particularly common for larger construction or infrastructure projects, may have
specialization benefits, may help to prevent capacity bottlenecks and responsibility
is easier to assign.
Far-reaching cooperation decisions may frequently also change the cooperation
and its structure after receipt of the order. If it proves to be unavoidable, proposal
partners may need to be replaced, e.g. if delivery deadlines cannot be complied
with. Possible changes to the service to be provided, or in the contract with the
customer (which is based on the submitted proposal) must therefore be regulated in
a ‘change or claim management’ clause in the plant contract as a precautionary
measure. Accordingly, a change clause in the supplier coalition cooperation con-
tract must allow for smooth adaptations. The necessity of aligning the internal
cooperation contract, which regulates the internal relationship in the supplier
coalition, to the conditions in the customer contract must be emphasized. For
example, if this is not the case, agreements with the customer regarding deadlines
or warranties, which are
not
regulated and specified between the consortium
partners, can lead to disputes over respective areas of competence, performance
gaps, delays in deliveries, liabilities, additional costs and reduced earnings (Molter
1986
).
4.6
Termination of a Project Cooperation and Consequences
A cooperation contract ends on fulfillment of all the obligations entered into in the
internal relationships between the partners (VDI
1991
, p. 252 et seqq.). However, in
a marketing cooperation, the fulfillment of the external obligations towards the
customer is usually a requirement. Cooperation contracts also permit termination
based on premature termination. In addition, certain circumstances, e.g. insolvency
of a partner, enable a project cooperation to be terminated.
Project Cooperation
373
A termination based on fulfillment is regulated in
}
362 (1) BGB (German civil
law). When a contract is deemed to be fulfilled depends on the type of contract. The
determination of the fulfillment of the contract requires an analysis of the contrac-
tual agreements and the type of contract in accordance with the applicable law.
Even if a cooperation contract is terminated due to fulfillment, post-contractual
obligations may remain or arise, which results in a continuation of a cooperation
relationship (warranty claims, ancillary obligations, such as confidentiality
obligations or the obligation to maintain and defend a property right). Additional
obligations may also be included, such as those relating to environmental protection
or product liability law. So, the fulfillment of the contractual tasks is not necessarily
the ‘natural end’ of a cooperation in all cases.
Customer contracts normally contain termination or withdrawal clauses that
entitle the customer to either terminate the contract for the future (generally with
immediate effect) or, in the case of withdrawal, cancel the contract retrospectively.
Internal cooperation regulations generally provide for similar, if not broader
agreements, on the premature termination of the cooperation. If the customer
prematurely terminates the supply contract with a general contractor, this contractor
must be sure that they are also able to terminate the corresponding subcontractor
contracts. Consortium contracts usually contain two separate regulations on prema-
ture termination of a contract. If the customer terminates the contract with the
consortium, this terminates the consortium contract, and the customer contract
regulations on the specification of the level of performance with regard to the
payments made apply accordingly for internal settlement within the consortium.
The other standard regulation provides for the right of members of a consortium to
exclude a member of the consortium from the consortium, (for example) if this
member seriously breaches their performance obligations.
Beyond the considerations on the termination of a project cooperation, the
longer-term consequences from cooperatively provided proposal and order man-
agement must also be covered. The successful or less successful sale of a complex
capital good also has consequences for a supplier’s image. The construction of a
plant becomes a reference, which can be used in the communication policy for
subsequent projects. The need for cooperation means that image and reference
effects are also dependent on the good or poor performance of the cooperation
partner.
Successful project management increases the opportunities for follow-up orders
for a supplier who becomes an
in-supplier
for a certain customer or in a customer
country compared to an
out-supplier
.
Ultimately, positive cooperation experiences in a plant project have
consequences on subsequent cooperation. In many cases, these experiences, the
clarification of interface issues and better information about the proposal partner
(
¼
risk reduction) result in known partners receiving preferred treatment for
subsequent projects. As a result, cooperation decisions for capital good proposals
are not just important on a case-by-case basis, but are also an effective strategic
marketing instrument.
374
B. Gu¨nter
5
Project Cooperation in Supplier Coalitions
The previous consideration of the structure and the course of a project cooperation
in Sect.
4
identified the topic of the organizational form of a project cooperation;
this will be looked at in the following Sect.
5
, as the scope and importance of the
decisions require certain considerations on the various forms of supplier coalitions
(Gu¨nter
1977
,
1979
).
