Project-Based Organizations’ Pursuit of Production Efficiency and Legitimate Power: An Institutional Perspective

Abstract

Drawing on institutional theory, this article aims to investigate how owners’ project-based organizations (PBOs) can promote production efficiency and legitimate power under the influence of legal enforceability. Analyzing a sample of Chinese construction projects, we find that PBOs can achieve this goal by designing more complex contracts when legal enforceability increases. The PBOs’ expertise reduces the effect of legal enforceability on contracts and alleviates their dependence on contracts when pursuing efficiency. These results can guide PBOs to design contracts according to their expertise and the legal environment to promote production efficiency and legitimate power.

Keywords

project-based organizations (PBOs)institutional theory legal enforceability production efficiency legitimate power contractual complexity

Introduction

Due to the one-off and unique nature of construction projects, owner firms often set up a special project-based organization (PBO) for transaction governance (Hobday, 2000). The PBO can use various influence strategies to affect the contractor (e.g., issue instructions to the contractor and punish the contractor for misconduct), thereby improving production efficiency to obtain more profits (Kalkanci et al., 2011; Wynn et al., 2021). However, these influences may be considered as power abuse and distrust if they lack legitimate bases. For example, the owner PBO’s change order and penalties for the contractor’s misconduct may be considered unreasonable practices and power abuse if they lack clear legitimate bases, leading to disputes and litigation, which may undermine their relationship and mutual trust (Brahm & Tarziján, 2014; Ren et al., 2001; Wang & Liu, 2021). How to turn the influences into the legitimate power accepted by the contractor, therefore, is also an important issue worthy of the owners’ concern (Wang et al., 2021a). Legitimate power is an indicator of the legitimacy of the owner PBO’s influence, capturing the extent to which the owner PBO has a legitimate right to influence the contractor and that the contractor has an obligation to accept this influence (French et al., 1959).

Previous literature shows that the design feature of the transaction contract is the key to determine whether organizations can obtain both production efficiency and legitimate power (Yang et al., 2012). The core design feature of a contract is contractual complexity, which is defined as the degree of detail specified for governing the transaction in the contract (Wang et al., 2021a). Contractual complexity further depends on the level of legal enforceability, which captures the extent to which the legal system (i.e., the applicable laws and/or regulations specified in the contract) can protect contract execution and the transaction parties’ rights (Shou et al., 2016).

However, there is still controversy over the effects of legal enforceability on contractual complexity as well as the effects of contractual complexity on organizational performance. Some scholars argue that since contract execution can be more effectively safeguarded when legal enforceability is higher, owner PBOs will naturally design more detailed contracts to specify the influence strategies that can promote production efficiency when legal enforceability increases (Zhou & Poppo, 2010). The signing of the contract means that the contractor acknowledges these influences and is obliged to accept them. The contract can also provide a legal basis for the owner PBO’s power use, promoting both production efficiency and legitimate power (Wang et al., 2021a). However, some scholars have observed that many key provisions of contracts are open-ended and vague even when legal enforceability is high because, although a complex contract enables the PBO to intervene deeply in the transaction, it signifies distrust and high possibility of power abuse from the contractors’ point of view (Mayer & Argyres, 2004; Poppo & Zenger, 2002). Complex contracts, therefore, often lead to the contractors’ repulsion and reluctance when accepting the PBO’s influences, which damages the contractors’ enthusiasm for work and recognition of the PBO’s influence, thereby harming production efficiency and legitimate power (Ariño et al., 2014; Klijn & Koppenjan, 2016).

To settle the above disputes in the literature, we propose the following research questions: (1) How is legal enforceability related to contractual complexity? (2) How is contractual complexity related to the owner PBOs’ legitimate power and production efficiency?

Efficiency and legitimacy are topics of institutional theory (Yang et al., 2012). We therefore propose relevant hypotheses based on institutional theory and empirically test them to answer the above questions. Institutional theory assumes that organizations with more expertise tend to pay more attention to complying with professional norms so they can be more capable of maintaining stability in a turbulent environment (Chen et al., 2018; DiMaggio & Powell, 1983). We regard organizational expertise as a contingent variable that moderates the effects of legal enforceability on contract design and performance, which is defined as the extent to which the owner PBO understands the technical and managerial knowledge, experience, and skills of the project (Grant et al., 1997).

In the following sections, we will explore the relationships among legal enforceability, contractual complexity, and the owner PBO’s performance (including production efficiency and legitimate power) as well as the moderating role of the PBO’s expertise in these relationships. By doing this, this article can practically guide PBOs to use their expertise and design contract according to the level of legal enforceability in a manner that promotes both production efficiency and legitimate power.

Theory and Hypotheses

Institutional Theory and PBOs in the Chinese Construction Industry

There are several lines of literature related to institutional theory (Farrell, 2018). We adopt sociological institutionalism in this article. This line of literature alleges that institutions may not always promote efficiency; instead, they may reduce efficiency since they limit organizational behavior. However, an organization still abides by these institutions because only by doing so, the external audiences (e.g., trading partners, media, and community members) would regard it as a legitimate entity and let it survive.

Institutional environment refers to the set of fundamental legal, social, and cultural ground rules (corresponding to regulative, normative, and cognitive institutional pressures, respectively) that establishes the basis for production, exchange, and distribution (Davis et al., 1971). Institutional theory assumes that organizations in a similar institutional environment tend to be pressured into behaving similarly, resulting in a process of homogenization called isomorphism (DiMaggio & Powell, 1983).

We focus on the effects of legal enforceability (reflecting the effectiveness of legal ground rules in the institutional environment), because the legal rules are the most fundamental institutional basis for transaction contracts. Development of the legal system in China has been imbalanced and inadequate, making legal enforceability a decisive variable that directly affects the effectiveness of contracts in China (Shou et al., 2016), whereas other institutional factors (e.g., social morality, political systems, and culture) are often regarded as moderating variables or a background when interpreting the effectiveness of contracts (Lu et al., 2016; Zhang et al., 2018). In contrast, in western countries with well-developed legal systems, owners tend to pay more attention to the characteristics of the project itself (e.g., technical complexity and asset specificity) when designing contracts (Anderson & Dekker, 2005), whereas legal enforceability is not the core variable that determines contract design.

