A platform for research: civil engineering, architecture and urbanism
A platform for research: civil engineering, architecture and urbanism
An optimal target cost contract with a risk neutral owner
– Target cost contracts are commonly used to share the monetary outcome of work or a project. However, discussion is ongoing, as to what constitutes optimal sharing. The purpose of this paper is to examine optimal sharing and derives a result for defined risk assumptions on the owner (risk neutral) and contractor (risk-averse ranging to risk neutral).
– The derivation is based on solving a constrained maximization problem using ideas from principal-agent theory. Practitioners were engaged in a designed exercise in order to validate the approach and propositions. The influence of the contractor's level of risk aversion, the cost uncertainty and the contractor's effort effectiveness are examined.
– The paper shows that, at the optimum, the sharing ratio between contractor and owner needs to reduce and the fixed fee needs to increase when the contractor becomes more risk-averse, the level of the cost uncertainty increases, or the effectiveness of the contractor effort decreases.
– The paper's findings provide practitioners with a useful benchmark for outcome sharing in target contracts.
– Existing work on outcome sharing in target contracts is limited to being qualitative and anecdotal in nature. This paper extends existing knowledge by providing a quantitative treatment of optimal sharing.
An optimal target cost contract with a risk neutral owner
– Target cost contracts are commonly used to share the monetary outcome of work or a project. However, discussion is ongoing, as to what constitutes optimal sharing. The purpose of this paper is to examine optimal sharing and derives a result for defined risk assumptions on the owner (risk neutral) and contractor (risk-averse ranging to risk neutral).
– The derivation is based on solving a constrained maximization problem using ideas from principal-agent theory. Practitioners were engaged in a designed exercise in order to validate the approach and propositions. The influence of the contractor's level of risk aversion, the cost uncertainty and the contractor's effort effectiveness are examined.
– The paper shows that, at the optimum, the sharing ratio between contractor and owner needs to reduce and the fixed fee needs to increase when the contractor becomes more risk-averse, the level of the cost uncertainty increases, or the effectiveness of the contractor effort decreases.
– The paper's findings provide practitioners with a useful benchmark for outcome sharing in target contracts.
– Existing work on outcome sharing in target contracts is limited to being qualitative and anecdotal in nature. This paper extends existing knowledge by providing a quantitative treatment of optimal sharing.
An optimal target cost contract with a risk neutral owner
Mahdi Hosseinian, S. (author) / G. Carmichael, David (author)
Engineering, Construction and Architectural Management ; 21 ; 586-604
2014-09-09
19 pages
Article (Journal)
Electronic Resource
English
Optimal Incentive Contract with Risk-Neutral Contractor
| Online Contents | 2013
Optimal Incentive Contract with Risk-Neutral Contractor
| British Library Online Contents | 2013
Optimal Incentive Contract with Risk-Neutral Contractor
| ASCE | 2012
British Library Online Contents | 1993
Development of target cost – By the owner or together with Contractors - Target Value Design
| BASE | 2021