Incentive Mechanisms in Mega Project-Risk Management Considering Owner and Insurance Company as Principals
Publication: Journal of Construction Engineering and Management
Volume 146, Issue 10
Abstract
In mega projects, the stakeholders may be exposed to significant on-site construction risk, especially the owners and insurance companies who take the most responsibility for the risk loss. It is difficult for insurance companies to diversify their risks by undertaking enough similar policies, and participating in on-site risk management has become an important method of active risk control. Based on the principal-agent relationship between the owner, insurance company, and contractor, this paper establishes incentive mechanisms for risk management considering the common agency and exclusive agency models. The results show that an insurance company’s involvement in the common agency model creates external effects that can improve the utility of both the owner and the insurance company. The owner is then willing to provide a higher incentive coefficient, and the contractor’s nonrisk and risk management efforts increase accordingly. From the owner’s perspective, the influence of the participants’ characteristics and external uncertainties on the incentive strategy are discussed. The results recommend that it is better for the owners and insurance companies to jointly establish a good cooperative relationship and build the incentive mechanism. The spillover effect has a positive effect on the cooperation between the two parties, while the impact of the uncertainty in risk management output on the cooperative relationship is negative. This paper contributes to the body of knowledge for understanding the on-site risk management considering stakeholders’ participation and provides a practical mode for owners and insurance companies to implement active risk management in mega projects, thus achieving better risk governance of mega projects.
Get full access to this article
View all available purchase options and get full access to this article.
Data Availability Statement
All data generated or analyzed during the study are included in the published paper. Information about the Journal’s data-sharing policy can be found here: http://ascelibrary.org/doi/10.1061/(ASCE)CO.1943-7862.0001263.
Acknowledgments
This work was supported by National Natural Science Foundation of China (Nos. 51978164, 71871113, 71971100, and 71671078), and the program A&B for Outstanding Ph.D. candidate of Nanjing University (Nos. 201701B010, 201801A001, and 201802A016).
References
Adkisson, J. 2006. Captive insurance companies: An introduction to captives, closely-held insurances, and risk retention group. Bloomington, IN: iUniverse.
Bergemann, D., and J. Välimäki. 2003. “Dynamic common agency.” J. Econ. Theory 111 (1): 23–48. https://doi.org/10.1016/S0022-0531(03)00079-6.
Bernheim, B. D., and M. D. Whinston. 1985. “Common marketing agency as a device for facilitating collusion.” RAND J. Econ. 16 (2): 269–281. https://doi.org/10.2307/2555414.
Bernheim, B. D., and M. D. Whinston. 1986. “Common agency.” Econometrica 54 (4): 923–942. https://doi.org/10.2307/1912844.
Biglaiser, G., and C. Mezzetti. 1993. “Principals competing for an agent in the presence of adverse selection and moral hazard.” J. Econ. Theory 61 (2): 302–330. https://doi.org/10.1006/jeth.1993.1071.
Bower, D., G. Ashby, K. Gerald, and W. Smyk. 2002. “Incentive mechanisms for project success.” J. Manage. Eng. 18 (1): 37–43. https://doi.org/10.1061/(ASCE)0742-597X(2002)18:1(37).
Bunni, N. G. 2003. Risk and insurance in construction. London: Routledge.
Chang, C. Y. 2013. “Principal-agent model of risk allocation in construction contracts and its critique.” J. Constr. Eng. Manage. 140 (1): 04013032. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000779.
Cheng, M. Y., H. S. Peng, Y. W. Wu, and Y. H. Liao. 2011. “Decision making for contractor insurance deductible using the evolutionary support vector machines inference model.” Expert Syst. Appl. 38 (6): 6547–6555. https://doi.org/10.1016/j.eswa.2010.11.084.
Ding, L. Y., B. T. Zhong, S. Wu, and H. B. Luo. 2016. “Construction risk knowledge management in BIM using ontology and semantic web technology.” Saf. Sci. 87 (Aug): 202–213. https://doi.org/10.1016/j.ssci.2016.04.008.