Owner firms always set up a special temporary PBO to prepare the project and manage the contractor on-site, which is a general practice worldwide, reflecting a decoupling between permanent institutionalized departments and temporary specialized (technical) ones (Hobday, 2000; Meyer & Rowan, 1977). The PBO team writes the contract conditions into the bidding documents during the bidding stage and manages the transaction relationship on-site during the construction period based on the signed contract (Wang et al., 2021a).

A comparative concept to the PBO is the permanent organization, which is defined as organizations whose future is eternal, such as general firms without a specific survival time (Engwall & Svensson, 2004). These organizations need to maintain long-term survival and lasting interorganizational relationships; therefore, the transactions between them (such as interfirm strategic cooperation) are typically repetitive and open-ended, whereas the transaction contracts are often compendious, lest an overly complex contract be perceived as mistrust and power abuse (Das & Teng, 1998). However, simple contracts may fail to effectively resist transaction hazards (such as deceit and opportunism), leading to efficiency losses (Kalkanci et al., 2011).

Unlike permanent organizations, PBOs have a limited future. After a project is finished, the constellation of people working together is dissolved (Lindner & Wald, 2011). Additionally, project transactions are highly unique and non-repetitive (Wang et al., 2021a). Since there tend to be no established evaluation criteria for the governance and performance of unique and ambiguous work (Cannon et al., 2000), the PBOs’ control and coordination measures for construction work tend not to be considered excessive or illegitimate. Additionally, the contractor would not feel an indefinite sense of oppression in project transactions, since the project has a clear deadline. In this case, a detailed contract may be an easily acceptable norm and a key for achieving both legitimate power and production efficiency. However, there is a lack of evidence for this deduction, which is the gap we aim to fill and the reason why we focus on PBOs in this article.

PBOs are organizations in which the majority of products or services are produced through projects (Thiry & Deguire, 2007). The contractor is the external audience that has the closest relationship with the owner PBO. The main goal of the PBO’s contract design is legitimizing its control and coordination measures to restrict the contractor’s behavior and improve efficiency through these measures (Wang et al., 2021a). Although the scope of external audiences in construction projects is very broad (Sarhadi et al., 2021), the legitimate power perceived by the contractor is the most basic type of the owner’s legitimacy (Yang et al., 2012), referred to as “relational legitimacy” in the institutional theory literature (Dacin et al., 2007).

Efficiency reflects the relationship between resource input and output. Higher production efficiency means an organization produces a given product or service with fewer resources (Thatcher & Oliver, 2001). The most important resource for projects is time (Hameri & Heikkilä, 2002), so the owner PBO’s production efficiency can be reflected by the time invested in completing the project and the extent to which delays are effectively controlled under the agreed quality and cost limitations (Iyer & Banerjee, 2016; Swink et al., 2006). This comprehensive measurement incorporates the iron triangle (time, cost, and quality) of project performance into the efficiency evaluation, which is different from the measurement of independently evaluating schedule, cost, or quality. We also use the above comprehensive measurement to define and score production efficiency.

Institutional theory deems organizational expertise crucial to organizational isomorphism and performance under institutional pressures (Leicht & Fennell, 2008). This perspective emerges, because organizations with stronger expertise have more professional members or their members are more professional. Since professionals in a field are from similar institutions (e.g., universities and professional associations), they are subject to similar professional specifications. Later, they take up positions in different organizations but still work in a similar way, collectively defining a similar work regulation and solidifying the isomorphism of these organizations (DiMaggio & Powell, 1983). We, therefore, identify the expertise of owner PBOs as a critical moderator of the effects of legal enforceability on contract design and the PBOs’ performance.

Next, we develop the hypotheses about the effects of legal enforceability on contractual complexity and the effects of contractual complexity on the owner PBO’s production efficiency and legitimate power. Due to the coherence of these effects, contractual complexity can be regarded as a mediating variable in the relationship between legal enforceability and the PBO’s performance; we then propose hypotheses about the moderating role of organizational expertise in these effects.

The Effects of Legal Enforceability on Production Efficiency and Legitimate Power: The Mediating Role of Contractual Complexity

When legal enforceability increases, owner PBOs are pressured to face two options, namely to reduce or increase contractual complexity. On the one hand, a more elaborate legal system imposes a natural constraint on the contractor, reducing their opportunistic tendency (Zhou & Poppo, 2010). An owner PBO, therefore, can reduce its use of control and coordination measures to exhibit its trust toward the contractor, which may help in establishing a flexible transaction relationship. On the other hand, higher legal enforceability can facilitate owner PBOs’ contract design. Under a more effective legal system, the fulfillment of the contract and the penalty for contract breaches are more legally guaranteed, and the owner can draft a more detailed contract to protect the transaction without worrying about contractual ineffectiveness (Shou et al., 2016). Because of their capacity to provide convenience for the owner PBO in controlling the contractor and coordinating bilateral expectations, contracts are regarded as the key transaction mechanism to promote efficiency (Mesquita & Brush, 2008).

Projects are temporary and non-repeatable. After a project is finished, the constellation of people working together in the PBO is dissolved (Lindner & Wald, 2011). Efficient production is critical for them, because construction projects not completed on time may allow market demand to slip, leading to project failure and serious disputes that may directly threaten the owner firm’s survival (Chang & Ive, 2007). We assume, therefore, that since PBOs have a clear production target and limited longevity, efficiency pressure is their priority. When legal enforceability increases, their first thought is to use the legal system to promote production efficiency, which can be realized through a more elaborate contract. We thus hypothesize the following for owner PBOs:

Hypothesis 1: Legal enforceability is positively associated with production efficiency, and this relationship is mediated by contractual complexity.

We argue that legal enforceability can also facilitate the owner PBOs’ legitimate power through contractual complexity. The reasons can be explained from the perspective of project characteristics and types of contract terms, which are described as follows.

