Appropriate Types of Payments in Construction Contracts Based on Agency Theory Parameters
Publication: Journal of Construction Engineering and Management
Volume 148, Issue 1
Abstract
Choosing between different compensation strategies is one of the major concerns of owners in construction contracts. This paper is aimed at examining the choice between behavior-based and outcome-based payment types through the views of practitioners from construction projects with variables defined by agency theory. The study adopts the analysis of data through the Delphi technique supported by factor analysis and multinomial logistic regressions to test the paper hypotheses. The paper shows that in projects with a high level of contractor risk aversion, outcome uncertainty, task programmability, and information systems, cost-plus-fee payment is more attractive than lump-sum payment. Conversely, the paper shows that in projects with a high level of goal conflict and outcome measurability, lump-sum payment is more attractive than cost-plus-fee payment. The results demonstrate the practical usefulness of agency theory in the arena of construction management. The contribution of this paper lies in providing insights into choosing an appropriate contract payment type based on agency theory parameters.
Get full access to this article
View all available purchase options and get full access to this article.
Data Availability Statement
Data generated or analyzed during the study are available from the corresponding author by request.
References
Abdulhafedh, A. 2017. “Incorporating the multinomial logistic regression in vehicle crash severity modeling: A detailed overview.” J. Transp. Technol. 7 (3): 279–303. https://doi.org/10.4236/jtts.2017.73019.
Alaloul, W., M. Liew, and N. Zawawi. 2015. “Delphi technique procedures: A new perspective in construction management research.” Appl. Mech. Mater. 802 (Mar): 661–667. https://doi.org/10.4028/www.scientific.net/AMM.802.661.
Ameyaw, E. E., Y. Hu, M. Shan, A. P. Chan, and Y. Le. 2016. “Application of Delphi method in construction engineering and management research: A quantitative perspective.” J. Civ. Eng. Manage. 22 (8): 991–1000. https://doi.org/10.3846/13923730.2014.945953.
Anderson, E. 1985. “The salesperson as outside agent or employee: A transaction cost analysis.” Marketing Sci. 4 (3): 234–254. https://doi.org/10.1287/mksc.4.3.234.
Atkinson, R., L. Crawford, and S. Ward. 2006. “Fundamental uncertainties in projects and the scope of project management.” Int. J. Project Manage. 24 (8): 687–698. https://doi.org/10.1016/j.ijproman.2006.09.011.
Badenfelt, U. 2008. “The selection of sharing ratios in target cost contracts.” Eng. Constr. Archit. Manage. 15 (1): 54–65. https://doi.org/10.1108/09699980810842061.
Baiman, S. 1990. “Agency research in managerial accounting: A second look.” Account. Organ. Soc. 15 (4): 341–371. https://doi.org/10.1016/0361-3682(90)90023-N.
Bajari, P., and S. Tadelis. 2001. “Incentives versus transaction costs: A theory of procurement contracts.” Rand J. Econ. 32 (3): 387–407. https://doi.org/10.2307/2696361.
Baker, G. P. 1992. “Incentive contracts and performance measurement.” J. Political Econ. 100 (3): 598–614. https://doi.org/10.1086/261831.
Berends, T. C. 2000. “Cost plus incentive fee contracting—Experiences and structuring.” Int. J. Project Manage. 18 (3): 165–171. https://doi.org/10.1016/S0263-7863(99)00076-9.
Carmichael, D. G. 2000. Contracts and international project management. London: CRC Press.
Ceric, A. 2014. “Strategies for minimizing information asymmetries in construction projects: Project managers’ perceptions.” J. Bus. Econ. Manage. 15 (3): 424–440. https://doi.org/10.3846/16111699.2012.720601.
Cimellaro, G. P., M. Malavisi, and S. Mahin. 2018. “Factor analysis to evaluate hospital resilience.” J. Risk Uncertainty Eng. Syst. 4 (1): 04018002. https://doi.org/10.1061/AJRUA6.0000952.
Coughlan, A. T., and S. K. Sen. 1989. “Salesforce compensation: Theory and managerial implications.” Marketing Sci. 8 (4): 324–342. https://doi.org/10.1287/mksc.8.4.324.
