Incentivising project performance in the construction of new facilities : Utilising the earned value‐based method

Purpose – The purpose of the paper is to outline a method for reporting project performance that can be used to provide incentives to both clients and contractors to share risks and opportunities. Design/methodology/approach – The conceptual foundation of the paper is two‐fold: firstly, a review of the literature highlights the limitations of fixed price, fixed unit price and variable (fee for service) type contracts and hence the need for contracts that incentivise project clients and contractors to act in mutually beneficial ways; secondly, the earned‐value method (EVM) is discussed as a means of reporting project progress via a single value‐based metric that is applicable to both client and contractor. The integrating of these two elements provides the basis for the method for reporting project performance described in this paper. Findings – The paper presents the co‐operative incentivised negotiation budget (COIN). The COIN budget uses the concept of the variable (fee for service) type contract. In addition, it utilises the EVM to report project progress in a simple, easy‐to‐understand manner that enables both parties to share in the beneficial outcomes of better than planned performance and to share in the negative results of under‐performance. Research limitations/implications – This paper is conceptual and, although reporting elements of best practice, further research is needed in the following areas: firstly, the benefits, costs and limitations of, and the barriers to, using EVM‐based approaches in projects in general, and facilities projects in particular; secondly, the effectiveness of incentivising contracts in terms of addressing issues that lead to poor performance, such as poor communication and lack of trust between the parties. Practical implications – The COIN budget is a means by which the client and contractor can easily monitor performance in terms of the value earned in providing the agreed project deliverables. Whilst enabling the contractor to earn a cost plus margin, it enables both parties to have a common goal through the sharing of the positive and negative consequences associated with project opportunities and risks. Originality/value – The paper makes an original contribution by integrating elements of best practice in the areas of contract selection and monitoring of project performance.