Eisenhardt, K. M. 1989. “Agency theory: An assessment and review.” Acad. Manage. Rev. 14 (1): 57–74. https://doi.org/10.5465/amr.1989.4279003.
El-Adaway, I. H. 2013. “Promoting the sustainability of relational contracting through addressing third party insurance obstacles.” J. Manage. Eng. 29 (3): 216–223. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000140.
El-Adaway, I. H., and A. A. Kandil. 2009a. “Contractors’ claims insurance: A risk retention approach.” J. Constr. Eng. Manage. 135 (9): 819–825. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000033.
El-Adaway, I. H., and A. A. Kandil. 2009b. “Construction risks: Single versus portfolio insurance.” J. Manage. Eng. 26 (1): 2–8. https://doi.org/10.1061/(ASCE)0742-597X(2010)26:1(2).
El-Gafy, M., and T. Abdelhamid. 2015. “Impact of I/D contracts used for expediting Michigan’s road construction.” J. Constr. Eng. Manage. 141 (7): 05015005. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000977.
Gailmard, S. 2012. “Accountability and principal-agent models.” In Oxford handbook of public accountability, edited by M. Bovens, R. E. Goodin, and T. Schillemans. Oxford, UK: Oxford University Press.
Gal-Or, E. 1991. “A common agency with incomplete information.” RAND J. Econ. 22 (2): 274–286. https://doi.org/10.2307/2601023.
Griffis, F. H., and S. Christodoulou. 2000. “Construction risk analysis tool for determining liquidated damages insurance premiums: Case study.” J. Constr. Eng. Manage. 126 (6): 407–413. https://doi.org/10.1061/(ASCE)0733-9364(2000)126:6(407).
Guo, S., C. Xiong, and P. Gong. 2018. “A real-time control approach based on intelligent video surveillance for violations by construction workers.” J. Civ. Eng. Manage. 24 (1): 67–78. https://doi.org/10.3846/jcem.2018.301.
Hertogh, M. J. C. M., and E. Westerveld. 2010. Playing with complexity, management and organisation of large infrastructure projects. Rotterdam, Netherlands: Erasmus Univ.
Holmstrom, B., and P. Milgrom. 1991. “Multitask principal-agent analyses: Incentive contracts, asset ownership, and job design.” J. Law Econ. Organ. 7: 24. https://doi.org/10.1093/jleo/7.special_issue.24.
Hosseinian, S. M., and D. G. Carmichael. 2012. “Optimal incentive contract with risk-neutral contractor.” J. Constr. Eng. Manage. 139 (8): 899–909. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000663.
Hu, Z. N., Y. L. Xie, and J. Wang. 2015. “Challenges and strategies involved in designing and constructing a 6 km immersed tunnel: A case study of the Hong Kong–Zhuhai–Macao Bridge.” Tunnelling Underground Space Technol. 50 (Aug): 171–177. https://doi.org/10.1016/j.tust.2015.07.011.
Imriyas, K. 2009. “An expert system for strategic control of accidents and insurers’ risks in building construction projects.” Expert Syst. Appl. 36 (2): 4021–4034. https://doi.org/10.1016/j.eswa.2008.02.029.
Imriyas, K., L. S. Pheng, T. A. Lin, and C. S. Lean. 2006. “A fuzzy expert system for computing workers’ compensation insurance premiums in construction: A conceptual framework.” Archit. Sci. Rev. 49 (3): 270–284. https://doi.org/10.3763/asre.2006.4937.
Imriyas, K., L. S. Pheng, and E. A. L. Teo. 2007. “A framework for computing workers’ compensation insurance premiums in construction.” Constr. Manage. Econ. 25 (6): 563–584. https://doi.org/10.1080/01446190601110116.
