Abstract
There have been an increasing number of attempts to introduce the new contracting schemes in construction projects in Japan, among which is target cost contracting with a pain/gain share mechanism. This paper aims at building a theoretical model that formally evaluates the effects of a risk share on the behaviors of the project owner and the contractors. A numerical illustration is made based on the cost breakdown of a real project. Our analysis shows that the effect of introducing a target cost contract depends primarily on the cost variance and the contractor's potential capability towards cost reduction. From a stochastic simulation, it has also been suggested that stepwise risk shares set according to the level of cost variance have significant merits.
