Incentive Contracts for Managing a Project with Uncertain Completion Time

Christopher S. Tang, Kairen Zhang and Sean X. Zhou

Production and Operations Management, 2015, vol. 24, issue 12, 1945-1954

Abstract: type="main" xml:id="poms12387-abs-0001">

We examine two time-related incentive project management contracts (C1 and C2 contracts) when the manager conducts a reverse auction. Under the C1 contract, the contractor with the lowest bid price wins; however, the manager imposes a linear and symmetric incentive/disincentive for early/late completion according to a pre-specified due date. Under the C2 contract, the winning contractor has the lowest composite score that is based on the quoted price and the quoted due date; however, in addition to the linear and symmetric penalty/incentive, the contractor is subject to an additional penalty for late completion. While the C2 contract is more sophisticated than the C1 contract (in terms of the number of decisions that each party has to make), our analysis reveals that, unless the project is truly urgent, the more complicated C2 contract adds no value to the manager— the simple C1 contract will suffice.

Date: 2015
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