Project Management

Commercial and Contractual Management of Projects Assignment (CETM 10)

Commercial and Contractual Management of Projects Assignment

Introduction

In the last two decades, most countries have experienced exponential growth in their economies, which is partly influenced by the continued investment partnerships they have made with other countries. The number of fast-growing economies in some countries in which they have invested resources in other countries has increased trade relations between them. For example, the UK nuclear power deals with China. Ting-Toomey and Chung (2012) stated that trade between other nations and China will continue to grow in the coming years. Unfortunately, scholars have quickly noticed that the trade relations between China and other nations are hugely skewed in favour of the former. There are some risks of missing out on the potential opportunities with large project negotiations unless the negotiators adopt favourable negotiating tactics and skills. This report seeks to demonstrate the role of negotiations and the tactics and skills organisations use to negotiate large projects.

The Role of Negotiation in Large Projects

Negotiation is a communication process used by legal practitioners to resolve arguments and finish business transactions for clients on-behalf (Guthrie and Robbennolt 2015).

Many organisations have found it difficult to negotiate for large projects today. This has often been attributed to how most project negotiations are done, which is highly tied to cultural values. Some countries host some of the world’s oldest civilisations based on ancient philosophies, thus differentiating the negotiation traditions from any other country (Dussel, 2009). Despite their unique business culture, most countries have made tremendous progress in learning the cultures in various parts of the world, which has helped their growth in different parts of the world. Before getting into any contracts, negotiations have to be carried out as they set the terms of that agreement. This is not just for a specific project but also for any other business setting. The trick with negotiations is that the cultural backgrounds of the parties to the agreement shape them. Most countries have followed the modern style in project negotiations, while some have retained their own style of negotiation. This complicates the negotiating process in some countries, as cultural differences enhance the risk of negotiations failing due to cultural misunderstandings (Robbins et al., 2013).

There has been increased research on large project negotiations as academic scholars seek to solve the problem of failing negotiations. A majority of the existing academic thinking has looked at negotiations in a commercial setting in some countries without looking at the subgroup cultural factors such as the age of the negotiating parties or whether it is employees or corporations involved in the negotiations. For purposes of this study, the negotiations will be researched from the perspective of the corporations since they are the ones that have commercial and more detailed contracts when compared to the perspective of the employees. In order to understand negotiations in large projects, it is important to understand the negotiation strategies that negotiating parties use and the impact of culture in these negotiations (Duan, 2012).

Some organisations have been part of some foreign-invested business partnerships in other countries. Foreigners seeking partnerships in some industries may require special approval from relevant government agencies aside from the usual process that involves registering with a local branch of the State Administration of Industry and Commerce (Chan and Shing, 2016). Selecting a partner, particularly in restricted industries, presented a huge challenge. Factors such as good reputation, legal standing and alignment of strategies and goals are critical universal qualities that are sought after when selecting a partner. For example, for investors in the automotive industry in China, where partnerships are restricted to state-owned entities, such qualities may be extremely limited among legally qualified parties. Lin and Zou (2010) encourage foreign partners to be involved in operations, manage diversities in culture and values, and be open to conflict resolution early in the process in order to make headway in their partnerships.

Communication in Commercial Negotiations

Chuah, Hoffmann and Larner (2014) cite negotiating contracts with some business partners as one of the most daunting challenges that negotiators can face. For westerners, the stark cultural disparities pour into large project negotiations and overcoming the associated challenges requires a good understanding of these disparities (Chan and Shing, 2016). The first challenge that needs to become is the obvious language barrier. Even in a competent translator’s presence, there is a real danger of meanings being lost in translation. Farquhar and Fitzsimons (2011) recommend the use of more than one communication channel by having more than one person in the negotiating team who can speak different languages. When delivering a speech or presentation, it is wise to use straightforward language, as jokes or dramatic presentations may fail to come out clearly in the translated delivery (Farquhar and Fitzsimons 2011). A distinct quality about some people and their culture is that friendship and business tend to overlap seamlessly (Chuah & Hoffmann, 2014).

As such, the “friendship first, business later” approach that is almost taboo in the West is the natural course of business transactions in some countries. During meetings, especially early ones, a lot of seemingly irrelevant discussions touching on issues like family, leisure and hometowns tend to come up quite frequently. Rather than skirting such discourses, it may be beneficial to encourage the client/team as they begin forming commercial connections in some clients’ business cultures. Moreover, successful negotiations are followed by prolonged sessions of socialisation. Despite this seemingly casual approach to large project negotiation, negotiations tend to be very fast as singular issues are not given too much time. Some negotiators focus more on the whole package than the details. Rather than dwelling on unresolved issues, they prefer to move ahead and come back to polish up on these later. They prefer to begin the negotiation as swiftly as possible, and any unresolved issues are usually catered for by a memorandum of understanding (Chan and Shing, 2016).

