Preferred risk allocation in target cost contracts in construction

Abstract

Purpose -The purpose of this paper is to identify the party most preferred to take the risks associated with the Target Cost Contracts and Guaranteed Maximum Price Contracts (TCC/GMP) in the Hong Kong context. Design/methodology/approach -An empirical questionnaire survey was conducted with the relevant industrial practitioners to solicit their preferences of risk allocation in TCC/GMP construction projects in Hong Kong. Findings -The survey findings indicated that risks on tender documentation and project design are better borne by clients, while construction related risks are perceived to be taken by contractors. The research findings are consistent with other similar studies on risk allocation in construction projects in general. Practical implications -This paper has developed a preferred risk allocation scheme for the delivery of future TCC/GMP projects, taking Hong Kong as an example. It can serve as a useful guide for the decision makers to determine an optimal risk allocation at the planning stage of a TCC/GMP scheme. Originality/value -This study is expected to benefit both academic researchers and industrial practitioners in generating an equitable risk sharing mechanism for TCC/GMP projects. It has provided sufficient empirical evidence, added to the growing body of knowledge and laid a solid foundation for further research such as an international comparison of various risk allocation schemes associated with this kind of contractual arrangement.

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

“…Another on-going research project looking at the identification of key risk factors and risk mitigation measures, together with the evaluation of various risk sharing mechanisms for GMP/TCC projects is now being launched in Hong Kong (Chan et al, 2008) and the key research findings will be compiled later via publications (e.g. Chan et al, 2010).…”

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

“…We hope that the research study will stimulate a wider debate on the underlying benefits associated with GMP/TCC in both local and international contexts for reference by the construction industry at large. Another research project focusing on risk identification, risk analysis, risk mitigation, and risk allocation inherent with GMP/TCC contracts have been completed recently in Hong Kong, Australia, and the United Kingdom (Chan et al, 2008b) and the key research findings have been reported in other publications (e.g., Chan et al, 2010a;2011c).…”

An optimal time incentive/disincentive -based compensation in contracts with multiple agents

“…To develop a proper incentive arrangement, Badenfelt (2008) recommended that the contracting parties collect trustworthy data about each other's skills, reputation and target time. Based on a survey, Chan et al (2011) suggested that any time incentive arrangement should be established based on risk control ability of both agent and client. Carmichael (2013a, b and2014) addressed the optimal incentive problem in construction projects with a single agent.…”

“…Using principal-agent theory Chang (2013) investigated the consequence of contract breakup into risk allocation decisions. Chan et al (2011) Despite an extensive body of publications on time incentive contracts, a review of the literature, as shown in Table 1, reveals that few studies have examined the influence of factors affecting the choice of a time incentive arrangement (Al-Subhi Al-Harbi, 1998;Broome and Perry, 2002;Badenfelt, 2008;Carmichael, 2013a, b and2014). No literature appears to have focused on the optimal time incentive compensation arrangement in contracts with multiple agents.…”