Risk ranking and analysis in target cost contracts: Empirical evidence from the construction industry

Abstract

The construction industry is often characterized by the traditional adversarial working relationships between contracting parties. There has been a strong call for applying target cost contracts to align the interest of owners and contractors together. By doing so, it aims to achieve a win-win situation under a partnering arrangement within the construction industry. Even though a multitude of research studies have been undertaken on target cost contracts (TCC) or guaranteed maximum price (GMP) contracts, not many of them have focused on the risk management and analysis of these procurement strategies. This paper aims to identify, rank and compare the key risk factors encountered with these forms of procurement based on an empirical questionnaire survey geared towards the clients, contractors and consultants in Hong Kong. Despite the limited number of completed TCC and GMP (TCC/GMP) construction projects in Hong Kong, the chosen sample was perceived to be truly representative of the survey population. A four-level data analysis framework was applied in this paper, including descriptive statistics, Kendall's concordance test, Spearman's rank correlation test and Mann-Whitney U Test. The research findings showed that the client group, contractor group and consultant group are in general agreement on the impact of individual risks. The identification of the key risk factors and their relative significance are important in the risk management of target cost contracts and guaranteed maximum price projects, which, if properly done, would enhance the value for money throughout the whole procurement process. This research study also helps various key project stakeholders to equip with better knowledge and understanding of TCC/GMP scheme by paying close attention to those This is the Pre-Published Version. (Final Accepted Manuscript), Volume 29, Issue 6, August 2011, Pages 751-763 2 high-risk factors and then the implementation of appropriate risk mitigation measures in a proactive manner. International Journal of Project Management (IJPM)

Critical Factors Affecting the Quality of Industrialized Building System Projects in China

“…The t-test is commonly used to examine whether the mean values of a specific variable from two independent groups are significantly consistent, or whether they are significantly different [27,28]. The value of a parameter "Sig" needs to be established to indicate the level of difference between two groups of professionals about their perceptions of the importance of a specific variable.…”

A Comparative Study of the Benefits of Applying Target Cost Contracts between South Australia and Hong Kong

“…We hope that the research study will stimulate a wider debate on the underlying benefits associated with GMP/TCC in both local and international contexts for reference by the construction industry at large. Another research project focusing on risk identification, risk analysis, risk mitigation, and risk allocation inherent with GMP/TCC contracts have been completed recently in Hong Kong, Australia, and the United Kingdom (Chan et al, 2008b) and the key research findings have been reported in other publications (e.g., Chan et al, 2010a;2011c).…”

Developing a fuzzy risk assessment model for guaranteed maximum price and target cost contracts in South Australia

“…Chan et al (2010b) reported on the major findings of a questionnaire survey on critical success factors in the implementation of TCC/GMP schemes in Hong Kong. Chan et al (2011a) ranked and analysed the key risks inherent with TCC/GMP contracts through an empirical survey in Hong Kong. In view of the viewpoints of the researchers mentioned above, the similar nature of TCC and GMP and the practices of previous research studies, TCC and GMP are put together for subsequent analyses and discussions in this paper.…”

“…The interviewees suggested that the nature of variations, change in scope of works, quality and clarity of tender documents, unforeseen ground conditions, fluctuation of materials price, and approval from regulatory bodies for alternative cost saving designs, are the key risk factors inherent with TCC/GMP projects in Hong Kong . The results of the seven interviews also enabled the fine-tuning and confirmation of the 34 key risk factors sought from the literature review to be included on the empirical research survey questionnaire used in Hong Kong (Chan et al, 2011a).…”

“…those with direct hands-on TCC/GMP experience) and the non-experienced group of respondents (i.e. those without direct TCC/GMP experience before but with basic understanding of the underlying principles of TCC/GMP schemes), as previously adopted by both Xu et al (2010b) and Chan et al (2011a). The test results reflected that there are no statistically significant differences on the risk assessment of each of the risk factors elicited for TCC/GMP projects between the experienced group and the non-experienced group.…”