Development of an Interdependency Network Model for Analyzing Construction Contractor Payment Risks in Kenya: A Case of Design-Bid-Build Procurement System

Abstract

One of the most important components of systems used to procure construction projects is payment to construction contractors. It is connected to the owner's financial obligations in the design-bid-build D-B-B system. For the owner, paying late, paying insufficiently, or not paying at all portend a favorable risk consequence, as evidenced by incurring a lower realization cost than actual. On the other hand, it portends a risk consequence that is undesirable. To better comprehend how contractor payment risks are initiated and propagated, it is necessary to analyze the interconnectedness nature. However, the connections between various payment risk causes are scarcely accounted for in prior literature. Secondly, little attention has been paid to the influence of contextual determinants on occurrence of payment dispute risks. Thirdly, literature has ignored the connections between application of incompatible procurement practices and occurrence of payment risks. In addressing these gaps, three objectives were tackled. First, the study assessed the influence of contextual factors on the co-occurrence of payment disputes. The second objective determined of compatibility of D-B-B practices and their influence on occurrence of payment risks. The third objective developed an interdependency network model for analyzing contractor payment risks. In tackling the first objective, contextual determinants were gathered from the literature. These were then tested with 29 and 22 payment dispute cases in the private and public sectors, respectively. Using social network analysis (SNA) techniques, such as degree, eigenvector, and Bonacich centralities, and structural hole measures, the results were quantitatively analyzed. In the second objective, incompatible practices were gathered through qualitative synthesis and then rated by 12 subject matter experts. This output was subsequently analyzed using SNA techniques including hierarchical clustering, structural equivalence, and Euclidean distance. In the third objective, incompatible practices were used to generate 12 propositions, which were then evaluated by 12 SME. This output was then used to develop an interdependency network model, which was analyzed using SNA techniques such as one-mode matrix, eigenvector and eigenvalue, and Labda partitioning. A major finding as pertains objective one was that site asset specificity reflected by the practice of separating legal ownership from contractual possession propagates most of the payment dispute cases. As a result, the study recommends an evaluation of the effectiveness of current payment default remedies in addressing the challenge of the inseparability of the site from the final product in order to protect the rights of contractors who have not been paid. A key finding from the second objective was that the linkages between certain D-B-B procurement practices and the owner’s cost saving strategies contributed to most contractor payment risks. As a result, the study recommends adoption equitable risk sharing practices such as social capital. Analysis of the interdependency network model revealed that 20% of the risk practices cause and propagate 80% of payment risks. To effectively reduce the majority of these risks, the study recommends adoption of Social Network Analysis (SNA) methods in identifying and determining the most significant payment risk causes from an interconnected perspective. The study focused on payment risks within the D-B-B procurement system. Therefore, there is need for future studies to explore occurrence of payment risks in other construction procurement systems. Key words: Contractual practices, design-bid-build procurement system, social network analysis, payment risks, vulnerability assessment