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Target cost contracts are growing in popularity but concerns remain about the interplay between fee, target, sharing ratios and the final price. This paper offers a fundamental analysis of the principles under‐pinning target contracts. It shows that there is scope for manipulation of tenders and that suboptimal methods of tender evaluation are in use. The paper analyses both fixed fee and percentage fee contracts. Methods of tender evaluation are proposed that will both reduce the scope for manipulation by tenderers and increase the likelihood of the contract being awarded to the tenderer whose final price will be the lowest. The analysis reveals a strong case for setting the contractor's share of cost overrun or underrun at a value that is not less than 50%. Finally, the paper proposes two simplifications that would reduce the number of variables in target cost contracts of the future. One is for the employer to set the fee and the other requires only that a target be tendered but with the fee built into it.

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.

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.

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.

This study identifies factors that previous research has ignored in relation to the negotiation of target cost contracts.

This paper aims to explore the implementation framework, project performance, underlying motives, perceived benefits, potential difficulties, as well as critical success factors, of adopting the target cost contracting (TCC) form of procurement, based on an in‐depth real‐life case study of a challenging underground railway station modification project in Hong Kong.

The case project was analysed by means of the related project documentation and face‐to‐face interviews with the relevant senior representatives from the client organisation.

The target cost‐based procurement strategy generates a plethora of benefits throughout the whole delivery process of the project case, including the provision of cost incentives for the contractor to work efficiently, aligning individual goals of various contracting parties with the overall project objectives, achieving better value for money and more satisfactory overall project performance in terms of time, cost and dispute occurrence.

Although the selected TCC case study project is based in Hong Kong, the research findings and hands‐on experience of the relevant industrial practitioners may be cross‐referenced to other similar TCC projects in other parts of the world for international comparisons.

The paper provides some useful insights into assisting key project stakeholders in maximising the benefits, whilst minimising the detriments brought about by potential difficulties in launching the TCC scheme. It seeks more research evidence to evaluate the entire project delivery process, and capture the levels of success and lessons learned from previous TCC construction projects for generating best practice recommendations to achieve better construction performance.

The purpose of this paper is to present a case study on the use of performance-based contracting in the outsourcing of a reliability-centered maintenance program of a Gulf oil refinery.

A case study method is used whereby data are collected through semi-structured interviews, informal discussions with executives from the participant companies, in addition to official documents and secondary materials.

The case analysis reveals the use of a risk–reward payment scheme and key performance indicators (KPIs) deployed to support the management of the outsourced maintenance function. The financial incentive scheme was clearly designed to motivate the outsourcing contractor to achieve more financial benefits when meeting a defined set of KPIs while also delivering operating cost savings and other qualitative benefits to the outsourcing company. Managing the outsourced function also involved the use of routine budgetary control systems, in addition to other informal control mechanisms such as trust, knowledge sharing, mutual understanding and co-operation between the two collaborative partners.

The evidence presented in the case description and analysis may assist in increasing the understanding of how outsourcing relationships in maintenance business are managed and evaluated. The case findings may also provide the opportunity for further research investigating the use of performance measurement systems and incentive-based schemes in a variety of maintenance contracts.

The case study presents new empirical evidence on the use of performance risk–reward payment schemes in the management of an outsourcing relationship. Findings reported in the study will add to the existing literature on maintenance performance measurement and management practices in outsourcing relationships.

Target cost contracts are commonly used to share the monetary outcome of work or a project. However, discussion is ongoing, as to what constitutes optimal sharing. The purpose of this paper is to examine optimal sharing and derives a result for defined risk assumptions on the owner (risk neutral) and contractor (risk-averse ranging to risk neutral).

The derivation is based on solving a constrained maximization problem using ideas from principal-agent theory. Practitioners were engaged in a designed exercise in order to validate the approach and propositions. The influence of the contractor's level of risk aversion, the cost uncertainty and the contractor's effort effectiveness are examined.

The paper shows that, at the optimum, the sharing ratio between contractor and owner needs to reduce and the fixed fee needs to increase when the contractor becomes more risk-averse, the level of the cost uncertainty increases, or the effectiveness of the contractor effort decreases.

The paper's findings provide practitioners with a useful benchmark for outcome sharing in target contracts.

Existing work on outcome sharing in target contracts is limited to being qualitative and anecdotal in nature. This paper extends existing knowledge by providing a quantitative treatment of optimal sharing.

The paper aims to present a succinct review of guaranteed maximum price (GMP) and target cost contracting (TCC) concepts and features in general, and to identify the critical success factors for procuring GMP/TCC contracts from the Hong Kong perspective in particular.

By means of an empirical questionnaire survey geared towards industrial practitioners with direct hands‐on GMP/TCC experience, the opinions of various contracting parties including clients, consultants and contractors were solicited, analysed and compared in relation to GMP/TCC success factors.

Experienced practitioners shared the unanimous perception that: reasonable share of cost saving and fair risk allocation; partnering spirit from all contracting parties; right selection of project team; well‐defined scope of work in client's project brief and early involvement of contractor in design development, are the most essential ingredients for the successful implementation of GMP/TCC scheme.

Although the research study is based in Hong Kong with a limited sample size, the survey findings and hands‐on experience of the relevant industrial practitioners may be cross‐referenced to other similar investigations in other parts of the world for international comparisons.

