121220012 incentives in the chinese construction industry
Wenzhe Tang,Maoshan Qiang, Colin Young, David young & Youmei Lu.ASCE Journal July 08Presented ByAshutosh Patekar121220012
Introduction Selection of china as a study area Questionnaire Data analysis technique Survey results & analysis Example of using incentives: three gorges project Balance scorecard technique Derivation of incentive matrix Conclusion Future research directions References
This paper reports the findings of an empirical study of the Chinese constructionindustry into the need to apply incentives, frequency of the usage of incentives,how the incentive schemes should decided, and their effectiveness in application. it is necessary to adopt cooperative strategies to improve performance byreducing confrontation in the construction industry Such arrangements are underpinned by an incentive scheme, whereby the rewardsof the contractor and, indeed, the owner are linked directly to actual performanceduring the execution phase of the project. main reason for introducing incentives is that project benefits should be equitablyshared among participants. Commonly incentives involve a risk-reward or gain share/pain share formulawhich specifies the division of gains or losses that were based on an agreed targetcost Financial gain or loss should be decided according to the achievement of thetargets stated in the key performance indicators
China has created the largest construction market in the world, which may provideadequate data for this study. Chinese culture comprises certain core values such as trust and relationship thatinfluence business operations. practical limitation of resources has constrained the survey component of thisstudy to the construction industry in China. Six areas Hubei, Beijing, Shanghai, Jiangsu, Heilongjiang, and Guangxi werecarefully chosen for sources of data. In 2001, the overall construction production value of the six areas was UnitedStates $55 billion, accounting for 29.4% of the whole construction industry inChina. It was decided to use the principal stakeholders of the Chinese constructionindustry as respondents. It was decided that all types of project be included to reflect the overall picture ofthe industry as much as possible
A questionnaire was chosen as the principal survey method. Most questions were asked by using a five-point Liker scale, andother multichoice questions were applied, which permit differentstatistical techniques to be used to analyze the collected data. questionnaire survey was conducted through fieldwork, with theprojects and respondents being chosen and contacted in advance. An interview with the respondent after the questionnaire wascompleted has also been done, which helps to test and interpret theresults from the questionnaire survey. The total number of respondents is 115, and the distribution ofsamples is as follows: (18) Hubei, (38) Beijing, ten Shanghai,(19)Jiangsu, ten Heilongjiang, and (20) Guangxi
The data collected from questionnaire were analyzed using theStatistical Package for Social Science (SPSS) Other techniques used• Estimation of the sample population mean• rank cases• one-way analysis of variance (ANOVA)• Spearman rank correlation• chi-square test Of these statistical techniques the ANOVA, Spearman rankcorrelation, and chi-square test were adopted for inferential analysiswith the results being tested by their significant level.
First, respondents were asked their perceptions of the contract anddeliver system used in the industry. Question “What do you think about the allocation ofobligations/risks in the current delivery system? their perceptions of the allocation of risks according to a scale of 1–5, where 1contractors taking all risks; 2contractors taking morerisks; 3contractors and clients taking even risks; 4clients takingmore risks; and 5 clients taking all risks.
To investigate the need of incentives, respondents wereasked to give a response to the statement “the current contract has specified the risks and obligationsof the parties, but lacks incentives to promote betterperformance” on a scale of 1–5, where 1strongly disagree; and 5stronglyagree.
The overall score for the statement is 3.67, indicating that mostrespondents believe there is a lack of incentives to promote betterperformance To investigate the perceptions of applying incentives, respondentswere asked to give a response to the statement “incentives make theproject risk allocation fairer, because incentives can be seen as thesharing of rewards from good performance” Ranging from 1-strongly disagree to 5-strongly agree The overall score for statement is 3.98, and all groups believe thatincentives make risk allocation fairer between parties
Respondents were asked to give a response to the question “what isthe relevant significance of the objectives of cost, quality, andschedule/time of your project?” ranging from 1-not important, and5-most important. The quality objective was found to be the most important, ahead ofthe schedule/time objective and the cost objective. The low rating of the cost objective provides a solid base for partiesto reach incentive agreements.
