Augmenting the Incentivizing Power of Target Cost Contracting in Integrated Project Delivery

Abstract

Target cost contracts (TCCs) with risk/reward-sharing incentivizing arrangements are often used to promote performances in integrated project delivery (IPD) projects. However, setting the target cost can be challenging due to the diverse interests of team members and many uncertain cost influencing factors inherent in such projects. According to prospect theory and goal-setting theory, neither overly lenient nor unattainably high target costs would drive exceptional performance. This study proposes that the relationship between target cost and cost performance is an inverted asymmetrical V-shape, indicating that cost performance improves with more challenging targets up to a point, beyond which unreasonably challenging targets would render negative effect. To mitigate the risk of setting unreasonable targets, establishing cost targets within a zone that spans between the at-risk threshold and the shared-reward threshold can be an option. This zone is identified as neutral. Despite reducing the risk of unreasonable target costs, the incentivizing power of this neutral zone approach diminishes sharply once the cost exceeds the at-risk threshold. Strategies are proposed to augment the incentivizing power of neutral zone–based TCC for two types of agents: myopic and forward-looking. Complementing neutral zone with subgoaling strategy can significantly improve cost performance for myopic agents. Furthermore, the prospect of repeated business can incentivize the forward-looking agents to achieve the shared-reward threshold. This novel method is instrumental in establishing target costs at the early stages of IPD projects.