Social hierarchy is important in some cultures (Stark et al., 2005). As such, the working level of the negotiators sends an important message to the client/stakeholders regarding the other party’s regard for the project. Therefore, it is wise to send at least a few high-level executives as part of the negotiating team and ensure that negotiations are carried out with top decision-makers (Ghauri and Fang, 2001). Bargaining and tough negotiation is part of the business approach. However, harmony is a valuable concept among many clients, and negotiators take special care to avoid conflict. Concessions from both sides are usually encouraged as part of the process to smooth things over and stay on good terms. Disputes rarely deteriorate into legal action, and where this does happen, legal redress tends to be a protracted and often biased process that is best avoided. Mediation through third parties is more common (Stark et al., 2005).

Negotiation tactics and skills

Liu and Low (2009) indicated two negotiation processes: symbiosis and predation. The two processes can also be referred to as cooperation and competition. The theory of social exchange informs the cooperation/symbiosis process of negotiating. The theory asserts that relationships are best established through open communications, revealing all the underlying interests that inform the various positions and through the fulfilment of mutual gain solutions. On the other hand, the competitive process does not consider meaningful relationships as a priority when it comes to negotiations. The approach involves the use of power as opposed to interest in a particular issue which means that the outcome of a negotiation has an outright winner and a loser. These processes will work differently depending on the cultural context. Chen et al. (2013) mentioned that culture is a set of shared and lasting meanings, beliefs, and tenets that identify a particular national, ethnic, or any other group of people. Parties in a contract are always people who have a certain cultural background. This means that the parties may also have differing assumptions, differing perspectives and thoughts, and different behavioural models. Failure to comprehend these cultural undertones sets the negotiation process up for failure.

The behaviour of some people in negotiations can be deduced through a thorough identification of the unique aspects that shape their cultural identity. Some of the unique aspects include the communist political ideology. Lai et al. (2004) stated in their research that socioeconomic and political culture makes some people (clients) averse to risks and will be unwilling to accommodate any contract that exposes them to risks. They are also very careful not to make mistakes and will want to negotiate every aspect of large projects, leaving no room for errors. Some of them, believing in moral ethics, tend to be highly sceptical about outsiders and are slow to trust anyone they are unfamiliar with. The foundation of commercial relationships in some countries was founded on social capital as opposed to the legal framework. This is also explained by the fact that their philosophy does not have as much regard for legal systems as it does for self-regulation. Most individuals are expected to be honourable so as to save their face and protect themselves from shame. Shame and face are highly regarded in some countries (Feng and Lu, 2013).

Most organisations are very careful when deciding on a contractor who will deliver on any large projects, and this is even more significant when it involves long-term contracts. The choice of a contractor in any organisation is informed by a number of factors, including the reputation of the contractor, the price agreement, and the schedule for completion of the project, among other factors. This means that in some organisation settings, the concern is not just the ability to complete a project but proof of similar successful projects carried out by the contractor. Having a good record and having a fair price is likely to result in the award of the contract, as this is aimed at ensuring that the award of tenders and contracts is done on merit and in a manner that does not accommodate the corrupt elements.

The process of selecting the right contractor is regularly reviewed in the country’s law to increase project procurement efficiency. However, the general trend is to pick the contractor who has the lowest price as well as confirmation of the ability to complete the project within the required time length and in the highest possible standards. The contractor’s ability is measured using the assets base, the level of expertise in the firm, the management skills used at the company, and a positive reputation. Selective tendering is also common in long-term and high-value tenders. In this type of tendering, the client invites a number of well-reputed firms for a competitive tender (Richards 2014).

Ordinarily, the negotiation must be done in such a manner that the project goals are explained in the tender documentation, followed by submitting tenders that align with the requirements in the tender documents. The bids submitted are usually intended to serve as a distribution that details how the contractor will get the assets needed to complete the project, thus providing contractors with an opportunity to prove their competitiveness (Firth et al., 2010).

Contract Issues

If the contracting and negotiating process are not well understood, there is the risk of issues arising after the contract has been signed. To avoid such issues, it is expected that the contract is well explained, especially when dealing with contract novices or if the contractor is foreign to the processes of where the project will be carried out. The contract should be well explained, simple, precise, and flexible but detailed, while at the same time, it should be conclusive (Stark et al., 2005). If the terms of the contract are not well documented, there is the risk that the parties may take advantage of each other and create misunderstandings that make implementation difficult. Some issues that often arise when most organisations deal with foreign partners include language barriers, different legal frameworks, and regulations.

