Skip to main content
Top

2014 | OriginalPaper | Chapter

Optimization in the Development of Target Contracts

Authors : S. Mahdi Hosseinian, David G. Carmichael

Published in: Optimization and Control Methods in Industrial Engineering and Construction

Publisher: Springer Netherlands

Activate our intelligent search to find suitable subject content or patents.

search-config
loading …

Abstract

Target contracts are commonly used in construction and related project industries. However, research to date has largely been qualitative, and there is no universal agreement on how any sharing of project outcomes should be allocated between contracting parties. This chapter demonstrates that by formulating the sharing problem in optimization terms, specific quantitative results can be obtained for all the various combinations of the main variables that exist in the contractual arrangements and project delivery. Such variables include the risk attitudes of the parties (risk-neutral, risk-averse), single or multiple outcomes (cost, duration, quality), single or multiple agents (contractors, consultants), and cooperative or non-cooperative behaviour. The chapter gives original, newly derived results for optimal outcome sharing arrangements. The chapter will be of interest to academics and practitioners interested in the design of target contracts and project delivery. It provides an understanding of optimal sharing arrangements within projects, broader than currently available.

Dont have a licence yet? Then find out more about our products and how to get one now:

Springer Professional "Wirtschaft+Technik"

Online-Abonnement

Mit Springer Professional "Wirtschaft+Technik" erhalten Sie Zugriff auf:

  • über 102.000 Bücher
  • über 537 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Maschinenbau + Werkstoffe
  • Versicherung + Risiko

Jetzt Wissensvorsprung sichern!

Springer Professional "Technik"

Online-Abonnement

Mit Springer Professional "Technik" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 390 Zeitschriften

aus folgenden Fachgebieten:

  • Automobil + Motoren
  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Elektrotechnik + Elektronik
  • Energie + Nachhaltigkeit
  • Maschinenbau + Werkstoffe




 

Jetzt Wissensvorsprung sichern!

Springer Professional "Wirtschaft"

Online-Abonnement

Mit Springer Professional "Wirtschaft" erhalten Sie Zugriff auf:

  • über 67.000 Bücher
  • über 340 Zeitschriften

aus folgenden Fachgebieten:

  • Bauwesen + Immobilien
  • Business IT + Informatik
  • Finance + Banking
  • Management + Führung
  • Marketing + Vertrieb
  • Versicherung + Risiko




Jetzt Wissensvorsprung sichern!

