Cost-plus and incentive contracting: Some false benefits and inherent drawbacks

Abstract

Two problems associated with cost-plus and incentive contracts in the construction industry are discussed: the financial costs of an earlier construction start through the use of a ‘fast-tracked’ design-build cycle, and the counterproductive effects of the ‘adverse selection’ of competing construction firms that must occur in a cost-plus or incentive contract environment. Though they stem from basic economic principles, these problems are often ignored in the conventional wisdom. The authors argue that the demonstration of these serious, commonly overlooked drawbacks should result in a decrease in the use of cost-plus or incentive contracts.