Incentive contract design for projects: The owner׳s perspective

• We analyse incentive contract design from the perspective of the project owner.
• A model integrating project trade-offs, contract structure and payoffs is presented.
• Completely transferring cost, duration or scope risk to either party should be avoided.
• Piecewise linear and nonlinear incentive clauses perform better and are more robust.
• Project owners are advised to use multidimensional incentive contracts.

Due to the adoption of more and more complex incentive contract structures for projects, designing the best contract for a specific situation has become an increasingly daunting task for project owners. Through the combination of findings from contracting literature with knowledge from the domain of project management, a quantitative model for the contract design problem is constructed. The contribution of this research is twofold. First of all, a comprehensive and quantitative methodology to analyse incentive contract design is introduced, based on an extensive review of the existing literature. Secondly, based on this methodology, computational experiments are carried out, which result in a set of managerial guidelines for incentive contract design. Our analysis shows that substantial improvements can often be attained by using contracts which include incentives for cost, duration as well as scope simultaneously. Moreover, nonlinear and piecewise linear formulae to calculate the incentive amounts are shown to improve both the performance and robustness across different projects.