Aspects of Contractual Incentives and its Application to Japanese Construction Industry

Contractual incentives are a useful tool by which an owner intends to reduce costs primarily. The use of incentives for construction contracts in our country has just begun by the Ministry of Construction through the implementation of value engineering program in bidding. However, there is a lack of understanding on the incentive theory to adopt this tool effectively. Furthermore, there are needs to develop different approaches that are applicable to Japanese construction industry.This research focuses on indirect costs that may significantly affect contractor's profit under current estimating and contract practices in the industry. This paper first shows an example cost analysis using actual cost-control data of a contractor to discuss potential of indirect costs for cost reduction. Then, the ideas of using incentives as an inducement for contractors to perform efficient risk management are discussed to achieve owner's goals.