Risk perception in performance based contracts and the influence of experience

Purpose - In performance-based contracting (PBC), the provider is paid according to outcomes for its customer, and therefore assumes responsibility for customer risks. Previous studies have revealed that risk exposure is a fundamental influencing factor. Thus, the purpose of this paper is to analyze how previous experience with PBC influences the perception of risks. Design/methodology/approach - This research is based on a cross-industry study. Factor analysis and discriminant analysis are used to reveal to what extent experience influences PBC risk factors. Findings - It is confirmed that risk perception differs significantly according to previous PBC experience. Thus, significant learning effects are identified in the PBC context. Research limitations/implications - Experiential learning in PBC can explain entry barriers to PBC faced by new buyers with low levels of experience. Although the internal validity of the sample is high, as all analyzed cases represent PBC buying companies, there are limitations related to external validity. Practical implications - To manage risks this study provides a structure (12 risks, 3 aggregated factors), which could be used for risk evaluation and strategic and operative risk management. Other implications recommend, e.g., to collaborate with a PBC “veteran” when entering into PBC, as this boosts the level of PBC-related experience. Originality/value - The findings of this study contribute to identifying PBC risks through the explorative statistical assessment of these PBC risk factors.