Appendix
Available only for authorised users
Literature
1.
go back to reference Abrahams A, Cullen C (1998) Project alliances in the construction industry. Aust Constr Law Newslett 62:31–36 Abrahams A, Cullen C (1998) Project alliances in the construction industry. Aust Constr Law Newslett 62:31–36
2.
go back to reference Abudayyeh O (1994) Partnering: a team building approach to quality construction management. J Manag Eng ASCE 10(6):26–29CrossRef Abudayyeh O (1994) Partnering: a team building approach to quality construction management. J Manag Eng ASCE 10(6):26–29CrossRef
3.
go back to reference Abu Hijleh SF, Ibbs CW (1989) Schedule-based construction incentives. J Constr Eng Manag 115(3):430–443CrossRef Abu Hijleh SF, Ibbs CW (1989) Schedule-based construction incentives. J Constr Eng Manag 115(3):430–443CrossRef
4.
go back to reference Al-Bahar JF, Crandall KC (1990) Systematic risk management approach for construction projects. J Constr Eng Manag 116(3):533–546CrossRef Al-Bahar JF, Crandall KC (1990) Systematic risk management approach for construction projects. J Constr Eng Manag 116(3):533–546CrossRef
5.
go back to reference Al-Subhi Al-Harbi KM (1998) Sharing fractions in cost-plus-incentive-fee contracts. Int J Proj Manag 16(2):73–80CrossRef Al-Subhi Al-Harbi KM (1998) Sharing fractions in cost-plus-incentive-fee contracts. Int J Proj Manag 16(2):73–80CrossRef
6.
go back to reference ANAO (2000) Construction of the national museum of Australia and the Australian Institute of Aboriginal and Torres Strait Islander Studies. Audit Rep, Canberra, Australia, Australian National Audit Office ANAO (2000) Construction of the national museum of Australia and the Australian Institute of Aboriginal and Torres Strait Islander Studies. Audit Rep, Canberra, Australia, Australian National Audit Office
7.
go back to reference Ang AHS, Tang W (1975) Probability concepts in engineering planning and design, vol I. Wiley, New York Ang AHS, Tang W (1975) Probability concepts in engineering planning and design, vol I. Wiley, New York
8.
go back to reference Antill JM (1970) Civil engineering management. Angus and Robertson, Sydney Antill JM (1970) Civil engineering management. Angus and Robertson, Sydney
9.
go back to reference Arditi D, Yasamis F (1998) Incentive/disincentive contracts: perceptions of owners and contractors. J Constr Eng Manag 124(5):361–373CrossRef Arditi D, Yasamis F (1998) Incentive/disincentive contracts: perceptions of owners and contractors. J Constr Eng Manag 124(5):361–373CrossRef
10.
go back to reference Aulakh P, Kotabe M, Sahay A (1996) Trust and performance in cross-border marketing partnerships: a behavioral approach. J Int Bus Stud 27(5):1005–1032CrossRef Aulakh P, Kotabe M, Sahay A (1996) Trust and performance in cross-border marketing partnerships: a behavioral approach. J Int Bus Stud 27(5):1005–1032CrossRef
11.
go back to reference Badenfelt U (2008) The selection of sharing ratios in target cost contracts. Eng Constr Architect Manag 15(1):54–65CrossRef Badenfelt U (2008) The selection of sharing ratios in target cost contracts. Eng Constr Architect Manag 15(1):54–65CrossRef
12.
go back to reference Banker RD, Thevaranjan T (1997) Accounting earnings and effort allocation. Manag Finance 23(5):56–71 Banker RD, Thevaranjan T (1997) Accounting earnings and effort allocation. Manag Finance 23(5):56–71
13.
go back to reference Barnes M (1983) How to allocate risks in construction contracts. Int J Proj Manag 1(1):24–28CrossRef Barnes M (1983) How to allocate risks in construction contracts. Int J Proj Manag 1(1):24–28CrossRef
14.
go back to reference Bartling B, Von Siemens FA (2010) The intensity of incentives in firms and markets: moral hazard with envious agents. Labour Econ 17(3):598–607 Bartling B, Von Siemens FA (2010) The intensity of incentives in firms and markets: moral hazard with envious agents. Labour Econ 17(3):598–607
15.
go back to reference Basu AK, Kalyanaram G (1990) On the relative performance of linear versus nonlinear compensation plans. Int J Res Mark 7:171–179 Basu AK, Kalyanaram G (1990) On the relative performance of linear versus nonlinear compensation plans. Int J Res Mark 7:171–179
