Optimal Sharing of Construction Project Outcomes with Downstream Contracting Parties: Principal–Agent Analysis

Abstract

Sharing of a project’s outcomes drives the contracting parties to closer cooperation. However, subcontracting and sharing with downstream contracting parties (e.g., subcontractor and sub-subcontractor) have received less attention in the construction literature. This paper proposes an optimal multilayer outcome-sharing model for construction contracts between a client and a construction team (e.g., including contractors, subcontractors, and sub-subcontractors), based on existing utility and principal–agent models. A numerical study supports the validity of the proposed model and the paper’s propositions. The findings indicate that optimal effort levels by downstream parties result in cost savings for all contracting parties, promoting fair and efficient outcome sharing. Moreover, the study highlights that contracts with risk-neutral downstream contracting parties lead to the most significant cost-saving for the client. The paper’s contribution lies in establishing a connection between optimal sharing in upstream layers and downstream layers. The modeling approach is original, with no similar models found in the existing literature. The model can be utilized by those involved in writing incentive contracts to determine the best approach for sharing project outcomes with downstream parties. The paper sheds new light on the sharing problem in multilayer contracting. During the tendering process, clients, contractors, subcontractors, and others may encounter challenges in negotiating appropriate outcome-sharing contracts. The insights gained from this article will assist them in navigating such negotiations, particularly in cases where the construction project involves a high level of uncertainty.