Poor project governance is the main cause of project failures for complex projects. Historically, formal contracting has been the mainstay of project governance for outsourced projects. However, subsequent studies found that reliance on formal contracting typically results in adversarial relationship between clients and contractors in large construction projects, which exacerbates chances of project failure by thwarting exchange of information, hindering collaboration and increasing hostility between the parties. Moreover, due to high levels of uncertainty and complexity in practice, it is often impossible or excessively expensive to construct “complete” contracts upfront or the institutional structures needed to enforce the contract do not exist. Consequently, relational governance mechanisms have been proposed as an effective alternative in such situations. Subsequent literature has shifted to the effects of contractual and relational governance mechanisms on the performance of exchange relationships as well as the interactions between those mechanisms. In particular, the relationship between contractual and relational governance has been the focus of a substantial body of literature and the findings are contradictory. Whilst some studies find the relationship to be substitutive, others indicate it is complementary. In this study, drawing from transaction cost economics (TCE), social capital theory, and social exchange theory, we re-examine the relationship by distinguishing two forms of relational governance, namely ex-ante and ex-post relational governance and argue that the relationship between these two forms and contractual governance are substitutive and complementary, respectively, thereby reconciling the contradictory findings on the relationship. Our conceptual model is validated using survey data collected from 40 client-contractor partnerships in large construction projects in Australia. Contributing to literature, the results show that ex-ante relational governance has both substitutive relationship as well as complementary relationship (mediated by ex-post relational governance) with formal contracting while ex-post relational governance has a complementary relationship with formal contracting. In addition, the results indicate that formal contracting has direct effect on project performance while ex-post relational governance has a direct effect on relationship performance.

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