Principal/agent problem

The principal-agent theory has been in existence for a long time. It is a theory that was developed to help people understand and resolve dilemmas associated with information asymmetries between the agent and the principal (Bensoussan, 2013).  In most cases, the principal and the agent have divergent goals, motivations and attitudes that bring about conflict of interest between the two players. In essence, agency problem occurs when the interests of the principal and the agent are not in the same direction.

It is, however, important to distinguish between agency and contracts that have been confused to mean the same thing for a long time. The two concepts are distinct with unique features separating the contractual and agency relationships. For example, agents are usually retained not for any particular or discrete set of tasks, but instead to fulfill a wide range of activities likely to vary over time on behalf of the principal.  Under such circumstances, the principal must be concerned with the agent’s dispositions, attitudes and other characteristics that are not of concern in a contractual agreement (Lowe,  2013). Another major distinguishing aspect between the two is that there is less independence in the agency relationship than there is in the contractual relationship between the agent and the principal. In essence, this implies that the principal-agent relationship in agency relationship is more hierarchical and power driven as compared to the contractual relationship. Nevertheless, it is worth noting that a conflict of interest is eminent in these two relationships and organizations should strive to mitigate the effects.

Role of commercial manager in resolving principal-agent problem in contractual relationship

As earlier discussed, there are cases where the principal-agent relationship is on a contractual basis where the principal has mandated an agent to complete a certain project within a given duration. Under such circumstances, the contractor has an obligation of fulfilling the objective of the principal effectively and within the set time frame (Siebert, 2008).  Nevertheless, conflict of interest within such contracts is eminent, and it is, therefore, imperative to design on how best to deal with them. For a long time, commercial management has been an effective tool for resolving such agency problem. The commercial managers have different roles that enable resolution of the agency problem between a client and the contractor.

Capture phase or pre-bid phase

The commercial managers have a significant role in the capture phase of the contractual relationship between the principal and the agent. It is essential for them to ensure that the commercial relationship between the two parties is in order just from the inception. Commercial managers are obliged to carry out an intensive analysis of what is expected in the contract. It is imperative that the management is conversant with what the principal need in order to have the best agent (Morris, 2013). Organizations culture and policy plays a significant role in determining the kind of contractor necessary to implement the desires of the principal. Together with the other concerned team members in the organization, the commercial manager must ensure that there is an effective bid strategy during the capture phase that is instrumental in future dealings with the contracted agent.

In order to have an effective contractual relationship between an agent and the principal, the commercial manager has an obligation of determining the requirements and constraints of the project. This calls for extensive analysis and feasibility of the project prior to the contractual agreement. After proper analysis of the intended project, the commercial manager can determine the best procurement or bidding strategy.

Bid Phase

After the analysis of the project and the best bidding strategy, the next step involves the bidding process where the commercial manager has to use his skills and know how to contract the best agent to act in the best interest of the principal. This is a very critical phase since it determines the agency choice and thus the relationship between the principal and the agent (Kendrick, 2009).  At this juncture, the manager has an obligation of vetting the different bidders and come up with the best bet for completion of a project and in the best interests of the parties involved.

At the bidding phase, the commercial manager must ensure that they prepare a commercial proposal. This proposal must outline the estimated costs, risks, and the expected results of the project in question (Faur, 2009). The commercial manager must also have a clear understanding of the contractual requirements in order to have a vivid picture of the commitment, risks and opportunities associated with such contracts. This will be essential since the manager is expected to work in the best interest of the principal. The commercial manager is obliged to ensure that they are conversant with all the rules and regulations that govern the contractual agreement.

Contract negotiation

Commercial managers have another critical role in contract negotiation. This is a very critical stage in the contractual relationship between the terms of contracts are discussed at this stage.  Failure to understand the different terms of a contract can be a source of conflict between the client and the contractor. All the laws and regulations governing the contract must be discussed and agreed by the two parties involved in the contract.  The issue of offer and acceptance are the critical components in contract negotiation.

For example, the commercial manager must understand the content of the offer that contains essential information on terms and details of the project. The offer also contains all the criteria necessary in order to fulfill the effective completion of the project (Hall & Lieberman, 2010).  The commercial manager must also be aware of all the factors that may result in a breach of contract, as well as a conflict between the agent and the principal. It is the obligation of the manager to ensure that all the legal requirements for the specific project. A proper description of the offer will make a smooth working relationship between the agent and the principal.

