The selection of sharing ratios in target cost contracts

Abstract

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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