International Journal of Project Management 29 (2011) 751 – 763 www.elsevier.com/locate/ijproman
Risk ranking and analysis in target cost contracts: Empirical evidence from the construction industry
Daniel W.M. Chan a , Albert P.C. Chan a , Patrick T.I. Lam a , John F.Y. Yeung b , Joseph H.L. Chan a,⁎
Department of Building and Real Estate, The Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong, China b
College of International Education, School of Continuing Education, Hong Kong Baptist University, Hong Kong, China Received 29 December 2009; received in revised form 26 July 2010; accepted 17 August 2010
The construction industry is often characterized by the traditional adversarial working relationships between contracting parties. There has been a strong call for applying target cost contracts to align the interest of owners and contractors together. By doing so, it aims to achieve a win–win situation under a partnering arrangement within the construction industry. Even though a multitude of research studies have been undertaken on target cost contracts (TCC) or guaranteed maximum price (GMP) contracts, not many of them have focused on the risk management and analysis of these procurement strategies. This paper aims to identify, rank and compare the key risk factors encountered with these forms of procurement based on an empirical questionnaire survey geared towards the clients, contractors and consultants in Hong Kong. Despite the limited number of completed TCC and GMP (TCC/GMP) construction projects in Hong Kong, the chosen sample was perceived to be truly representative of the survey population. A four-level data analysis framework was applied in this paper, including descriptive statistics, Kendall's concordance test, Spearman's rank correlation test and Mann–Whitney U test. The research findings showed that the client group, contractor group and consultant group are in general agreement on the impact of individual risks. The identification of the key risk factors and their relative significance is important in the risk management of target cost contracts and guaranteed maximum price projects, which, if properly done, would enhance the value for money throughout the whole procurement process. This research study also helps various key project stakeholders to be equipped with better knowledge and understanding of TCC/GMP scheme by paying close attention to those high-risk factors and then the implementation of appropriate risk mitigation measures in a proactive manner. © 2010 Published by Elsevier Ltd.
Keywords: Risk management; Risk analysis; Construction industry; Target cost contracts; Guaranteed maximum price contracts; Hong Kong
The construction industry is conventionally fraught with the adversarial working relationships between contracting parties, particularly in case of competitive fixed-price lump-sum
contracts (Kaka et al., 2008). The rationale of applying the traditional procurement approach is often questioned by industry review reports worldwide (Latham, 1994; Egan, 1998; Construction Industry Review Committee, 2001). Target cost ⁎ Corresponding author.
E-mail addresses: email@example.com (D.W.M. Chan),
firstname.lastname@example.org (A.P.C. Chan), email@example.com (P.T.I. Lam), firstname.lastname@example.org (J.H.L. Chan).
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contracts (TCC) and guaranteed maximum price (GMP)
contracts (being a variant of TCC), which align the individual objectives of various contracting parties together, would be appropriate procurement models to encourage more co-operative working culture and partnering spirit within the construction industry (Construction Industry Review Committee, 2001).
TCC has often been practiced in construction projects with a high level of risks (Broome and Perry, 2002). The identification of risks is a significant task for...
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