Another major job that a commercial manager must fulfill in contract negotiation is determining the type of contract. It is their obligation to ensure that there are no loopholes left in the terms of the contract that in most cases depends on the kind of contract. The manager should be able to differentiate the different types such as the specialty, contract under seal and written contracts.  It is, therefore, paramount for the commercial manager to understand all these concepts and advise the principal accordingly (Lowe, 2007).   To avoid the agency problem, the commercial manager must be acquainted with all the ups and downs involved in contract formation. He has the responsibility of ensuring that there is harmony between the contracting parties. It is therefore of paramount importance for the commercial manager to have adequate experience and expertise in contract negotiation.

The commercial manager must also have the responsibility to follow-up the offer. This ensures that the contractor fulfills the objectives of the organization. To ensure the success of the project, the commercial manager must engage in intensive project marketing that will be instrumental in solving the agency problem.

Contract enforcement phase

After negotiating the contract terms, the commercial manager has an obligation of ensuring that the terms of contract are followed to the letter. A comprehensive enforcement of the terms of contract will ensure a smooth running of the contractual relationship. It is during this phase that the manager must make sure that all the questions within the contract are answered effectively ( Zwikael & Smyrk, 2011).  For instance, the manager must ensure that the project is well defined in terms of its specifications, its duration and any other information relating to the project in question. It is also at this point that the manger should advice on the payable amounts and when these payments should be made. If there is a proper understanding of these concepts between the agents and the principal, then there will be minimal chances of conflicts.

Commercial managers have a significant role in changing the contract contents just in case need to do arise. There are circumstances under which the terms of contract changes due to internal r external forces. Under such circumstances, the commercial manager has a role of ensuring that these changes are not done unilaterally (Boyce  & Lake, 2007). He has the obligation of ensuring that there is mutual understanding and consent among the different players. All the parties involved are required to cost share any risk factor arising as a result of change in contract contents.  The contract enforcement phase also requires a lot of input from legal and financial advisors to enhance mutual relationship between the two parties.

Project implementation phase

This is the most critical stage in a contractual relationship. This is the stage whereby the principal expects to get the results and the agent expects payments for the services rendered. The commercial manager is required to be at his best to fulfill his role in agency problem solving. (Potts & Ankrah, 2014).  He has the responsibility of managing the project team and makes a follow-up of the contractu8al obligation. When the terms of contract are strictly followed, chances of collision between the agent and the principal are minimal.

During the project implementation, the commercial manager has the obligation of dealing with potential risks and opportunities. Risk management forms one of the critical responsibilities of the commercial manager. Commercial managers must possess the best risk management practices which are mainly incorporated in business operations and functions. This is a very important step in the project cycle which should be carried out from inception to conclusion of the project (Altfeld, 2010).  The commercial managers must recognize the threats to the project and execute them during vital positions in the implementation process.

Risk management in project management forms a critical part. It is a step by step process which ensure that all possible risks are identified and adequate actions taken. A commercial manager must identify the possibilities and places where risk factors are high and their effects to project implementation. To avoid conflicts and reduce the agency problem, the commercial manager must ensure that the necessary actions taken are in accordance with the legal framework provided in the contract (Towey, 2012).  It is essential for the commercial manager to ensure routine risk assessment and make the necessary changes as the project implementation continues.

Commercial managers must possess adequate skills essential for identification analysis and mitigation of risks incurred in the project implementation. For instance, the sources of risks differ from one project to another depending on the nature and scope of the project. The greater the size of the project the greater the chances of risk involved (Bensoussan, 2013).  The commercial manager must ensure that proper risk analysis and mitigation tools put in place for effective project implementation. Nevertheless, legal framework must be followed in taking risk mitigating actions to avoid conflicts between the principal and the agent. The commercial manager must also ensure that the risks are identified in time, and the necessary actions taken to prevent possible collision between the two players.

The issue of risk management is a very broad concept where the commercial managers must undertake with a lot of considerations. Since a contractual relationship between the agency and the principal is by mutual agreement, the two parties will try to manage risks in their part. These competing interests may be a cause of conflict between the involved parties. This is now the e critical point where the role of the commercial manager becomes critical (Chapman, n.p.).  It is worth noting that the commercial manager should be a neutral figure and ensure that the conflict levels are minimized as much as possible. The commercial manager has the obligation of assigning different responsibilities to different individuals to avoid such conflicts.

Risk analysis is an important step in risk management. A commercial manager may not decide on the corrective measures if there is no proper risk analysis. After identifying the risk events, it is essential to conduct further analysis of the risk to have the best action. It is important to understand whether the risk information can be acquired through qualitative or quantitative means (Zwikael & Smyrk, 2011). The commercial manager must be conversant with the critical risk assessment and analysis tools. Both the risk probability and the risk consequences forms an integral part of risk analysis.