First, project works are highly unique and non-repeatable. The literature shows that there tend to be no established evaluation criteria for the governance and performance of unique and ambiguous works (Cannon et al., 2000). The control and coordination measures for construction works, therefore, tend not to be considered excessive or illegitimate. Additionally, unlike long-term contracts between firms (e.g., strategic alliances agreement), a project contract is terminated when the project finishes. The contractor would thus not feel an indefinite sense of oppression in project transactions. In this case, the project contract can be an easily acceptable norm and a resource of owner PBOs’ legitimate power. In contrast, the investment in formal control over repeatable and non-temporary transactions between permanent organizations are often considered unnecessary measures and signals of distrust, harming legitimate power (Das & Teng, 1998).

Second, contract terms are divided into express terms and implied terms (Collins, 2014). Express terms refer to a clear statement in the contract of a particular right or duty. Implied terms refer to regulations that are not clearly stated but deemed to have been included in the contract, giving rise to a particular right or duty that is understood to be part of the contract. For example, the Construction Law of the People’s Republic of China prohibits general contractors from subcontracting projects to firms without corresponding qualifications. Even if the contract does not expressly state this prohibition, the general contractor is obliged to abide by these terms implied by law. Implied terms also include the transaction routines as well as the civil and commercial conventions, because the law presumes that transaction parties have considered these generally accepted practices and implied them in the contract (Harrison, 2004). Both express and implied terms impose constraints and obligations on the transaction parties, providing bases for legitimate power. Correspondingly, the measurement of legitimate power also includes both aspects (Wang et al., 2021a).

The increase in legal enforceability means more complete legal provisions in the local law (Zhou & Poppo, 2010). Contracts must not conflict with the law, thus those legal provisions can be considered as implied in the contract, strengthening the owner PBO’s legitimate power. Additionally, the increase in legal enforceability provides stronger support for contract execution, encouraging the PBO to design a more complex contract to govern the transaction (Shou et al., 2016). The increase in contractual complexity not only means more express terms but also indicates the PBO’s richer business experience and a deeper understanding of commercial conventions (Argyres et al., 2007). What is more, a detailed contract can help in establishing a standardized transaction routine and an owner-dominated relational norm in the transaction (Zhang et al., 2018). In this case, even if some instructions issued by the PBO are not clearly stipulated in the contract, the contractor would also treat them as obligations under the implied terms and the owner’s legitimate power (Wang et al., 2021a). We, thus, hypothesize the following:

Hypothesis 2: Legal enforceability is positively associated with legitimate power and this relationship is mediated by contractual complexity.

Moderating Roles of Organizational Expertise

We argue that organizational expertise enables PBOs to resist external constraints and maintain behavioral stability in a turbulent environment. According to institutional theory, professionals in different organizations tend to act in a similar manner because of their similar educational experiences, making these organizations also become similar (DiMaggio & Powell, 1983). As expertise increases, PBOs tend to keep in step with their peers rather than break through the existing professional norms, which enables them to maintain stability (rather than heterogeneity) and reduce sensitivity to the institutional environment. This assumption coincides with the finding of Chen et al. (2018) that in a turbulent environment, professional knowledge can produce a “cognitive entrenchment” that signifies “a high level of stability in one’s domain schemas” (p. 3).

Organizational expertise, therefore, can help to extricate PBOs from institutional constraints, meaning that professional PBOs with an in-depth knowledge of the project can still create a detailed contract at low levels of legal enforceability. The more professional PBOs are, the less they rely on the legal system and the weaker the impact of institutional changes on the contract design. In contrast, less specialized organizations may be more sensitive to the external environment. We, thus, hypothesize the following for owner PBOs:

Hypothesis 3a: The positive relationship between legal enforceability and contractual complexity will be weaker under conditions of greater organizational expertise.

As previously hypothesized, the increase in contractual complexity may promote production efficiency. However, the contract text only embodies the PBOs’ ex-ante arrangement of the transaction, inevitably limited by bounded rationality (Foss & Weber, 2016). Fortunately, organizational expertise can help the owner PBO strengthen ex-post control of the transaction, reducing its reliance on ex-ante arrangements (Yang et al., 2018). That is, when organizational expertise increases, the owner PBO can more effectively avoid technical and managerial defects in the transaction, reducing the use of contracts in project governance. Consequently, the improvement of expertise substitutes the effects of the contract on production efficiency, weakening the positive effect of contractual complexity on production efficiency. We, thus, hypothesize the following for PBOs:

Hypothesis 3b: The positive relationship between contractual complexity and production efficiency will be weaker under conditions of greater organizational expertise.

As previously hypothesized, a more detailed contract can also provide a stronger legal basis for the owner PBO’s power use, promoting its legitimate power. However, we argue that the improvement of organizational expertise may weaken the positive effect of contractual complexity on legitimate power, because people instinctively obey experts and authorities. A more professional organization, therefore, can be easily accepted and recognized by others without having to rely on other external means (such as contracts) to consolidate legitimate power (Bitektine, 2011). Consequently, there is an interactive effect between organizational expertise and contracts. When the owner PBO has a high level of expertise, its distinguished managerial and technical competences can naturally affect the contractor, prompting the contractor to ascribe the owner PBO’s legitimate power to its expertise. Meanwhile, the influence of other external factors (including contracts) on legitimate power is concealed, weakening the perceived positive effects of contractual complexity on legitimate power. We, thus, hypothesize the following for owner PBOs:

Hypothesis 3c: The positive relationship between contractual complexity and legitimate power will be weaker under conditions of greater organizational expertise.

Figure 1 shows the overall research model. We assume that legal enforceability positively affects contractual complexity, which, in turn, positively affects organizational performance (i.e., production efficiency and legitimate power). Taken together, legal enforceability has a positive effect on organizational performance, mediated by contractual complexity. Further, organizational expertise weakens the positive relationship between legal enforceability and contractual complexity as well as the positive relationship between contractual complexity and organizational performance (production efficiency and legitimate power, respectively). Table 1 lists the constructs’ definitions and descriptions.

Figure 1.

General model.

Table 1.

