Choosing the right contract: a probabilistic model

Abstract

The inherent risks of civil engineering projects mean the choice of contract can have a significant impact on cost and duration. In the absence of any quantitative comparisons, the decision tends to be based on qualitative criteria or personal preference—which may not result in the best solution either for the client or contractor. Help is now at hand in the form of a spreadsheet-based, probabilistic model which uses a Monte Carlo simulation to plot the possible range of costs and durations associated with each type of contract. This paper shows how the model can be applied to a small tunnelling project, making a comparison between fixed-priced and cost-plus-fixed-fee arrangements. The results are quite striking, showing the substantial potential cost savings offered by the cost-plus route in this case.