The efficient allocation of risk in contracts
The efficient allocation of risk in contracts
This paper considers how project risk should be allocated between clients and contractors, where significant project risk is characterized as uncertainty about project costs requiring explicit attention and policy or behaviour modification.
The risk efficiency of cost reimbursement and fixed price contracts given different degrees of client and contractor risk aversion is considered first, using a novel form of model. Then the potential for efficient risk sharing is considered in a mean-variance framework. The concern in both cases is with clarifying the rationale for conventional wisdom and resolving conflicting rules of thumb. Finally, practical application of the analysis with a mixture of controllable and uncontrollable risks is discussed.
risk allocation, contracting, dominance, utility, decision making
537-552
Chapman, C.B.
a4f4805b-b67d-4c4c-856b-78e01a2c89a0
Ward, S.C.
ac1bf683-4186-44e7-9f5e-4193ee4d03cd
1994
Chapman, C.B.
a4f4805b-b67d-4c4c-856b-78e01a2c89a0
Ward, S.C.
ac1bf683-4186-44e7-9f5e-4193ee4d03cd
Chapman, C.B. and Ward, S.C.
(1994)
The efficient allocation of risk in contracts.
OMEGA - The International Journal of Management Science, 22 (6), .
(doi:10.1016/0305-0483(94)90046-9).
Abstract
This paper considers how project risk should be allocated between clients and contractors, where significant project risk is characterized as uncertainty about project costs requiring explicit attention and policy or behaviour modification.
The risk efficiency of cost reimbursement and fixed price contracts given different degrees of client and contractor risk aversion is considered first, using a novel form of model. Then the potential for efficient risk sharing is considered in a mean-variance framework. The concern in both cases is with clarifying the rationale for conventional wisdom and resolving conflicting rules of thumb. Finally, practical application of the analysis with a mixture of controllable and uncontrollable risks is discussed.
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Published date: 1994
Keywords:
risk allocation, contracting, dominance, utility, decision making
Organisations:
Management
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Local EPrints ID: 35674
URI: http://eprints.soton.ac.uk/id/eprint/35674
ISSN: 0305-0483
PURE UUID: 115cfc87-d230-4f8d-8d27-a206794595d2
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Date deposited: 26 Jun 2006
Last modified: 15 Mar 2024 07:53
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Author:
S.C. Ward
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