How practitioners set share fractions in target cost contracts

Broome, Jon; Perry, John G.

doi:10.1016/s0263-7863(00)00035-1

Cited by 75 publications

(58 citation statements)

References 15 publications

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“…When the situation is opposite and the contractor completes a job below target cost, he should be rewarded for his efficient management (Bagnall, 1990;Badenfelt, 2008;Chan et al, 2010). The sharing ratio is agreed in advance and varies from a simple 50:50 to complex mechanisms of benefits and risks sharing (Perry and Barnes, 2000;Broome and Perry, 2002;Badenfelt, 2008).…”

Section: Target Costing In Constructionmentioning

confidence: 99%

Target value design: using collaboration and a lean approach to reduce construction cost

Zimina

Ballard

Pasquire

2012

Construction Management and Economics

192

143

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Target Costing is an effective management technique that has been used in manufacturing for decades to achieve cost predictability during new products development. Adoption of this technique promises benefits for the construction industry as it struggles to raise the number of successful outcomes and certainty of project delivery in terms of cost, quality and time. Target Value Design is a management approach that takes the best features of Target Costing and adapts them to the peculiarities of construction. In this paper the concept of Target Value Design is introduced based on the results of action research carried out on 12 construction projects in the USA. It has been shown that systemic application of Target Value Design leads to significant improvement of project performance -the final cost of projects was on average 15% less than market cost. The construction industry already has approaches that have similarities with elements of the Target Value Design process or uses the same terminology, e.g. Partnering and Target Cost Contracts, Cost planning, etc. Following an exploration of the similarities and differences Target Value Design is positioned as a form of Target Costing for construction that offers a more reliable route to successful projects outcomes.Keywords: target cost, lean construction, cost planning, target value design. IntroductionTarget Costing (TC) appeared in the manufacturing industry in the early 1930s (Feil et al., 2004) and has proved to be a powerful strategic instrument for management and profit planning (Cooper and Kaplan, 1999). Since then it has been used in manufacturing to achieve cost predictability during new product development so that new products and services both meet market determined price and provide financial returns. The main principle of Target Costing is to make cost and value drive the design process instead of calculating the cost after design is complete.Similarity in manufacturing product development and construction project delivery processes opens an opportunity for Target Costing in construction. However in spite of potential benefits there is no evidence of this practice being taken up by the industry of Europe or the USA. In Japan about 15% of construction companies use Target Costing from manufacturing (Jacomit et al., 2008). Academic literature provides only scarce reports on theoretical and practical issues of the method (Nicolini, 2000;Pennanen et al., 2010;Knott, 1996).Insights into the adaptation of the manufacturing Target Costing method to the project-based environment of construction can be drawn directly from 12 practical cases of Target Value Design (TVD). TVD takes a view of construction as a complex system which includes project definition, design and construction stages. It correlates closely with lean thinking in design and construction.Many construction cost and project management practices already use "target costing" terminology or repeat TVD in some part of the process. "Target costing" stands for a range of techniques and methods applied ...

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Section: Target Costing In Constructionmentioning

confidence: 99%

Target value design: using collaboration and a lean approach to reduce construction cost

Zimina

Ballard

Pasquire

2012

Construction Management and Economics

192

143

View full text Add to dashboard Cite

show abstract

“…Boyd (1985) opined that TCC is a contract in which payment is based on the actual cost of contractor with incentives for efficient performance in terms of time and cost against the targets set before the contract is awarded. Broome and Perry (2002) suggested that a target cost is introduced in this kind of project and any cost saving or overrun against the target cost is divided with pre-agreed and specified portions. Wong (2006) stated that the employer paid the actual cost for the work completed to the contractor during the construction stage.…”

Section: Definitions Of Tcc and Gmpmentioning

confidence: 99%

“…Perry and Barnes (2000) proposed methods of tender evaluation of TCC and suggested that the contractor's share of cost overrun and under spent should not be less than 50%. Broome and Perry (2002) and Badenfelt (2008) explored how the gain-share/pain-share ratio in TCC should be determined in the British and Swedish perspectives respectively. Boukendour and Bah (2001) analysed GMP with option pricing theory and considered GMP as a hybrid of cost reimbursement contract and optional contract which hedge the owner from over-budget and provide him possibility of cost savings.…”

Section: Rationale Behind Using Tccmentioning

confidence: 99%

Preferred risk allocation in target cost contracts in construction

Chan

Lam

et al. 2011

Facilities

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Purpose -The purpose of this paper is to identify the party most preferred to take the risks associated with the Target Cost Contracts and Guaranteed Maximum Price Contracts (TCC/GMP) in the Hong Kong context. Design/methodology/approach -An empirical questionnaire survey was conducted with the relevant industrial practitioners to solicit their preferences of risk allocation in TCC/GMP construction projects in Hong Kong. Findings -The survey findings indicated that risks on tender documentation and project design are better borne by clients, while construction related risks are perceived to be taken by contractors. The research findings are consistent with other similar studies on risk allocation in construction projects in general. Practical implications -This paper has developed a preferred risk allocation scheme for the delivery of future TCC/GMP projects, taking Hong Kong as an example. It can serve as a useful guide for the decision makers to determine an optimal risk allocation at the planning stage of a TCC/GMP scheme. Originality/value -This study is expected to benefit both academic researchers and industrial practitioners in generating an equitable risk sharing mechanism for TCC/GMP projects. It has provided sufficient empirical evidence, added to the growing body of knowledge and laid a solid foundation for further research such as an international comparison of various risk allocation schemes associated with this kind of contractual arrangement.

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“…Perry and Barnes (2000) suggested avoiding a proportion of time risk sharing to the agent less than 50%. Broome and Perry (2002) concluded that there is need for research on the interaction of risk and the selection of an incentive arrangement. Love et al (2011) argued 50:50 time risk sharing underpins the equality of the principal and agent relationship.…”

Section: Literature Reviewmentioning

confidence: 99%

An optimal time incentive/disincentive -based compensation in contracts with multiple agents

Hosseinian

2016

CEB

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This paper establishes an optimal time incentive/disincentive-based compensation in a contract between a principal and a team of agents. The establishment is based on solving an optimization problem. In order to validate the paper's theoretical development practitioners were engaged in a designed exercise. The paper demonstrates that, at the optimum: the proportion of time incentive/disincentive compensation among agents with the same risk-attitude should reflect the levels of their contributions; the proportion of time incentive/disincentive among agents with the same level of contribution should be lowered for agents with higher levels of risk aversion; and the proportion of time incentive/disincentive to a team of risk averse agents should reduce, and the fixed component of the team fee should increase, when the agents in the team become more risk-averse or the level of the uncertainty in project completion time increases. The paper’s outcome provides guidance to those involved in contracts design for choosing the best way to reward (penalise) multiple agents, form a team, and allow for any time saving (overrun) through the terms of a contract.

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How practitioners set share fractions in target cost contracts

Cited by 75 publications

References 15 publications

Target value design: using collaboration and a lean approach to reduce construction cost

Target value design: using collaboration and a lean approach to reduce construction cost

Preferred risk allocation in target cost contracts in construction

An optimal time incentive/disincentive -based compensation in contracts with multiple agents

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