Study On Division Of Profit And Vertical Integration Of General Contractor

More than 20 years of practice has proved that the general contracting has various advantages compared with the traditional DBB mode in terms of decreasing the total construction cost and shortening construction cycle. To study the internal profit distribution and to design a reasonable profit distribution mechanism exerts important significance on promoting the project parties to participate in the optimizing design. On the other hand, as for the general contractors with single ability of design or construction, the implementation of vertical integration is a strategy to distribute interests between the contractor and the subcontractor in the long term. Meanwhile, the contractor shall decide to carry out vertical integration or subcontract if the contractor wants to take part in the competition of international general contracting construction market and enhance the competitive power.Against the background that most engineering enterprises in China are of single ability of design or construction, there are two ways to under take general contracting projects: one is that the engineering enterprise with single ability serves as the general contractor and subcontracts the works it is not competent for; the other is that the design entity and the construction company form a joint venture, which acts as the general contractor. This paper has conducted the analysis and investigation for the relevant issues of profit distribution of general contractors and vertical integration based on profit by use of the methods and tools of game theory, contract theory and vertical integration theory on the basis of summarizing the present research situation and exiting problems.As for the first way, i.e. the design entity or the construction company with single ability serves as the general contractor, the general contractor needs to distribute part of the profit of the general contracting project to the subcontractor so as to encourage the subcontractor to participate in the project optimizing design. The model of profit distribution between the general contractor and the subcontractor is thus established, the range of general contracting project profit to be paid to the subcontractor for its participation in the project optimizing design is worked out, and the most favorable profit distribution ratio between the general contractor and the subcontractor is determined.Besides acting independently as the general contractor, the design entity or the construction company may also establish a joint venture for general contracting. Without considering the bidding cost incurred in the early stage of the project and under the presumption that it is the only cooperation between the two parties, the issue of profit distribution between both parties of the joint venture has been studied. It will get the distribution scope and the optimization distribution proportion within the general contractor and subcontractor under the profit of the optimization-design general contract project through analysis and solving the model, and fetches the endeavor degree of the adopted optimization-design project under either designing company or building company as subcontractor. Then, early period bidding cost shall be included in the profit model of a joint venture to figure out how the profit distribution does not affect the latter implementation, the realization degree of optimal design of project, the optimal distribution ratio of the general contracting project profit distribution within the joint venture and the efforts to optimize the project design by members, on the basis of which the further analysis has been done to get the reasonable distribution ration of early period tendering cost among the members of joint venture. Subsequently, repeat the game theory and method to study the profit distribution of the general contractor of a joint venture. The trigger strategy of tit-for-tat and cool have been taken as an example to discuss the strategy selection of Design Company and Building Company in a joint venture respectively and analyze the influence of distribution ration of the project profit for the critical discount rate so as to get the critical discount rate of default of members; under the background of which, the possibility of the members' default has been compared and analyzed.From the view of long-term development, should a general contractor with only single ability of design or construction cultivate the ability it lacks to achieve the vertical integration, or always subcontracts the works it is not competent for? In this Paper, the cost models for the construction industry and general contracting in case of integration and non-integration are established on the basis of the relationship between the upstream enterprises and the downstream enterprises of the industry. It figures out the vertical integration condition of the industry and the general contractor and the affecting factors, and analyzed the impact of keen competition of subcontract to general contractor's influence in vertical integration decision.