Optimum Outcome-Sharing Construction Contracts with Multiagent and Multioutcome Arrangements

Abstract

Incentive contracts are widely used in construction to not only provide motivation but also to develop a cooperative relationship among project players. However, establishing the best outcome sharing is seen as a challenge to those involved in contracts design. Although the optimization of incentive contracts has been approached by a number of researchers, there is no guidance on optimum incentive contracts with multiagent/multioutcome arrangements. This paper develops the optimum multiagent/multioutcome sharing model in incentive contracts with a risk-neutral owner and risk-averse agents (contractors, consultants). Optimization, principal–agent theory, and utility theory provide the basis for the development. The application of the model is addressed in different scenarios. The paper demonstrates that adopting optimum effort by agents is an effective strategy that avoids project time overruns and also gives maximum savings to all contracting parties. It is shown that: at the optimum, outcome (time, cost, quality, and safety) sharing is positively related to an agent’s contribution and negatively related to the agent’s effort cost; as the correlation of the outcomes or the level of agent risk aversion increases, agents prefer low outcome sharing; and outcome variances and outcome sharing are related negatively which means that high outcome variances result in low outcome sharing. The contribution of this study lies in providing insights into designing optimum incentive contracts with multiagent/multioutcome arrangements.