Flexibility in contract terms and contracting processes

Abstract

PurposeNew business models, such as life‐cycle contracting, challenge the narrow and static understanding of contracts with hard and precise terms. The aim of this paper is to examine how flexibility could be incorporated into contracting processes.Design/methodology/approachThe data of the paper have been gathered applying the triangular method; first, by interviewing key personnel participating in contracting at eight Finnish firms; second, examining contract and other documents of those companies; and third, studying earlier research on contracting practices. Theoretically, the paper is based on relational contract and proactive approaches to law on the one hand and on organizational studies based on new institutional economics on the other.FindingsFlexibility is often introduced to contracts with relational methods, relying on good personal relationships between business partners or negotiation power and negotiation skills. Contract documents often do not contain mechanisms for dealing with contingencies, or “soft” contract terms. The paper finds the following reasons that may explain this. First, firms heavily rely on model contracts to develop their own templates and the lack of contract models in new business areas hinders firms to develop their templates. Second, unfamiliarity with using soft elements makes it difficult to use them. Additionally, in some cases firms may prefer using relational capability.Research limitations/implicationsThe findings need verification from further multidisciplinary empirical research.Practical implicationsThe findings support firms in developing their contracting capabilities to meet the requirements of the changing business environment and gain competitive advantage from well‐organized contracting.Originality/valueThis paper is one of the first empirical studies comprising also the legal approach.

Flexibility in PPP contracts – Dealing with potential change in the pre-contract phase of a construction project

“…This is in line with Nystén-Haarala et al 's (2010) findings that introducing flexibility into contracts via relational methods relies on good personal relationships between the actors. As mentioned in the introduction, Hertogh and Westerveld (2010) stress that interaction is an important instrument to manage the needs of stakeholders, and to anticipate the consequences of potential changes.…”

“…Based on a study on flexibility in health care PPP projects, Cruz and Marques (2013) propose in line with this notion a double entry matrix based on real options theory as a new model for contract flexibility. According to Nystén-Haarala et al (2010), flexibility is often introduced in contracts through social methods, relying on good personal relationships between business partners rather than through the contract itself. Therefore, contract documents often do not contain mechanisms for dealing with contingencies.…”

Integrated Product Service Offerings for Rail and Road Infrastructure : Reviewing Applicability in Sweden

“…Other precautions for risk are performance requirements (Nystén-Haarala et al, 2010). Both the STA and the contractors have indicated that the evaluation, both during the contract and afterwards, will be difficult.…”

“…Implementing the IPSO as a business model is not without its challenges; as for any change in the business model, the risks change as well (Nystén-Haarala et al, 2010). An IPSO implies taking over some of the customer's processes, which is a major risk for the provider (Meier et al, 2010).…”

“…However, other industries have managed the uncertainties with long-term contracting by adding flexibility to the contract using soft elements such as renegotiation (Nystén-Haarala et al, 2010). An adjustable part of the price or re-negotiations as a way to decrease risk-taking would be appropriate if including e.g.…”