Definitions and Descriptions of the Constructs

Construct	Definition and Description
Legal enforceability	Legal enforceability is the extent to which the enforcement of legislation and regulations is effective, and the legal framework is capable of providing protection for the project transactions (Zhou & Poppo, 2010). As legal enforceability increases, the project contracts can be more effectively enforced and protected.
Contractual complexity	Contractual complexity is the degree of detail specified for governing the transaction in a project contract (Wang et al., 2021a).
Production efficiency	The production efficiency of an owner PBO is reflected in the performance of the project (Iyer & Banerjee, 2016; Thomas, 2013). It is defined as the extent to which the project meets the planned schedule under the agreed quality and cost criteria (Hameri & Heikkilä, 2002).
Legitimate power	In a project transaction relationship, the owner PBO's legitimate power is defined as the power that stems from the internalized values of the contractor that dictate that the owner PBO has a legitimate right to influence the contractor and that the contractor has an obligation to accept this influence (French et al., 1959). It reflects the contractor's perception of the acceptability and legitimacy of the owner PBO's influence.
Organizational expertise	The organizational expertise of an owner PBO is the extent to which the PBO understands the technical and managerial knowledge, experience, and skills of the project, such as the engineering tools and techniques, product applications, technological trends, and evolutions of the project (Grant et al., 1997).

Method

Sample and Data Collection

The hypotheses were empirically tested in the context of the Chinese construction industry. China is the biggest emerging market in the world. Its vast territory gives rise to differences in the progress of institutional reforms and business practices across regions, ensuring a diversity of institutional forces, including legal enforceability (Shi et al., 2020; Zhou & Poppo, 2010). For these reasons, China is an ideal empirical context for this study.

We conducted a questionnaire survey to collect empirical data from key informants. The questionnaire was developed in English, translated into Chinese, and then back into English to ensure conceptual equivalence. To ensure content and face validity, we conducted in-depth interviews with eight engineering experts to verify the semantic relevance and completeness of the measures. These experts were selected from the university where the authors work through convenience sampling. Based on their responses, we explained the terms “legal system” and “owner PBO” involved in the items according to their suggestions (as shown in Table 2). We then selected 24 engineering practitioners through the random sampling method used in the formal survey to conduct a pilot study. They answered all the questions and provided feedback to improve the Chinese expression, leading us to confirm the final questionnaire.

Table 2.

Characteristics of the Respondents and Their Projects

Range	Frequency	Percentage (%)
Work experience (in years; Mean = 7.83; S.D. = 5.81)
3–5	159	48.6
6–8	51	15.6
9–11	50	15.3
>11	67	20.5
Age
20–30	132	40.4
31–40	97	29.7
41–50	55	16.8
>50	43	13.1
Job position
Project/department manager	127	38.8
Contract/business manager	53	16.2
Senior engineer	63	19.3
Senior executive	84	25.7
Project type
Housing	34	10.4
Road and bridge	156	47.7
Municipal engineering	106	32.4
Port and waterway	31	9.5

The senior managers of projects were selected as key informants because they had extensive information about the PBO and project transaction relationship (Meng & Boyd, 2017). Since the IPMP® (International Project Manager Professional) is a recognized certification of project managers’ competence in China (Zhai et al., 2009) we contacted three regional institutions from the list of IPMP certification centers of China. These institutions are responsible for IPMP certification and training in eastern and central China, where the most active construction activities can be found. Their private database lists the certified personnel’s firms and contact information; they randomly selected 400 certified managers from different contractor firms in the database as our respondents.

We asked the respondents to recall a recently completed construction project in which they had been deeply involved and knew well enough to answer the questions. We informed the respondents that the survey was anonymous and that the results would be kept confidential. The respondents confirmed that the project contracts were drafted by the owner PBOs and were established for the first time and specifically for the project. The detailed characteristics of the respondents and projects are shown in Table 2.

The 400 participants (i.e., those who committed to responding) were defined as the sample population, which is a common technique for investigating senior managers (Poppo & Zenger, 2002). We received 327 completed replies, leading to a response rate of 81.8% (327/400). According to previous literature, the recommended sample size is 2 to 20 times the number of items, whereas the minimum size is 100 to 250 (Anthoine et al., 2014). We used 24 items and the sample size is 327, which met this requirement.

Measures

All the measures were based on prior theory and research and adopted three-item (except for control variables) 7-point Likert scales, ranging from 1 (strongly disagree) to 7 (strongly agree). The survey items are presented in Table 3.

Table 3.

Measures Reliability and Validity Assessment

Constructs and Measuring Items	SFL
Legal enforceability (α = 0.864; AVE = 0.699; CR = 0.873) (The legal system in the items refers to the local laws, ordinances, and government regulations, as well as other applicable laws or regulations specified in the contract [if any].)
1. The legal system ensures that we can get our deserved money back.	0.878
2. The legal system ensures accuracy of the delivery of the project.	0.693
3. The legal system protects our interests.	0.919
Contractual complexity (α = 0.797; AVE = 0.582; CR = 0.805) (There are detailed provisions about… in the contract.)
1. the responsibility, rights, and beneﬁts of each party	0.654
2. the procedures for handling conﬂicts between the parties	0.743
3. the project’s mission, objectives, scope, scale, and duration	0.875
Organizational expertise (α = 0.756; AVE = 0.513; CR = 0.759) (The project-based organization [PBO] in the items refers to the temporary organization established by the owner firm to specially govern the project transaction.)
1. The PBO has a lot of experience and usually knows best.	0.639
2. For projects like this, the PBO is very knowledgeable.	0.724
3. The PBO’s knowledge usually made them likely to suggest the proper thing to do.	0.779
Production efficiency (α = 0.794; AVE = 0.567; CR = 0.797) (…under the agreed quality and cost limitations.)
1. The project delays were well controlled.	0.772
2. The project achieved successful schedule performance.	0.723
3. The progress deviations in the construction were quickly corrected.	0.762
Legitimate power (α = 0.769; AVE = 0.563; CR = 0.790)
1. It was our duty to do as the PBO requested.	0.728
2. We had an obligation to do what the PBO wanted, even though it wasn’t a part of the contract.	0.602
3. Due to the owner PBO’s position, we accepted its recommendations.	0.892

Note. SFL = standardized factor loading; α = Cronbach’s alpha; AVE = average variance extracted; CR = composite reliability.

