A critical study of risk allocation in guaranteed maximum price and target cost contracts in Hong Kong

Both the Guaranteed Maximum Price (GMP) and Target Cost Contracting (TCC) schemes are relatively novel procurement arrangements in the construction market of Hong Kong. Risk allocation is one of the fundamental functions of a construction contract. It is widely accepted to allocate a certain risk to the party best capable to manage such risk, especially in construction which is a risky business. Despite many research studies on GMP/TCC in the western world, those focusing on the risk aspects associated with these procurement forms are rather limited. An empirical questionnaire survey was launched to solicit the perceptions of industrial practitioners in Hong Kong on risk allocation for a total of 34 key risks of GMP/TCC identified from the literature review. The survey results were then cross-referenced to the risk allocation stated under the two standard forms of target cost contracts adopted within the United Kingdom, i.e. Institution of Civil Engineers (ICE) Contract and New Engineering Contract (NEC). The two standard forms of contract are found to be silent in the allocation of 9 risks out of 34. The allocation of 13 out of the remaining 25 risks matches with those stipulated in the standard forms. Moreover, it is indicated that the design-related risks are better to be taken by owners and the construction-related risks are perceived to be allocated to contractors, while physical risks are recommended to be shared or negotiated by both owners and contractors together. The survey findings could serve as a useful reference for desirable risk allocation for future GMP and Target Cost Contracts in construction.