16.
go back to reference Benjamin JR, Cornell CA (1970) Probability, statistics and decision for civil engineers. McGraw-Hill, New York Benjamin JR, Cornell CA (1970) Probability, statistics and decision for civil engineers. McGraw-Hill, New York
17.
go back to reference Berends TC (2000) Cost plus incentive fee contracting—experiences and structuring. Int J Proj Manag 18(3):165–171CrossRef Berends TC (2000) Cost plus incentive fee contracting—experiences and structuring. Int J Proj Manag 18(3):165–171CrossRef
18.
go back to reference Bolton P, Dewatripont M (2005) Contract theory. MIT Press, Cambridge, Mass, London Bolton P, Dewatripont M (2005) Contract theory. MIT Press, Cambridge, Mass, London
19.
go back to reference Bower D, Ashby G, Gerald K, Smyk W (2002) Incentive mechanisms for project success. J Manag Eng ASCE 18(1):37–43CrossRef Bower D, Ashby G, Gerald K, Smyk W (2002) Incentive mechanisms for project success. J Manag Eng ASCE 18(1):37–43CrossRef
20.
go back to reference Bresnen M, Marshall N (2000b) Motivation, commitment and the use of incentives in partnerships and alliances. Constr Manag Econ 18(5):587–598CrossRef Bresnen M, Marshall N (2000b) Motivation, commitment and the use of incentives in partnerships and alliances. Constr Manag Econ 18(5):587–598CrossRef
21.
go back to reference Broome J, Perry J (2002) How practitioners set share fractions in target cost contracts. Int J Proj Manag 20(1):59–66CrossRef Broome J, Perry J (2002) How practitioners set share fractions in target cost contracts. Int J Proj Manag 20(1):59–66CrossRef
22.
go back to reference Carmichael DG (2000) Contracts and international project management. A. A. Balkema, Rotterdam Carmichael DG (2000) Contracts and international project management. A. A. Balkema, Rotterdam
23.
go back to reference Carmichael DG (2002) Disputes and international projects. A A Balkema, Swets and Zeitlinger B V, Lisse Carmichael DG (2002) Disputes and international projects. A A Balkema, Swets and Zeitlinger B V, Lisse
24.
go back to reference Carmichael DG (2004) Project management framework. A. A. Balkema, Rotterdam Carmichael DG (2004) Project management framework. A. A. Balkema, Rotterdam
25.
go back to reference Carmichael DG (2006) Project planning, and control. Taylor and Francis, Oxford Carmichael DG (2006) Project planning, and control. Taylor and Francis, Oxford
26.
go back to reference Chan APC, Chan DWM, Fan LCN, Lam PTI, Yeung JFY (2008) Achieving partnering success through an incentive agreement: lessons learned from an underground railway extension project in Hong Kong. J Manag Eng ASCE 24(3):128–137CrossRef Chan APC, Chan DWM, Fan LCN, Lam PTI, Yeung JFY (2008) Achieving partnering success through an incentive agreement: lessons learned from an underground railway extension project in Hong Kong. J Manag Eng ASCE 24(3):128–137CrossRef
27.
go back to reference Clemen RT, Reilly T (2001) Making hard decisions with decision tools. Duxbury/Thomson Learning, Pacific Grove Clemen RT, Reilly T (2001) Making hard decisions with decision tools. Duxbury/Thomson Learning, Pacific Grove
28.
go back to reference Cook EL, Hancher DE (1990) Partnering: contracting for the future. J Manag Eng ASCE 6(4):431–446CrossRef Cook EL, Hancher DE (1990) Partnering: contracting for the future. J Manag Eng ASCE 6(4):431–446CrossRef
29.
go back to reference Coughlan AT, Sen SK (1989) Salesforce compensation: theory and managerial implications. Mark Sci 8(4):324–342CrossRef Coughlan AT, Sen SK (1989) Salesforce compensation: theory and managerial implications. Mark Sci 8(4):324–342CrossRef
30.
go back to reference Das T, Teng BS (2001) Trust, control, and risk in strategic alliances: an integrated framework. Organ Stud 22(2):251–283CrossRef Das T, Teng BS (2001) Trust, control, and risk in strategic alliances: an integrated framework. Organ Stud 22(2):251–283CrossRef
33.
go back to reference Eisenhardt KM (1989) Agency theory: an assessment and review. Acad Manag Rev 14(1):57–74 Eisenhardt KM (1989) Agency theory: an assessment and review. Acad Manag Rev 14(1):57–74