Cox, R. F., R. R. Issa, and A. Frey. 2006. “Proposed subcontractor-based employee motivational model.” J. Constr. Eng. Manage. 132 (2): 152–163. https://doi.org/10.1061/(ASCE)0733-9364(2006)132:2(152).
Cuevas-Rodriguez, G., L. R. Gomez-Mejia, and R. M. Wiseman. 2012. “Has agency theory run its course? Making the theory more flexible to inform the management of reward systems.” Corporate Governance: Int. Rev. 20 (6): 526–546. https://doi.org/10.1111/corg.12004.
Dobson, A. J. 1993. “Moral hazard, adverse selection and reputation: A synthesis.” Managerial Finance 19 (6): 2–8. https://doi.org/10.1108/eb013725.
Eisenhardt, K. M. 1985. “Control: Organizational and economic approaches.” Manage. Sci. 31 (2): 134–149. https://doi.org/10.1287/mnsc.31.2.134.
Eisenhardt, K. M. 1988. “Agency-and institutional-theory explanations: The case of retail sales compensation.” Acad. Manage. J. 31 (3): 488–511. https://doi.org/10.5465/256457.
Eisenhardt, K. M. 1989. “Agency theory: An assessment and review.” Acad. Manage. Rev. 14 (1): 57–74. https://doi.org/10.2307/258191.
Ekanayake, S. 2004. “Agency theory, national culture and management control systems.” J. Am. Acad. Bus. 4 (1–2): 49–54.
Elhag, T. M. S., A. H. Boussabaine, and T. M. A. Ballal. 2005. “Critical determinants of construction tendering costs: Quantity surveyors’ standpoint.” Int. J. Project Manage. 23 (7): 538–545. https://doi.org/10.1016/j.ijproman.2005.04.002.
Ferraro, P. J. 2008. “Asymmetric information and contract design for payments for environmental services.” Ecol. Econ. 65 (4): 810–821. https://doi.org/10.1016/j.ecolecon.2007.07.029.
Frinsdorf, O., J. Zuo, and B. Xia. 2014. “Critical factors for project efficiency in a defence environment.” Int. J. Project Manage. 32 (5): 803–814. https://doi.org/10.1016/j.ijproman.2013.10.008.
Geraghty, D., and M. O’Mahony. 2016. “Urban noise analysis using multinomial logistic regression.” J. Transp. Eng. 142 (6): 04016020. https://doi.org/10.1061/(ASCE)TE.1943-5436.0000843.
Gidado, K. I. 1996. “Project complexity: The focal point of construction production planning.” Constr. Manage. Econ. 14 (3): 213–225. https://doi.org/10.1080/014461996373476.
Hallowell, M. R., and J. A. Gambatese. 2009. “Qualitative research: Application of the Delphi method to CEM research.” J. Constr. Eng. Manage. 136 (1): 99–107. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000137.
Hartono, B., S. R. Sulistyo, P. P. Praftiwi, and D. Hasmoro. 2014. “Project risk: Theoretical concepts and stakeholders’ perspectives.” Int. J. Project Manage. 32 (3): 400–411. https://doi.org/10.1016/j.ijproman.2013.05.011.
Heiko, A. 2012. “Consensus measurement in Delphi studies: Review and implications for future quality assurance.” Technol. Forecasting Social Change 79 (8): 1525–1536. https://doi.org/10.1016/j.techfore.2012.04.013.
Hosseinian, S. M., and D. G. Carmichael. 2013a. “Optimal gainshare/painshare in alliance projects.” J. Oper. Res. Soc. 64 (8): 1269–1278. https://doi.org/10.1057/jors.2012.146.
Hosseinian, S. M., and D. G. Carmichael. 2013b. “Optimal incentive contract with risk-neutral contractor.” J. Constr. Eng. Manage. 139 (8): 899–909. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000663.
Hosseinian, S. M., and D. G. Carmichael. 2014a. “An optimal target cost contract with a risk neutral owner.” Eng. Constr. Archit. Manage. 21 (5): 586–604. https://doi.org/10.1108/ECAM-01-2013-0003.
