Project Management Contracts with Delayed Payments

Abstract

When managing projects with considerable uncertainty, such as those arising in construction, defense, and new product development, it is customary for a manufacturer (project manager) to offer contracts under which each supplier (contractor) receives a prespecified payment when she completes her task. However, there are recent cases in which the manufacturer imposes “delayed payment” contracts under which each supplier is paid only when all suppliers have completed their tasks. By considering a model of one manufacturer and n ≥ 2 identical and independent suppliers with exponential completion times, we analyze the impact of both a delayed payment regime and a no-delayed-payment regime on each supplier's effort level and on the manufacturer's net profit in equilibrium. When the suppliers' work rates are unadjustable, we conjecture that the manufacturer is actually worse off under the delayed payment regime. However, when the suppliers' work rates are adjustable, we obtain a different result: the delayed payment regime is more profitable for the manufacturer either when the project revenue is sufficiently small or when the number of suppliers is sufficiently large.

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