Risk Assessment Model for Optimal Gain–Pain Share Ratio in Target Cost Contract for Construction Projects

Abstract

Recently various contracting methods have been introduced for construction projects. Target cost contracts have been used widely where risk can be shared between contract parties. This gain–pain sharing method has proven its efficiency as a fair contracting method, but it depends on the adopted gain–pain share ratio. Minimal research efforts have quantified the optimal gain–pain share using game theory simulation. This research closes the gap by developing a mathematical formulation of the utility functions for both contract parties (i.e., the owner and the contractor) in target cost contracts. The effect of the risk-sharing rate on the behavior of the contact parties and risk direction was modeled. The developed mathematical model was analyzed to consider all possible scenarios. A simulation analysis that considered project characteristics and construction cost variations was performed to provide a robust valuation of potential risk allocation in determining the optimal share ratio using real-world construction data. The results showed that the optimal gain–pain share ratio varies according to the difference between the construction project cost variation and the contractor’s efforts fees. It is practical to set different gain–pain share ratios based on the construction project characteristics and the contractor’s efforts fees to satisfy contract parties in this complicated and interconnected relationship. Quantifying the optimal gain–pain share ratio helps to produce more-reliable target cost contracts.