Optimal time-based and cost-based contracts in construction projects under asymmetric information
Abstract
A project owner (principal) delegates a project to a contractor (agent). Because the contractor has construction experience, he has private information about the project’s expected completion time. Besides, the contractor can exert an unobservable effort to shorten the completion time. Under an asymmetric information setting, we provide the optimal time-based contract and the optimal cost-based contract, both of which consists of one payment scheme. Additionally, we consider a menu of time-based contracts that consists of a series of contracts. By comparing three contracts, we demonstrate that the owner has a preference for the menu of time-based contracts over the other two. The pooling time-based contract is superior to the pooling cost-based contract. We also find that the social welfare under the pooling time-based contract is lower than under the menu of time-based contracts if the daily operating cost is low but it may be higher than under the menu of time-based contracts if the daily operating cost is high. For the pooling cost-based contract, whether it is better than the previous two contracts depend greatly on the proportion of cost borne by the contractor and the daily operating cost.
Keyword : construction project management, time-based contract, cost-based contract, principal-agent model
How to Cite
Shi, G., Tong, J., Chen, Z., & Wang, Y. (2025). Optimal time-based and cost-based contracts in construction projects under asymmetric information. Journal of Civil Engineering and Management, 31(4), 299–317. https://doi.org/10.3846/jcem.2025.23318
This work is licensed under a Creative Commons Attribution 4.0 International License.
References
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Sambasivan, M., & Soon, Y. W. (2007). Causes and effects of delays in Malaysian construction industry. International Journal of Project Management, 25(5), 517–526. https://doi.org/10.1016/j.ijproman.2006.11.007
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Sweis, G. J. (2013). Factors affecting time overruns in public construction projects: The case of Jordan. International Journal of Business and Management, 8(23), 120–129. https://doi.org/10.5539/ijbm.v8n23p120
Wang, W., Jin, X., Tan, Z., Sun, H., & Wu, J. (2022). Modeling the effects of government subsidy and regulation on BOT transport project contract design within contractible service quality. Transportation Research Part E: Logistics and Transportation Review, 164, 1366–5545. https://doi.org/10.1016/j.tre.2022.102820
Zeng, W., Wang, H., Li, H., Zhou, H., Wu, P., & Le, Y. (2019). Incentive mechanisms for supplier development in mega construction projects. IEEE Transaction on Engineering Management, 66(2), 252–265. https://doi.org/10.1109/TEM.2018.2808169
Zhang, Q., Chen, J., & Chen, B. (2021). Information strategy in a supply chain under asymmetric customer returns information. Transportation Research Part E: Logistics and Transportation Review, 155, Article 102511. https://doi.org/10.1016/j.tre.2021.102511
Zhao, S., You, Z., & Zhu, Q. (2022). Effects of asymmetric cost information on collection outsourcing of used products for remanufacturing. Transportation Research Part E: Logistics and Transportation Review, 162, Article 102729. https://doi.org/10.1016/j.tre.2022.102729
Assaf, S. A., & Al-Hejji, S. (2006). Causes of delay in large construction projects. International Journal of Project Management, 24(4), 349–357. https://doi.org/10.1016/j.ijproman.2005.11.010
Bayiz, M., & Corbett, C. J. (2005). Coordination and incentive contracts in project management under asymmetric information. SSRN. https://doi.org/10.2139/ssrn.914227
Berends, T. C. (2000). Cost plus incentive fee contracting experiences and structuring. International Journal of Project Management, 18, 165–171. https://doi.org/10.1016/S0263-7863(99)00076-9
Boarnet, M. G. (1998). Business losses, transportation damage and the Northridge earthquake. Journal of Transportation and Statistics, 1(2), 49–64.
Bower, D., Ashby, G., Gerald, K., & Smyk, W. (2002). Incentive mechanisms for project success. Journal of Management in Engineering, 18(1), 37–43. https://doi.org/10.1061/(ASCE)0742-597X(2002)18:1(37)
Cachon, G. P., & Lariviere, M. A. (2001). Contracting to assure supply: How to share demand forecasts in a supply chain. Management Science, 47(5), 629–646. https://doi.org/10.1287/mnsc.47.5.629.10486
Chen, F. (2005). Salesforce incentives, market information, and production/inventory planning. Management Science, 51(1), 60–75. https://doi.org/10.1287/mnsc.1040.0217
Chen, T., Klastorin, T., & Wagner, M. R. (2015). Incentive contracts in serial stochastic projects. Manufacturing and Service Operations Management, 17(3), 273–426. https://doi.org/10.1287/msom.2015.0528
Chen, Z., Lan, Y., Li, X., Shang, C., & Shen, Q. (2022). Quality management by warranty contract under dual asymmetric information. IEEE Transactions on Engineering Management, 69(4), 1022–1036. https://doi.org/10.1109/TEM.2020.2972563
Dai, T., & Jerath, K. (2019). Salesforce contracting under uncertain demand and supply: Double moral hazard and optimality of smooth contracts. Marketing Science, 38(4), 733–912. https://doi.org/10.1287/mksc.2019.1171
Gonik, J. (1978). Tie salesmen’s bonuses to their forecasts. Harvard Business Review, 56, 116–122.
