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International Journal of Project Management xx (2014) xxx – xxx
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The effectiveness of contractual and relational governances in

construction projects in China
Lu Ping, Guo Shuping, Qian Lamei, He Ping, Xu Xiaoyan ⁎
School of Management, University of Science and Technology of China, Hefei 230026, China

Received 22 March 2013; received in revised form 28 February 2014; accepted 6 March 2014
Available online xxxx

Abstract

Based on the transaction cost economics, this article addresses the effectiveness of contractual and relational governances in improving project
performance and restricting opportunism in construction. Ten hypotheses are presented. Using data from construction project in China, we adopt
Partial Least Squares (PLS) to test and verify our hypothesis. The results show that the contractual and relational governances are important to
improve project performance, and these two factors function as complements rather than substitutes. The contractual governance is more effective
in improving performance while relational governance is more powerful in restricting opportunism. The opportunism does not have a direct
negative impact on project performance.
© 2014 Elsevier Ltd. APM and IPMA.

Keywords: Construction project; Contractual governance; Relational governance; Project performance; Opportunism

1. Introduction
For a long time, the low efficiency and poor performance in
construction industry have been perplexing the practitioners
and researchers (Briscoe and Dainty, 2005; Cox and Ireland,
2002; Love et al., 2004; Bankvall et.al., 2010; Vrjhoef and
Koskela, 2000).
In China, the profit rates in construction industry from 2005 to
2011 are 2.62%, 2.87%, 3.06%, 3.55%, 3.54%, 3.55% and 3.56%,
respectively (National Bureau of Statistics of China, 2012), which
are lower than those in the other industries. The important reason
for these problems is the lack of coordination among participants
(e.g. Lars et al., 2010; Love et al., 2004), which in turn originates
mainly from opportunistic behaviors (Willaimson, 1985). Accord-
ing to the transaction cost economics (TCE), some governance
mechanisms could prevent opportunism (e.g., Caniëls and
Gelderman, 2010; Liu et al., 2009; Lui and Ngo, 2004;
Willaimson, 1981) and significantly enhance operational perfor-
⁎ Corresponding author.
E-mail address: xxy204@ustc.edu.cn (X. Xu).
mance (e.g., Lee and Cavusgil, 2006; Poppo and Zenger, 2002).
The mechanisms reported most in the literature can be
grouped into two types. One is contractual governance (Lusch
and Brown, 1996), which emphasizes the importance of the
formal rules of compliance and contracts between transaction
partners (Lumineau et al., 2011; Reuer and Ariño, 2007). The
other is relational governance (Heide and John, 1992; Lusch and
Brown, 1996; Macneil, 1980), which stresses the significance of
the relationship among all the partners and the clients. Table 1
summarizes some recent studies in the contractual and relational
governances. However, these studies are mainly focused on the
developed countries and the industries other than construction.
The effectiveness of contractual and relational governances
on performance is not context-free (Jap and Anderson, 2003;
Tangpong et al., 2010). Compared with other industries, cons-
truction is more complex and has a high degree of fragmen-
tation characteristics (Dainty et al., 2001a, 2001b). A project
created by contract could be regarded as a temporary coalition
of some firms together with the clients (Winch, 1989). It is
temporary, unique and heterogeneous, of short-term orientation
and lacks organizational routines. These characteristics pose

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Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
2 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx

Table 1
Overview of prior literature related to governance strategies.
Authors/years Focus Country/type of Survey Findings
exchange
Cannon et al. Contracts governance US and others Emails • Contracts and social norms were both found to be effective in enhancing
(2000) Norms governance Buyers–suppliers 443 (23%) supplier performance individually or in the plural form.
• Increasing the relational content of a governance structure containing
contractual agreements enhances performance (the plural form) when
transactional uncertainty is high, but not when it is low.
Poppo and Formal contracts US Email • Formal contracts and relational governance function as complements.
Zenger (2002) Relational governance Information service 152 (6%) • This interdependence underlies the ability to generate improvements in
exchanges exchange performance.
Kalnins and Contract North American and Text • Site-specific measures of relationship lead to a preference for low-powered
Mayer (2004) Relationship others 394 contracts T&M contracts (i.e., substitute).
IT service • Hybrid contracts are more likely to be used at intermediate levels of ex
ante cost uncertainty and ex post quality measurement difficulty.
Ferguson et al. Governance US/Can/Mex Experimental • Relational governance is the predominant governance mechanism
(2005) mechanisms Commercial banking 160 dyads connected to exchange performance.
·Relational • Contractual governance is also positively associated to exchange
·Contractual performance, but to in a lesser degree.
Carson et al. Volatility and US and others Survey • Formal contracts will be robust to ambiguity but not to volatility, whereas
(2006) ambiguity R&D outsourcing 125 (31%) relational contracts will be robust to volatility but not to ambiguity.
Contractual governance • Relational and formal contracts each have advantages and disadvantages in
Relational governance specific situations and are not simply substitutes.
Lee and Relational-based US Survey • Relational-based governance as opposed to contractual-based governance
Cavusgil governance Technology-intensive 184 (66.7%) is more effective and influential in strengthening the interfirm partnership,
(2006) Contractual-based stabilizing the alliance, and facilitating knowledge transfer between alliance
governance partners.
• Under high pressure of environmental turbulence the positive effects of
relational-based governance are enhanced.
Yu et al. (2006) Formal governance China Taiwan Survey • Both formal and relational governance mechanisms affect suppliers'
Relational governance manufacturing 77 (83%) tendencies to make specialized investments.
• Calculative trust acts as a moderating factor in the relationship between
transaction-specific investments and formal governance mechanisms.
Liu et al. (2009) Transactional China Survey • Transactional mechanisms are more effective in restraining opportunism,
Mechanisms Household appliance 225 dyads (25%) while in improving relationship performance relational mechanisms are more
Relational Mechanisms manufacturer powerful.
• When two mechanisms are used together, it will be greater benefits than
when they are used separately.
Hoetker And Alliance German Survey • The optimal of governance mechanisms depends on the assets involved in
Mellewigt Formal governance Telecommunications 83 (32%) an alliance, with relational mechanisms best suited to knowledge-based
(2009) Relational governance industry alliances assets and formal governance best suited to property-based assets.
• A mismatch between asset type and governance mechanisms can be harm
to the performance of the alliance.
Ryall and Formal contracting US Text • Complementarity between formal and relational contracts.
Sampson Relational mechanisms Telecommunications 52 contracts • A firm's contracts are more detailed and more likely to include penalties
(2009) and microelectronics when it engages in frequent deals (whether with the same or different
partners).
Goo et al. (2009) Formal contracts South Korea Survey • Formal contracts and relational governance function as complements,
Relational governance IT outsourcing 92 (62.3%) instead of as substitutes.
• Well-structured service level agreements have significant positive
influence on the various aspects of relational governance in IT outsourcing
relationships.

