Project management: what should a contract specify when requirements may change?
Entrusting part of a project to a supplier requires formalising requirements that may not yet be settled. The management question is precise: should the contract mainly detail the expected outcome, or establish how that outcome can be revised?
What the literature establishes
Kathleen M. Eisenhardt (1989, Academy of Management Review) reviews research on the agency relationship, in which a principal delegates an activity to an agent whose actions cannot be fully observed. The choice between behaviour-based and outcome-based contracts depends, among other things, on the observability of the work, the measurability of outcomes and uncertainty. Applied to projects, this framework cautions against expecting an outcome-based contract alone to resolve requirements that remain unsettled.
Contracts and relationships can reinforce each other
Laura Poppo and Todd Zenger (2002, Strategic Management Journal) examine information services exchanges and find that formal contracts and relational governance can function as complements. Written commitments therefore do not necessarily replace cooperation based on an ongoing relationship and shared expectations. One proposed mechanism is that an explicit framework limits some opportunities for conflict, thereby facilitating cooperation when adaptations are needed.
The hasty conclusion
It would be tempting to conclude that contracts should become ever longer. Yet these studies do not show that adding clauses mechanically improves a project. The useful distinction concerns their substance: specifying a deliverable and specifying how a change will be assessed, costed and authorised address two different problems. (our executive and employee training programmes)
What the evidence cannot settle
The agency theory review is not a trial comparing project contract models, and the information services study does not demonstrate a universal causal effect. Nor does it justify transferring its findings without further examination to hydraulic engineering works or healthcare services. Safety requirements, procurement rules and the actual scope for switching suppliers must therefore remain part of the analysis.
A practical check in Sion
Within SHR’s “Project Management” programme, an exercise applicable in Sion would examine a project involving an external supplier in hydropower, healthcare, viticulture or alpine tourism. For one month, every change request would be entered in a register recording the request date, its estimated impact on cost and schedule, the person authorised to decide and the dated decision. The measure would be the proportion of implemented changes with a traceable authorisation issued before the affected work began, with emergency exceptions identified separately. This result would not prove the quality of the contract, but would make it possible to check whether the project authorises changes before being overtaken by them. To go further: explore the Project Management training in Sion in the canton of Valais, or browse our executive and employee training programmes in Switzerland.
In pictures: Project Management in Sion
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