Risk/Reward Compensation Model for Integrated Project Delivery
Keywords:Integrated Project Delivery, Risk Perception, Nash Bargaining Solution, Prospect Theory, 2-Tuple Linguistic Representation
AbstractIn an Integrated Project Delivery (IPD) project, the main participants share risk and reward, a characteristic used to incentivize collaboration as the compensation method. This study aims to propose a specific risk/reward compensation model to highlight the characteristic of IPD. An analysis of the differences between IPD and project alliancing reveals that the compensation strategy can be determined using a cooperative and non-controversial contract in the early stages of a project because of the application of Building Information Modeling and the early stage collocation of the main participants. Therefore, this study proposes the compensation method based on cooperative game theory to determine the risk/reward sharing in the early stages of a project to incentivize the participants and align the goals of all participants. The innovation of our work is to combine risk perception and Nash Bargaining Solution (NBS) in the risk/reward compensation model. It is not easy to measuring the risk borne by participants in the early project stages; thus, this study explores the problem from the perspective of risk perception. The perceived level of risk influences the utility of the participants. The research problem is formulated as an n-person bargaining problem; thus, NBS provides the optimal and fair compensation strategy. Moreover, to overcome the limitation of information loss and reflect the bounded rationality of the participants, 2-tuple linguistic representation and prospect theory are used as complementary methodologies to develop the utility function. This study provides an explicit, comprehensive, and systematic framework for risk/reward allocation practice in an IPD project, which has both theoretical and practical significance.
ECONOMICS OF ENGINEERING DECISIONS