Preparing a framework for two-stage target-cost arrangement formulation

Abstract

Purpose – Early involvement of the project team with the construction resources seems to be gaining popularity as it aims to improve the cost efficiency of a project as there is significantly more potential to influence the project solution at that point in time. The missing price during early involvement/selection and the principal-agent setting, however, tend to leave the project owner in doubt of the reasonableness of pricing when it is fixed only later after the joint design phase involving the service provider and the owner. The purpose of this paper is to find a solution for this challenge. Design/methodology/approach – A two-stage target-cost (2STC) arrangement has been proposed as the solution. In this model the service provider earns a bonus by suggesting a lower target cost than the reference set at the time of the involvement of the provider. The amount of bonus also impacts the cost over-run risk transferred to the service provider to avoid overly optimistic promises. The proposition encompassed just the basic idea, and did not really delve into actual model formulations and their functioning under practical realities. Therefore, the required work is presented here in the form of a conceptual, discursive study focusing on relevant theories and empirical findings from major investment projects. Findings – The study produces a requirement framework for the 2STC model to allow functioning models to be formulated and tested. The framework incorporates numerous requirements, constraints and a suggested path forward. For instance, while the model may not be manipulatable, it must incentivise the service provider to seek more cost-effective project solutions, be feasible also from the view of the project owner and adapt to various project risk profiles and ranges of efficiency improvements. Research limitations/implications – The study suggests more concrete model formulations to be provided under the guidance of the presented framework. Originality/value – The 2STC model is a unique concept and no comparable construct is known to exist. Besides the requirement framework, the study also strengthens the foundation of and need for the 2STC model by a thorough survey of its theoretical linkages. Accordingly, the study presented in this paper forms the second stage in the overall 2STC development process focused on benefiting project owners and the industry.

Formularising two-stage target-cost arrangements for use in practice

“…The work was, however, only suggestive and argumentative and made no real attempt at detailed formulation and testing of the hypothetical model against practical risks and cost realities of construction projects. That is why Lahdenperä (2016) delved into the topic in more detail in order to produce a rigorous framework for developing and assessing alternative formulations of a 2STC model as to proper functioning and instantiation. The framework incorporates numerous criteria to ensure functioning and a suggested path to instantiation.…”

“…The previous section revisited the idea of a potentially better target-cost arrangement without providing any proof that such a solution would not also be biased. That is why Lahdenperä (2016) reviewed critically the approach and specified general criteria for rigorous assessment of potential solutions. The criteria are summarised in Table I and the model formulations generated below are to be assessed against them.…”

“…For a more detailed description of the 2STC arrangement and its rationality, see Lahdenperä (2010Lahdenperä ( , 2016.…”

Early contractor involvement (ECI): ways to do it in public projects

“…The development towards more complex projects demands, however, alternative (evolving) project delivery methods to ensure appropriate project delivery, contract compliance and quality assurance (Molenaar et al, 2007). One of the evolving approaches is early contractor involvement (ECI) (Lahdenperä, 2016;Molenaar et al, 2007;Manley and Chen, 2017). ECI facilitates implementation of innovative, efficient and value-adding solutions through building trust-based cooperation between clients and contractors (Ozorhon, 2013;Ozorhon et al, 2014;Ozorhon et al, 2015;Wondimu et al, 2018c).…”

Early contractor involvement approaches in public project procurement

“…However, the growth of increasingly more complex projects demands alternative (evolving) project delivery methods to ensure appropriate project delivery, contract compliance, and quality assurance (Molenaar et al , 2007). One of the evolving approaches is ECI (Lahdenperä, 2016; Molenaar et al , 2007).…”