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Optimal Incentive Contracts in Project Management

Author

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  • Milind Dawande
  • Ganesh Janakiraman
  • Anyan Qi
  • Qi Wu

Abstract

Motivated by the ever‐growing complexity of projects and the consistent trend of outsourcing of individual tasks or components, we study the contract‐design problem faced by a firm (or organization) for executing a project consisting of multiple tasks, each of which is performed by an individual contractor whose efforts (work‐rates) are not observable. While the contractors incur costs continuously during the course of their tasks, the firm realizes its reward or revenue only when the entire project is (i.e., all tasks are) completed. The firm’s contract‐design decisions and the contractors’ effort‐level decisions are all governed by the goals of maximizing the respective party’s expected discounted profit. We adopt the framework in Kwon et al. (2010a) and Chen et al. (2015), and derive optimal contracts for both parallel projects (tasks can be performed in parallel) and sequential projects (tasks have to be performed sequentially). The simplicity of the contracts we obtain suggests that there is potential for designing profit‐maximizing contracts without paying a price in terms of contract complexity.

Suggested Citation

  • Milind Dawande & Ganesh Janakiraman & Anyan Qi & Qi Wu, 2019. "Optimal Incentive Contracts in Project Management," Production and Operations Management, Production and Operations Management Society, vol. 28(6), pages 1431-1445, June.
    • Handle: RePEc:bla:popmgt:v:28:y:2019:i:6:p:1431-1445
    DOI: 10.1111/poms.12997
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    Cited by:

    1. Hua Xiao & Tong Xu & Huyang Xu & Yong Lin & Manjing Sun & Manyi Tan, 2022. "Production Capacity Reserve Strategy of Emergency Medical Supplies: Incentive Model for Nonprofit Organizations," Sustainability, MDPI, vol. 14(18), pages 1-16, September.
    2. Suresh P. Sethi & Sushil Gupta & Vipin K. Agrawal & Vijay K. Agrawal, 2022. "Nobel laureates’ contributions to and impacts on operations management," Production and Operations Management, Production and Operations Management Society, vol. 31(12), pages 4283-4303, December.
    3. 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.
    4. Ju Myung Song & Yao Zhao & Xin Xu, 2021. "Incentives and Gaming in Collaborative Projects Under Risk-Sharing Partnerships," Manufacturing & Service Operations Management, INFORMS, vol. 23(2), pages 453-470, March.
    5. Chen, Zhenzhen & Zhu, Wanshan & Crama, Pascale, 2023. "Subcontracting and rework cost sharing in engineering–procurement–construction projects," International Journal of Production Economics, Elsevier, vol. 262(C).
    6. Shivam Gupta & Anupam Agrawal & Jennifer K. Ryan, 2023. "Agile contracting: Managing incentives under uncertain needs," Production and Operations Management, Production and Operations Management Society, vol. 32(3), pages 972-988, March.

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