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Incentive Contracts for Managing a Project with Uncertain Completion Time

Author

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  • Christopher S. Tang
  • Kairen Zhang
  • Sean X. Zhou

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.

Suggested Citation

  • Christopher S. Tang & Kairen Zhang & Sean X. Zhou, 2015. "Incentive Contracts for Managing a Project with Uncertain Completion Time," Production and Operations Management, Production and Operations Management Society, vol. 24(12), pages 1945-1954, December.
    • Handle: RePEc:bla:popmgt:v:24:y:2015:i:12:p:1945-1954
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    File URL: http://hdl.handle.net/10.1111/poms.2015.24.issue-12
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    Cited by:

    1. Shi Chen & Ted Klastorin & Michael R. Wagner, 2021. "Designing practical coordinating contracts in decentralized projects," Naval Research Logistics (NRL), John Wiley & Sons, vol. 68(2), pages 183-198, March.
    2. Bai, Jiaru & So, Kut C. & Tang, Christopher, 2016. "A queueing model for managing small projects under uncertainties," European Journal of Operational Research, Elsevier, vol. 253(3), pages 777-790.
    3. Qianqian Shi & Jianbo Zhu & Marcel Hertogh & Zhaohan Sheng, 2018. "Incentive Mechanism of Prefabrication in Mega Projects with Reputational Concerns," Sustainability, MDPI, vol. 10(4), pages 1-16, April.
    4. Zhihua Chen & Yanfei Lan & Ruiqing Zhao & Changjing Shang, 2019. "Deadline-based incentive contracts in project management with cost salience," Fuzzy Optimization and Decision Making, Springer, vol. 18(4), pages 451-473, December.

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