Shehadeh, A; Alshboul, O and Hamedat, O (2022) Risk assessment model for optimal gain-pain share ratio in target cost contract for construction projects. Journal of Construction Engineering and Management, 148(2): 04021197, ISSN 0733-9364
Abstract
Recently various contracting methods have been introduced for construction projects. Target cost contracts have been used widely where risk can be shared between contract parties. This gain-pain sharing method has proven its efficiency as a fair contracting method, but it depends on the adopted gain-pain share ratio. Minimal research efforts have quantified the optimal gain-pain share using game theory simulation. This research closes the gap by developing a mathematical formulation of the utility functions for both contract parties (i.e., the owner and the contractor) in target cost contracts. The effect of the risk-sharing rate on the behavior of the contact parties and risk direction was modeled. The developed mathematical model was analyzed to consider all possible scenarios. A simulation analysis that considered project characteristics and construction cost variations was performed to provide a robust valuation of potential risk allocation in determining the optimal share ratio using real-world construction data. The results showed that the optimal gain-pain share ratio varies according to the difference between the construction project cost variation and the contractor's efforts fees. It is practical to set different gain-pain share ratios based on the construction project characteristics and the contractor's efforts fees to satisfy contract parties in this complicated and interconnected relationship. Quantifying the optimal gain-pain share ratio helps to produce more-reliable target cost contracts.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | optimal gain-pain sharing; potential risks; simulation analysis; target cost contract |
| Index terms: | construction cost, owner, target cost, efficiency, pain, risk assessment, risk allocation, game theory, mathematical model, simulation analysis, construction project, variation, contracting method |
| Subjects: | health conditions and diseases, sociology, performance management, economics, production management, contractual condition, financial risk, design analysis, contractual arrangements, financial and cost management, decision models, mathematical modelling |
| Topics: | Quality Management, Design Practice, Contract Administration, Research Practice, Project Management, Cost Management, Health and Safety, Procurement, Stakeholder Management |
| Descriptive scope: | 4 PCTA |
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