The second meeting was with Professor Said Boukendour, who is spending his sabbatical with us, from University of Quebec. We are working on a paper about a new way of arriving at a price for a Guaranteed Maximum Price (GMP) contract. We spent our time talking about the similarity that Said had noticed between these contracts and call options. In traditional GMP contract, the bidder is incentivized to push the GMP up. This will increase the contractor's profit because of the way that the difference between the outturn and the GMP is shared with the contractor. Competition between contractors would overcome this, except that the evidence is that GMP is usually a negotiation with a sole contractor. So, it the GMP is artifically high, then this sets up a low-risk, high-compensation deal which goes against the rational, economic approach. Perhaps this is an unintended consequence. Without competition, this situation can be overcome through open-book accounting, by enabling transparency. But this seems to be saying that even though GMP incentivizes the behaviours we wuold like to see, we still need to check the detail, being unable to trust the contractor to behave. Does this mean that GMP inherently fails to incentivise the contractor adequately? This was the issue that Said had dealt with in an earlier paper. I was thinking that if a contractor offered open-book, then this is a gesture of goodwill, whereas if a client insisted upon it, then it implies that GMP is not a sufficient incentive and is being reinforced with intrusive monitoring. Said's point is that if there was an effective financial incentive, then there would be no need for all the detailed analysis of open books. This was the thrust of his 2001 paper. Simplifying the construction situation, a GMP contract based on one lump-sum payment at the end of the contract is exactly the same as a call option in other types of market. This means that the GMP can be seen as a cost-plus contract with an option to switch to a lump-sum. This is interesting because there has already been a lot of work on call options. Using this understanding as basis, we are developing an approach to incentivizing construction contracts in a very effective way.
The third meeting was with Jan Hillig who had finished a very detailed edit of our chapter in a forthcoming book about procuring complex performance. Wisdom Kwawu had developed the initial draft from my outlinem and I'd thought the chapter was just about complete until Jan worked his magic and added some detailed sections on legal aspects as well as editing the rest of the chapter in considerable detail.
By the time I was walking over to a seminar with 20-odd industry people to launch our new Technology for Sustainable Built Environments, I was feeling that we'd had a very productive and enjoyable morning. What a team!