The commercial manager also has an obligation to carry out continuous reviews on the development of project implementation. He has the supervisory role of ensuring that since day one of project implementation, all the plans are effectively accomplished. It also the responsibility of the manager to assess the development of the project, in terms of progress and whether the stipulated deadlines are met.  In order to have a good assessment program, the managers can carry out progress meetings where the team players can report on their progress.  This is an important aspect of the principal will be getting the necessary information on how far the projects have gone (Bensoussan, 2013). These assessments should be carried out to the completion of the project.

The commercial managers are also obligated in supporting the project manager in attaining his contractual aspects. For instance, the manager is expected to ensure that the terms of payments are effected as outlined in the contract. All the necessary claims that the contractor may be willing to claim and are in accordance with the negotiated contract must be effected. In case of any contractual amendments, penalties and remedies, the commercial manager has the obligation of ensuring that they are paid according to the legal framework provided. This will substantially reduce any chances of conflict between the client and the contractor.

Apart from the direct involvement in the contractual relationship, the commercial mangers have other major roles which are equally important in solving principal-agency problem. For instance, they are involved in production of documentation, negotiation of intellectual property rights, crisis handling and monitoring compliance just to mention a few.

Conclusion

In conclusion, it clear that principal-agent problem is a common problem in the modern economy. However, it is imperative to understand that there are various ways through which such problems can be resolved. Commercial management, for instance, has been a critical tool in resolving agency problem especially in contractual relationship. It is essential that we distinguish between the project manager and commercial manager and the roles played by each of them in the project implementation (Winch, 2010). Major organizations should embrace the positive contributions by the commercial managers in terms of resolving the agency problem. It is however essential to ensure that the commercial mangers have the necessary knowledge and skills to counter the agency problem prevalent in major contractual relationship.

References

A guide to the Project Management Body of Knowledge (PMBOK guide), fifth edition (5th ed.). (2013). Newtown Square, Pa.: Project Management Institute.

Altfeld, H., 2010. Commercial aircraft projects: Managing the development of highly complex products. Farnham, Surrey, England: Ashgate Pub.

Bensoussan, A., 2013. Real options, ambiguity, risk and insurance: World Class University Program in Financial Engineering, Ajou University. Amsterdam [etc.: IOS Press.

Boyce, T., & Lake, C., 2007. The commercial manager: The complete handbook for commercial directors and managers. London: Thorogood.

Chapman, R. (n.d.). The rules of project risk management: Implementation guidelines for major projects.

Faure, M., 2009. Tort law and economics. Cheltenham, UK: Edward Elgar.

Hall, R., & Lieberman, M., 2010. Microeconomics: Principles and applications (5th ed.). Mason, OH: South-Western, Cengage Learning.

Kendrick, T., 2009. Identifying and managing project risk essential tools for failure-proofing your project (2nd ed.). New York: AMACON.

Lowe, D., 2007. Commercial Management of Projects. Oxford: John Wiley & Sons.

Lowe, D., 2013. Commercial management theory and practice. Chichester: Wiley, Blackwell.

McEachern, W., 2012. Economics: A contemporary introduction (9th ed.). Mason, OH: South-Western Cengage Learning.

Morris, P., 2011. The Oxford handbook of project management. Oxford: Oxford University press.

Morris, P., 2013. Reconstructing project management. Chicester: John Wiley & Sons.

Murthy, D., & Jack, N., 2014. Extended Warranties, Maintenance Service and Lease Contracts Modeling and Analysis for Decision-Making. London: Springer :.

Pinto, J., & Morris, P., 2013. The wiley guide to project, program, and portfolio management. Hoboken, N.J.: Wiley.

Potts, K., & Ankrah, N., 2014. Construction Cost Management Learning from Case Studies. (2nd ed.). Hoboken: Taylor and Francis.

Ross, A., & Williams, P. (n.d.). Financial management in construction contracting.

Siebert, H., 2008. Economics of the environment theory and policy (7th ed.). London: Springer.

Smyth, H., 2014. Relationship management and the management of projects. Abingdon, Oxon: Routledge, Taylor and Francis.

Towey, D., 2012. Construction Quantity Surveying A Practical Guide for the Contractor’s QS (1., Auflage ed.). New York, NY: John Wiley & Sons.

Winch, G., 2010. Managing construction projects: An information processing approach (2nd ed.). Chichester: Blackwell Pub.

Zwikael, O., & Smyrk, J., 2011. Project management for the creation of organisational value. London: Springer.

Do you need an Original High Quality Academic Custom Essay?