Optimal time-based and cost-based coordinated project contracts with unobservable work rates

H. Dharma Kwon, Steven A. Lippman, Christopher S. Tang

Research output: Contribution to journalArticlepeer-review

Abstract

When managing a project with uncertain completion time and unobservable contractor's work rate, self-interest can create conflicts between the project manager and the contractor leading to actions that reduce the profits of both. We first investigate how the concept of supply contract coordination (i.e., a Nash equilibrium that yields the first-best solution for the entire supply chain) can be applied to project contract management. In our examination of three types of project contracts commonly used in practice, fixed price, time-based (i.e., price depends on the realized project completion time), and cost-based (i.e., price depends on the actual cost), we show that fixed price contracts and cost-plus contracts cannot coordinate a channel. With carefully chosen parameters, however, time-based, cost-sharing can achieve optimal channel coordination.

Original languageEnglish (US)
Pages (from-to)247-254
Number of pages8
JournalInternational Journal of Production Economics
Volume126
Issue number2
DOIs
StatePublished - Aug 2010

Keywords

  • Channel coordination
  • Project contracts
  • Supply contracts

ASJC Scopus subject areas

  • Business, Management and Accounting(all)
  • Economics and Econometrics
  • Management Science and Operations Research
  • Industrial and Manufacturing Engineering

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