The selection of sharing ratios in target cost contracts

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.