We adapted the measure of legal enforceability from Zhou and Poppo (2010) and Shou et al. (2016). We explained the legal system in these items based on subclause 1.3 in the Conditions of Contract for Construction (model text) and the Conditions of Contract for EPC (model text) issued by the Ministry of Housing and Urban-Rural Development of the People’s Republic of China.

The items of contractual complexity came from Gong et al. (2007). Contractual complexity captures the extent to which the provisions are detailed, emphasizing the depth of the contract. A similar construct is contractual completeness, which captures the extent to which the contract is well-rounded and covers as many aspects as possible, emphasizing the breadth of the contract (Gong et al., 2007). The way to measure contractual completeness is to evaluate whether the contract has included as many needed terms as possible in the project (Lu et al., 2016). Unlike this, we asked the respondents to evaluate the extent to which “there are detailed provisions” about project governance in the contract, which is consistent with the measurement of contractual complexity in previous literature (Wang et al., 2021b; Wang et al., 2018).

The measure of organizational expertise was adapted from Ke et al. (2009). Although PBOs are temporarily established, their members can be experienced and professional. The members’ knowledge and experience further constitute the PBOs’ resources and characteristics, making these temporary organizations expert and experienced (Lu & Hao, 2013).

The measure of production efficiency was adapted from Karimi et al. (2017) and Zwikael and Smyrk (2015). We asked the respondents to evaluate whether the owner PBO achieved successful schedule performance and effectively controlled project delays under the agreed cost and quality limitations. There is wording “under the agreed quality and cost limitations” at the end of each item of production efficiency, which is listed on a separate line in Table 2 in this article. In the actual questionnaire, we use an obvious font to remind the respondents to notice it. The measure of legitimate power was from Wang et al. (2021a).

Control Variables

The literature shows that the significance of the independent variable is credible only under the premise of controlling for other factors that significantly affect the dependent variable (Carlson & Wu, 2012). We set the following control variables identified as the main factors affecting contract design and organizational performance, other than legal enforceability by the previous literature (Shou et al., 2016; Wang et al., 2021a). First, according to institutional theory, the environment in which an organization is embedded includes institutional and technical environment (Scott, 1995). The relative status of transaction parties in the social network determines the features of social norms that complement the effect of legal enforceability (Zhou & Poppo, 2010). We, therefore, control variables related to the technical environment and social network characteristics. Second, the design features of the contract are matched with the transaction attributes to achieve the optimal governance effect (Wang et al., 2021a), thus, the transaction attributes are controlled. Third, relational norms may affect organizational performance. Contracts are one of the sources of relational norms, and we need to control other sources, such as prior cooperation (Poppo & Zenger, 2002).

First, we used one item (i.e., there are established processes and a sequence of steps in finishing the project) from Withey et al. (1983) to capture the project’s task analyzability. The higher the score, the more mature the technical environment in which the PBO is located. Additionally, the relative status of the transaction parties in the social network can be captured by mutual dependence, the owner’s power advantage, and the contractor’s power advantage (Gulati & Sytch, 2007). We used one item (i.e., it is difﬁcult for the owner PBO to find an alternative partner that is like the contractor) to measure the owner’s dependence (OD) on the contractor and one item (i.e., it is difficult for the contractor to find an alternative partner that is like the owner PBO) to measure the contractor’s dependence (CD) on the owner. Mutual dependence (= OD + CD), the contractor’s power advantage (= OD – CD, if OD > CD; or = 0, if OD ≤ CD), and the owner’s power advantage (= CD – OD, if CD > OD; or = 0, if CD ≤ OD) were then calculated.

Second, based on Poppo and Zenger (2002), we controlled for the following transaction attributes. Firstly, measurement difficulty is measured by one item: the owner PBO can evaluate whether the contractor follows the established procedures, depending solely on the submitted reports (the item was then reverse coded). Secondly, asset specificity is measured by one item: if the project is terminated, it will be difficult for the owner PBO to recoup investments in resources. Thirdly, the owner’s firm size is measured by the natural logarithm of the number of employees in the owner’s firm. Fourthly, foreign investment is coded as a dummy variable (1 = foreign investment and 0 = otherwise).

Third, based on Poppo and Zhou (2014), we controlled for the following sources of relational norms: relationship tenure (i.e., the number of years the two firms had done business with each other) and contract duration (i.e., the duration [in years] of the contract).

Nonresponse and Common Method Assessment

To assess nonresponse bias, we split the sample based on the time spent completing the survey and compared the early responses with the late responses (Armstrong & Overton, 1977). No significant mean difference across all constructs was found (p > 0.1) in the two-tailed t-tests. Nonresponse bias, therefore, is not a problem that requires consideration. Harman’s single-factor test was applied to test common method bias. For the entire model, four factors were extracted, with eigenvalues greater than 1 (ranging from 1.18 to 3.58), accounting for 52.19% of the total variance. A clear multifactor solution (unrotated) was generated, with the most influential common factor explaining 23.85% of the variation in the data, which is below the 50% threshold (Podsakoff & Organ, 1986); thus, common method bias is not a problem that requires consideration here.

Construct Reliability and Validity

Regarding construct reliability, the values of Cronbach’s alpha (the indicator of internal consistency) and composite reliabilities (CR) of all multi-item measures are higher than Nunnally’s (1978) suggested criterion (0.70). Conﬁrmatory factor analysis (CFA) was used to assess construct validity. An overall model with all the multi-item variables included showed a good model fit (χ²/df = 2.993, IFI = 0.925, TLI = 0.900, CFI = 0.924, RMSEA = 0.078). The average variance extracted (AVE) for every construct exceeded the 0.50 cutoff, and the square roots of the AVE of each construct are higher than its correlations with other constructs, demonstrating the satisfactory convergent validity and discriminant validity of these measures, respectively (Fornell & Larcker, 1981). The specific data (Cronbach’s alpha, the standardized factor loadings in the CFA model, AVE, and CR) are listed in Table 3.

Results

Table 4 presents the correlations, means, and standard deviations for all variables involved in this study. We use the conditional process analysis in the PROCESS macro for SPSS to test our hypotheses. The PROCESS macro can integrate the indirect effects (mediation; assessed through bootstrapping) and interactions (moderation) with control variables in an analytical model (Hayes, 2013). In contrast, another common method for empirical analysis—structural equation model—may be less competent in terms of its estimation of the interactions between the latent variables (Hayes et al., 2017).

