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Using Nash bargaining to design project management contracts under cost uncertainty

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  • Lippman, Steven A.
  • McCardle, Kevin F.
  • Tang, Christopher S.

Abstract

In the design of procurement contracts, cost sharing, wherein the contractor receives a fixed fee plus a fraction of his cost, is common when the cost for completing the project is uncertain. We determine the best cost-sharing contract between a risk-neutral project manager and a risk-averse contractor when negotiation proceeds in accord with Nash bargaining. We examine the characteristics of the contract when the contractor can invest to reduce the mean and/or the uncertainty of the project cost. We show that cost-plus contracts dominate fixed-price contracts as well as all other cost-sharing contracts. In order to extend our analysis to the case when the value of the project itself is uncertain, we employ the recent method of embedded Nash bargaining. Finally, we generalize our main result by allowing an asymmetric Nash bargaining solution.

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  • 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.
    • Handle: RePEc:eee:proeco:v:145:y:2013:i:1:p:199-207
    DOI: 10.1016/j.ijpe.2013.04.036
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    Cited by:

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    3. Palit, Niladri & Brint, Andrew, 2020. "A win-win supply chain solution using project contracts with bargaining games," Operations Research Perspectives, Elsevier, vol. 7(C).
    4. Luo, Chunlin & Zhou, Xiaoyang & Lev, Benjamin, 2022. "Core, shapley value, nucleolus and nash bargaining solution: A Survey of recent developments and applications in operations management," Omega, Elsevier, vol. 110(C).
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    6. Yigal Gerchak & Eugene Khmelnitsky, 2019. "Bargaining over shares of uncertain future profits," EURO Journal on Decision Processes, Springer;EURO - The Association of European Operational Research Societies, vol. 7(1), pages 55-68, May.
    7. Kerkhove, L.-P. & Vanhoucke, M., 2017. "A parallel multi-objective scatter search for optimising incentive contract design in projects," European Journal of Operational Research, Elsevier, vol. 261(3), pages 1066-1084.
    8. Kerkhove, L.P. & Vanhoucke, M., 2016. "Incentive contract design for projects: The owner׳s perspective," Omega, Elsevier, vol. 62(C), pages 93-114.
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