34.
go back to reference El-Sayegh SM (2008) Risk assessment and allocation in the UAE construction industry. Int J Proj Manag 26(4):431–438CrossRef El-Sayegh SM (2008) Risk assessment and allocation in the UAE construction industry. Int J Proj Manag 26(4):431–438CrossRef
35.
go back to reference Eriksson P, Laan A (2007) Procurement effects on trust and control in client-contractor relationships. Eng Constr Architect Manag 14(4):387–399CrossRef Eriksson P, Laan A (2007) Procurement effects on trust and control in client-contractor relationships. Eng Constr Architect Manag 14(4):387–399CrossRef
36.
go back to reference Feltham GA, Xie J (1994) Performance measure congruity and diversity in multi-task principal/agent relations. Acc Rev 69(3):429–453 Feltham GA, Xie J (1994) Performance measure congruity and diversity in multi-task principal/agent relations. Acc Rev 69(3):429–453
37.
go back to reference Harmon KMJ (2003) Conflicts between owner and contractors, proposed intervention process. J Manag Eng 19(3):121–125CrossRef Harmon KMJ (2003) Conflicts between owner and contractors, proposed intervention process. J Manag Eng 19(3):121–125CrossRef
38.
go back to reference Hauck AJ, Walker DHT, Hampson KD, Peters RJ (2004) Project alliancing at the national museum of Australia—collaborative process. J Constr Eng Manag 130(1):143–152CrossRef Hauck AJ, Walker DHT, Hampson KD, Peters RJ (2004) Project alliancing at the national museum of Australia—collaborative process. J Constr Eng Manag 130(1):143–152CrossRef
39.
go back to reference Holmstrom B (1979) Moral hazard and observability. Bell J Econ 10(1):74–91CrossRef Holmstrom B (1979) Moral hazard and observability. Bell J Econ 10(1):74–91CrossRef
40.
go back to reference Holmstrom B, Milgrom P (1987) Aggregation and linearity in the provision of intertemporal incentives. Econometrica 55(2):303–328CrossRefMathSciNet Holmstrom B, Milgrom P (1987) Aggregation and linearity in the provision of intertemporal incentives. Econometrica 55(2):303–328CrossRefMathSciNet
41.
go back to reference Holmstrom B, Milgrom P (1991) Multitask principal-agent analyses: incentive contracts, asset ownership, and job design. J Law Econ Organ 7:24–52CrossRef Holmstrom B, Milgrom P (1991) Multitask principal-agent analyses: incentive contracts, asset ownership, and job design. J Law Econ Organ 7:24–52CrossRef
42.
go back to reference Hosseinian SM (2013) Optimal outcome sharing arrangements in construction target contracts. Doctoral dissertation. The University of New South Wales, Sydney, Australia Hosseinian SM (2013) Optimal outcome sharing arrangements in construction target contracts. Doctoral dissertation. The University of New South Wales, Sydney, Australia
43.
go back to reference Hosseinian SM, Carmichael DG (2013) An optimal incentive contract with a risk-neutral contractor. ASCE J Constr Eng Manag 139(8): 899–909 Hosseinian SM, Carmichael DG (2013) An optimal incentive contract with a risk-neutral contractor. ASCE J Constr Eng Manag 139(8): 899–909
44.
go back to reference Hosseinian SM, Carmichael DG (2013) Optimal gainshare/painshare in alliance projects. J Oper Res Soc 64(8):1269–1278 Hosseinian SM, Carmichael DG (2013) Optimal gainshare/painshare in alliance projects. J Oper Res Soc 64(8):1269–1278
45.
go back to reference Huang M, Chen G, Ching WK, Siu TK (2010) Principal-agent theory based risk allocation model for virtual enterprise. J Serv Sci Manag 3:241–250 Huang M, Chen G, Ching WK, Siu TK (2010) Principal-agent theory based risk allocation model for virtual enterprise. J Serv Sci Manag 3:241–250
46.
go back to reference Hughes D, Williams T, Ren Z (2012) Is incentivisation significant in ensuring successful partnered projects? Eng Constr Architect Manag 19(3):306–319CrossRef Hughes D, Williams T, Ren Z (2012) Is incentivisation significant in ensuring successful partnered projects? Eng Constr Architect Manag 19(3):306–319CrossRef
47.
