The Changing Status of Infrastructure Project Procurement in North America

It’s just a game: Revolutionising Infrastructure Construction Contracts with Game Theory Principles

In the high-stakes world of infrastructure construction, the design of contracts can mean the difference between project success and failure. Contracts not only define the obligations and rights of stakeholders but also shape the behaviours and relationships that underpin collaboration. Traditional approaches to contract drafting, often rooted in adversarial paradigms, fail to address the complexity and dynamism of modern projects. They frequently lead to disputes, delays, and cost overruns.

Progressive contracts (such as PDBs and Alliances) offer a compelling alternative by fostering collaboration, shared risk, and mutual incentives. However, their success depends on precise contract drafting that aligns the interests of all parties. This is where game theory, a mathematical framework for analysing strategic interactions, becomes invaluable. By applying game theory principles, legal professionals and senior leaders can craft agreements that encourage cooperation, build trust, and optimise outcomes.

But does game theory have a place in drafting effective Infrastructure contracts? We attempt to assess this by contrasting its application in traditional and progressive frameworks and provide insight into the drafting of effective clauses. Perhaps there are some actionable recommendations where game theory can be used to address challenges and measure success?

Understanding Game Theory and Its Relevance to Contracting

What Is Game Theory?

Game theory is the study of strategic decision-making, where multiple players interact with the potential for their choices to influence each other’s outcomes. It models these interactions to predict behaviours and identify optimal strategies.

Key concepts in game theory include:

• Players: The decision-makers in the interaction. In contracts, these are typically clients, contractors, and subcontractors.

• Strategies: The actions or choices available to each player. For example, a contractor can choose to cooperate by prioritising project goals or act opportunistically to maximise individual profit.

• Payoffs: The outcomes each player receives based on their strategies. In contracts, this could be financial profit, reputation gains, or penalties.

• Nash Equilibrium: A state where no player can improve their payoff by unilaterally changing their strategy,  reflecting stable outcomes.

• Cooperative vs. Uncooperative Games: In cooperative games, players collaborate to achieve shared benefits, while in uncooperative games, they prioritise self-interest, often leading to conflict.

Studies in game theory, particularly those involving the Iterated Prisoner's Dilemma (IPD), have consistently demonstrated the effectiveness of cooperative strategies like Tit-for-Tat (TFT) over deceptive or exploitative approaches. In Robert Axelrod's seminal tournaments, TFT emerged as a top-performing strategy by initiating cooperation and then mirroring the opponent's previous move. This approach fostered mutual cooperation and outperformed strategies that attempted to deceive or exploit opponents, which often led to mutual defection and suboptimal outcomes. 

Further research has reinforced these findings. A study published in PLOS ONE utilized reinforcement learning techniques to develop strategies for the IPD. The results indicated that strategies promoting cooperation, akin to TFT, consistently outperformed those based on deception or exploitation. The cooperative strategies achieved higher cumulative payoffs by encouraging mutual cooperation, whereas deceptive strategies led to cycles of retaliation and lower overall gains. 

These studies underscore the practical advantages of iterative collaboration and reciprocity in strategic interactions. By aligning incentives and fostering trust, cooperative strategies not only enhance individual outcomes but also contribute to more efficient and harmonious engagements between parties.

These principles are directly relevant to contract drafting. Contracts establish the "rules of the game" that influence players’ strategies. When drafted with game theory insights, contracts can guide stakeholders toward behaviours that maximise collective and individual benefits.

The Inefficiencies of Traditional Contracts: Lessons from Uncooperative Game Theory

Traditional infrastructure contracts, such as lump-sum or fixed-price agreements, often operate within the framework of uncooperative game theory, where stakeholders focus on maximising individual payoffs rather than collective success. While these contracts are designed to allocate risk and enforce compliance, they inadvertently foster adversarial relationships and incentivise behaviours that undermine project efficiency and trust.

Challenges in Traditional Contracting

1. Disputes and LitigationAmbiguities in terms or unforeseen conditions frequently escalate into disputes, leading to costly legal battles. These conflicts drain resources, strain relationships, and cause project delays.

2. Misaligned IncentivesTraditional contracts often prioritise individual risk mitigation over collective project goals. For example, contractors may focus on minimising costs or avoiding penalties rather than ensuring long-term success, compromising project outcomes.

3. Erosion of TrustRisk transfer mechanisms embedded in traditional contracts discourage collaboration, creating an environment where parties are incentivised to avoid responsibility and shift blame when issues arise.

Game Theory Perspective

From a game theory standpoint, these contracts reflect the dynamics of zero-sum games, where one party’s gain necessarily comes at another’s loss. This fosters a cycle of distrust and retaliation, leading to suboptimal outcomes for all stakeholders. Without mechanisms to encourage cooperation, interactions devolve into a Nash equilibrium—a state where parties stick to self-serving behaviours, even though they could achieve better results through collaboration. 

Hypothetical ExampleIn a fixed-price contract for a bridge construction project, unexpected geotechnical challenges arise. The contractor demands additional compensation, citing scope changes, while the client insists the contractor absorb the costs under the agreed terms. Neither party is willing to compromise, leading to costly delays and arbitration. Both stakeholders suffer financial losses and reputational harm, highlighting the inefficiency of adversarial strategies.