Table 4.

Descriptive Statistics and Correlations

Variables	1	2	3	4	5	6	7	8	9	10	11	12	13	14	15
1. Legal enforceability	—
2. Contractual complexity	0.33	—
3. Organizational expertise	0.38	0.29	—
4. Production efficiency	0.42	0.37	0.36	—
5. Legitimate power	0.35	0.29	0.46	0.27	—
6. Task analyzability	0.26	0.28	0.20	0.34	0.18	—
7. Mutual dependence	0.32	0.13	0.41	0.41	0.40	0.07	—
8. Owner’s power advantage	−0.05	0.13	−0.07	−0.07	−0.01	0.08	−0.00	—
9. Contractor’s power advantage	0.06	−0.05	−0.01	−0.01	−0.06	−0.14	0.07	−0.41	—
10. Measurement difficulty	0.23	0.18	0.35	0.25	0.23	0.12	0.35	0.06	0.04	—
11. Asset specificity	0.18	0.16	0.32	0.27	0.23	0.06	0.38	−0.03	−0.02	0.24	—
12. Relationship tenure	0.16	0.03	0.20	0.20	0.09	0.10	0.17	0.09	0.02	0.15	0.06	—
13. Contract duration	0.17	0.06	0.25	0.13	0.23	0.04	0.35	0.02	0.08	0.19	0.18	0.25	—
14. Firm size	0.06	0.09	−0.03	−0.00	−0.05	−0.04	−0.04	−0.12	0.03	−0.08	0.01	−0.08	−0.14	—
15. Foreign investment	−0.24	0.13	−0.12	−0.15	−0.05	−0.06	−0.11	0.00	−0.08	−0.36	−0.06	−0.27	−0.09	0.19	—
Mean	4.61	5.39	4.37	4.65	4.68	4.80	8.06	0.91	0.68	4.68	5.01	5.68	3.15	6.90	0.43
SD	1.40	1.13	1.30	1.31	1.35	1.58	2.78	1.35	1.13	1.68	1.68	5.58	1.67	1.52	0.50

Note. Sample size = 327. Correlation is significant at the 0.01 level for |ρ| > 0.14 and 0.05 level for |ρ| > 0.11 (2-tailed). ρ = Pearson Correlation Coefficient. SD = Standard Deviation.

Bootstrapping treats the sample as a population, then resamples with replacement a number of times, and computes the relevant statistics for each replacement sample. We conducted bootstrapping analyses to construct bias-corrected confidence intervals (CIs) based on 10,000 random samples with replacement from the full sample. Since organizational expertise may be affected by previous cooperation experience, two-stage least squares regressions were used to deal with endogeneity. We regressed the organizational expertise on relationship tenure (β = 0.01, p < 0.001), after which the residuals were used as the indicator of organizational expertise (Shou et al., 2016).

Model 58 in PROCESS can produce results predicting the mediating variable (contractual complexity) and dependent variables (production efficiency and legitimate power) (see Table 5) as well as the conditional indirect effects of the independent variable (legal enforceability) on the dependent variables at different values of the moderator (organizational expertise) (see Table 6; mean center for products). When the moderator equals its mean value, the conditional indirect effect equals the mediating effect.

Table 5.

Regression Analyses Predicting Contractual Complexity and Performance

Variables	Contractual Complexity					Production Efficiency					Legitimate Power
Variables	β	SE	p	LLCI	ULCI	β	SE	p	LLCI	ULCI	β	SE	p	LLCI	ULCI
Constant	−1.71	0.42	0.00	−2.54	−0.88	3.04	0.47	0.00	2.11	3.97	2.315	0.52	0.00	2.79	4.82
Task analyzability	0.13	0.04	0.00	0.06	0.20	0.16	0.04	0.00	0.08	0.23	0.03	0.04	0.52	−0.06	0.10
Mutual dependence	−0.03	0.02	0.21	−0.08	0.02	0.12	0.03	0.00	0.07	0.17	0.11	0.03	0.00	0.05	0.16
Owner’s power advantage	0.13	0.04	0.00	0.04	0.22	−0.13	0.05	0.01	−0.23	−0.03	−0.05	0.05	0.39	−0.15	0.06
Contractor’s power advantage	0.05	0.05	0.34	−0.05	0.16	−0.06	0.06	0.31	−0.17	0.05	−0.11	0.06	0.07	−0.24	0.01
Measurement difficulty	0.10	0.04	0.01	0.02	0.17	−0.00	0.04	0.91	−0.09	0.08	0.01	0.04	0.82	−0.08	0.10
Asset specificity	0.05	0.04	0.18	−0.02	0.12	0.05	0.04	0.16	−0.02	0.13	0.00	0.04	0.92	−0.08	0.09
Relationship tenure	0.00	0.01	0.71	−0.02	0.02	0.03	0.01	0.02	0.00	0.05	0.00	0.01	0.85	−0.02	0.03
Contract duration	−0.01	0.04	0.76	−0.08	0.06	−0.04	0.04	0.25	−0.12	0.03	0.06	0.04	0.15	−0.02	0.14
Firm size	0.04	0.04	0.24	−0.03	0.12	−0.02	0.04	0.67	−0.09	0.06	−0.04	0.04	0.30	−0.13	0.04
Foreign investment	0.58	0.13	0.00	0.33	0.82	−0.22	0.14	0.11	−0.50	0.05	0.08	0.15	0.58	−0.21	0.38
Legal enforceability (LE)	0.20	0.05	0.00	0.11	0.29	0.14	0.05	0.01	0.04	0.24	0.14	0.05	0.01	0.03	0.24
Organizational expertise (OE)	0.14	0.05	0.01	0.04	0.23	0.03	0.05	0.57	−0.08	0.14	0.27	0.06	0.00	−0.15	0.39
LE×OE	−0.06	0.03	0.04	−0.12	−0.00
Contractual complexity (CC)						0.24	0.06	0.00	0.11	0.36	0.16	0.07	0.02	0.20	0.30
CC×OE						−0.06	0.04	0.10	−0.14	0.01	0.02	0.04	0.61	−0.06	0.10
R²			0.28					0.40					0.32
F			9.58					14.66					10.61

Note. Bootstrap sample size =10,000; β = Unstandardized coefficients; LL = lower limit; CI = confidence interval (95%); UL = upper limit.