go back to reference Kamann D, Snijdets C, Tazelaar F, Welling D (2006) The ties that bind: buyer-supplier relations in the construction industry. J Purch Supply Manag 12(1):28–38CrossRef Kamann D, Snijdets C, Tazelaar F, Welling D (2006) The ties that bind: buyer-supplier relations in the construction industry. J Purch Supply Manag 12(1):28–38CrossRef
48.
go back to reference Kirkwood CW (2004) Approximating risk aversion in decision analysis applications. Decis Anal 1(1):51–67CrossRef Kirkwood CW (2004) Approximating risk aversion in decision analysis applications. Decis Anal 1(1):51–67CrossRef
49.
go back to reference Kraus S (1996) An overview of incentive contracting. Artif Intell 83(2):297–346CrossRef Kraus S (1996) An overview of incentive contracting. Artif Intell 83(2):297–346CrossRef
50.
go back to reference Laffont JJ, Martimort D (2002) The theory of incentives: the principal-agent model. Princeton University Press, Princeton, N.J., Oxford Laffont JJ, Martimort D (2002) The theory of incentives: the principal-agent model. Princeton University Press, Princeton, N.J., Oxford
51.
go back to reference Lahdenpera P (2010) Conceptualizing a two-stage target-cost arrangement for competitive cooperation. Constr Manag Econ 28(7):783–796CrossRef Lahdenpera P (2010) Conceptualizing a two-stage target-cost arrangement for competitive cooperation. Constr Manag Econ 28(7):783–796CrossRef
52.
go back to reference Lambert R (2001) Contracting theory and accounting. J Acc Econ 32(1):3–87CrossRef Lambert R (2001) Contracting theory and accounting. J Acc Econ 32(1):3–87CrossRef
53.
go back to reference Larson E (1997) Partnering on construction projects: a study of the relationship between partnering activities and project success. IEEE Trans Eng Manag 44(2):188–195CrossRef Larson E (1997) Partnering on construction projects: a study of the relationship between partnering activities and project success. IEEE Trans Eng Manag 44(2):188–195CrossRef
54.
go back to reference Love PED, Davis PR, Chevis R, Edwards DJ (2011) Risk/reward compensation model for civil engineering infrastructure alliance projects. J Constr Eng Manag 137(2):127–136CrossRef Love PED, Davis PR, Chevis R, Edwards DJ (2011) Risk/reward compensation model for civil engineering infrastructure alliance projects. J Constr Eng Manag 137(2):127–136CrossRef
55.
go back to reference Love PED, Irani Z, Cheng EWL, Li H (2002) A model for supporting inter-organisational relations in the supply chain. Eng Constr Architect Manag 9(1):2–15 Love PED, Irani Z, Cheng EWL, Li H (2002) A model for supporting inter-organisational relations in the supply chain. Eng Constr Architect Manag 9(1):2–15
56.
go back to reference Lyons T, Skitmore M (2004) Project risk management in Queensland engineering construction industry: A survey. Int J Proj Manag 22(1): 51–61 Lyons T, Skitmore M (2004) Project risk management in Queensland engineering construction industry: A survey. Int J Proj Manag 22(1): 51–61
57.
go back to reference Perry JG, Barnes M (2000) Target cost contracts: an analysis of the interplay between fee, target, share and price. Eng Constr Architect Manag 7(2):202–208 Perry JG, Barnes M (2000) Target cost contracts: an analysis of the interplay between fee, target, share and price. Eng Constr Architect Manag 7(2):202–208
58.
go back to reference McGeorge D, Palmer A (2002) Construction management new directions, 2nd edn. Blackwell Science, Oxford McGeorge D, Palmer A (2002) Construction management new directions, 2nd edn. Blackwell Science, Oxford
59.
go back to reference Petersen T (1993) The economics of organization: the principal-agent relationship. Acta Sociologica 36(3):277–293 Petersen T (1993) The economics of organization: the principal-agent relationship. Acta Sociologica 36(3):277–293
60.
go back to reference Puddicombe MS (2009) Why contracts: evidence. J Constr Eng Manag 135(8):675–682 Puddicombe MS (2009) Why contracts: evidence. J Constr Eng Manag 135(8):675–682
61.
go back to reference Rahman MM, Kumaraswamy MM (2002) Risk management trends in the construction industry: moving towards joint risk management. Eng Constr Architect Manag 9(2):131–151 Rahman MM, Kumaraswamy MM (2002) Risk management trends in the construction industry: moving towards joint risk management. Eng Constr Architect Manag 9(2):131–151
