Formularising alternative two-stage target-cost arrangements for projects with development and risk mitigation potential

A two-stage target-cost (2STC) contract has been proposed to advance efficient pricing in collaborative projects where a project team is involved in the project early on (with a commitment to a certain target cost level) to improve its value-for-money in a separate development phase (after which the target cost and risk allocation may be altered) before entering to implementation. However, so far, 2STC solutions have only been formularised for projects where there is a lot of uncertainty left in the implementation phase requiring the use of joint risk-sharing principles (a target cost system) until the completion of the project. The purpose of this paper is to discover whether a similar form of incentivisation could be developed for more straightforward projects, where the starting point is a target cost or guaranteed maximum price contract initially, but the implementation phase may follow (or move towards) a more common risk-transfer practice (a fixed price contract) because of a successful development phase providing improved cost efficiency and reduced uncertainty. By means of design science the study establishes two concrete 2STC payment system formulations that are shown to function as intended, with certain reservations. Therefore, the study contributes by extending the potential application area of a 2STC strategy to new types of projects by enabling them to benefit from the parties’ combined know-how while fostering development and efficient pricing also from the view of the project owner.