Complexity, Contract Design and Incentive Design in the Construction Management Industry

Abstract

In this paper I examine how one construction management company uses contract design and incentive design to respond to aspects of task complexity and relationship complexity present in its construction projects. In terms of contract design, I find that the company is unable to increase its use of cost-plus pricing when faced with technically complex projects. Instead, the company uses increased pre-execution design modification and price markups when technically complex projects are contracted with fixed-pricing. Further, I find that design modification is only margin-improving when used in projects that are both technically complex and fixed-price and that price markups are only margin-improving when projects are fixed-price. In terms of incentive design, I find that the company provides more qualitative feedback to employees and quantitatively rates employees with less centrality bias (i.e. more dispersed ratings) when employees work on fixed-price projects. Further, when employees work on fixed-price projects, they are granted greater average financial rewards, their financial rewards are relatively more based on input-behaviors (i.e. less based on output-results), and their bonuses, raises and promotions appear to be awarded with more managerial discretion (i.e. are less systematic.)