Why Contracts: Evidence

Abstract

Contracts are a ubiquitous part of the architecture, engineering, and construction industry. Despite this, they are poorly understood by practitioners and academics. This paper empirically tests a conceptual model of the contract that seeks to improve our understanding of contracts. This model argues that the contract should be viewed as a managerial tool that provides the structure within which we accomplish the project tasks. The choice of the appropriate contract facilitates a process that allows the parties to achieve superior performance. The model views the contract as a multidimensional instrument that addresses three critical questions: (1) what is the structure of the organizational relationship between firms; (2) what is the disposition of risk and reward for involvement in the project; and (3) how will conflicts between firms be resolved? This paper empirically examines the first two dimensions. In order to address these distinct but intertwined questions, theories from Transaction Cost Economics and Agency Theory are brought to bear. The results of the study suggest that the conceptual model explains some of the variation in project performance, and therefore holds promise as a strategic management tool.