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Journal cover: Engineering, Construction and Architectural Management

Engineering, Construction and Architectural Management

ISSN: 0969-9988

Online from: 1994

Subject Area: Built Environment

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The selection of sharing ratios in target cost contracts

Document Information:
Title:The selection of sharing ratios in target cost contracts
Author(s):Ulrika Badenfelt, (Department of Technology Management and Economics, Chalmers University of Technology, Göteborg, Sweden)
Citation:Ulrika Badenfelt, (2008) "The selection of sharing ratios in target cost contracts", Engineering, Construction and Architectural Management, Vol. 15 Iss: 1, pp.54 - 65
Keywords:Construction industry, Contracts, Risk management, Sweden, Target costs
Article type:Case study
DOI:10.1108/09699980810842061 (Permanent URL)
Publisher:Emerald Group Publishing Limited

Purpose – The purpose of this paper is to provide a broader understanding of target cost arrangements by empirical study of the choice of sharing ratios from the perspective of both clients and contractors.

Design/methodology/approach – Eight Swedish construction clients and eight contractors were interviewed. These interviews were followed by a case study of a large construction project with a target cost contract. The data for the case study were gathered through interviews, contract documents and non-participant observation. The impact of perceived risks on the selection process is discussed in terms of agency theory.

Findings – Key factors influencing the selection of a sharing ratio included perceptions of fairness, knowledge of target cost contracts, and long-term relationships. The perceived level of risk is affected by the perceived performance risk and the perceived relational risk. Consequently, attention should be paid to the impact of long-term relationships on the design and outcome of target cost contracts since such relationships reduce the risks associated with asymmetric information, such as relational risk.

Originality/value – This study identifies factors that previous research has ignored in relation to the negotiation of target cost contracts.

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