EXECUTIVE SUMMARY: English Title: “Mutual Value Creation in Construction Contracts – Strategic Application of Proactive Law and Value Creating Economic Theory” The topic of this thesis was conceived while discussing flaws and inefficiency in different commercial sectors. The need for better risk and contract management concerning large construction projects was quickly identified, which gave the idea for writing this thesis. The aim is to assess certain risk and contract management areas and apply proactive law and economic theory, in order to optimize the contractual parties’ incentives to maximize their joint value. The thesis argues from an academic point that it is economically efficient for companies to have legally astute contract managers, whose focus is not solely on securing the largest share of the pie, but who also understands the importance of applying proactive law and an economic understanding to the drafting and negotiation of contracts, and thereby maximize the overall size of the pie. Throughout the thesis, different parts of construction contracts are being analyzed in order to minimize the risk of delay as well as cost of construction, and also increase the value of the finished product, in order to maximize the overall profitability of the contract. The analysis sets of by first looking at how liquidated damages should be effectively used, in order to ensure that the Constructor has the optimal incentives to avoid delay, and how the Developer should price the liquidated damages, in order to maximize his own pay-offs. It was found that the optimal liquidated damages clause should be priced as low as possible without undermining the Constructors’ incentive to avoid delay. Further, it was found that the Constructors’ subcontracts, e.g. labor contracts, would be more efficient, if the subcontracts are made congruent with the subcontracts the Developer and the Constructor would draft, in case they were operating as one entity. The reason for this is that the risk of their collective losses will be taking into account when drafting the subcontracts, compared to only the Constructors’ own losses, when the Constructor operates as an individual entity. In extension from here, the analysis assessed some value maximizing initiatives, e.g. asset specific investments in special material and equipment, where the use of safeguards is of paramount importance to ensure the right incentives to invest, resulting in an enhanced overall value of the contract. In the last section of the analysis, knowledge sharing and co-operation, e.g. compatible IT-systems and business secrets, is being analyzed, in order to identify ways to create relational rents in a long term perspective. In order to create the right incentives for the parties to disclose such business critical information, the parties need to sign a non-disclosure agreement. Finally, the results from the analysis are combined to create a contract and risk management model.
|Educations||MSc in Commercial Law, (Graduate Programme) Final Thesis|
|Number of pages||180|