Commercial Issues

The tensions that have characterised other countries’ commercial relationships with western economies tend to spill over into business relationships between non-state parties. Shi and Wright (2003) argue that some foreign clients are easily affected by national feelings of dignity and pride in handling individual-to-individual business relationships. Although it is a highly subconscious effect, it is a very strong factor, and the authors encourage western negotiators to divide the relationship into micro and macro dynamics. The micro section would encompass short-term social aspects of the relationship, while the macro section would include aspects touching on the wider national good. For example, Chinese business transactions and relationships are generally built on the handshake principle, known as ‘Guanxi’. Westerners are more inclined towards legally binding agreements, and this disparity often leads to conflict in Sino-western business transactions (Shi and Wright, 2003; Ghauri and Fang, 2001). The demand for legal by some investors is often misconstrued as a sign of distrust by other foreign counterparts who are used to informal setups. The principle of conflict avoidance means that emerging issues are easily ironed out as they arise through incremental concessions that may see both parties lose significant ground on their initial bargaining stance.  On the other hand, some investors tend to maintain a rigid stance, and aggressive legal redress is an often followed course even for minor conflicts (Ghauri and Fang, 2001).

Conclusion

The cross-cultural business presents a challenging hurdle to all parties involved. Owing to vast cultural and value-based disparities, most investors approach large project negotiations in a very different manner from other foreign counterparts. While most value patient and non-confrontational negotiations, some negotiators are used to a more aggressive and incentivised approach. Without a proper understanding of these disparities, foreign investors looking to score large project contracts in certain countries are unlikely to succeed. The laws on bidding and tendering are changing dramatically in recent years to reflect increasing openness to foreign input in their economies. Various subtle negotiating tactics and skills such as conflict resolution, concession making and incentivisation are particularly effective when negotiating for a large project contract.

References

Chan, S. and Shing, T. (2016). ‘Ethical negotiation values of Chinese negotiators’, Journal of Business Research, 69(2), pp.823-830.

Chen, C., Zhu, X., Ao, J. and Cai, L. (2013). ‘Governance mechanisms and new venture performance in China’, Systems Research and Behavioral Science, 30(3), pp.383-397.

Chen, L. I. U. (2012). ‘The Intercultural Analysis of Chinese Cultural Communication in the World’, Journal of Fujian Normal University (Philosophy and Social Sciences Edition), 6, 036.

Chuah, S., Hoffmann, R. and Larner, J. (2014). ‘Chinese values and negotiation behaviour: A bargaining experiment’, International Business Review, 23(6), pp.1203-1211.

Duan, M. (2012). ‘The role of formal contracts with weak legal enforcement: A study in the Chinese context’, Strategic Organization, 10(2), pp.158-186.

Dussel, E. (2009). ‘A new age in the history of philosophy: The world dialogue between philosophical traditions’, Philosophy & Social Criticism, 35(5), pp.499-516.

FARQUHAR, S. and FITZSIMONS, P. (2011). ‘Lost in Translation: The power of language’, Educational Philosophy and Theory, 43(6), pp.652-662

Feng, Q. and Lu, L.X. (2013). ‘The role of contract negotiation and industry structure in production outsourcing’, Production and Operations Management, 22(5), pp.1299-1319.

Firth, M., Lin, C. and Zou, H. (2010). Friend or foe? The role of state and mutual fund ownership in the split share structure reform in China.

Ghauri, P. and Fang, T. (2001). ‘Negotiating with the Chinese: a socio-cultural analysis’, Journal of World Business, 36(3), pp.303-325.

Guthrie, C. and Robbennolt, J. (2015). International Encyclopedia of the Social & Behavioral Sciences.pp.418–422.

Jandt, F. E. (2015). An introduction to intercultural communication: Identities in a global community. Sage Publications.

Lai, K. K., Liu, S. L, and Wang, S. Y. (2004). ‘A method used for evaluating bids in the Chinese construction industry’, International Journal of Project Management, 22, pp. 193-201.

Liu, J. Y., and Low, S. P. (2009). ‘Developing an organizational learning based model for risk management in Chinese construction firms: A research agenda’, Disaster Prevention and Management, 18 (2), pp.170 – 186.

Richards, E. L. (2014). ‘Contracting from East to West:  Bridging the cultural divide’, Business Horizons, 57 (5), pp. 677-684.

Robbins, S., Judge, T. A., Millett, B., & Boyle, M. (2013). Organisational behaviour. Pearson Higher Education AU.

Shi, X. and Wright, P. (2003). ‘The potential impacts of national feelings on international business negotiations: a study in the China context’, International Business Review, 12(3), pp.311-328.

Stark, A., Fam, K., Waller, D., and Tian, Z. (2005). ‘Chinese negotiation practice: a perspective from New Zealand exporters’, Cross-Cultural Management, 12 (3) pp. 85 – 102.

Ting-Toomey, S., & Chung, L. C. (2012). Understanding intercultural communication. New York: Oxford University Press.

Zhou, K.Z. and Xu, D. (2012). ‘How foreign firms curtail local supplier opportunism in China: Detailed contracts, centralized control, and relational governance’, Journal of International Business Studies, 43(7), pp.677-692.