Preparing a framework for two-stage target-cost arrangement formulation

Design/methodology/approach A two-stage target-cost (2STC) arrangement has been proposed as the solution. In this model the service provider earns a bonus by suggesting a lower target cost than the reference set at the time of the involvement of the provider. The amount of bonus also impacts the cost over-run risk transferred to the service provider to avoid overly optimistic promises. The proposition encompassed just the basic idea, and did not really delve into actual model formulations and their functioning under practical realities. Therefore, the required work is presented here in the form of a conceptual, discursive study focusing on relevant theories and empirical findings from major investment projects. Findings The study produces a requirement framework for the 2STC model to allow functioning models to be formulated and tested. The framework incorporates numerous requirements, constraints and a suggested path forward. For instance, while the model may not be manipulatable, it must incentivise the service provider to seek more cost-effective project solutions, be feasible also from the view of the project owner and adapt to various project risk profiles and ranges of efficiency improvements. Research limitations/implications The study suggests more concrete model formulations to be provided under the guidance of the presented framework. Originality/value The 2STC model is a unique concept and no comparable construct is known to exist. Besides the requirement framework, the study also strengthens the foundation of and need for the 2STC model by a thorough survey of its theoretical linkages. Accordingly, the study presented in this paper forms the second stage in the overall 2STC development process focused on benefiting project owners and the industry.