Mahdi, H S and Carmichael, D G (2014) Optimal sharing arrangement for multiple project outcomes. Journal of Financial Management of Property and Construction, 19(3), pp. 264-280. ISSN 1366-4387
Abstract
Purpose – The purpose of this paper is to address a shortfall in the literature dealing with optimal sharing arrangements. In construction projects, where the owner is concerned about multiple project outcomes (cost, time, quality, […]), there exist no guidelines in the literature on what a sharing arrangement should be between the owner and the contractor. This paper gives that arrangement, under defined risk assumptions on the contractor (risk averse ranging to risk neutral) and the owner (risk neutral). The sharing aligns the contractor's interests with those of the owner. Design/methodology/approach – The results are based on solving a constrained maximisation problem involving the expected utilities of both the owner and contractor. Construction practitioners were interviewed in a designed experiment to validate the results. Findings – It is demonstrated that, at the optimum, the proportions of outcomes sharing to the contractor should be higher for outcomes with lower effort cost and a lower level of uncertainty, and by increasing the correlation between outcomes, the fixed component of the contractor’s fee should increase and the proportions to the contractor should decrease. Research limitations/implications – The theoretical results assume that the contractor is risk-averse ranging to risk-neutral, and that the owner is risk-neutral. The theory is supported through conducting an empirical study based on interviewing a sample of practitioners working for medium-sized contractors, and hence the support is limited to similar situations, until further data are assembled. Practical implications – By providing a broader understanding of sharing arrangements within contracts, a contribution is made to the current practice of contracts management. The results may be used in the design of contracts, or as benchmarks, by which contracts designed differently, may be compared. Originality/value – The results address a shortfall in the literature and are an original solution to establishing an optimal multiple-outcome sharing arrangement.
| Item Type: | Article |
|---|---|
| Uncontrolled Keywords: | multiple outcomes; sharing arrangement; optimum; effort cost; uncertainty |
| Index terms: | sharing arrangement, empirical study, multiple outcomes, owner, project outcome, utilities, methodology, construction project, practitioner, effort cost, maximization, experiment, construction practitioner |
| Subjects: | partnership management, sociology, research methods, algorithms, production management, professional development, evaluation, financial and cost management, data collection methods, construction type, project completion, practitioner |
| Topics: | Digital Applications, Quality Management, Stakeholder Management, Roles and Professions, Construction Technology, Cost Management, Information Management, Project Management, Research Practice |
| Descriptive scope: | 5 PCTEA |
N.B. Descriptive scope is a count of how many of the five facets of empirical research are indicated by the words used in title, abstract and keywords. It is not intended as a judgement on the research; merely a count of the kind of word we would expect to indicate Phenomenon, Concepts, Theoretical framing, Empirical techniques, Analytical techniques. If all five are present, then a code of “5 PCTEA” will indicate this. If you feel the coding for this record is questionable, we welcome discussion around the terms we matched or the way we categorized them. The facet you would expect may not be coded, or a facet may be coded inappropriately. This can also bear on a larger question, of which facets should be treated as defining in construction management research. Please get in touch, and we will look at it. More details here