Evaluating fixed price incentive contracts

This paper considers choosing between different forms of fixed price incentive contracts. The analysis assumes the underlying probability density function for project costs is triangular. The methods of evaluation considered are expected value, certainty equivalence and stochastic dominance. The latter two methods take into account the typical risk aversion of contractors and clients. The analytical form of project cost and incentive contract adopted offer a robust analysis suitable for a wide variety of practical situations. However, the methods of evaluation described could be applied to other forms of contract and cost distribution.