Progressive Contracts: Harnessing Cooperative Game Theory and Tit-for-Tat Dynamics

In contrast to traditional approaches, Progressive Design and Build (PDB) contracts and Alliances align closely with principles of cooperative game theory, fostering collaboration and mutual trust. Central to their success is the incorporation of strategies like Tit-for-Tat (TFT)—an iterative approach where stakeholders initially cooperate and then mirror each other’s actions. This encourages fairness, discourages opportunistic behaviours, and builds trust over repeated interactions.

Benefits of Progressive Contracts

1. Alignment of IncentivesProgressive contracts reward behaviours that prioritise shared goals, ensuring all parties benefit from collaboration.

2. Dispute ReductionBy embedding transparent processes and mechanisms for joint decision-making, these contracts minimise conflict.

3. Optimised OutcomesCooperative dynamics enable stakeholders to address challenges collaboratively, resulting in improved project timelines, cost efficiency, and quality.

Game Theory Insights

Progressive contracts mirror the structure of repeated games, where parties interact continuously and have opportunities to build trust and improve outcomes. Cooperative strategies, such as signalling a willingness to collaborate and maintaining reciprocity through fair risk-sharing, prevent the erosion of goodwill. Studies in game theory, such as Robert Axelrod’s tournament on the Iterated Prisoner’s Dilemma, show that TFT—a strategy of cooperation followed by reciprocity—outperforms exploitative tactics over time, maximising cumulative benefits for all participants.

Hypothetical ExampleIn an Alliance for a renewable energy project, stakeholders agree to share risks and rewards proportionally. When permitting delays occur, the group collaborates to resolve the issue, drawing on contingency funds without assigning blame. Each party’s willingness to cooperate fosters a cycle of trust, ensuring minimal disruption and demonstrating the efficacy of TFT dynamics in resolving unforeseen challenges. 

Drafting Game-Theory-Informed Clauses

To leverage the benefits of cooperative strategies and TFT, contracts must include provisions that align incentives, share risks equitably, and promote transparency. One such example of this can be seen in the NEC suite of contracts, where parties are compelled to notify and manage risk in a collaborative manner. The clause relating to notification of risks (Early Warnings) is drafted in such a way that the principles of TFT are embodied in the contract: Early Warnings of risks are compelled by the terms of the contract, where each party must inform the other if a risk arises which may change the price or schedule. This is the first stage of TFT: Cooperating for success. If a party does not do so, they are subject to the second stage of the TFT dynamic: Reciprocity. If the risk results in an adjustment event, the party who should have been informed may value the adjustment as if he had been informed (as the client) or may take the full benefit of not being informed in his valuation (as the contractor). As such, the non-cooperative partner has suffered because of their uncooperative behaviour. 

True to the TFT model however, this only applies to the single event, and the parties are incentivised to go back to cooperating again following the reciprocity. 

The Pitfalls of Ignoring Cooperative Dynamics

Failing to incorporate cooperative strategies like TFT in contract design perpetuates the inefficiencies of uncooperative game dynamics. Exploitative tactics may yield short-term gains but often result in retaliatory behaviours, escalating conflicts, and diminishing trust. As demonstrated in both academic research and real-world applications, adversarial approaches lead to higher costs, longer delays, and damaged relationships compared to the superior outcomes achieved through iterative collaboration and reciprocity.

By embedding game theory principles into infrastructure contracts, stakeholders can transform adversarial interactions into productive partnerships, ensuring sustainable success for all involved.

Addressing Challenges in Progressive Contracts

Despite their benefits, progressive contracts face challenges that must be addressed.

Building TrustTrust is fundamental to cooperation. Game theory highlights the role of signalling and repeated interactions in trust-building. Transparency in decision-making and joint governance structures can reinforce trust.

Balancing Competitive InterestsWhile progressive contracts emphasise collaboration, stakeholders may still have competitive objectives. Bargaining models in game theory can guide equitable negotiations, ensuring fairness in profit-sharing or resource allocation.

Hypothetical ExampleIn an Alliance project, a competitive bidding process establishes baseline profit margins for contractors. Performance bonuses, determined through independent audits, incentivise exceptional contributions without undermining cooperation.

Measuring Success and Encouraging Future Research

To evaluate the impact of game-theory-aligned contracts, stakeholders should monitor metrics such as:

• Reduction in disputes and litigation.

• Improved adherence to project timelines and budgets.

• Enhanced stakeholder satisfaction and repeat collaborations.

Further research is needed to quantify the long-term benefits of these approaches, particularly in large-scale, multi-stakeholder projects. Academic partnerships can provide valuable insights into optimal contract designs.

Conclusion

Game theory offers a transformative framework for contract design, moving beyond adversarial norms to foster collaboration, trust, and optimal outcomes. Progressive contracts informed by cooperative principles hold the key to unlocking the full potential of infrastructure projects.

Legal professionals and senior leaders are urged to integrate these insights into their contracts. By doing so, they will not only improve individual projects but also contribute to a more collaborative and innovative construction industry. For guidance in implementing these practices, contact CIVEX Consulting Group—experts in aligning contracts with cutting-edge principles for superior project outcomes.