Stress-testing relational contracting beyond “safe” jurisdictions

Why do so many government contracts struggle or fail outright to deliver what they promise?

One reason is contractual incompleteness, the inability to anticipate and incorporate all potential contingencies that may occur. During Yetunde’s summer placement with the Government Outcomes Lab (GO Lab) , she explored this issue while engaging with procurement practitioners and academics on the subject.

Managing government contracts

Contractual incompleteness is a universal problem. Some high trust jurisdictions, such as the UK, have trialed relational contracting as a way to solve it, an approach which relies on the use of trust and collaboration alongside legal terms, to manage contracts. However, the real test and real need for this approach is in countries battling systemic corruption and institutional weaknesses, such as Nigeria and Brazil.

Rigid contracting law can initially appear to be a rational response to minimise the risk of corruption, but it only creates a false sense of security built on the assumption that the scope and requirements of all projects can be fully specified in advance. There is substantial research and empirical evidence showing that high-risk, corruption-prone settings experience more contractual failure despite their highly rigid procurement rules and controls. There is, thus, a compelling case to explore how relational contracting might be helpful in achieving better outcomes for these countries.

How relational contracting can help

Relational contracting has been widely used in the private sector and is slowly being adopted in public sector reforms, particularly in OECD countries. Public sector adoption has been most visible in construction and infrastructure projects, smart city projects, and social services.

In the realm of social services, the Kirklees Better Outcomes Partnership (KBOP) is a great success story of this approach in the UK. Kirklees Council’s redesigned its service delivery for homelessness prevention services in 2019 and awarded a single five-year contract for the work which incorporated formal-relational contracting. This service has performed better than expected in a number of areas such as accommodation, well-being, education, training and employment.

This early example of success comes from a high-trust and mature procurement context and it should be acknowledged that the adoption of relational contracting without robust accountability mechanisms in high-risk countries may create additional risks. What this means, however, is that approaches to relational contracting cannot simply be transplanted from low-risk to high-risk environments; they need to be adapted to each new context. What we need now is to test this approach.

Risk of Collusion

At first glance, relational contracting can look a lot like favoritism, particularly in high-risk environments, where corruption concerns are front of mind. This is why policymakers shy away from even trialing it.

The famous trade-off between flexibility and corruption is a false dilemma that has been used to keep procurement processes rigid. Klitgaard’s classic corruption formula, Corruption = Monopoly + Discretion – Accountability, diagnoses the risk of discretion in public procurement. However it also directly points to the solution - build in robust accountability, and discretion no longer has to be interpreted as corruption.

The governance mechanisms embedded in relational contracting enhance transparency rather than reduce it. These mechanisms provide structured flexibility alongside enhanced accountability, demonstrating that flexibility and accountability can co-exist and be mutually reinforcing.

If the logic holds that robust accountability transforms discretion into integrity, then high-risk contexts should not be neglected. They should, instead, be supported to trial relational contracting through thoughtful adaptation that reflects their realities.

Relational governance is designed to confront the very hazards that face high-risk settings i.e. corruption, low-trust, weak institutions. It does this through trust-building, open communication, transparency, risk-sharing and joint-problem solving. Since the stakes are higher here, the potential value of relational contracting is greater.

What is needed is a controlled trial of relational contracting in high-risk settings. The idea would be to test, adapt, learn and build local evidence before scaling this approach. This could start small with a pilot, supported by robust transparency and accountability mechanisms as a low-risk entry point. Pilot projects, under tight monitoring and independent evaluation, could build local evidence incrementally while bypassing the rigid safeguards, and test relational contracting under “stress” in a controlled, accountable environment.

Why academics should engage

Much of the literature on relational contracting is focused on low-risk contexts because scholars and researchers study it mainly in low-risk jurisdictions. This creates a research and evidence gap. The thin evidence base from high-risk contexts perhaps explains the skepticism of policy makers to trial relational contracting in those regions.

Testing relational contracting in high-stakes environments could serve as a form of “stress test” to enrich this research, in a similar manner to how software is tested under extreme conditions. It would provide an opportunity to assess whether the theory’s benefits hold beyond ideal circumstances and creates a basis for comparative research.

Within the broader policy space, relational contracting could be a case study of how reform ideas can be adapted, stress-tested and strengthened incrementally in high-risk contexts.

Relational contracting is a governance model that deserves to be tested in all jurisdictions. Incomplete contracts exist everywhere and leave legal gaps that need to be addressed. Ignoring the potential of relational contracting to close those gaps in countries with less stable political environments is unjust, incurious, and shortsighted. Relational contracting is not a luxury to be enjoyed by low-risk environments, it is a governance model that deserves to be tested everywhere.

Policymakers should resist the urge to dismiss it out of fear of corruption risks, and instead explore carefully designed pilots that can balance flexibility with accountability to generate local evidence. Scholars should also broaden their research scope to study relational contracting in high-risk environments for more inclusive and globally relevant insights.