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Evaluating fixed price incentive contracts

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  • Ward, S. C.
  • Chapman, C. B.

Abstract

This paper considers choosing between different forms of fixed price incentive contracts. The analysis assumes the underlying probability density function for project costs is triangular. The methods of evaluation considered are expected value, certainty equivalence and stochastic dominance. The latter two methods take into account the typical risk aversion of contractors and clients. The analytical form of project cost and incentive contract adopted offer a robust analysis suitable for a wide variety of practical situations. However, the methods of evaluation described could be applied to other forms of contract and cost distribution.

Suggested Citation

  • Ward, S. C. & Chapman, C. B., 1995. "Evaluating fixed price incentive contracts," Omega, Elsevier, vol. 23(1), pages 49-62, February.
    • Handle: RePEc:eee:jomega:v:23:y:1995:i:1:p:49-62
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    References listed on IDEAS

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    1. G. Hanoch & H. Levy, 1969. "The Efficiency Analysis of Choices Involving Risk," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 36(3), pages 335-346.
    2. William Samuelson, 1986. "Bidding for Contracts," Management Science, INFORMS, vol. 32(12), pages 1533-1550, December.
    3. F. M. Scherer, 1964. "The Theory of Contractual Incentives for Cost Reduction," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 78(2), pages 257-280.
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    1. Kerkhove, L.-P. & Vanhoucke, M., 2017. "A parallel multi-objective scatter search for optimising incentive contract design in projects," European Journal of Operational Research, Elsevier, vol. 261(3), pages 1066-1084.
    2. Kerkhove, L.P. & Vanhoucke, M., 2016. "Incentive contract design for projects: The owner׳s perspective," Omega, Elsevier, vol. 62(C), pages 93-114.
    3. Graves, Samuel B. & Ringuest, Jeffrey L., 2009. "Probabilistic dominance criteria for comparing uncertain alternatives: A tutorial," Omega, Elsevier, vol. 37(2), pages 346-357, April.
    4. Wen Jiang & Wenfei Lu & Qianwen Xu, 2019. "Profit Distribution Model for Construction Supply Chain with Cap-and-Trade Policy," Sustainability, MDPI, vol. 11(4), pages 1-24, February.

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