some specific challenges to management (Hanisch and Wald,
2011). For instance, the opportunism often occurs (e.g., Lau
and Rowlinson, 2009; Lo et al., 2007) and the collaboration in
the coalition could be difficult (Phelps et al., 2009). The
previous research on project governance mainly focused on the
governance structures, diverse project governance framework
and models in project-based organization, and the governance
of project process (e.g. Miller and Hobbs, 2005; Turner and
Keegan, 1999, 2000, 2001; Winch, 2001), but did not involve
the governance mechanisms, which are closely related to
performance (Lee and Cavusgil, 2006; Liu et al., 2009; Luo,
2002; Poppo and Zenger, 2002).
In this paper, we try to address the effectiveness of the
governance mechanisms in construction industry in China, by
means of an empirical analysis. Specifically, we intend to verify
the effects of both contractual governance and relational gover-
nance on the opportunism and project performance. Furthermore,
we also want to identify the relationship between contractual and
relational governances, and the relationship between opportun-
ism and project performance. This study could be helpful to guide

Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx
the project management and improve project performance in
construction.
The rest of this paper is organized as follows. In Section 2,
we provide the knowledge background of contractual and
relational governances, and propose our model and hypotheses.
In Section 3, we describe the experiment setting, including the
sampling and data collection procedures, the measures and
instruments. In Section 4, we present the results and analysis on
these results. In Section 5, we discuss some interesting findings
from our study. Finally, in Section 6, we give the conclusion of
this paper.
2. Theory background and hypotheses
Governance refers to the formal and informal rules of exchange
between partners (Nickerson et al., 2001). It is essential to the
stability of buyer–supplier relationships (Benton and Maloni,
2005). Project governance sets the objectives of the project, and
determines the means to attain those objectives and monitor the
performance of the project (Turner and Keegan, 2001). Project
governance involves a set of relationships among partners,
including sponsor, contractor, client and other stakeholders.
Contractual governance and relational governance are two
mechanisms in the inter-organizational exchanges. Fig. 1 illus-
trates the conceptual framework that proposes several hypothe-
sized relation: (1) the direct impact of contractual and relational
governances on project performance and opportunism; (2) the
complement relationship between them; and (3) the relationship
between opportunism and performance.
2.1. Contractual governance
A project is a complex dynamic system, which involves
participants and their interdependencies (Jaafari, 2001). The
typical processes of an engineering construction project usually
include geological exploration, architectural design, construction
work, equipment installation and debugging. According to the
TCE theory, in response to exchange hazards, firms either draw
complex contracts or choose to be vertically integrated when
contracts are too costly to enforce. The various project processes
Contractual H1(+)H3 Project
Governance Performance
H6(-)
H4b(+)
H4a(+)
H5(-)
H2(+)
Relational
Opportunism
Governance H7(-)H8
Notes:
+ = Positive relationship, support for Complements (H4a, H4b)
Fig. 1. Conceptual framework and hypotheses.
Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
3
generally are organized into distinct firms which are related to
each other through transactions governed by contractual relation
(Winch, 1989), i.e., the contracting is chosen as a governance
mechanism.
A contract is the agreements reached by the participants in
a project, including natural persons, legal entities and other
organizations (Project Management Research Committee of
China, 2009). The contractual governance emphasizes the use
of a formalized, legally-binding agreement to specialize the
inter-organization trading partnership (Ferguson et al., 2005;
Lusch and Brown, 1996). Formal contracts represent the
promises or obligations of performing particular actions in the
future (Macneil, 1978).
A construction project contract determines the outcomes or
outputs to be delivered within the given time and budget. It gives
a thorough description of the roles and responsibilities of each
party, and specifies the monitoring procedures and default
penalties. A typical project contract usually includes three parts.
The first part is the fundamental elements, which specify the key
principles and agreements among the parties, e.g. delivery
deadline, quality standards and budget of the project. The second
part is the contractual terms associated with provisions specifying
principles, tactics, organization structures and processes for
settling unforeseeable events. The third part is the contractual
terms associated with governance elements specifying the ways
to maintain the relationships through a clear statement of the
measurements, penalties and incentives (Ouchi, 1979), to claim
and give the termination of an agreement, and to resolve disputes
among parties. Roehrich and Lewis (2010) concluded that
contracts can reduce uncertainties by providing a clear specifi-
cation of what is allowed and what is not, and can minimize the
risk of opportunism by enforcing legal rules and standards.
Ferguson et al. (2005) and Judge and Dooley (2006) recognized
that the contract can enhance the performance of the exchange due
to restraining opportunistic behaviors. Luo (2002) also gave the
result that contracts are associated with the performance and
contract completeness drive firms' performance. Thus, we propose
our first hypothesis as follows:
H1. Contractual governance positively affects project performance.
2.2. Relational governance
Although contracts play an important role in project gover-
nance, the parties who draw up the contracts cannot foresee all
possible conditions due to the Bound Rationality of human beings,
especially for the projects that are unique and one-off. Thus a