In certain economic sectors, such as the industrial plant business, several
suppliers are generally required to receive an order and manage the process, in
order to be able to offer the customer’s required scope of supplies and manage the
order. Two or more suppliers may form a supplier coalition for this reason, in order
to submit a joint proposal for a system or a plant and manage the order once it is
received. The typical method for organizing project-based cooperation in the plant
business and for construction projects are supplier associations, for which the term
supplier coalition
has become established (Gu¨nter
1977
). These forms of coopera-
tion are based on case by case contractual relationships between the partners, in
which the division of the deliveries and services, the customer payment, the liability
and other risks are regulated.
Project-based supplier coalitions are predominantly established in four basic
organizational forms (Gu¨nter
1979
; Lemiesz
1978
; Hautkappe
1986
; Backhaus and
Voeth
2010
, p. 351 et seqq.):
• As a general contractor with subcontractors
• As consortium
• As a general contractor with an internal consortium (sometimes called “silent
consortium” or even “hidden consortium”) and
• As a joint venture or syndicate (especially in the construction industry)
The form of a European Economic Interest Grouping (EEIG) and a few others
also need to be considered. The decision on one of these forms, if no requirements
are specified by a project customer, falls to the considered cooperation partners as a
consequence of the desired project structure and distribution. The following roles
are available for the individual partner companies:
• General contractor
• Consortium partner, either as the consortium manager (principal) or as a consor-
tium partner (basic member of the consortium)
• Partner in a syndicate, or
• Subcontractor to a general contractor or a consortium partner
This function and role decision also needs to consider the needs and expectations
of the project customer and potential cooperation partners.
Project Cooperation
375
5.1
General Contractor
In the case of a
general contractor
, a single company takes overall responsibility for
the planning, control and management of an industrial project (cf. diagram in
Fig.
3
). The general contractor, prime contractor or main contractor, is solely
responsible towards the customer for the provision of the overall supplies and is
solely liable to the customer. The general contractor assigns other suppliers to
provide goods and services in the general contractor’s name and behalf. This may
take place with the knowledge or even at the behest of the principal. The suppliers
assigned by the general contractor are in a subcontractor relationship with the
general contractor. The term “subcontractor” is used in this respect. However,
this is still referred to as a supplier
coalition
, as the general contractor can only
carry out their tasks in close cooperation with the subcontractors. Furthermore, in
some cases, subcontractors may also be in direct project-based contact with the
plant customer, so that a group of suppliers must be considered in this relationship.
However, the responsibility for the overall project is centralized to the general
contractor at the request of, and in the interests of, the customer (“package from a
single source and a single contact”).
Out of the group of potential coalition partners, the general contractor is consid-
ered to be the company that is in a position
• To prepare the entire project planning and/or
• To take over the acquisition management and project management and/or
• To provide the most important part of the supplies with regard to value/scope, or
with regard to the key elements, i.e. which has the “core competence”, that
characterizes a project. This often excludes construction services; in contrast to
Principal
External and
overall contract
Internal and
individual
contracts
Interface
problems
General
contractor
S
C
1
S
C
2
S
C
3
S
C
4
SC =
subcontractor
Fig. 3
General contractor with subcontractors (VDI
1991
, p. 34)
376
B. Gu¨nter
traffic and construction works, a construction company never takes on the role of
general contractor for industrial plants
Of particular importance is the service that integrates all the subservices to a
complete major plant. The general contractor’s strengths lie more in the necessary
process know-how and less in their share of the service. These may be minimal in
the case of engineering companies.
Notable benefits of general contractors are that the general contractor has a great
deal of freedom in determining their own part of the supplies and performance in a
project as well as in the planning and implementation of a technical and economic
concept. This is considerably larger than for other forms of supplier coalitions. On
the other hand, general contractors are exposed to significant risks, which may
sometimes be externally influenced and which cannot always be balanced by
additional remuneration or the opportunity to influence the overall project. These
kinds of problems generally arise where interfaces between the various subcontrac-
tor supplies or between the subcontractors and the tasks of the general contractor
arise (difference risks). Gaps generally arise both in the task and performance area
as well as in the remuneration and contracting area (contract policy), whose closure
is the main task of the general contractor. This requires interface management.
Example 2
The customer requests a warranty period of two years; subcontractor A grants
this for their part of the performance, but subcontractor B concedes a maxi-
mum of one year. The general contractor may have to take over this warranty
to rectify this discrepancy. The general contractor can attempt to transfer
these risks to subcontractors who answer to the general contractor. However,
this will not always be possible, especially as the general contractor alone is
responsible to the customer. Whether the general contractor may have
recourse to the subcontractors depends on the contractual relationship
between the general contractor and the subcontractor in each individual case.
