An empirical survey of the motives and benefits of adopting guaranteed maximum price and target cost contracts in construction

Abstract

In light of increasing project complexity, constraints on programme schedule and limited budget, there exists a strong call for changes in contracting procedures in construction. Both the Guaranteed Maximum Price (GMP) and Target Cost Contracting (TCC) approaches with a gain-share/pain-share arrangement have been advocated to achieve better value for money and more satisfactory project performance. This paper aims to review the prevailing practices of GMP/TCC in general, and explore the motives and benefits of implementing the GMP/TCC scheme in comparison with the traditional fixed-price lump-sum contract in particular. The research study is based on a comprehensive literature review and an industrywide empirical questionnaire survey for evaluating the relative importance of motives and benefits associated with GMP/TCC in Hong Kong. The survey data collected from 45 valid completed questionnaires were analysed using the mean score ranking technique, Kendall's concordance test, Spearman's rank correlation test and one-way ANOVA test. The perceived benefits were measured and ranked from the perspectives of the client, contractor and consultant for cross-comparison. The survey findings indicated that the three most common motives of clients behind their decision of adopting GMP/TCC include: (1) To generate an incentive for contractor to achieve cost saving; (2) To develop better working relationship within the project team; and (3) To tap in contractor's expertise in design and innovation. The top three perceived benefits of applying GMP/TCC were found to be: (1) Early settlement of final project account; (2) Improved partners' working relationship under a partnering arrangement; and (3) Capability of integrating contractor's expertise in building designs and innovations prior to construction. The research results are particularly essential in assisting key project stakeholders to realise the potential benefits derived from the use of GMP/TCC contracts and in generating more useful insights into alternative integrated contracting strategies for the construction industry, so as to drive for excellence in overall project performance. This is the Pre-Published Version.

Target value design: using collaboration and a lean approach to reduce construction cost

“…When the situation is opposite and the contractor completes a job below target cost, he should be rewarded for his efficient management (Bagnall, 1990;Badenfelt, 2008;Chan et al, 2010). The sharing ratio is agreed in advance and varies from a simple 50:50 to complex mechanisms of benefits and risks sharing (Perry and Barnes, 2000;Broome and Perry, 2002;Badenfelt, 2008).…”

Managing cost implications for highway infrastructure sustainability

“…Prior to proceeding with the analysis, a Cronbach a reliability analysis was conducted. Data reliability was set for a C0.7 as recommended (Chan et al 2011;Yip Robin and Poon 2009). Yang and Peng (2008) suggest that in the early stages of research on predictor tests or hypothesised measures of a construct, reliability of a C0.7 or higher will be adequate.…”

A Comparative Study of the Benefits of Applying Target Cost Contracts between South Australia and Hong Kong

“…This contracting approach also allows the contractor and employer to determine the appropriate ownership of risks and encourages various contracting parties to agree on an equitable allocation of risks, which is in the client's long-term interest (Sadler, 2004). A fair and effective dispute resolution mechanism and communication opportunities are provided by means of adjudication meetings, not only leading to a reduction in claim or dispute occurrence (Hong Kong Housing Authority, 2006;Chan et al, 2011a), but also improving working relationships among project team members and incorporating interdisciplinary efforts into the project (Ting, 2006). In the traditional lump-sum approach, the design is almost completed and the price is fixed, which does not leave much room for negotiation about who is right or wrong or for making any possible compromise.…”

“…The partnering concepts accompanied by the GMP/TCC form of procurement can considerably improve the working relationships between contracting parties (Chan et al, 2011a) and probably shorten the duration of the final account settlement.…”

“…However, South Australia has a longer history of employing GMP/TCC compared with Hong Kong. An extensive literature review has produced a detailed analysis of the perceived benefits of GMP/TCC; hence, in this paper, the findings of two empirical questionnaire surveys conducted in Hong Kong (Chan et al, 2011a) and South Australia (Perkin, 2008) using the same survey instrument, are presented, discussed, compared, and cross-referenced with other related studies.…”