Construction contracts with conversion capability: a way forward

Abstract

Purpose

The purpose of this paper is to explore the role and viability of changing contract terms as a project progresses and to offer an original analysis in this respect. Commonly, projects start out with broadly defined information, and this gets refined as the project progresses. This suggests that a prudent approach would be to tailor the contract between the project owner and the project contractor to the project stage, with conversions along the way. Information asymmetry between owner and contractor also suggests the need to tailor a contract to a project ' s situation.

Design/methodology/approach

An original method of analysis of the conversion of contract terms within projects is given, along with discussion on the risk transfer between owner and contractor, the common law issues associated with implementing such conversions, any compensation that the owner might need to pay, the timing of the conversion and associated practical implementation issues. The paper, for definiteness, concentrates on construction contracts with conversion between payment types, but the paper’s approach applies to all contracts and all terms within contracts.

Findings

The paper provides a readily usable method for analysing the value of having a convertible contract, couched within acceptable common law practice.

Practical implications

The paper offers a novel method and framework usable by practitioners for establishing the value of convertibility within a contract. Having convertibility within a contract can be shown to offer benefits to both contracting parties.

Originality/value

The idea of having flexible contracts is not new, but, hitherto, a rational method of analysing their value has been missing. This paper gives an original analysis of contracts with conversion capabilities. Current literature does not deal directly with the matter addressed in the paper.

Citation

Carmichael, D.G. and Karantonis, J.P. (2015), "Construction contracts with conversion capability: a way forward", Journal of Financial Management of Property and Construction, Vol. 20 No. 2, pp. 132-146. https://doi.org/10.1108/JFMPC-10-2014-0022