Shared risk and reward contracts are becoming increasingly common in construction worldwide. From Integrated Form of Agreements (IFOA) used by Sutter Health in the U.S., to ConsensusDocs 300 and AIA provisions, and the “Project Alliancing” model in Europe and Australia, these agreements aim to align the interests of owners, contractors, architects, and other stakeholders. The core idea is simple: everyone shares in the profits and the losses of a project. This approach supports Integrated Project Delivery (IPD) and Target Value Design (TVD), seeking to improve collaboration, reduce costs, and minimize disputes.
Why Shared Risk Matters
Traditional construction contracts often pit parties against each other, leading to adversarial relationships and wasted resources. Shared risk models address this by fostering early involvement, open communication, and innovation. Research shows that projects using these methods can deliver 15–20% below market price, with fewer cost overruns compared to conventional approaches. However, this isn’t without risk: some projects deplete profit and contingency funds, leaving teams with zero earnings.
This highlights a critical issue: shared risk must be sustainable —meaning owners get value, and contractors make a fair profit. Without both, the model collapses.
How to Make Shared Risk Work
Here are key strategies for improving the viability of shared risk and reward in the Architecture, Engineering, and Construction (AEC) industry:
1. Align Objectives from the Start
The entire team, including the owner, must agree on delivering value while ensuring fair profits for all participants. The owner must genuinely support the economic success of service providers, and contractors must prioritize customer value. Only projects that achieve both financial success and meaningful results are truly successful.
2. Anchor Costs to the Owner’s Business Case
View the project as a business investment. Service providers must assess feasibility based on market costs and the owner’s budget. If these don’t align, the team must either walk away or accept the risk of working without profit. Transparency is crucial: owners must share their cost constraints upfront.
3. Clearly Define Scope at Risk vs. Fixed Price
Not every aspect of a project needs to be part of the shared risk pool. Typically, 80–90% is at-risk, with the remainder fixed-price. For those in the pool, clearly document what is included. Changes to this scope must trigger adjustments to the target cost. Define which owner-driven changes are included in the risk pool and which are not, to avoid disputes.
4. Engage Experts Early
Involve craft workers and supervisors during the design phase. Their practical insights can prevent unconstructable designs. Ensure owner representatives have real decision-making power to avoid delays. Early input from those who will build the project is invaluable.
5. Choose the Right Team
Shared risk requires trust, transparency, and a collaborative culture. Not every company or individual is suited for this model. Select participants carefully, prioritizing those with high coordination needs and a major impact on project success.
6. Shared Governance is Key
Profit and losses are tied to collective performance. All parties in the risk pool must share responsibility for managing the project. It’s not just the architect or contractor’s job; it requires shared leadership.
7. Use Transparent Metrics
Shared risk demands new, transparent KPIs. The team must know the financial position at all times: profits, cash flow, burn rates, and future expenses. Share manpower curves, productivity rates, and lessons learned to ensure alignment and proactive problem-solving.
Ultimately, shared risk and reward offers a pathway to more efficient, collaborative construction. By prioritizing sustainability, transparency, and alignment, the industry can unlock its full potential.
