Contractual Governance: Effects of Risk Allocation on Contractors’ Cooperative Behavior in Construction Projects

Abstract

When designing contracts in practice, project owners often allocate excessive risks to contractors. Although previous studies have suggested that such improper risk allocation may harm the relationship between the owner and the contractor and thus lower project performance, few have explicitly investigated the effects of risk allocation on the contractor’s cooperative behavior. This paper fills this gap by empirically exploring whether, how, and when risk allocation influences the contractor’s cooperative behavior. To do this, data were collected from 284 Chinese project professionals and hierarchical regression analysis was performed. The results show that pro-owner contractual terms with regard to risk allocation negatively affect the contractor’s cooperative behavior, and the contractor’s fairness perception partially mediates such an effect. Moreover, risk premium weakens the effect of environmental risks allocation on the contractor’s fairness perception, and term specificity strengthens the effect of the contractor’s fairness perception on the contractor’s cooperative behavior. Theoretically, these insights extend risk allocation studies by identifying the underlying mechanism behind the relationship of risk allocation and interfirm cooperation and thus contribute to sound contractual governance. Practically, this study’s findings can help project owners design better contracts, particularly by bearing in mind that risk premium should not always be used to restore the contractor’s fairness perception to elicit the contractor’s cooperative behavior because it does little to help when owner risks are allocated to contractors.