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Badenfelt, U (2008) The selection of sharing ratios in target cost contracts. Engineering, Construction and Architectural Management, 15(01), 54–65.

  • Type: Journal Article
  • Keywords: Construction industry; contracts; risk management; Sweden; target costs
  • ISBN/ISSN: 0969-9988
  • URL: http://www.emeraldinsight.com/10.1108/09699980810842061
  • Abstract:
    Purpose 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. Design/methodology/approach 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. Findings 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. Originality/value This study identifies factors that previous research has ignored in relation to the negotiation of target cost contracts.