Kim, S. G. 2010. “Risk performance indexes and measurement systems for mega construction projects.” J. Civ. Eng. Manage. 16 (4): 586–594. https://doi.org/10.3846/jcem.2010.65.
Liu, J., R. Gao, C. Y. Cheah, and J. Luo. 2016. “Incentive mechanism for inhibiting investors’ opportunistic behavior in PPP projects.” Int. J. Project Manage. 34 (7): 1102–1111. https://doi.org/10.1016/j.ijproman.2016.05.013.
Love, P. E., P. R. Davis, R. Chevis, and D. J. Edwards. 2010. “Risk/reward compensation model for civil engineering infrastructure alliance projects.” J. Constr. Eng. Manage. 137 (2): 127–136. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000263.
Lu, I. F., S. J. Guo, and Y. J. Pan. 2010a. “Construction project management and insurance program for Taiwan high speed rail project.” Leadership Manage. Eng. 11 (1): 45–56. https://doi.org/10.1061/(ASCE)LM.1943-5630.0000088.
Lu, I. F., S. J. Guo, and Y. J. Pan. 2010b. “Owner-controlled insurance program and construction project management for Taiwan high speed rail project.” J. Manage. Eng. 26 (4): 164–175. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000034.
Lyons, T., and M. Skitmore. 2004. “Project risk management in the Queensland engineering construction industry: A survey.” Int. J. Project Manage. 22 (1): 51–61. https://doi.org/10.1016/S0263-7863(03)00005-X.
Ma, H. Y., S. X. Zeng, H. Lin, and R. C. Zeng. 2020. “The impact of public sector on sustainability of public-private partnership (PPP) projects.” J. Constr. Eng. Manage. 146 (2): 04019104. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001750.
Martimort, D., and L. Stole. 2009. “Market participation in delegated and intrinsic common-agency games.” RAND J. Econ. 40 (1): 78–102. https://doi.org/10.1111/j.1756-2171.2008.00056.x.
Meng, Q., Z. Li, J. Du, H. Liu, and X. Ding. 2019. “Negotiation for time optimization in construction projects with competitive and social welfare preferences.” Complexity 2019: 13. https://doi.org/10.1155/2019/3269025.
Meng, X., and B. Gallagher. 2012. “The impact of incentive mechanisms on project performance.” Int. J. Project Manage. 30 (3): 352–362. https://doi.org/10.1016/j.ijproman.2011.08.006.
Müller, R., and J. R. Turner. 2005. “The impact of principal–agent relationship and contract type on communication between project owner and manager.” Int. J. Project Manage. 23 (5): 398–403. https://doi.org/10.1016/j.ijproman.2005.03.001.
Ndekugri, I., H. Daeche, and D. Zhou. 2013. “The project insurance option in infrastructure procurement.” Eng. Constr. Archit. Manage. 20 (3): 267–289. https://doi.org/10.1108/09699981311324005.
On Cheung, S., L. Zhu, and K. Wai Lee. 2018. “Incentivization and interdependency in construction contracting.” J. Manage. Eng. 34 (3): 04018010. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000601.
Ozcan-Deniz, G., Y. Zhu, and V. Ceron. 2011. “Time, cost, and environmental impact analysis on construction operation optimization using genetic algorithms.” J. Manage. Eng. 28 (3): 265–272. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000098.
Park, J., Y. Cho, and A. Khodabandelu. 2018. “Sensor-based safety performance assessment of individual construction workers.” Sensors 18 (11): 3897. https://doi.org/10.3390/s18113897.
Parker, D. W., U. Dressel, D. Chevers, and L. Zeppetella. 2018. “Agency theory perspective on public-private-partnerships: International development project.” Int. J. Productivity Perform. Manage. 67 (2): 239–259. https://doi.org/10.1108/IJPPM-09-2016-0191.
Raviv, A. 1979. “The design of an optimal insurance policy.” Am. Econ. Rev. 69 (1): 84–96.
