Primary Author: Said Boukendour
Audience Focus: Intermediate
Application Type: Theoretical
Venue: 2012 AACE International Annual Meeting, San Antonio, TX, USA
Abstract: Instead of standard cost plus and fixed price contracts that allocate all risk to either contracting party, the target cost contracts adopt a risk sharing approach in which the parties agree on a target profit, a target cost and a sharing formula of any difference between the actual cost and the target. By its very nature, the sharing formula gives the contractor the opportunity to increase profit either by reducing cost or by artificially inflating the target cost. The use of the open book is expensive, time consuming, and raises issues of trust in the reliability of data but also about their possible use for other purposes. The use of competition does not always ensure value for money since it is common to submit bids to win the contract and recover losses from claims. The new formula we propose incentivizes the contractor to submit the lowest possible target cost without relying on open book accounting or competitive tendering. The most significant advantage is the building of trust in setting the target cost and fostering collaboration for achieving better performance.
Audience Focus: Intermediate
Application Type: Theoretical
Venue: 2012 AACE International Annual Meeting, San Antonio, TX, USA
Abstract: Instead of standard cost plus and fixed price contracts that allocate all risk to either contracting party, the target cost contracts adopt a risk sharing approach in which the parties agree on a target profit, a target cost and a sharing formula of any difference between the actual cost and the target. By its very nature, the sharing formula gives the contractor the opportunity to increase profit either by reducing cost or by artificially inflating the target cost. The use of the open book is expensive, time consuming, and raises issues of trust in the reliability of data but also about their possible use for other purposes. The use of competition does not always ensure value for money since it is common to submit bids to win the contract and recover losses from claims. The new formula we propose incentivizes the contractor to submit the lowest possible target cost without relying on open book accounting or competitive tendering. The most significant advantage is the building of trust in setting the target cost and fostering collaboration for achieving better performance.