Sample Risk Sharing Compensation System. Using this approach, the key negotiation issues are: 1) the target cost; 2) the normal profit level; 3) the maximum contribution amount (“at risk profit”); 4) the percentage allocation between contractor and architect; and 5) the percentage allocation of cost savings between the owner and design team. The correct balance of these issues varies between specific projects and teams. In general, however, the owner wants to assure that the target cost is below similar projects delivered conventionally and that the maximum contribution amount is large enough to soften a moderate cost overrun.25 The architect, contractor and any subconsultants or subcontractors within the shared risk/profit group want to assure that the 25 One approach to defining these numbers is to determine the appropriate maximum contribution amount and to back calculate the other numbers. For example, if the parties believe that change orders, other than true scope additions, on a typical project is approximately 3 percent and that the range of “reasonably anticipatable” cost outcomes is -5% to +7%, then a maximum contribution amount of 4% would result in a net 3% cost if the +7% outcome occurred. Thus the owner would have an acceptable (but not good) result if a significant overrun occurred, and would have a better than average outcome if the overrun was less. A 4% maximum contribution amount is achievable on many projects, especially if subcontractors and subconsultants are included in the cost sharing participants. target cost is high enough that, if they work collaboratively, there is a real chance they can better the target price. Moreover, they want a percentage of shared savings that is a real incentive and a reasonable limit to the amount of their risk. All parties have a shared interest in getting the numbers right because the correct balance encourages the collaboration that benefits all. This compensation strategy can be varied to accommodate different goals and issues. For example, because the designer has completed most of its work before construction commences, it may not be reasonable, and perhaps not financially feasible, for the designer to wait until construction completes before obtaining any portion of the “at risk” profit. This leads to considering a partial distribution when the design milestone is completed, provided there is strong evidence that the design will be constructed within the target price. The table below provides an example of milestone distributions with ...