contract is usually incomplete for a construction project. It is not
enough to rely on contractual governance. Heide and John (1992)
suggested that contractual governance has deficiencies owing to
the omission of a key social element.
Some scholars have observed that the inter-organizational
exchanges are typically the repeated exchanges embedded in social
relationships (Dwyer and Schurr, 1987; Lusch and Brown, 1996).
Individuals would never be able to act independently of society.
Trade practices are to some extent influenced by social rules and
value system. Governance emerging from the values and agreed-
4 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx
upon processes are also found in social relationships (Heide
and John, 1992; Macneil, 1980). Another governance approach,
i.e. relational governance, was thus suggested by scholars.
Macneil (1980) first differentiated two kinds of exchanges, i.e.
discrete exchange and relational exchange. During making a
discrete exchange, communication is limited and the identity is
neglected. During making a relational exchange, the exchange is
examined from the past to future. However, even the simplest
model of discrete exchange must have some relational elements
(Dwyer and Schurr, 1987). That is, almost every exchange may
contain some relational factors to harmonize the behaviors among
parties.
Relational governance regards relational norms as a form of
informal governance (Heide and John, 1992; Macneil, 1980).
Relational norms specify the permissible limits on behavior,
and hence serve as a general protective device against abnormal
behavior (Heide and John, 1992).
Relational norms traditionally involve information sharing,
flexibility and solidarity (e.g., Heide and John, 1992; Lusch and
Brown, 1996). Information sharing decreases information
asymmetry, promotes conflict and problem solution within the
exchange. Flexibility facilitates the project's adaptation to
unforeseeable events (Poppo and Zenger, 2002). Developing
solidarity shifts the focus away from self-centered behavior
towards the behavior that foster unity to arise common respon-
sibilities and interests (Rokkan et al., 2003). If the parties promise
such norms, mutual benefit and cooperation will be achieved.
Trust is also a substantial part of relational governance. Trust
is regarded as a key indicator in supply chain relationships and
can improve project performance in construction (Kadefors,
2004; Meng, 2012). Trust has been identified as one of the
deterministic factors to reduce the negotiation cost, decrease the
monitoring cost, and increase the possibility to attain mutually
beneficial agreements (Khalfan et al., 2007).
The relational governance has received much attention in the
buyer–supplier relationship over the last two decades. Many
firms have begun to adopt this approach in their exchange
relationships to help govern the behaviors of the exchange
partners. Chen and Partington (2004) show that Chinese project
managers prefer to develop and maintain a good, even personal,
relationship with their clients. This is considered to be an
essential attribute of being a good project manager. As a result,
good relationships with all involved parties are absolutely
critical for resolving conflicts friendly.
Relational governance from social processes, including rela-
tional norms, trust, etc., can mitigate the exchange hazards targeted
by formal contracts (Poppo and Zenger, 2002), and minimize
transaction costs compared with the formal contracts (Dyer and
Singh, 1998). Thus, we propose our second hypothesis as follows:
H2. Relational governance positively affects project performance.
2.3. Relationship between contractual and relational governances
Despite that both contractual and relational governances are
considered to positively affect project performance, there is
some difference between these two effects. First, the contract is
Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
a formal and legally-binding agreement which attempts to
reduce the risk and uncertainty in exchange relationships
(Lusch and Brown, 1996) and to provide a safeguard for ex post
performance. On the contrary, the relational governance is
informal and non-binding. Second, despite its incompletion,
contracts can still provide a structural system to respond to
unforeseen disturbances. Contracts are also preferred to relational
mechanisms in offering a formal framework (Poppo and Zenger,
2002). The level of contractual completeness is a good indicator
of parties' scope of ex post actions (Liu et al., 2009). Third,
contracts are helpful to build initial institutional trust for firms or
individuals from temporary coalitions (Mcknight et al., 1998).
Thus, we propose our third hypothesis as follows:
H3. Contractual governance is more effective than relational
governance in improving project performance.
As to the relationship between contractual governance and
relational governance, two viewpoints arise in the existing
literature. One suggests that the contractual governance and
relational governances are substitutes (Corts and Singh, 2004;
Dyer and Singh, 1998; Kalnins and Mayer, 2004). It is said that
relational governance can produce informal self-enforcing agree-
ments and replace contractual governance through the social
processes. Relational governance may also minimize transaction
costs compared with formal contracts (Dyer and Singh, 1998). It is
reported that detailed contractual specifications indicate a signal of
distrust in the construction project (Kadefors, 2004). The other
viewpoint suggests that the contractual and relational governances
are mutual complements (e.g., Li et al., 2010; Poppo and Zenger,
2002; Ryall and Sampson, 2009). The reason is that contract
provides an institutional framework guiding the course of cooper-
ation, while relational governance overcomes the adaptive limits
of contracts (Luo, 2002).
According to Poppo and Zenger (2002), if contacts are more
customized, then the levels of established and developed norms
become higher; levels of relational governance are higher, and
the contractual complexity are all increased. This interdepen-
