Optimal Sharing of Construction Project Outcomes with Downstream Contracting Parties: Principal–Agent Analysis
Publication: Journal of Construction Engineering and Management
Volume 150, Issue 2
Abstract
Sharing of a project’s outcomes drives the contracting parties to closer cooperation. However, subcontracting and sharing with downstream contracting parties (e.g., subcontractor and sub-subcontractor) have received less attention in the construction literature. This paper proposes an optimal multilayer outcome-sharing model for construction contracts between a client and a construction team (e.g., including contractors, subcontractors, and sub-subcontractors), based on existing utility and principal–agent models. A numerical study supports the validity of the proposed model and the paper’s propositions. The findings indicate that optimal effort levels by downstream parties result in cost savings for all contracting parties, promoting fair and efficient outcome sharing. Moreover, the study highlights that contracts with risk-neutral downstream contracting parties lead to the most significant cost-saving for the client. The paper’s contribution lies in establishing a connection between optimal sharing in upstream layers and downstream layers. The modeling approach is original, with no similar models found in the existing literature.
Practical Applications
The model can be utilized by those involved in writing incentive contracts to determine the best approach for sharing project outcomes with downstream parties. The paper sheds new light on the sharing problem in multilayer contracting. During the tendering process, clients, contractors, subcontractors, and others may encounter challenges in negotiating appropriate outcome-sharing contracts. The insights gained from this article will assist them in navigating such negotiations, particularly in cases where the construction project involves a high level of uncertainty.
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Data Availability Statement
Data generated or analyzed during the study are available from the corresponding author by request.
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Published In
Journal of Construction Engineering and Management
Volume 150 • Issue 2 • February 2024
Copyright
© 2023 American Society of Civil Engineers.
History
Received: Feb 14, 2023
Accepted: Sep 20, 2023
Published online: Nov 22, 2023
Published in print: Feb 1, 2024
Discussion open until: Apr 22, 2024
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