Table 6.

Conditional Indirect Effects and Direct Effects of Legal Enforceability on Dependent Variables

Indirect and Direct Effects	Y = Production Efficiency				Y = Legitimate Power
Indirect and Direct Effects	Effect	SE	LLCI	ULCI	Effect	SE	LLCI	ULCI
Low (−SD) = −1.27	0.09	0.03	0.04	0.16	0.04	0.02	−0.00	0.10
Mean = 0.00	0.05	0.02	0.02	0.09	0.03	0.02	0.01	0.08
High (+SD) = 1.27	0.02	0.02	0.00	0.07	0.02	0.02	0.00	0.08
Direct effect of X on Y	0.14	0.05	0.04	0.24	0.14	0.05	0.03	0.24
p values of direct effect		0.01				0.01

Note. Values for the moderator (Organizational expertise) are the mean and plus/minus one SD from mean. X = Legal enforceability; Bootstrap sample size = 10,000; LL = lower limit; CI = confidence interval (95%); UL = upper limit.

As shown in Table 5, legal enforceability is positively associated with contractual complexity (β = 0.20; p < 0.001; 95% CI = [0.11, 0.29]), and contractual complexity is positively associated with production efficiency (β = 0.24; p < 0.001; 95% CI = [0.11, 0.36]). Legal enforceability is positively related to production efficiency when contractual complexity is in regression (β = 0.14; p < 0.01; 95% CI = [0.04, 0.24]). In Table 6, when organizational expertise equals its mean value, the conditional indirect effect of legal enforceability on production efficiency = 0.05; 95% CI = (0.02, 0.09). Contractual complexity, therefore, partially mediates the effect of legal enforceability on production efficiency, supporting Hypothesis 1.

In Table 5, contractual complexity is positively related to legitimate power (β = 0.16; p < 0.05; 95% CI = [0.02, 0.30]). Legal enforceability is positively related to legitimate power when contractual complexity is in regression (β = 0.14; p < 0.05; 95% CI = [0.03, 0.24]). In Table 6, when organizational expertise equals its mean value, the conditional indirect effect of legal enforceability on production efficiency = 0.03; 95% CI = (0.01, 0.08). Contractual complexity, therefore, partially mediates the effect of legal enforceability on legitimate power, supporting Hypothesis 2.

As shown in Table 5, the interaction of legal enforceability and organizational expertise is negatively related to contractual complexity (β = −0.06; p < 0.05; 95% CI = [−0.12, −0.00]), indicating that as a PBO’s expertise increases, the positive correlation between legal enforceability and contractual complexity is weakened, supporting Hypothesis 3a. The interaction of organizational expertise and contractual complexity is negatively associated with production efficiency (β = −0.06; p < 0.1; 95% CI = [−0.14, 0.01]; 90% CI = [−0.12, −0.00], not shown in the table), indicating that as expertise increases the positive correlation between contractual complexity and production efficiency is weakened. However, the interaction of organizational expertise and contractual complexity is not significantly associated with a PBO’s legitimate power (β = 0.02; p > 0.1; 95% CI = [−0.06, 0.10]). Hypothesis 3b is supported, but Hypothesis 3c is not supported.

Chinese culture emphasizes relationship and trust. An overly complex contract may be regarded as distrust and ossifies the transaction order, causing an inverted U-shaped relationship between contractual complexity and performance. However, we examined the relationship between the square of contractual complexity and the owner PBOs’ performance, finding that the quadratic term is not significantly related to production efficiency or legitimate power (β = −0.04, p > 0.1; β = −0.02, p > 0.1). This result may be because construction project tasks are highly unique and uncertain, making it difficult to design a rather detailed contract. Additionally, it may be precisely because Chinese culture emphasizes relationship that the owner tends not to design very complex contracts. Consequently, we fail to detect a nonlinear relationship between contractual complexity and performance.

Discussion

In this article, we seek to reveal how legal enforceability is related to the owner PBOs’ contract design as well as how contractual complexity is related to the PBOs’ performance (including production efficiency and legitimate power) in an attempt to settle the existing disputes over these issues. By conducting an empirical survey and regression tests in the Chinese construction industry, our results show that legal enforceability is positively related to contractual complexity, and the increase in contractual complexity promotes both production efficiency and owner PBOs’ legitimate power. By definition, organizational isomorphism is the process of the homogenization of organizations living in the same institutional environment (DiMaggio & Powell, 1983). The phenomenon detected in this article—when legal enforceability increases, owner PBOs will increase contractual complexity—can be regarded as an isomorphism of PBOs.

Chinese culture is characterized by collectivism, high power distance, and long-term orientation. Under the influence of such a culture, the transaction parties attach great importance to solidarity and long-term relationships in the transaction (Lu et al., 2020). When the owner’s status is high, the contractor tends to comply with the owner’s instructions without revolt and regard these instructions as the PBO’s legitimate power. This deduction is also consistent with the findings in the previous literature: Contractual governance promotes the formation of an owner-dominated relational norm in the transaction, which can force the contractor to accept instructions beyond the contract and regard them as the owner’s legitimate power (Wang et al., 2021a). Compared with western countries, such as the United States and Germany, this promotion is more significant in the Chinese context (Cao & Lumineau, 2015).

Additionally, we find that the expertise of owner PBOs can stabilize the above-mentioned isomorphism trend (i.e., weaken the positive relationship between legal enforceability and contractual complexity) and the relationship between contractual complexity and production efficiency. However, we did not find significant moderating effects of PBOs’ expertise on legitimate power. This may be because if owners strengthen contractual governance despite being professional, the contractor may regard this action as a form of distrust and an abuse of power, harming the PBOs’ legitimacy. However, this may also be interpreted as owners’ legitimate right to exploit the potential of the contract by using their own capabilities. Since the two effects cancel each other out, we cannot detect a significant moderating effect of organizational expertise on legitimate power.