dence underlies their ability to generate improvement in project
performance. Jointly using both contractual and relational
governances will improve the performance more significantly
than using them separately (Liu et al., 2009).
A well-specified contract is viewed as a major instrument
that protects specific investment from opportunistic behavior
(Willaimson, 1985). The process of setting a contract requires
information exchange, flexibility and solidarity among parties.
On the contrary, with relational establishment and development,
previous experience could be reflected in contract revision, and
thus the contract could be improved.
In a word, contractual governance can provide institutional
framework for construction project, and the relational governance
can eliminate contract limitations. They function as mutual
complements, instead of substitutes. Thus, we propose the fourth
hypothesis, which consists of three parts as follows:
H4a. Relational governance positively affects the level of
contractual governance.
 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx
H4b. Contractual governance positively affects the level of
relational governance.
H4c. Contractual governance and relational governance will
function as complements in improving the performance of a
project.
2.4. Opportunism and project performance
According to Willaimson (1985), opportunism was
defined as the self-interest seeking with guile. Opportunism
is inherent in any inter-firm exchange (Willaimson, 1985).
Because of inherent asymmetries during construction project
processes, the practice of opportunism is potentially high
and tempting (Lau and Rowlinson, 2009). Firms and
individuals from temporary coalitions sometimes seek to
reap profits at the expense of others. There are some typical
behaviors of opportunism, such as hiding firm's qualifica-
tion, undertaking projects in unreasonably low price, illegal
sub-contracting, jerry-building, and false declaration of
quantity and price.
These kinds of behavior hurt the relationship satisfaction
and trust (Jap and Anderson, 2003). A firm with a high level
of opportunism tends to lack candor or honesty in exchanges
(Willaimson, 1985) and makes a lower level of commitment
to the bilateral relationship (Wang and Yang, 2013). So
opportunism negatively affects the factors to improve the
performance, such as trust, commitment, and satisfaction.
(Carr and Pearson, 1999; Villena et al., 2011). Some scholars
even insist that opportunism directly negatively affects the
performance (Crosno and Dahlstrom, 2008; Wang and Yang,
2013).
In the bidding and contracting stage of a construction
project, clients need to pay a lot of attention to prevent
malicious bidders. In the construction stage of a project,
opportunistic behaviors (e.g. jerry-building, adulterating and
others) can result in overrun of time and costs. These behaviors
could influence project performance. Thus, we propose the
following hypothesis:
H5. Opportunism negatively affects project performance.
2.5. Governance mechanisms and opportunism
The existing literature on TCE theory (e.g., Morgan et al.,
2007; Willaimson, 1985) suggests three common approaches to
control opportunism: the contractual governance, the hierarchy
approach and the relational governance. For construction
projects, the hierarchy approach can be excluded, thus is not
discussed in this paper.
Contracts play an important role in restricting opportunism.
An explicit contract specifies acceptable behaviors and unac-
ceptable behaviors (Lui and Ngo, 2004), and can mitigate
opportunistic behavior (Poppo and Zenger, 2002). Lui and Ngo
(2004) argued that contracts can curb opportunism through two
mechanisms. First, contracts can change the payment structure by
increasing the cost of opportunistic behavior. Second, contracts
Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
5
can reduce the monitoring cost by increasing the transparency of
relationships (Reuer and Ariño, 2002).
In fact, a contract cannot identify every potential
contingency (Macneil, 1980), and only provide the limited
protection (Willaimson, 1985). As a result, the participants
may rely on relational governance to adjust partners'
behavior. By sharing norms and values, partners' opportunism
is restricted (Brown et al., 2000). The effectiveness of relational
norms and trust is most prominent on opportunistic behavior
(Caniëls and Gelderman, 2010). They can facilitate the alignment
of partners' interests (Atkinson et al., 2006). Some researches
confirmed that trust positively affects a wide range of behaviors,
such as collaborative communication (Lusch and Brown, 1996),
conflict resolution, and flexibility in responding to unanticipated
circumstances (Dyer and Chu, 2003). Fostering trust is recognized
as one of the most effective means to suppress opportunism
(Walker, 2003). Thus, we propose the following hypotheses:
H6. Contractual governance negatively affects opportunism.
H7. Relational governance negatively affects opportunism.
Although both contractual and relational governances are
considered to be able to restrain opportunism, we suggest that
relational governance is relatively more effective than contractual
governance in restraining opportunism for construction projects,
due to three reasons.
First, a construction project has a larger uncertainty in task,
natural, organization and contracting (Winch, 1989). Drawings
and specifications of a construction project always contain errors
and omissions. Weather and soil conditions may also alter the
priorities of project processes. Changes are also frequently made
in contract documents during its lifecycle. These may give a door
to opportunism behavior.
Second, although contracts are formal and legally-binding
agreements, the more complicated the contract is designed, the
less the opportunism behavior appears when uncertainty is
present. Drawing up a detailed and explicit formal contract can
be costly and time consuming. Even if an explicit contract
exists, the firms in coalition often fail to seek legal sanctions
when disputes arise among parties. If they do that, not only the
cost and time are high but also the consequences may be
undesirable.
