The guaranteed maximum price contract as call option

International Journal of Project Management

et al. 2011

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.

Section: Enhanced Cost Controlmentioning

confidence: 99%

Section: Target Cost Contracting (Tcc)mentioning

confidence: 99%

Section: Motives Of Introducing Gmp/tccmentioning

confidence: 99%

See 1 more Smart Citation

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

International Journal of Project Management

et al. 2011

“…Broome and Perry (2002) and Badenfelt (2008) explored how the gain-share/pain-share ratio in TCC should be determined in the British and Swedish perspectives respectively. Boukendour and Bah (2001) analysed GMP with option pricing theory and considered GMP as a hybrid of cost reimbursement contract and optional contract which hedge the owner from over-budget and provide him possibility of cost savings. Bower et al (2002) examined three projects with different contractual arrangements, including one with TCC, to illustrate the effective use of incentive mechanisms.…”

Section: Rationale Behind Using Tccmentioning

confidence: 99%

Preferred risk allocation in target cost contracts in construction

et al. 2011

Facilities

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.

“…The gain-share/pain-share mechanism of the GMP/TCC approach generated an enormous impetus for contractor to innovate, save cost and solve problems as highlighted by Boukendour and Bah (2001). In particular, the contractor interviewee (Contractor 1) stressed that early participation of the contractor could not only enhance the buildability by integrating the design and construction, but also allow advanced programme planning for faster construction.…”

Section: Perceived Benefits Of Gmp/tccmentioning

confidence: 99%

Evaluating guaranteed maximum price and target cost contracting strategies in Hong Kong construction industry

Journal of Financial Management of Property and Construction

et al. 2007

SUMMARY• Guaranteed maximum price (GMP) and target cost contracting (TCC) with a painshare/gain-share arrangement have been adopted to integrate the construction delivery process and motivate service providers to seek continuous improvements in project outcomes. However, there is still a lack of research evidence to evaluate the levels of success and lessons learned from these innovative procurement strategies.• Based on the analysis of a series of in-depth interviews on the perceptions of various relevant experienced industrial practitioners, this paper aims to explore the key attributes of GMP/TCC including the underlying motives, perceived benefits, potential difficulties, critical success factors, key risk factors involved and optimal project conditions for adopting GMP/TCC.• The research findings are useful in assisting key project stakeholders in minimising the detriments brought about by potential difficulties in and maximising the benefits derived from implementing GMP/TCC concepts. The study is also significant in contributing to new knowledge and practical information of GMP/TCC applications and implementation, in both a national and international context.