The general contractor is faced with a variety of decision-making and coordina-
tion problems and huge risks in acquisition, proposal planning and management.
Their proposal planning must consider possible coordination difficulties in future
phases in order to mitigate the risks that arise for the general contractor due to their
exclusive responsibility towards the principal. Some of these problem areas are
covered here as examples (Nicklisch
1984
):
• The general contractor runs into difficulties in project management if individual
cooperation partners (subcontractors) do not provide their deliveries on time or
in accordance with the requirements. The consequences for the overall project
resulting from a potential delay in delivery of individual subcontractors cannot
simply be entirely imposed on the responsible party.
Project Cooperation
377
• The warranty period for subservices may have expired before the corresponding
deadlines for the overall plant even start. In this case the contract policy must
kick in and ensure cooperation.
• Problems regarding the coordination of customer payments with the general
contractor payments to the subcontractors (assumption or exclusion of the
general contractor’s del credere liability).
• Agreements on decisions by a court of arbitration and other conflict resolution
mechanisms may disintegrate between the parties involved.
• Limitation and assignment of warranty obligations and liability (contractual
penalties) often pose the greatest difficulties.
• If a subcontractor damages the overall project while performing their
subservices, the general contractor is fundamentally initially liable to the cus-
tomer. The opportunity for recourse against the party responsible for the damage
is often difficult in view of the disproportionate nature of the loss and the
delivery, or due to the size of the subcontractor.
• The general contractor also has additional financial burdens, such as bank
guarantees, advances for transport costs, custom payments, reimbursement of
port fees, etc.
• A general contractor requires a project management that commits highly quali-
fied specialists and which also poses a capacity problem.
The remuneration for taking on the role of general contractor (on average of
about 10–15 % of the total order price) may not be able to balance the risks and
costs. A general contractor is generally considered for turn-key plants (turn-key
projects) and in cases in which the subservices cannot be clearly defined and which
can result in significant risks for the customer. A general contractor is generally
only assigned at the urgent request of the customer, who lacks the know-how
(e.g. developing countries) or who wants clear responsibilities from one source.
The general contractor may attempt to transfer the risks to subcontractors
through contractual agreements. As shown by the above examples of problems
that may occur, this may be faced with significant difficulties in some cases.
5.2
Open Consortium
A
consortium
is a special form of Joint venture or syndicate. This involves the
coming together of a limited number of legally and, generally, also economically
independent companies (
consortium partners, members of the consortium
) with
similar and/or complementary areas of operation for a specific and temporary
cooperation.
In the case of a consortium, the project customer contract is with the consortium
and not with the individual suppliers. This means that the
consortium
appears as the
contractor (cf. diagram in Fig.
4
). Each member of the consortium is jointly and
severally liable, unless otherwise explicitly agreed in the contract with the cus-
tomer. Joint and several liability means that each consortium partner is fully liable
378
B. Gu¨nter
for the execution of the overall performance, i.e. not just their section, in their
external relationship. The customer can hold each individual member of the
consortium liable to fulfill their claims from the contract on the project with regard
to warranty, compensation, penalties, etc.
According to German law, a consortium is generally operated in the form of a
BGB company in accordance with
}}
705 ff. BGB, in which one of the companies
involved acts as the consortium manager (principal) and takes over the technical
and administrative management. This company receives compensation from the
other members of the consortium for these activities.
The consortium partners conclude a consortium contract between each other,
which regulates the rights and duties of every individual supplier (cf. Table
11
). The
contract also regulates the definition and limitation of the deliveries and services to
be provided by each member of the consortium, including any potential change
Regulations and claims. A so-called ‘completeness clause’ must be considered,
which defines—in a general form—the process if unforeseen gaps arise in the
service descriptions and limitations. Regulations regarding liability and warranties,
in the event of customer or third party claims, must also be considered, as well as
claims raised by members of the consortium against each other and for unclear
cases in which (for example) the party responsible cannot be defined, or at least not
directly. Table
11
provides an overview of additional regulation requirements
(Horn
1986
; VDI
1991
).