The research study has provided some useful insights into assisting key project stakeholders in determining important successful ingredients when launching GMP/TCC scheme. Such an identification of critical success factors would be valuable in formulating effective practical strategies to improve overall project performance, create win‐win opportunities for contracting parties and mitigate the occurrence of construction disputes/claims. It also attempts to seek more research evidence to capture the levels of success and lessons learned from previous GMP/TCC construction projects for generating best practice recommendations for future implementation.

Guaranteed maximum price (GMP) and target cost contracting (TCC) with a pain‐share/gain‐share arrangement have been adopted to integrate the construction delivery process and motivate service providers to seek continuous improvements in project outcomes. However, there is still a lack of research evidence to evaluate the levels of success and lessons learned from these innovative procurement strategies. Based on the analysis of a series of in‐depth interviews on the perceptions of various relevant experienced industrial practitioners, this paper aims to explore the key attributes of GMP/TCC including the underlying motives, perceived benefits, potential difficulties, critical success factors, key risk factors involved and optimal project conditions for adopting GMP/TCC. The research findings are useful in assisting key project stakeholders in minimising the detriments brought about by potential difficulties in and maximising the benefits derived from implementing GMP/TCC concepts. The study is also significant in contributing to new knowledge and practical information of GMP/TCC applications and implementation, in both a national and international context.

The purpose of this paper is to identify the party most preferred to take the risks associated with the target cost contracts and guaranteed maximum price contracts (TCC/GMP) in the Hong Kong context.

An empirical questionnaire survey was conducted with the relevant industrial practitioners to solicit their preferences of risk allocation in TCC/GMP construction projects in Hong Kong.

The survey findings indicated that risks on tender documentation and project design are better borne by clients, while construction related risks are perceived to be taken by contractors. The research findings are consistent with other similar studies on risk allocation in construction projects in general.

This paper has developed a preferred risk allocation scheme for the delivery of future TCC/GMP projects, taking Hong Kong as an example. It can serve as a useful guide for decision makers to determine an optimal risk allocation at the planning stage of a TCC/GMP scheme.

The paper can benefit both academic researchers and industrial practitioners in generating an equitable risk sharing mechanism for TCC/GMP projects. It provides sufficient empirical evidence, added to the growing body of knowledge and lays a solid foundation for further research such as an international comparison of various risk allocation schemes associated with this kind of contractual arrangement.

The purpose of this paper is to understand the factors relating to the implementation of a new procurement initiative that affect performance and value for money (VFM). The study is based on a four-year research project carried out on behalf of the Scottish Government to monitor and evaluate the performance and efficiency of a bulk procurement vehicle for social housing.

The researchers had a brief to monitor and evaluate the implementation of the procurement process and its influence on cost and efficiency targets. The study employed a mixed method approach with annual rounds of qualitative and quantitative data collection from project stakeholders including the contractors, consultants, clients and sponsor. Confidential semi-structured interviews were conducted on conclusion of the project to gauge views on how well the procurement process worked from the various perspectives and to reflect on the influence of the process on VFM.

The procurement programme failed to achieve the capital cost and efficiency savings targets quantified at the outset and on this measure alone VFM was not demonstrated, although there were a number of reported benefits. A major factor was the extent of process and behavioural change required from the project team and, although a procurement consultant was engaged to facilitate this, the theoretical benefits of “best practice” were not realized. The picture was further complicated by rapidly changing economic conditions experienced, and debate about the robustness of original cost savings targets.

The findings and conclusions are of relevance and interest to clients and construction organisations undergoing change through adopting novel procurement processes.

The empirical nature of the study provides a comprehensive evidence base for the performance of a collaborative procurement programme and an understanding of the potential difficulties in attaining the theoretical benefits of procurement innovation.

This paper aims to develop a fuzzy risk assessment model for construction projects procured with target cost contracts and guaranteed maximum price contracts (TCC/GMP) using the fuzzy synthetic evaluation method, based on an empirical questionnaire survey with relevant industrial practitioners in South Australia.

A total of 34 major risk factors inherent with TCC/GMP contracts were identified through an extensive literature review and a series of structured interviews. A questionnaire survey was then launched to solicit the opinions of industrial practitioners on risk assessment of such risk factors.

The most important 14 key risk factors after the computation of normalised values were selected for undertaking fuzzy evaluation analysis. Five key risk groups (KRGs) were then generated in descending order of importance as: physical risks, lack of experience of contracting parties throughout TCC/GMP procurement process, design risks, contractual risks and delayed payment on contracts. These survey findings also revealed that physical risks may be the major hurdle to the success of TCC/GMP projects in South Australia.

Although the fuzzy risk assessment model was developed for those new-build construction projects procured by TCC/GMP contracts in this paper, the same research methodology may be applied to other contracts within the wide spectrum of facilities management or building maintenance services under the target cost-based model. Therefore, the contribution from this paper could be extended to the discipline of facilities management as well.

An overall risk index associated with TCC/GMP construction projects and the risk indices of individual KRGs can be generated from the model for reference. An objective and a holistic assessment can be achieved. The model has provided a solid platform to measure, evaluate and reduce the risk levels of TCC/GMP projects based on objective evidence instead of subjective judgements. The research methodology could be replicated in other countries or regions to produce similar models for international comparisons, and the assessment of risk levels for different types of TCC/GMP projects (including new-build or maintenance) worldwide.