Relational contracting has been defined as an arrangement which places greater emphasis on the ongoing commercial relationship between the parties. There is greater reliance on informal agreements, and trust is generated and maintained through personal relationships, reputational incentives and the expectation of future business dealings rather than financial penalties and legal sanctions.
Some private markets rely heavily on relational contracting; indeed, academic awareness of this approach to contracting dates to a study of the manufacturing sector in Wisconsin undertaken in the early 1960s, which observed, among other things:
Businessmen often prefer to rely on 'a man's word' in a brief letter, a handshake, or 'common honesty and decency' - even when the transaction involves exposure to serious risks. . .
While a significant amount of creating business exchanges is done on a fairly noncontractual basis, the creation of exchanges usually is far more contractual than the adjustment of such relationships and the settlement of disputes.32
In the UK public sector, this approach to contracting was reflected in a focus for some years on partnering, although terms such as 'collaborative contracting' and 'high-trust contracting' have also been used. A literature had begun to emerge about the use of relational contracting in the UK public service economy throughout the 1990s and 2000s.33
Public service contracting has since become much more transactional - although lip service is sometimes still given to more relational models of the past. One experienced bid director said that he was tired of hearing talk of partnership and then encountering aggressive contracting behaviour. A chief executive with a distinguished career in the public sector reported that: 'Government is full of promises - equal terms, partnership, proportionate risk - but when you get down to it, the relationship is unilateral'.
Providers also report that some departments and agencies do acknowledge the complexity of the services they are putting to tender, and engage in intelligent dialogue with potential suppliers with the objective of developing mature relationships. But there are certainly a number of major departments where contractual dealings have become highly transactional.
Survey participants reported a move towards smaller contracts of shorter duration, an increased focus on low price and risk transfer, a more adversarial approach to contract management, with the emergence of a 'policing mentality' and a greater reliance on financial penalties. (Of course, exceptions were also mentioned.)
This has been associated with a more 'commercial' approach to contracting - a renewed emphasis on contract management which focuses heavily on monitoring and enforcement. (Private firms that rely on relational contracting would no doubt dispute the proposition that they were behaving in a less commercial way than government, so the recent use of the term assumes a particular approach to commerciality.) Cabinet Office documents and NAO reports now focus more on 'commercial' capabilities and less on partnership skills.
None of the providers interviewed in researching this paper disagreed that government needed to become more effective in its dealings with contractors. They accept that some of the practices that had emerged in the market were politically and commercially unsustainable.
To acknowledge this, however, is not to endorse the aggressive and highly transactional form of contracting that has been adopted by many departments and agencies. It was entirely possible for government to have addressed its deficiencies in procurement and contract management without abandoning the use of relational contracts and the principles of partnering for complex services (although whether it could have done so in a climate of extreme financial stress is not so clear).
It appears that there is scope for a one-off financial gain when the dominant party suddenly shifts from a relational form of contracting to an aggressively contractual one. Arguably, this is what happened in the UK market over the past five or six years. Government has exploited its supply chain, extracting large cash payments based on the expectation of additional contracts, adopting an adversarial approach to the interpretation of contract clauses and in the process extracting significant financial abatements or penalties in circumstances where, traditionally, a more collaborative approach would have been adopted. (Again, there are exceptions.) Such a sudden shift in the terms of exchange has reaped huge financial dividends, at the expense of social capital and trust.