Theoretical Implications

This article contributes to institutional theory in the following ways. First, this article helps in settling the dispute over the relationship between legal enforceability and contract design in the institutional theory literature. Some scholars argue that, since higher legal enforceability can more effectively safeguard contract execution, owners will naturally design more detailed contracts to strengthen transaction governance when legal enforceability increases (Zhou & Poppo, 2010). However, some scholars observed that contracts are simple even when legal enforceability is high, because a simple contract helps in establishing an amicable relationship (Mayer & Argyres, 2004; Poppo & Zenger, 2002). Our results support the first view by finding a positive relationship between legal enforceability and contractual complexity in the context of construction projects, which may be because projects are temporary and one-off. The project-specific relationship, therefore, cannot be long-lasting and totally reliable, encouraging the owner to strengthen the contract design when legal enforceability gets higher.

Second, this article helps in resolving the existing dispute about the relationship between contractual complexity and transaction performance. Some scholars allege that contracts serve as a useful instrument in promoting production efficiency and a foundation of legitimate power (Shen et al., 2017; Wang et al., 2021a). However, some scholars argue that complex contracts may limit the flexibility of the communication among parties, harming production efficiency (Klijn & Koppenjan, 2016). The complex contracts may also be perceived as distrust and behavioral restriction by the contractor, serving as an access to power abuse for the owner PBO and damaging the PBO’s legitimate power (Mayer & Argyres, 2004; Poppo & Zenger, 2002). By empirically observing a positive relationship between contractual complexity and the owner PBO’s performance (including production efficiency and legitimate power), this article supports the first view. This may be because the temporary nature of projects determines that the contractor would not feel an indefinite sense of oppression in the transaction. In this case, a detailed contract can be an easily acceptable norm and a key to achieving both legitimate power and production efficiency.

Third, this article deepens the institutional theory’s understanding of the role of organizational expertise in PBOs’ isomorphism and performance. The previous literature suggests that mimicking and strengthening professional skills that other peers possess can help an organization earn legitimacy; however, there is no evidence that such a practice can increase efficiency (DiMaggio & Powell, 1983). We find the missing evidence by observing that the increase in expertise can stabilize the isomorphic trend and production efficiency of PBOs; however, it does not have a significant effect on PBOs’ legitimate power, which may be a difference between permanent organizations and PBOs.

Practical Implications

This article can provide guidance for the decision-making of owner firms and PBOs under the influence of legal enforceability. First, when legal enforceability increases, the contract execution is more effectively guaranteed; thus, owner PBOs can use such institutional convenience to facilitate more detailed contracts. The contract itself has control and coordination functions to increase production efficiency (Wang et al., 2021a); meanwhile, such a time-bound governance mechanism can exert an acceptable obligation on the contractor, granting the owner PBO legitimate power. The finding also inspires firms in that when dealing with unique tasks, they can establish a special PBO and strengthen contractual governance in the project to achieve both production efficiency and legitimate power.

Second, project tasks are unique and susceptible to the external institutional environment. Improving expertise can help PBOs reduce the impact of legal enforceability on contracts and alleviate their dependence on contracts in terms of promoting production efficiency. When lacking expertise, PBOs should pay more attention to contract design, because contracts can promote production efficiency in this case.

Limitations and Future Research Directions

This study has some limitations, which can be addressed in future research. First, we only examined the formal legal environment and treated informal social network features as control variables. Generalized institutional pressure may include regulative, normative, and cognitive elements (Scott, 1995), which are worthy of further research. Second, a wider range of project goals, such as stakeholder satisfaction and social media evaluation (Jeong & Kim, 2019), is encouraged to help PBOs achieve project success in a broader sense.

Conclusions

Based on institutional theory, this article examines the effects of legal enforceability on the behavior and performance of owner firms’ temporary PBOs and concludes that owner PBOs can obtain both production efficiency and legitimate power by improving contractual complexity. First, when legal enforceability increases, project transactions can obtain more effective external protection, which may enable owner PBOs to reduce their reliance on contracts. However, empirical data from the Chinese construction industry indicate that PBOs do not relax the contractual governance; instead, they increase contractual complexity, which can be seen as an isomorphism of PBOs. This finding helps compensate for institutional theory’s lack of attention on the isomorphism of PBOs under institutional pressure and in explaining the contradictory views on the relationship between legal enforceability and contract design in the current literature.

Second, we find that contracts can promote project production efficiency while vesting owner PBOs with the legitimate power recognized by the contractor. This finding helps explain the controversy over the effects of organizational isomorphism on performance in the current literature.

Finally, we explored the effects of organizational expertise on PBOs’ behavior and performance from a contingency perspective. We find that expertise can help PBOs reduce the effect of legal enforceability on contract design, improving the stability of PBO’s isomorphism under institutional pressure. It also alleviates PBOs’ dependence on contractual governance when PBOs pursue production efficiency. These results help in finding the missing evidence of the relationship between organizational expertise and efficiency in the current literature and in guiding PBOs to use expertise and contractual governance to deal with institutional pressure.

Footnotes

Acknowledgments

This study was supported by the National Natural Science Foundation of China (Grants No. 71772135 and 72031008).

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship, and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship, and/or publication of this article.

ORCID iD

Rui Wang

Author Biographies

Rui Wang is a PhD candidate at the College of Management and Economics of Tianjin University (TJU) in China. He earned his bachelor’s degree at the School of Civil Engineering of Central South University (CSU). His research interests include contractual and relational governance of construction projects, institutional theory, and transaction cost economics. He can be contacted at wangrui34@yeah.net

Wenxue Lu is a professor and doctoral supervisor at the College of Management and Economics of Tianjin University (TJU) where he obtained his PhD degree. He also holds the post of the Deputy Dean of the College of International Engineering Management in TJU. Professor Lu is an expert in conflict and contract management in construction projects. He can be contacted at luwenxue63@126.com

Yuxin Wei is a business manager of the 4th Complete Plants Division of China Machinery Engineering Corporation (CMEC), Sinomach. She earned a master’s degree in management from Tianjin University (TJU). Her research field involves conflict and dispute management in construction projects. She can be contacted at weiyx@cmec.com

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