.

Painsharing/Gainsharing
Painsharing generally operates through the mechanism of a pool of profit contributed by each of the participating members of the design and construction team. Often, only the major players participate. The profit pool is available to pay for cost overruns. Once the pool is exhausted, the owner typically bears the risk of further cost overruns, unless done in the context of a GMP, where the CM would share the costs of overruns with other project team members up to a point, with further overruns borne by the CM alone. If there are cost underruns, some portion is usually added to the profit pool and distributed in accordance with the negotiated percentages in the incentive program (“gainsharing”). Frequently, the percentages are based on the parties’ estimated compensation in relation to the estimated construction cost of the project, although the percentages might be weighted to provide a greater share to the designers, since their raw percentage might be viewed as disproportionate to their influence on project outcome. The main purpose is to provide a commercial structure that promotes team behavior rather than simply individual behavior. By requiring at least the major players to share in the risks and benefits resulting from a common fund, the key project players now have financial interest in helping each other. In addition, putting profit at risk gives all key team members—not just the CM—“skin in the game” to keep them focused.

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March April 2010 CMAdvisor

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