The Beauty of Incentivised capability-and-fee Competition Based Target-cost Contracting

The early involvement of a construction team is increasingly utilised in demanding projects to incorporate versatile expertise in their planning and to avoid the problems resulting from the low bid practice. Often a solution is to strive for an open process where the target-cost of a project is set later after a joint development phase involving an owner and a selected team. Parties enter into a target-cost contract which means risk sharing and leads to taking each other's views into account better than normally. Cost transparency is expected to ensure efficiency in direct costs. Yet, the same approach may not be applicable to service providers’ fees, i.e. overhead and profit. That is why some public owners have resorted to competition where fees are tendered and used in team selection along with capability. In that case, the structuring of fees may have a decisive impact on incentivising the service providers to strive for an efficient target-cost and, eventually, a successful project. This paper aims at examining the appropriateness and feasibility of such an approach in ensuring the efficiency of a project based on the experiences drawn from a unique road tunnel construction project in Finland that adheres to the practice.