Conceptualizing a two-stage target-cost arrangement for competitive cooperation

Pertti Lahdenpera

Construction Management and Economics, 2010, vol. 28, issue 7, 783-796

Abstract: The owner may involve design and construction service providers in a project at different stages of planning and design. Early involvement of the versatile know-how of service providers places the owner at the services providers' mercy as to pricing. Late involvement, when design is close to completion, allows using price competition to ensure reasonable pricing. Then, design usually does not involve interplay between the key parties to benefit the project. The aim of the conceptualization is to overcome the above-mentioned problem by generating a novel type of two-stage target-cost contracting system which combines early selection and price containment. There the calculated tender price is based on both the owner's estimates and the tenderers' unit cost and overhead data while the project scope is not yet fully established. Selected service providers then develop the project and its designs in cooperation with the owner before the actual target-cost is set. Incentives have been created to lower the target-cost below the earlier calculated tender price. The idea is to spur actors to invest especially in the critical pre-implementation development phase. Subsequent risk sharing is believed to increase the cooperation between parties further. The model offers a means, especially for European public owners, to enter into a cooperative relationship that is of value in the case of projects involving special challenges and a great deal of uncertainty. The European Procurement Act requires costs to be taken into account in the selection.

Keywords: Incentive contracts; target-cost; early contractor involvement; public sector procurement; alliancing (search for similar items in EconPapers)
Date: 2010
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DOI: 10.1080/01446193.2010.487534

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