Third, through socialization processes, both passive and
active opportunistic behaviors are mitigated in the exchanges
(Wathne and Heide, 2000). Relationships characterized by
relational norms provide a foundation for restricting oppor-
tunism in exchange relationships (Carson et al., 2006). Low
relational norm relationships tend to be competitive, while
high relational norm relationships tend to be cooperative
(Tangpong et al., 2010). According to Tangpong et al. (2010),
relational norms and agent cooperativeness interact with each
other in restricting opportunism and this interaction yields
better results in opportunism. Thus, we propose our last
hypothesis as follows:
H8. Relational governance is more effective than contractual
governance in restraining opportunism.
6 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx
3. Research setting
3.1. Sampling and data collection procedures
Data for this study is obtained through a survey from clients,
contractors, supervisors and designers, who are principal and
familiar with the engineering construction projects.
More than twenty firms were chosen from the 2011 List of
Large and Medium-sized Enterprises in Engineering Construc-
tion in three cities (Hefei, Tongling and Maanshan) in Anhui
province, China. Each firm gets less than 20 questionnaires.
Totally 300 questionnaires were sent out and 230 questionnaires
were returned. The response rate is 76.7%. Some questionnaires
used the matched survey to the client, contractor, supervisor and
designer around the project. The process lasted for three months.
After removing null responses, we have 225 valid questionnaires,
which are from 67 clients, 74 contractors, 30 supervisors, 48
designers and 6 others, with the proportion of 29.8%, 32.9%,
13.3%, 21.3%, and 2.7%, respectively.
Among the 225 informants, 35 persons have been working in
their current position for 1–3 years, 56 persons for 4–8 years, 58
persons for 9–14 years, 44 persons for 15–20 years and 32
persons for more than 20 years, with the proportion of 15.6%,
24.9%, 25.8%, 19.6% and 14.2%, respectively. In the 225
responses which are related to project budget, 50.2% projects
have the total investments more than 100 million RMB (about
16 million US dollars).
3.2. Measure
To make the measures valid, we select many instruments from
the literature. For ease of understanding, the English version of
the instruments was first developed and then translated into
Chinese, and finally was back-translated into English for
accuracy. In the absence of any existing entry, new items were
created based on the literature and refined by our pilot test.
Subjects responded to each questionnaire item using the 1–5
scale (i.e., 1 = Strongly Disagree and 5 = Strongly Agree).
Before issuing the questionnaires, three specialists who
work in construction industry from the positions of client,
contractors and supervisions for at least 15 years were invited
to examine our scales, to make sure that the questionnaire are
coincident with the reality.
3.2.1. Contractual governance
Three variables from Goo et al. (2009) in measuring contracts
are for our reference. The first part is the fundamental elements
with four items. The second part is the change elements with three
items. The third part is the governance elements with three items.
The Cronbach's α values of three variables used to measure
contracts are 0.880, 0.746 and 0.881 respectively.
3.2.2. Relational governance
Based on Griffith and Myers (2004), relational norms involve
information exchange (3 items), solidarity (3 items) and flexibility
(2 items). Their Cronbach's values α are 0.822, 0.825 and 0.731,
respectively.
Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
A considerable literature concerns the impact of trust on
successful project management. Several alternative models have
been proposed. Pinto et al. (2009) suggest Hartman's model of
integrity, competence, and intuitive forms of trust because it is
purposely developed to address trust within a project setting to a
greater degree than the theoretical works. Six trust items, adapted
from Chow et al. (2012), Hartman (2002) and Pinto et al. (2009)
are used in our study. The Cronbach's α value is 0.882.
3.2.3. Project performance
The traditional way of judging project success is the so-called
iron-triangle of time, budget and required quality, which are
widely reviled in late years. Many studies have expanded the
project success criteria by adding other aspects, such as
stakeholders' satisfaction, customer's benefit, and future poten-
tial to organization (Jugdev and MÜller, 2005; Nixon et al.,
2012). Based on the work of Pinto et al. (2009) and our field
practitioner interview, six items are developed to measure the
project performance. The Cronbach's α value is 0.749.
3.2.4. Opportunism
Opportunism is measured by four items which were drawn
from Heide et al. (2007). The Cronbach's α value is 0.889.
All items are specified in Appendix A.
4. Results and analysis
4.1. Model evaluation and hypothesis testing
We use the Structure Equation Modeling (SEM) method,
which is able to simultaneously process multiple dependent
variables and comparison of different models, and is widely used
in social, economic and management science. Data analysis is
conducted with Partial Least Square (PLS) technique, which is
well suitable for small data samples, skewed distribution
(Hulland, 1999), and the latent constructs to be modeled with
formative indicators (Chin, 1998). It is appropriate to adopt PLS
method in our study, because there are formative indicators in
latent constructs.
The reliability and validity of all constructs used for our
research were checked. The reliability is reflected by internal
consistency reliability, called Cronbach's α value. Generally,
it is necessary to let the Cronbach's α value be greater than 0.7.
In this study, the Cronbach's α value of each multi-item
variable is greater than 0.7, which implies high internal
consistency.
Composite Reliability (CR) and Average Variance Extracted
(AVE) were used to estimate the convergent validity. It is
necessary that CR value is greater than 0.7 and AVE value is
greater than 0.5. It can be seen from Table 2 that for each