Renn, O. 2015. “Stakeholder and public involvement in risk governance.” Int. J. Disaster Risk Sci. 6 (1): 8–20. https://doi.org/10.1007/s13753-015-0037-6.
Rose, T. M., and K. Manley. 2010a. “Client recommendations for financial incentives on construction projects.” Eng. Constr. Archit. Manage. 17 (3): 252–267. https://doi.org/10.1108/09699981011038051.
Rose, T. M., and K. Manley. 2010b. “Financial incentives and advanced construction procurement systems.” Project Manage. J. 41 (1): 40–50. https://doi.org/10.1002/pmj.20145.
Rwelamila, P. D., P. Fewings, and C. Henjewele. 2014. “Addressing the missing link in PPP projects: What constitutes the public?” J. Manage. Eng. 31 (5): 04014085. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000330.
Schexnayder, C. J., S. L. Weber, and S. A. David. 2004. “Transportation agency use of owner-controlled insurance programs.” J. Constr. Eng. Manage. 130 (4): 517–524. https://doi.org/10.1061/(ASCE)0733-9364(2004)130:4(517).
Sheng, Z. 2018. Fundamental theories of mega infrastructure construction management. New York: Springer.
Shi, Q., M. Hertogh, M. Bosch-Rekveldt, J. Zhu, and Z. Sheng. 2020. “Exploring decision-making complexity in major infrastructure projects: A case study from China.” China Manage. J. https://doi.org/10.1177/8756972820919205.
Siqueira, K., T. Sandler, and J. Cauley. 2009. “Common agency and state-owned enterprise reform.” China Econ. Rev. 20 (2): 208–217. https://doi.org/10.1016/j.chieco.2009.02.001.
Stole, L. A. 1991. Mechanism design under common agency. Cambridge, MA: Program in Law and Economics, Harvard Law School.
Suprapto, M., H. L. Bakker, H. G. Mooi, and M. J. Hertogh. 2016. “How do contract types and incentives matter to project performance?” Int. J. Project Manage. 34 (6): 1071–1087. https://doi.org/10.1016/j.ijproman.2015.08.003.
Turner, J. R., and R. Müller. 2003. “On the nature of the project as a temporary organization.” Int. J. Project Manage. 21 (1): 1–8. https://doi.org/10.1016/S0263-7863(02)00020-0.
Turner, J. R., and R. Müller. 2004. “Communication and co-operation on projects between the project owner as principal and the project manager as agent.” Eur. Manage. J. 22 (3): 327–336. https://doi.org/10.1016/j.emj.2004.04.010.
Valero, E., A. Sivanathan, F. Bosché, and M. Abdel-Wahab. 2017. “Analysis of construction trade worker body motions using a wearable and wireless motion sensor network.” Autom. Constr. 83 (Nov): 48–55. https://doi.org/10.1016/j.autcon.2017.08.001.
Van Ackere, A. 1993. “The principal/agent paradigm: Its relevance to various functional fields.” Eur. J. Oper. Res. 70 (1): 83–103. https://doi.org/10.1016/0377-2217(93)90234-E.
Zhao, X. H., W. C. Cheng, J. S. Shen, and A. Arulrajah. 2017. “Platform collapse incident of a power plant in Jiangxi, China.” Nat. Hazard. 87 (2): 1259–1265. https://doi.org/10.1007/s11069-017-2800-z.
Zhu, Y., J. Zhang, and X. Gao. 2018. “Construction management and technical innovation of the main project of Hong Kong–Zhuhai–Macao Bridge.” Front. Eng. Manage. 5 (1): 128–132.
Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 146 • Issue 10 • October 2020
Copyright
© 2020 American Society of Civil Engineers.
History
Received: Jul 8, 2019
Accepted: May 18, 2020
Published online: Jul 24, 2020
Published in print: Oct 1, 2020
Discussion open until: Dec 24, 2020
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.