Ha, A. Y. (2001). Supplier-buyer contracting: Asymmetric cost information and cutoff level policy for buyer participation. Naval Research Logistics, 48(1), 41–64. 3.0.CO;2-M> https://doi.org/10.1002/1520-6750(200102)48:1<41::AID-NAV3>3.0.CO;2-M
Hou, C., Lu, M., Deng, T., & Shen, Z. (2021). Coordinating project outsourcing through bilateral contract negotiations. Manufacturing and Service Operations Management, 23(6), 1543–1561. https://doi.org/10.1287/msom.2020.0911
Jiang, Z., He, N., & Huang, S. (2021). Government penalty provision and contracting with asymmetric quality information in a bioenergy supply chain. Transportation Research Part E: Logistics and Transportation Review, 154, 1366–5545. https://doi.org/10.1016/j.tre.2021.102481
Jørgensen, M., Mohagheghi, P., & Grimstad, S. (2017). Direct and indirect connections between type of contract and software project outcome. International Journal of Project Management, 35(8), 1573–1586. https://doi.org/10.1016/j.ijproman.2017.09.003
Kwon, H. D., Lippman, S. A., & Tang, C. S. (2010). Optimal time-based and cost-based coordinated project contracts with unobservable work rates. International Journal of Production Economics, 126(2), 247–254. https://doi.org/10.1016/j.ijpe.2010.03.013
Majid, M., & Mccaffer, R. (1998). Factors of non-excusable delays that influence contractors’ performance. Journal of Management in Engineering, 14(3), 42–49. https://doi.org/10.1061/(ASCE)0742-597X(1998)14:3(42)
Manavazhi, M. R., & Adhikari, D. K. (2002). Material and equipment procurement delays in highway projects in Nepal. International Journal of Project Management, 20(8), 627–632. https://doi.org/10.1016/S0263-7863(02)00027-3
Mantrala, M., & Raman, K. (1990). Analysis of a sales force incentive plan for accurate sales forecasting and performance. International Journal of Research in Marketing, 7(2–3), 189–202. https://doi.org/10.1016/0167-8116(90)90021-E
Odeh, A. M., & Battaineh, H. T. (2002). Causes of construction delay: Traditional contracts. International Journal of Project Management, 20(1), 67–73. https://doi.org/10.1016/S0263-7863(00)00037-5
Rao, A. K., & Gul, W. (2017). Emperical study of critical risk factors causing delays in construction projects. In 9th IEEE International Conference on Intelligent Data Acquisition and Advanced Computing Systems: Technology and Applications (IDAACS), Bucharest, Romania. https://doi.org/10.1109/IDAACS.2017.8095217
Rubel, O., & Prasad, A. (2016). Dynamic incentives in sales force compensation. Marketing Science, 35(4), 676–689. https://doi.org/10.1287/mksc.2015.0953
Sambasivan, M., & Soon, Y. W. (2007). Causes and effects of delays in Malaysian construction industry. International Journal of Project Management, 25(5), 517–526. https://doi.org/10.1016/j.ijproman.2006.11.007
Shi, L., He., Y., Onishi, M., & Kobayashi, K. (2021). Double moral hazard and risk-sharing in construction projects. IEEE Transactions on Engineering Management, 68(6), 1919–1929. https://doi.org/10.1109/TEM.2019.2938261
Shi, G., & Zhang, X. (2022). Development of a regulatory mechanism for key stages in public-private partnerships. Journal of Infrastructure Systems, 28(3), Article 04022017. https://doi.org/10.1061/(ASCE)IS.1943-555X.0000697
Sun, X., Tang., W., Chen, J., Li, S., & Zhang, J. (2019). Manufacturer encroachment with production cost reduction under asymmetric information. Transportation Research Part E: Logistics and Transportation Review, 128, 191–211. https://doi.org/10.1016/j.tre.2019.05.018
Sweis, G. J. (2013). Factors affecting time overruns in public construction projects: The case of Jordan. International Journal of Business and Management, 8(23), 120–129. https://doi.org/10.5539/ijbm.v8n23p120
Wang, W., Jin, X., Tan, Z., Sun, H., & Wu, J. (2022). Modeling the effects of government subsidy and regulation on BOT transport project contract design within contractible service quality. Transportation Research Part E: Logistics and Transportation Review, 164, 1366–5545. https://doi.org/10.1016/j.tre.2022.102820
Zeng, W., Wang, H., Li, H., Zhou, H., Wu, P., & Le, Y. (2019). Incentive mechanisms for supplier development in mega construction projects. IEEE Transaction on Engineering Management, 66(2), 252–265. https://doi.org/10.1109/TEM.2018.2808169
Zhang, Q., Chen, J., & Chen, B. (2021). Information strategy in a supply chain under asymmetric customer returns information. Transportation Research Part E: Logistics and Transportation Review, 155, Article 102511. https://doi.org/10.1016/j.tre.2021.102511
Zhao, S., You, Z., & Zhu, Q. (2022). Effects of asymmetric cost information on collection outsourcing of used products for remanufacturing. Transportation Research Part E: Logistics and Transportation Review, 162, Article 102729. https://doi.org/10.1016/j.tre.2022.102729