variable, the CR values range from 0.832 to 0.927, and the
AVE values range from 0.624 to 0.809. All of them are higher
than the required level.
Discriminant validity is another value that is considered to
be able to distinguish constructs. It could be obtained from the
comparison of the square root of an AVE with the absolute
value of the correlative coefficients of the other latent variables.
 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx
As shown in Table 3, the minimum in the square root of AVE is
bigger than the maximum in absolute values of correlative
coefficients. Thus discriminant validity is satisfied.
4.2. Governance influencing project performance
Regarding the hypotheses H1 and H2, we checked the
influence of two governances on project performance. The
corresponding results are shown in Fig. 2. It is found that there
were significant positive relationships between contractual
governance and project performance (b = 0.325, p b 0.001)
and between relational governance and project performance
(b = 0.268, p b 0.05). These findings support the hypotheses
H1 and H2. Obviously, the path coefficients of these two
governance mechanisms are different. According to Chin's
(2003) equation which is an adaptation of the t-test for
comparing regression coefficients between independent sam-
ples, we test the difference between the two paths. Contractual
governance (b = 0.325) has a stronger impact on project
performance compared to relational governance (b = 0.268)
(T = 7.243, p b 0.001). Hypothesis H3 is therefore supported.
4.3. Relation between contractual and relational governances
In this section, we intend to find out the relationship between
contractual governance and relational governance themselves:
mutual complements or substitutes. As shown in Fig. 2, the
contractual governance positively influences the relational
governance (b = 0.613, p b 0.001). That means there will be
stronger relational governance when contractual governance is
higher. In other words, the increases in the level of relational
governance are associated with the greater levels of contractual
governance. Similarly, relational governance positively influ-
ences the contractual governance (b = 0.578, p b 0.001). The
positive coefficients support hypotheses H4a and H4b. There
exists the evidence of a complementary effect on performance,
if both contractual and relational governances positively
influence the project performance, and positively influence
each other themselves (Poppo and Zenger, 2002). Thus, we can
conclude that relational governance and contractual governance
are complements, rather than substitutes. Hypothesis H4c is
thus supported.
Table 2
Values of reliability and convergent validity.
Variables Cronbach's alpha Composite reliability AVE
Project performance (PP) 0.749 0.840
Opportunism (OP) 0.889 0.923
Fundamental elements (FE) 0.880 0.918
Change elements (CE) 0.746 0.832
Governance elements (GE) 0.881 0.927
Information exchange (IE) 0.822 0.882
Solidarity (SD) 0.825 0.883
Flexibility (FB) 0.731 0.880
Trust (TR) 0.882 0.910
Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
7
4.4. Opportunism influencing project performance
Hypothesis H5 predicts that opportunism will hurt the project
performance. However, as shown in Fig. 2, opportunism doesn't
have a significant negative impact on project performance
(b = − 0.041, p N 0.05). The result suggests that decreasing
opportunism cannot significantly improve project performance.
Hence, hypothesis H5 is not supported.
4.5. Contractual and relational governances restraining
opportunism
As shown in Fig. 2, relational governance has a significant
negative effect on opportunism (b = − 0.311, p b 0.001). This
implies that the increases in relational governance will signifi-
cantly reduce opportunism. The result supports hypothesis H7.
However contractual governance has no obvious effect on
opportunism. That means a more complete contract, which
contains the detailed promises, obligations, and processes for
dispute resolution, could not effectively restrain opportunism.
Hypothesis H6 is not supported. Thus, relational governance is
more effective than contractual governance in restraining
opportunism. The hypothesis H8 is supported.
We use an independent-sample t-test to analyze the difference
between clients and contractors in performance and opportunism.
Interestingly, we find that clients (M = 2.780) are greater than
contractors (M = 2.517) in opportunism (T = 1.929, p b 0.1).
The results are shown in Table 4.
5. Discussions
Our analysis has confirmed the effectiveness of contractual
governance and relational governance on the project perfor-
mance, supported TCE theory and shown the theory's relevance
in explanation construction project governance. If the firm seeks
to improve project performance, contractual and relational
governances can be emphatically used to achieve this goal.
Some studies argue that the relational governance, as opposed
to the contractual governance, is more effective in alliance
performance (Lee and Cavusgil, 2006) or relationship perfor-
mance (Liu et al., 2009), but our results show that the contractual
governance has a stronger impact on project performance than the
relational governance. The reason could be that the effectiveness
of contractual and relational governances is closely related to the
construction context.
Previous researchers proposed two competing views for the
relationship between contractual and relational governances,
substitutes or complements. Our results are in agreement with
the conclusion that contractual and relational governances
0.636 function as complements. These findings indicate that complex
0.750 contract has always much to do with the greater levels of
0.736
relational governance, and the higher relational governance
0.624
0.809 tends to employ perfect contract.
0.651 Surprisingly, our results show that opportunism is not related
0.654 significantly to project performance. Unlike some scholars (e.g.,
0.785 Chen and Lien, 2012; Morgan et al., 2007), we don't confirm the
0.629
direct negative impact of opportunism on performance. Brown et
8 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx

