Risk Assessment Model for Optimal Gain–Pain Share Ratio in Target Cost Contract for Construction Projects
Publication: Journal of Construction Engineering and Management
Volume 148, Issue 2
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.
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Data Availability Statement
Some or all data, models, or codes generated or used during the study are proprietary or confidential in nature and may be provided only with restrictions. These data are still in use to develop future research.
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Journal of Construction Engineering and Management
Volume 148 • Issue 2 • February 2022
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© 2021 American Society of Civil Engineers.
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Received: Feb 21, 2021
Accepted: Oct 5, 2021
Published online: Nov 27, 2021
Published in print: Feb 1, 2022
Discussion open until: Apr 27, 2022
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