Hosseinian, S. M., and D. G. Carmichael. 2014b. “Optimal sharing arrangement for multiple project outcomes.” J. Financial Manage. Property Constr. 19 (3): 264–280. https://doi.org/10.1108/JFMPC-09-2013-0038.
Hosseinian, S. M., and D. G. Carmichael. 2016. “Optimal outcome sharing with a consortium of contractors.” J. Civ. Eng. Manage. 22 (5): 655–665. https://doi.org/10.3846/13923730.2014.914086.
Hosseinian, S. M., E. Farahpour, and D. G. Carmichael. 2020a. “An optimum multiple outcomes sharing model with multiple risk-averse agents.” Eng. Constr. Archit. Manage. 2020 (Nov): 12. https://doi.org/10.1108/ECAM-03-2020-0194.
Hosseinian, S. M., E. Farahpour, and D. G. Carmichael. 2020b. “Optimum outcome-sharing construction contracts with multiagent and multioutcome arrangements.” J. Constr. Eng. Manage. 146 (7): 04020067. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001862.
Jaafari, A. 2001. “Management of risks, uncertainties and opportunities on projects: Time for a fundamental shift.” Int. J. Project Manage. 19 (2): 89–101. https://doi.org/10.1016/S0263-7863(99)00047-2.
Jensen, M. C., and W. H. Meckling. 1976. “Theory of the firm: Managerial behavior, agency costs and ownership structure.” J. Financial Econ. 3 (4): 305–360. https://doi.org/10.1016/0304-405X(76)90026-X.
Jiang, F., T. Liu, H. Zhou, J. J. Rakofsky, H. Liu, Y. Liu, and Y. L. Tang. 2019. “Developing medical record-based, healthcare quality indicators for psychiatric hospitals in China: A modified Delphi-analytic hierarchy process study.” Int. J. Qual. Health Care 31 (10): 733–740.
Koksal, A., and D. Arditi. 2004. “Predicting construction company decline.” J. Constr. Eng. Manage. 130 (6): 799–807. https://doi.org/10.1061/(ASCE)0733-9364(2004)130:6(799).
Kyriazos, T. A. 2018. “Applied psychometrics: Sample size and sample power considerations in factor analysis (EFA, CFA) and SEM in general.” Psychology 9 (8): 2207–2230. https://doi.org/10.4236/psych.2018.98126.
Lahdenpera, P. 2010. “Conceptualizing a two-stage target-cost arrangement for competitive cooperation.” Constr. Manage. Econ. 28 (7): 783–796.
Lechler, T. G., B. H. Edington, and T. Gao. 2012. “Challenging classic project management: Turning project uncertainties into business opportunities.” Project Manage. J. 43 (6): 59–69. https://doi.org/10.1002/pmj.21304.
Ling, F. Y. Y., and M. Liu. 2004. “Using neural network to predict performance of design-build projects in Singapore.” Build. Environ. 39 (10): 1263–1274. https://doi.org/10.1016/j.buildenv.2004.02.008.
Liu, J., and G. Ma. 2020. “Study on incentive and supervision mechanisms of technological innovation in megaprojects based on the principal-agent theory.” Eng. Constr. Archit. Manage. 2020 (Aug): 25. https://doi.org/10.1108/ECAM-03-2020-0163.
Love, P. E. D., P. R. Davis, R. Chevis, and D. J. Edwards. 2011. “Risk/reward compensation model for civil engineering infrastructure alliance projects.” J. Constr. Eng. Manage. 137 (2): 127–136. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000263.
Luo, L., Q. He, J. Xie, D. Yang, and G. Wu. 2016. “Investigating the relationship between project complexity and success in complex construction projects.” J. Manage. Eng. 33 (2): 04016036. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000471.
MacCallum, R. C., K. F. Widaman, K. J. Preacher, and S. Hong. 2001. “Sample size in factor analysis: The role of model error.” Multivariate Behav. Res. 36 (4): 611–637. https://doi.org/10.1207/S15327906MBR3604_06.