Table 3
Correlations of latent variables and the values of discriminant validity (n = 225).
Mean SD 1 2 3 4 5 6 7 8 9
1 PP 3.733 0.488 0.797
2 OP 2.597 0.820 − 0.287 0.866
3 FE 3.979 0.542 0.405 − 0.201 0.858
4 CE 3.510 0.550 0.307 − 0.249 0.328 0.790
5 GE 3.871 0.515 0.387 − 0.250 0.555 0.403 0.899
6 IE 3.790 0.595 0.393 − 0.324 0.298 0.432 0.459 0.807
7 SD 3.779 0.540 0.414 − 0.303 0.473 0.355 0.560 0.554 0.809
8 FB 3.656 0.551 0.281 − 0.292 0.303 0.435 0.319 0.561 0.518 0.886
9 TR 3.644 0.534 0.440 − 0.314 0.361 0.337 0.421 0.575 0.687 0.544 0.793
Note: PP = project performance; OP = opportunism; FE = fundamental elements; CE = change elements; GE = governance elements; IE = information exchange;
SD = solidarity; FB = flexibility; TR = trust.

al. (2009) argue that opportunism is more relevant to relationship
satisfaction rather than operation performance. Although oppor-
tunism behaviors may not directly decrease performance, they are
likely to undermine the relationship satisfaction. Some studies
argue that the impact of opportunism on performance is mainly
through some mediate variables, such as trust, commitment,
conflict, and satisfaction (Wang and Yang, 2013). Opportunism
may indirectly have a negative impact on project performance by
influencing these factors.
How to reduce opportunism is one of major topics that have
been studied in various buyer–supplier contexts. According to
TCE theory, formal contractual and relational governances can
substantially curb opportunism. But our analysis does not show
effectiveness of contractual governance in restricting opportun-
ism. Recent research on the mitigation of opportunism among
parties mainly focuses on relational governance, e.g., relational
norms (Tangpong et al., 2010). By sharing norms and values
among exchange partners, opportunism can be effectively
restrained. Our results show that relational governance is
effective in restricting opportunism. If the firms seek to reduce
opportunism, inter-firm trust and relational norms are important
means. Chinese project managers prefer to develop and maintain
a good, even personal relation, with clients (Chen and Partington,
2004). Good relationships with all parties involved are effective
in resolving any problem.
Contractual
0.325***
Governance
R²=0.421
-0.108
Based on the survey of engineering construction projects in
China, our research shows that client has greater opportunism
than contractor has. The status of construction market in China
indicates that the client is at a strong position, while the contractor
is at a weak position. Illegal behaviors from clients account for
70% of all illegal behaviors in construction (Sha, 2009).
6. Conclusions
This paper attempts to identify the effectiveness of
contractual and relational governances in construction projects.
Using construction projects in China as the empirical setting,
we have five major findings. First, both contractual governance
and relational governance are important in improving project
performance and contractual governance is more effective than
relational governance. Second, contractual governance and
relational governance function as complements, rather than
substitutes. Third, opportunism does not significantly influence
project performance. Fourth, relational governance plays an
important role in mitigating opportunism, but contractual
governance does not. Fifth, different stakeholders in coalition
are not alike in opportunism. Clients have greater opportunism
than contractors in engineering construction.
These outcomes provide several insights in construction
project governance. First, higher level contractual governance
plays an important role in improving performance. Detailed
contractual specifications don't signal a climate of distrust, but
increase the level of relational governance. From the managerial
perspective, contracts should also be further improved, but
Project cannot decrease opportunism in construction exchange. Second,
Performance the project participants, such as clients, contractors, subcontrac-
R²=0.302
tors and construction supervisors may also have potential

