doi:10.3850/978-981-08-7920-4_S1-L04-cd

ABSTRACT

The construction industry experiences cycles of significant growth and decline that result in contracting strategies that shift risk from contractor to owner or owner to contractor depending on the strength of the market. Unfortunately, risk strategies that focus on market conditions, rather than on project characteristics, may entice stakeholders to make decisions that elevate, rather than mitigate, risks to parties. The U.S. construction industry experienced strong growth from 2003 to 2007, which caused many owners to award projects using a cost reimbursable contracting strategy in order to attract the best companies. More recently, the decline in the economy has resulted in broader usage of lump sum contracts because competition among contractors for a smaller pool of projects has made it possible for owners to shiftmore risk to the contractors. Unfortunately, some projects that implement a lump sum contract possess characteristics that would make a reimbursable contract a more appropriate choice. The researchers found that cost reimbursable contracts provide a mechanism for undertaking projects that are faced with substantial uncertainty, new technologies, or a volatile labor market. However, understanding when to use reimbursable contracting to improve performance, and how to successfully implement a reimbursable contract, requires analyzing a complex set of factors prior to making a decision. This article presents initial results on when and how to implement a reimbursable contract to appropriately allocate risk.

Keywords: Reimbursable contract, Lump sum contract, Risk allocation, Market conditions, Uncertainty, Volatility.

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