Respondents were also asked to identify the incentives actuallybeing applied in their projects. They were required to respond on ascale ranging from 1 to 5, where 1-not applied, and5-alwaysapplied. In this table the top entry in each cell is the average rating of agroup, and the lower entry is the rank according to the rating.
Correlations among Participants on Incentives
To understand the project stage at which incentives are introducedto a project, respondents were required to give a response to thequestion: At what stage do the incentive provisions appear? The results are shown in Fig. 1.
The proportion of incentive provisions included at the planning anddesign stage is 10.1%. The proportion of incentive provisions included at the tendingdocuments is 22%, which are prepared by clients or consultants. another 22% of incentive provisions are decided by bothclients/consultants and contractors through negotiation at theawarding contract stage The remaining 45.5% of incentive provisions are decided at theconstruction stage, which has the largest proportion
To investigate the role of the parties in deciding the incentiveschemes, respondents were required to respond to the question:“who decides the incentive scheme?” The results are shown in Fig. 2. The majority of incentive schemes 58.6% are decided by clients andconsultants, and the remaining 41.4% of incentive plans are basedon negotiation among parties, suggesting that the use of incentivesin a project is largely decided by the choices of clients
The TGP is the largest hydropower project in China, which comprisesdams, power plants, and navigation facilities. The total investment isestimated to be $24.6 billion. construction period was scheduledfrom 1993 to 2009. The main functions of the project are floodcontrol, electricity generation, and navigation. Multiple incentive schemes were adopted in the TGP, which reflectedthe client’s priorities. TGP typically included five incentives: quality, schedule occupationalhealth and safety OH & S, and environment, informationmanagement, and coordination. The quality incentives have the heaviest weight of 45%, showing thatquality was considered as most important
Measurement of project performance is the key issue when settingup incentive schemes. Swamy 2002 summarized the evolution of performancemeasurement, and identified balanced scorecard BSC as animportant measurement technique since the 1990s. BSC has been adopted to appraise the incentive schemes of the TGP In traditional performance measurement there are weaknessesassociated with this approach1. The process is entirely retrospective: the tendency is to reviewperformance on completion. By then, it may be too late to take anycorrective action2. Measures tend to be the same for all projects, regardless of theproject aims and objectives3. The focus is on meeting accepted standards. This does notsupport an ethos of continuous improvement
The BSC is a performance management system which incorporatesfour main measurement categories perspectives: financial, customer,internal process, and learning, each with a wide range of potentialsub measures. attempts to integrate all the interests of key participants on ascorecard. BSC can be adapted to assist managing business functions,organizational units, and individual projects. BSC keeps an organization looking forward toward future growth,with the potential advantages being far greater than what traditionalmeasurement wud achieve. According to BSC, the TGP incentive schemes can be translated intothe scorecard as shown in Fig
As the incentive schemes can effectively facilitate improving projectperformance, it is desirable to develop the incentive schemes into aconcise matrix, which may facilitate other projects to develop similarincentive schemes.Incentive matrix can be expressed as eq aswhere I(i) =particular incentive, C =cost of the workX =percentage rate of the cost of the work, W(i)=weight of an incentiveα(i)=performance evaluation Index, R(i)=risk allocated fromnonconformance, RVE =reward from value engineering,Csave=cost reduction of value engineering proposalCEV=cost incurred for presenting the value engineering proposalβ= rate of sharing the net saving
The delivery systems currently being applied in China retain features of thetraditional systems. However, the limitations of these systems are beingrecognized, and it is agreed by all parties. All the parties also support the ideathat incentives make the project risk allocation fairer, because incentives can beseen as the sharing of rewards from good performance.4 Generally, the quality objective was found to be the most important, ahead of theschedule/time objective and the cost objective. The frequencies of usingincentives are consistent with the priority of objectives, and the quality incentive isthe most frequently used. It is found that the incentive provisions are mainly decided at the construction andbidding stages, following the planning and design stage. The majority of incentives are decided by clients and their consultants withconsiderable incentives being decided through negotiation among parities. Among a variety types of surveyed projects, nearly half of the projects spend verylimited resources on incentives, with incentive amounts of other projects rangingover 0.5% of the total project cost. There is a consensus among all parties that use of incentives is effective inproviding motivation for participants to perform better