Matsunaga, M. 2010. “How to factor-analyze your data right: Do’s, don’ts, and how-to’s.” Int. J. Psychol. Res. 3 (1): 97–110. https://doi.org/10.21500/20112084.854.
Müller, R., and J. R. Turner. 2005. “The impact of principal–agent relationship and contract type on communication between project owner and manager.” Int. J. Project Manage. 23 (5): 398–403. https://doi.org/10.1016/j.ijproman.2005.03.001.
Mundfrom, D. J., D. G. Shaw, and T. L. Ke. 2005. “Minimum sample size recommendations for conducting factor analyses.” Int. J. Testing 5 (2): 159–168. https://doi.org/10.1207/s15327574ijt0502_4.
Ndihokubwayo, R., G. Crafford, and F. Buys. 2014. “Model for setting priority construction project objectives aligned with monetary incentives.” Acta Structilia 21 (1): 79–116.
Ochieng, E. G., and A. D. F. Price. 2010. “Managing cross-cultural communication in multicultural construction project teams: The case of Kenya and UK.” Int. J. Project Manage. 28 (5): 449–460. https://doi.org/10.1016/j.ijproman.2009.08.001.
Osipova, E. 2014. “Establishing cooperative relationships and joint risk management in construction projects: Agency theory perspective.” J. Manage. Eng. 31 (6): 05014026. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000346.
Oyedele, L. O. 2010. “Sustaining architects’ and engineers’ motivation in design firms.” Eng. Constr. Archit. Manage. 17 (2): 180–196. https://doi.org/10.1108/09699981011024687.
Palaneeswaran, E., and M. M. Kumaraswamy. 2000. “Contractor selection for design/build projects.” J. Constr. Eng. Manage. 126 (5): 331–339. https://doi.org/10.1061/(ASCE)0733-9364(2000)126:5(331).
Peng, C. Y. J., K. L. Lee, and G. M. Ingersoll. 2002. “An introduction to logistic regression analysis and reporting.” J. Educ. Res. 96 (1): 3–14. https://doi.org/10.1080/00220670209598786.
Pheng, L. S., and Q. T. Chuan. 2006. “Environmental factors and work performance of project managers in the construction industry.” Int. J. Project Manage. 24 (1): 24–37. https://doi.org/10.1016/j.ijproman.2005.06.001.
Puddicombe, M. S. 2009. “Why contracts: Evidence.” J. Constr. Eng. Manage. 135 (8): 675–682. https://doi.org/10.1061/(ASCE)0733-9364(2009)135:8(675).
Reimann, C., P. Filzmoser, and R. G. Garrett. 2002. “Factor analysis applied to regional geochemical data: Problems and possibilities.” Appl. Geochem. 17 (3): 185–206. https://doi.org/10.1016/S0883-2927(01)00066-X.
Sakka, O., H. Barki, and L. Cote. 2016. “Relationship between the interactive use of control systems and the project performance: The moderating effect of uncertainty and equivocality.” Int. J. Project Manage. 34 (3): 508–522. https://doi.org/10.1016/j.ijproman.2016.01.001.
Sapnas, K. G., and R. A. Zeller. 2002. “Minimizing sample size when using exploratory factor analysis for measurement.” J. Nursing Meas. 10 (2): 135–154. https://doi.org/10.1891/jnum.10.2.135.52552.
Schieg, M. 2008. “Strategies for avoiding asymmetric information in construction project management.” J. Bus. Econ. Manage. 9 (1): 47–51. https://doi.org/10.3846/1611-1699.2008.9.47-51.
Senaratne, S., and M. Ruwanpura. 2016. “Communication in construction: A management perspective through case studies in Sri Lanka.” Archit. Eng. Des. Manage. 12 (1): 3–18. https://doi.org/10.1080/17452007.2015.1056721.
Sharma, A. 1997. “Professional as agent: Knowledge asymmetry in agency exchange.” Acad. Manage. Rev. 22 (3): 758–798. https://doi.org/10.2307/259412.
