Mediating Role of Risk Perception of Trust and Contract Enforcement in the Construction Industry

Abstract

Contract violations have become common problems in construction projects, yet little of the construction contract literature addresses the questions of responses to contract violations (i.e., contract enforcement). This research investigates the effects of trust on contract enforcement in a principal-agent relationship, and it explores the mediating role of risk perception in the effects. The authors distributed 429 electronic questionnaires and received 280 responses. After deleting responses completed in under 100 seconds and non-manager responses, we narrowed the total to 253 valid responses from professionals in the Chinese construction industry. Hierarchical regression analyses were conducted to test the hypotheses in this study, and the findings revealed that goodwill-based trust 11 diminishes the severity of contract enforcement, while perceived relational risk and perceived performance risk increase the severity of contract enforcement. Mediation analyses also support the mediating role of perceived relational risk in the effect of goodwill-based trust on contract enforcement. The findings contribute to contract theory by providing a thorough understanding of contract enforcement and developing a conceptual framework consisting of trust, perceived risk, and contract enforcement. Managers from violating parties may benefit from this article through understanding the role of trust and perceived risk in dealing with a contract violation and following the strategies recommended for diminishing the severity of contract enforcement.

Contractual and relational enforcement in the aftermath of contract violations: the role of contracts and trust

“…In construction projects, formal enforcement mechanisms safeguard against contract violations and opportunistic behavior, but they may incur high legal enforcement costs, especially when disputes are referred to a third party (Sarhan et al, 2017) and especially in countries or industries with an imperfect legal system. Inappropriate contractual enforcement may also cause the violating party to retaliate through some opportunistic acts, leading to enforcement costs in subsequent stages of a construction project (Yao et al, 2019). Relational enforcement, as an informal enforcement mechanism, provides an alternative that involves a loss of future cooperation opportunities for the violating party (Gil and Zanarone, 2017).…”

“…Instead, both types of enforcement practices may be at work after contract violations (Chen et al, 2018a), and construction companies may consider different factors when determining which enforcement mechanisms to apply. Contractual enforcement may be mainly affected by legal enforcement costs and perceived intentionality (Antia and Frazier, 2001;Yao et al, 2019), while relational enforcement may be affected by future business benefits (Telser, 1980) and perceived intentionality.…”

“…Overly severe contractual enforcement may trigger disputes between the two parties, who may resort to the court systems to settle the contract violation (Yao et al, 2019). A great deal of law and economics literature has demonstrated that resorting to the courts will result in a significantly greater fixed cost than private settlements (Lumineau and Oxley, 2012), including the large number of resources that may be required to engage in a lawsuit and possible delays with the current transaction.…”

“…In terms of the contract violation, when a lower level of goodwill trust is exhibited, the violated party will be more likely to attribute the contract violation to the violating party's intentionality (Chen et al, 2018a;Yao et al, 2019). In such a case, the violated party may experience more negative emotions, which may cause it to apply more severe enforcement practices (contractual enforcement and relational enforcement).…”

“…Two enforcement mechanisms can be applied by the violated party in the construction industry: legal and contractual enforcement, such as the punitive measures stipulated in the contract documents, arbitration, litigation, or even termination of the current contract based on the formal stipulations (Ben ıtez-Avila et al, 2018;Sarhan et al, 2017); or relational enforcement, which denotes ways of reducing cooperation with the violating party and even blacklisting it (Lu et al, 2016a;Jagtap and Kamble, 2019). After a contract has been violated, the violated party will evaluate the real cause of the violation and determine the appropriate contractual enforcement and relational enforcement practices (Yao et al, 2019).…”