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Ahn, S, Lee, S and Steel, R P (2013) Effects of Workers’ Social Learning: Focusing on Absence Behavior. Journal of Construction Engineering and Management, 139(08), 1015–25.
Cheung, S O, Yiu, T W and Lam, M C (2013) Interweaving Trust and Communication with Project Performance. Journal of Construction Engineering and Management, 139(08), 941–50.
Choi, Y, Kim, D, Kim, S, Nam, M S and Kim, T (2013) Implementation of Noise-Free and Vibration-Free PHC Screw Piles on the Basis of Full-Scale Tests. Journal of Construction Engineering and Management, 139(08), 960–7.
de Lima, R X, Júnior, E F N, Prata, B d A and Weissmann, J (2013) Distribution of Materials in Road Earthmoving and Paving: Mathematical Programming Approach. Journal of Construction Engineering and Management, 139(08), 1046–54.
De Marco, A and Mangano, G (2013) Risk and Value in Privately Financed Health Care Projects. Journal of Construction Engineering and Management, 139(08), 918–26.
Gharaibeh, H M (2013) Managing the Cost of Power Transmission Projects: Lessons Learned. Journal of Construction Engineering and Management, 139(08), 1063–7.
Horta, I M, Camanho, A S and Lima, A F (2013) Design of Performance Assessment System for Selection of Contractors in Construction Industry E-Marketplaces. Journal of Construction Engineering and Management, 139(08), 910–7.
Hosseinian, S M and Carmichael, D G (2013) Optimal Incentive Contract with Risk-Neutral Contractor. Journal of Construction Engineering and Management, 139(08), 899–909.
- Type: Journal Article
- Keywords: Contracts; Construction management; Risk management; Optimal incentive contract; Construction; Principal-agent problem; Risk neutrality; Agency theory; Contracting;
- ISBN/ISSN: 0733-9364
- URL: https://doi.org/10.1061/(ASCE)CO.1943-7862.0000663
- Abstract:
Incentive clauses within contracts, referred to as incentive contracts in this paper, based on a sharing of the project outcome are regarded as an important vehicle to align contractor interests with that of the owner. However, discussion is ongoing as to what is the optimal incentive arrangement. This paper derives an optimal incentive contract for a risk-neutral contractor; the owner may be either risk averse or risk neutral. An incentive is established based on a sharing of a project’s equivalent monetary outcome (expressed relative to a benchmark or target that is desired by the owner), while aligning the contractor’s interests with those of the owner. The derivation is based on solving an optimization problem. The paper shows that at the optimum and expressed relative to the target, any favorable or adverse outcome associated with both the contractor’s effort and events beyond the contractor’s influence should, respectively, be wholly received by or wholly borne by a risk-neutral contractor. Practitioners were interviewed to validate this result. This paper gives an original solution to the optimal sharing problem in incentive construction contracts, contributing to current practices in contracts management. The solution follows an ordered argument and is usable by practitioners. Additionally, this paper extends agency theory on risk-averse principals. This paper will be of interest to academics and practitioners concerned with the design of incentive contracts.
Laryea, S (2013) Nature of Tender Review Meetings. Journal of Construction Engineering and Management, 139(08), 927–40.
Lee, N and Rojas, E M (2013) Visual Representations for Monitoring Project Performance: Developing Novel Prototypes for Improved Communication. Journal of Construction Engineering and Management, 139(08), 994–1005.
Lu, Y, Cui, Q and Le, Y (2013) Turning Green to Gold in the Construction Industry: Fable or Fact?. Journal of Construction Engineering and Management, 139(08), 1026–36.
Macarulla, M, Forcada, N, Casals, M, Gangolells, M, Fuertes, A and Roca, X (2013) Standardizing Housing Defects: Classification, Validation, and Benefits. Journal of Construction Engineering and Management, 139(08), 968–76.
Marks, E D, Cheng, T and Teizer, J (2013) Laser Scanning for Safe Equipment Design That Increases Operator Visibility by Measuring Blind Spots. Journal of Construction Engineering and Management, 139(08), 1006–14.
Minchin, R E, Thurn, S B, Ellis, R D and Lewis, D W (2013) Using Contractor Bid Amounts to Estimate the Impact of Night Construction on Cost for Transportation Construction. Journal of Construction Engineering and Management, 139(08), 1055–62.
Mostafavi, A, Abraham, D, Noureldin, S, Pankow, G, Novak, J, Walker, R, Hall, K and George, B (2013) Risk-Based Protocol for Inspection of Transportation Construction Projects Undertaken by State Departments of Transportation. Journal of Construction Engineering and Management, 139(08), 977–86.
Nguyen, L D, Phan, D H and Tang, L C M (2013) Simulating Construction Duration for Multistory Buildings with Controlling Activities. Journal of Construction Engineering and Management, 139(08), 951–9.
Puri, V and Martinez, J C (2013) Modeling of Simultaneously Continuous and Stochastic Construction Activities for Simulation. Journal of Construction Engineering and Management, 139(08), 1037–45.
Ugwu, O O, Arop, J B, Nwoji, C U and Osadebe, N N (2013) Nanotechnology as a Preventive Engineering Solution to Highway Infrastructure Failures. Journal of Construction Engineering and Management, 139(08), 987–93.