Sourani, A., and M. Sohail. 2015. “The Delphi method: Review and use in construction management research.” Int. J. Constr. Educ. Res. 11 (1): 54–76. https://doi.org/10.1080/15578771.2014.917132.
Stroh, L. K., J. M. Brett, J. P. Baumann, and A. H. Reilly. 1996. “Agency theory and variable pay compensation strategies.” Acad. Manage. J. 39 (3): 751–767. https://doi.org/10.5465/256663.
Suprapto, M., H. L. Bakker, H. G. Mooi, and M. J. Hertogh. 2016. “How do contract types and incentives matter to project performance?” Int. J. Project Manage. 34 (6): 1071–1087. https://doi.org/10.1016/j.ijproman.2015.08.003.
Trost, S. M., and G. D. Oberlender. 2003. “Predicting accuracy of early cost estimates using factor analysis and multivariate regression.” J. Constr. Eng. Manage. 129 (2): 198–204. https://doi.org/10.1061/(ASCE)0733-9364(2003)129:2(198).
Turner, J. R., and S. J. Simister. 2001. “Project contract management and a theory of organization.” Int. J. Project Manage. 19 (8): 457–464. https://doi.org/10.1016/S0263-7863(01)00051-5.
Uwakweh, B. O. 2006. “Motivational climate of construction apprentice.” J. Constr. Eng. Manage. 132 (5): 525–532. https://doi.org/10.1061/(ASCE)0733-9364(2006)132:5(525).
Winch, G. 1989. “The construction firm and the construction project: A transaction cost approach.” Constr. Manage. Econ. 7 (4): 331–345. https://doi.org/10.1080/01446198900000032.
Xia, B., and A. P. Chan. 2012. “Measuring complexity for building projects: A Delphi study.” Eng. Constr. Archit. Manage. 19 (1): 7–24. https://doi.org/10.1108/09699981211192544.
Xiang, P., J. Zhou, X. Zhou, and K. Ye. 2012. “Construction project risk management based on the view of asymmetric information.” J. Constr. Eng. Manage. 138 (11): 1303–1311. https://doi.org/10.1061/(ASCE)CO.1943-7862.0000548.
Yong, A. G., and S. Pearce. 2013. “A beginner’s guide to factor analysis: Focusing on exploratory factor analysis.” Tutorials Quant. Methods Psychol. 9 (2): 79–94. https://doi.org/10.20982/tqmp.09.2.p079.
Zhang, X. 2006. “Factor analysis of public clients’ best-value objective in public–privately partnered infrastructure projects.” J. Constr. Eng. Manage. 132 (9): 956–965. https://doi.org/10.1061/(ASCE)0733-9364(2006)132:9(956).
Zhu, J., M. Hertogh, J. Zhang, Q. Shi, and Z. Sheng. 2020. “Incentive mechanisms in mega project-risk management considering owner and insurance company as principals.” J. Constr. Eng. Manage. 146 (10): 04020120. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001915.
Zhu, J., and A. Mostafavi. 2017. “Discovering complexity and emergent properties in project systems: A new approach to understanding project performance.” Int. J. Project Manage. 35 (1): 1–12. https://doi.org/10.1016/j.ijproman.2016.10.004.
Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 148 • Issue 1 • January 2022
Copyright
© 2021 American Society of Civil Engineers.
History
Received: Feb 26, 2021
Accepted: Oct 6, 2021
Published online: Nov 10, 2021
Published in print: Jan 1, 2022
Discussion open until: Apr 10, 2022
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.
Cited by
- S. Mahdi Hosseinian, Amirhomayoun Jaberi, Optimal Sharing of Construction Project Outcomes with Downstream Contracting Parties: Principal–Agent Analysis, Journal of Construction Engineering and Management, 10.1061/JCEMD4.COENG-13652, 150, 2, (2024).
- S. Mahdi Hosseinian, Mehran Tavakoli, Markets, Hierarchies, or Hybrids as Alternative Governance Structures in Construction Contracts: Transaction Cost Economics Analysis, Journal of Construction Engineering and Management, 10.1061/(ASCE)CO.1943-7862.0002426, 149, 1, (2023).