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Contractor’s risk premium in design & build construction contracts
DOI:
https://doi.org/10.24425/ace.2025.156171Abstract
The article is based on data about 349 orders for road construction in Poland. The unit prices (per one kilometer of roads) are compared, arising from the following two types of orders: design-bid-build (DBB) and design & build (D&B). As the exact list of construction works, as well as, the precise number of works is unknown before the contract is signed, the contractor’s risk is higher. The probability of underpricing the offer in the case of D&B orders is higher than that of DBB orders. It is assumed that the contractors, to avoid the potential loss (if the offer is underpriced), raise the value of their offers more than in the case of DBB types of orders. This increase in offer price is usually named risk premium. The averaged unit prices of the roads of the same kind ordered as DBB are compared to D&B orders. To find the risk premium, to the values of DBB orders, the prices of the designs are added. This made the scope of the DBB and D&B orders the same i.e. able to compare. It is discovered that the average unit prices for DBB orders are higher than for D&B orders for four groups of orders, so the risk premium can’t be calculated there. For the other two groups of orders, the risk premium is 19% and 49% of the total value of the DBB order i.e. value of the design plus the value of construction works ordered.References
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