0.613*** 0.578*** -0.041 Table 4

Independent-sample t-test results.
0.268*
Relational Variables Work unit Mean SD T values
Opportunism
Governance -0.311*** Project performance Client 3.662 0.465 − 1.251
R²=0.150
R²=0.384
Contractor 3.759 0.457 − 1.251
Note *p<0.05;**p<0.01;***p<0.001 Opportunism Client 2.780 0.811 1.929 +
Contractor 2.517 0.806 ⁎,⁎⁎ 1.929 +
Fig. 2. Governance structural model with path coefficient. +
p b 0.10.

Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx
opportunism. Although the opportunism behaviors don't harm
project performance in our results, they are likely to decrease the
satisfaction. Relational governance, including relational norm
and trust, can effectively restrain the parties' opportunistic
action.
Several limitations exist in this study. First, this research
does not take antecedent variables into account, such as the
uncertainty of surrounding, complexity, and leaves some other
factors, such as past cooperation, cooperation length of time,
contract duration and person characteristics. Future research may
address these issues. Second, this study does not systematically
investigate the impacts of relational norms, trust, contractual
foundation elements and change elements on the project
performance and opportunism. The joint effect of contractual and
relational governances on project performance has not been
measured. Future work can study this in-depth. Third, this paper
uses the samples from only one province to test our hypotheses,
and does not cover the other regions. Governance mechanisms
may depend on Chinese context. Certainly China cannot represent
all emerging economies. Future research could extend our model to
the other national settings. The difference in economic and
institutional conditions could induce various governance strategies.
Conflict of interest
We declare that we have no conflict of interest with other
people or organizations.
Acknowledgments
The authors thank the editor and anonymous referees for
helpful comments and suggestions on the manuscript. This
work was supported by the National Natural Science
Foundation of China (No. 71001094, 71371176).
Appendix A. List of items
Project performance (6 items, alpha = 0.749, taken from
Pinto et al., 2009)
▪ The project results, or deliverables, are in line with client
objectives.
▪ This project has come in on budget.
▪ This project has come in on schedule.
▪ We are satisfied with the project outcomes.
▪ The construction quality and the deliverables quality accord
with the standard.
▪ This project has qualified acceptance and successful delivery
by one-time.
Opportunism (4 items, alpha = 0.889, taken from Heide
et al., 2007)
▪ On occasion, we lie about certain things in order to protect
our interests.
▪ We sometimes promise to do things without actually doing
them later.
Please cite this article as: P. Lu, et al., 2014. The effectiveness of contractual and relational governances in construction projects in China, Int. J. Proj. Manag. http://
dx.doi.org/10.1016/j.ijproman.2014.03.004
9
▪ We sometimes take advantage of “holes” in our contracts or
agreements to further our own interests.
▪ We do not always act in accordance with our contracts or
agreements.
Contractual governance
Fundamental elements (4 items, alpha = 0.880, derived
from Goo et al., 2009; Luo, 2002)
▪ Our relationship with the other parties is governed primarily
by written contracts.
▪ The contract has detailed the obligations and rights of every
party.
▪ The contract has a clear statement of the time, place and the
way of project fulfillment.
▪ The contract has described the safety management require-
ments, quality standards, contract price and its payment to
manage the agreements among parties.
Change elements (3 items, alpha = 0.746, derived from Goo
et al., 2009; Luo, 2002)
▪ The contract has specified major principles or guidelines for
handling unanticipated contingencies as they arise.
▪ The contract has provided alternative solutions for responding
to various contingencies that are likely to arise.
▪ The contract has allowed us to respond quickly to match
evolving client requirements.
Governance elements (3 items, alpha = 0.881, adapted
from Goo et al., 2009)
▪ We have a clear expression of the default definitions and
formula.
▪ The contract has a detailed description of conditions under
which termination may occur.
▪ The contract has specified the procedures and methods for
disputes.
Relational governance
Trust (6 items, alpha = 0.882, derived from Chow et al.,
2012; Pinto et al., 2009)
▪ We believe the other party can keep their word throughout
the life of the project.
▪ We feel confident that the other parties have high levels of
integrity and honest.
▪ We believe the project engineers and other technical people
are competent at what they are doing.
▪ We trust that the project participants are able to fulfill
contractual agreements.
▪ We are certain that the other parties have the ability to
perform their tasks.
▪ We believe that the other parties could meet the require-
ments of the project in technology and management.
Relational norms (based on Griffith and Myers, 2004)
Information exchange (3 items, alpha = 0.822)
10 P. Lu et al. / International Journal of Project Management xx (2014) xxx–xxx
▪ Exchange of information among the parties takes place
frequently.
▪ We keep each other informed about events or changes that
may affect the other parties.
▪ The parties established a good contact with each other,
avoiding the possible misunderstandings.
Solidarity (3 items, alpha = 0.825)
▪ The parties are consistent with the expectations of this
project.
▪ The project overall plan and the implementation scheme are
shared by every party.
▪ Parties involved in this project regard each other as major
partners.
Flexibility (2 items, alpha = 0.731)
▪ We believed that the parties were willing to cooperate to
work out solutions if some unexpected situations arise.
▪ The parties expected to be able to make adjustments in the
ongoing relationship to cope with changing circumstances.
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