A consortium is formed either before or, frequently, after the awarding of the
contract, potentially also in the preliminary project planning stage for the contrac-
tual object. For the acquisition and proposal planning, it seems to be important that
contacts take place between potential consortium partners at an early stage, not least
to allow them to participate in the endeavors of individual companies to obtain
certain major orders and to exercise a certain amount of influence. The distribution
of the proposal costs must be regulated in each individual case. It must be regulated
in the consortium contract together with the other charges to which the project is
exposed and which the consortium partners must deal with.
Principal
External and
overall contract
Internal and
individual contracts
Interface
problems
P
P
P
P
CM
CM = Consortium manager
P = Consortium partner
Fig. 4
The open consortium (VDI
1991
, p. 37)
Project Cooperation
379
The reasons that induce suppliers to establish a consortium can be diverse and
vary significantly for the individual participants:
• The necessary division of labor with regard to the areas of performance due to
specialization is an obvious reason. This generally results in the cooperation of
companies from the construction, mechanical engineering and electronics as
well as IT sectors.
• If the project exceeds a certain volume, this may mean that the involvement of
other suppliers is necessary simply for reasons of capacity. In this case, it is often
advisable to make these partners fully responsible and involve them in the
consortium. The size of the project does not just impact on the scope of service,
but also on the manner of risks, which then require liability to be divided
between the parties. Similar consequences for consortium cooperation may
arise for particularly complex projects and in the case of insufficient know-
how of the individual companies in the functional as well as the
management area.
• If the customer requests the construction of a plant within a relatively short
period, this may also require the formation of a consortium, especially if a
capacity expansion is not possible, or seems too risky with regard to long-term
employment aspects.
• High costs of acquisition and order attainment may require the bundling of
resources. The exploitation of certain sales market know-how and customer
relationships may also play a role.
Table 11
The key content of a consortium contract
1. Consortium objective and partners
2. Definition and limitation of delivery and service sections for every member of the consortium
with potential change regulations and claims, incl. completeness clause
3. Liability and warranty for customer claims due to performance by one or more members of the
consortium that is not in accordance with the contract due to delay, incorrect or non-performance
for third party claims in the event of unclear cases (where the responsible party cannot be
defined)
4. Management (principal): Activities, incl. limitations, costs (management fee), liability
5. General duties of the members of the consortium, e.g. information and cooperation obligations
6. Proposal preparation, project organization and management, scheduling
7. Consortium meeting and coordination modalities
8. Financing and the provision of security (bonds, e.g. bid bonds
¼
bid guarantees and
performance bonds
¼
performance guarantees)
9. Insurances
10. Financial transaction (payments) and accounting
11. Exclusivity agreement (if necessary)
12. Court of arbitration and applicable law
13. Formal provisions (term of the contract, withdrawal or exclusion of members of the
consortium, termination, confidentiality, etc.)
380
B. Gu¨nter
• Financial aspects have an important impact on the formation of a consortium.
Firstly, bid bonds may be required, which represent a burden that is easier to bear
if it is carried across several shoulders. Furthermore, in some cases, there are
significant financial resource requirements for advance payments, investments,
building site facilities, etc., for which a distribution is also advisable. Finally, a
consortium can provide for the customer’s credit requests, especially if export
financing and subsidies from other countries can be exploited with the aid of
foreign consortium partners. The latter also applies for export credit insurances.
In these cases, the involvement of foreign partners in a consortium becomes a
tool to secure cheaper financing and credit insurance conditions.
• Another beneficial aspect of a consortium is that it enables every individual
member of the consortium to cooperate and participate in the customer
negotiations as well as the performance and risk distribution to a much greater
extent than would be the case in the role of a subcontractor in the case that a
general contractor is assigned.
The selection of suitable partners for a consortium is one of the key issues
relating to business cooperation (cf. also Sects.
4.3.3
and
4.3.4
; VDI
1991
, p. 93 et
seqq.). A supplier is much more committed as part of a consortium than in the case
of a subcontractor status. The supplier must pay particular attention to the selection
of appropriate partners, especially their know-how and reputation, their credit
rating and soundness as well as their own and third-party experiences and the
assessment of the conflict options. For this reason, certain consortium partners in
multiple cases or regularly work together in project cooperation. It is not just
important to overcome certain technical interface problems (securing technical
compatibility, business in general: the
integration quality
), but previous
experiences with the same project management, including the associated
difficulties, also play a role.
A reconciliation of interests can be extremely difficult within this kind of
supplier coalition, especially if the order situation of the companies involved are
different. Accordingly, their interest in obtaining a certain order will also diverge
(potentially also due to concessions to the customer), as well as in reserving certain
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