Research On The Selection Of Cost-plus-fee Contracts Based On The Principal-agent Theory

In recent years, construction industry in China develops rapidly with largerinvestment scales, innovation in engineering construction projects and obvious tendencyto larger construction scales. With increasements in complicity of engineering projectsand requirements of technics, contracts for construction projects change from lump-sumcontracts and unit price contracts to mainly cost-plus-fee contracts. The signing ofincentive contracts by proprietors and contractors helps to reach project targets, and alsocost-plus-fee contracts motivate contractors well, so it becomes more and moreimportant to further study cost-plus-fee contracts. At present, there is much foreignstudy on cost-plus-fee contracts, but little study in China.Principal-agent theory marks the most important development of contract theory,and it focus on how to design contractual relationships between principal and agent, andhow to reduce agency cost. Nowadays, the study and application of principal-agenttheory in cost-plus-fee contracts lies mainly on the design of incentive mechanism. Withthe constant development of principal-agent model, cost-plus-fee contracts can be usedto build a principal-agent model in order to make quantitative analysis. Based onprincipal-agent theory, this essay makes a further study on principal-agent model builtby cost-plus-fee contracts.To begin with, this essay elaborates different types of construction engineeringcontracts, and gives detailed introductions on contracts features, risk allocation andapplication conditions, and also gives theoretical base by elaborating development andapplication of principal-agent theory and principal-agent model. Next, this essay studiesrelationship of proprietor and contractor with mature principal-agent theories, and analyses advantages of cost-plus-fee contracts in solving principal-agent problems.Once again, this essay analyses key features of different cost-plus-fee contracts,and studies matching relations between different types of cost-plus-fee contracts anddifferent engineering purchasing patterns. At last, based on expected utility of proprietorand contractor, this essay establishes principal-agent models consisted by cost plus fixedfee contracts, cost plus incentive fee contracts and target cost plus incentive feecontracts. And this essay also calculates utility to proprietor and contractor withdifferent models under different circumstances, and then ranks utilities. Quantitativeanalysis of utilities by different types of cost-plus-fee contracts helps to make moreprecise choices.