Optimum risk/reward sharing framework to incentivize integrated project delivery adoption

Abstract

The major benefit of integrated project delivery (IPD) is the involvement of stakeholders at the early stage of the project so that they can all contribute to project development. They would also work cooperatively towards the project goals that they have jointly developed. Moreover, IPD has not taken the market as promised by the aforementioned benefits due to two principal concerns. First, the conventional risk/reward sharing that has been developed for the principal-agent type of relationship has been used. Second, the reward has not been tailored to reflect the stochastic nature of the risks involved. This study proposes a novel risk/reward sharing framework that would alleviate these two concerns. Employing stochastic cooperative game theory and prospect theory as conceptual lenses, a more realistic risk/reward sharing framework is developed for IPD projects. The use of Pareto optimality enables the proposed framework to arrange incentives optimally with due regard to the risk propensity of the contracting parties. Setting the notional sharing approach as a fair starting point, the framework further introduces transfer payments to ensure fairness and retain optimum sharing at the same time. Both features would facilitate the structuring of multi-win sharing incentive to be incorporated with integrated project delivery. The operation of the proposed framework is illustrated by applying it to a real case. Wider adoption of IPD can be expected when the two principal concerns of IPD arrangements are addressed.