62.
go back to reference Rahman MM, Kumaraswamy MM (2005) Assembling integrated project teams for joint risk management. Constr Manag Econ 23(4):365–375 Rahman MM, Kumaraswamy MM (2005) Assembling integrated project teams for joint risk management. Constr Manag Econ 23(4):365–375
63.
go back to reference Rahman MM, Kumaraswamy MM (2008) Relational contracting and teambuilding: assessing potential contractual and noncontractural incentives. J Manag Eng ASCE 24(1):48–63 Rahman MM, Kumaraswamy MM (2008) Relational contracting and teambuilding: assessing potential contractual and noncontractural incentives. J Manag Eng ASCE 24(1):48–63
64.
go back to reference Raju JS, Srinivasan V (1996) Quota-based compensation plans for multiterritory heterogeneous salesforces. Manag Sci 42(10):1454–1462 Raju JS, Srinivasan V (1996) Quota-based compensation plans for multiterritory heterogeneous salesforces. Manag Sci 42(10):1454–1462
66.
go back to reference Sakal MW (2005) project alliancing: a relational contracting mechanism for dynamic projects. Lean Constr J 2(1):67–79 Sakal MW (2005) project alliancing: a relational contracting mechanism for dynamic projects. Lean Constr J 2(1):67–79
67.
go back to reference Sappington DEM (1991) Incentives in principal-agent relationships. J Econ Perspect 5(2):45–66 Sappington DEM (1991) Incentives in principal-agent relationships. J Econ Perspect 5(2):45–66
68.
go back to reference Sharma A (1997) Professional as agent: knowledge asymmetry in agency exchange. Acad Manag Rev 22(3):758–799 Sharma A (1997) Professional as agent: knowledge asymmetry in agency exchange. Acad Manag Rev 22(3):758–799
69.
go back to reference Shavell S (1979) Risk sharing and incentives in the principal and agent relationship. Bell J Econ 10(1):55–73 Shavell S (1979) Risk sharing and incentives in the principal and agent relationship. Bell J Econ 10(1):55–73
70.
go back to reference Stevens DE, Thevaranjan A (2010) A moral solution to the moral hazard problem. Acc Organ Soc 35(1):125–139 Stevens DE, Thevaranjan A (2010) A moral solution to the moral hazard problem. Acc Organ Soc 35(1):125–139
71.
go back to reference Turner JR, Simister SJ (2001) Project contract management and a theory of organization. Int J Proj Manag 19(8):457–464 Turner JR, Simister SJ (2001) Project contract management and a theory of organization. Int J Proj Manag 19(8):457–464
72.
go back to reference Uher ET, Toakley RA (1999) Risk management in the conceptual phase of a project. Int J Proj Manag 17(3):161–169 Uher ET, Toakley RA (1999) Risk management in the conceptual phase of a project. Int J Proj Manag 17(3):161–169
73.
go back to reference Ward S, Chapman C, Curtis B (1991) On the allocation of risk inconstruction projects. Int J Proj Manag 9(3):140–147 Ward S, Chapman C, Curtis B (1991) On the allocation of risk inconstruction projects. Int J Proj Manag 9(3):140–147
74.
go back to reference Ward S, Chapman C (1994) Choosing contractor payment terms. Int J Proj Manag 12(4):216–221 Ward S, Chapman C (1994) Choosing contractor payment terms. Int J Proj Manag 12(4):216–221
75.
go back to reference Weitzman ML (1980) Efficient incentive contracts. Q J Econ 44(1):719–730 Weitzman ML (1980) Efficient incentive contracts. Q J Econ 44(1):719–730
76.
go back to reference Wong PSP, Cheung SO (2005) Structural equation model of trust and partnering success. J Manag Eng ASCE 21(2):70–80 Wong PSP, Cheung SO (2005) Structural equation model of trust and partnering success. J Manag Eng ASCE 21(2):70–80
77.
go back to reference Zhao H (2005) Incentive-based compensation to advertising agencies: a principal-agent approach. Int J Res Mark 22(3):255–275 Zhao H (2005) Incentive-based compensation to advertising agencies: a principal-agent approach. Int J Res Mark 22(3):255–275
Metadata
Title
Optimization in the Development of Target Contracts
Authors
S. Mahdi Hosseinian
David G. Carmichael
Copyright Year
2014
Publisher
Springer Netherlands
DOI
https://doi.org/10.1007/978-94-017-8044-5_15