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Project Contract Management and a Theory of Organization

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  • Turner, J.R.

Abstract

This paper attempts to develop concepts of project and contract organization to predict the selection of contract type on infrastructure projects. Conventional wisdom is that at low risk fixed price contracts are best, moving to remeasurement and then cost plus as risk increases. We started trying to predict this from a transaction cost perspective, and such an analysis confirmed conventional wisdom. However, it does not fit with current practice. Further, the differences in transaction costs are small compared to differences in contract out-turn cost that occur under the different motivational effects of different contract types. We therefore take a different perspective. We assume the purpose behind a project contract is to create a cooperative project organization, in which all participants, clients and contractors, are motivated to achieve common objectives, their goals are aligned. This analysis confirms modern practice, and shows selection of contract type is related to uncertainty in the project's deliverables, and uncertainty in the process of their delivery. Build only remeasurement contracts are used where uncertainty of both product and process is low. Design and build fixed price contracts are used where uncertainty of the product is low, but the uncertainty in the process of delivery is high. Fixed price contracts should be used where both are high. We extend the analysis to show when the client should be involved in the project organization in an alliance contract, and when they should not, as in a traditional project contract

Suggested Citation

  • Turner, J.R., 2001. "Project Contract Management and a Theory of Organization," ERIM Report Series Research in Management ERS-2001-43-ORG, Erasmus Research Institute of Management (ERIM), ERIM is the joint research institute of the Rotterdam School of Management, Erasmus University and the Erasmus School of Economics (ESE) at Erasmus University Rotterdam.
  • Handle: RePEc:ems:eureri:106
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    File URL: https://repub.eur.nl/pub/106/erimrs20010720094711.pdf
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    References listed on IDEAS

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    1. William M. Dugger, 1996. "The Mechanisms of Governance," Journal of Economic Issues, Taylor & Francis Journals, vol. 30(4), pages 1212-1216, December.
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    Cited by:

    1. Weiping Jiang & Xianbo Zhao & Jian Zuo, 2017. "(Dis)Trust, Control, and Project Success: From a Chinese Project Owner’s Perspective," Sustainability, MDPI, vol. 9(11), pages 1-16, October.
    2. Joshua Steinfeld & Ron Carlee & Kouliga Koala, 2020. "DBFOM Contracting and Public Stewardship in the Norfolk-Portsmouth Elizabeth River Tunnels Public-Private Partnership," Public Organization Review, Springer, vol. 20(1), pages 37-62, March.
    3. Dharma Kwon, H. & Lippman, Steven A. & Tang, Christopher S., 2011. "Sourcing decisions of project tasks with exponential completion times: Impact on operating profits," International Journal of Production Economics, Elsevier, vol. 134(1), pages 138-150, November.
    4. Cezar-Petre SIMION & Stefan Catalin POPA, 2017. "Evolution Of Research In Project Management. An Analysis Of The Research Results Published In The Period 1999-2017," Proceedings of the INTERNATIONAL MANAGEMENT CONFERENCE, Faculty of Management, Academy of Economic Studies, Bucharest, Romania, vol. 11(1), pages 956-964, November.
    5. Ping Yung, 2015. "A new institutional economic theory of project management," Journal of Business Economics and Management, Taylor & Francis Journals, vol. 16(1), pages 228-243, February.
    6. Dharma Kwon, H. & Lippman, Steven A. & Tang, Christopher S., 2010. "Optimal time-based and cost-based coordinated project contracts with unobservable work rates," International Journal of Production Economics, Elsevier, vol. 126(2), pages 247-254, August.
    7. Lippman, Steven A. & McCardle, Kevin F. & Tang, Christopher S., 2013. "Using Nash bargaining to design project management contracts under cost uncertainty," International Journal of Production Economics, Elsevier, vol. 145(1), pages 199-207.
    8. Liu Yang & Anthony Rezitis & Yang Ren, 2022. "How Significant Are the Roles Moral Obligation and Formal Institutions Play in Participatory Irrigation Management?," Agriculture, MDPI, vol. 12(11), pages 1-19, November.

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    More about this item

    Keywords

    alliancing; contract selection; contract type; goal alignment; transaction costs;
    All these keywords.

    JEL classification:

    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L20 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - General
    • M - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics
    • M10 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - General

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