Cooperation and Contract Design in Project Management with Outsourcing

Abstract

We study a project management problem where the prime contractor needs to outsource tasks to subcontractors with the required resources. Successful execution of the project requires proper coordination among the subcontractors, as well as contract design by the prime contractor to incentivize the subcontractors. By modeling the subcontractors’ coordination problem as a cooperative game, we develop a profit sharing scheme to facilitate the subcontractors’ cooperation. We consider two contract designs for the prime contractor: a uniform contract across all subcontractors, and a nonuniform one that customizes incentives for each subcontractor. We propose efficient algorithms to solve the implicit optimization problems for optimal contract parameters. Computational experiments show that the pooling effect of subcontractors’ cooperation mitigates the negative impact of poor estimates about the crashing cost and resource availability. We observe three unexpected results through the randomized computation experiments: (i) the subcontractors’ profits may decrease if they provide false information; (ii) it is safer for the prime contractor to overestimate subcontractors’ crashing costs than underestimate them; and (iii) uniform contracts deliver more project profit for the subcontractors in the coalitions.

Keywords

Project management with outsourcing / subcontracting / cooperative game / contract design

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