An agency perspective for multi-mode project scheduling with time/cost trade-offs

Abstract

Project scheduling takes the perspective of a single decision-maker, where the owner is directly involved in the management and control of the project. In this paper, we study the multi-mode project scheduling problem from an agency perspective, where agency arises from the risk-averse contractor’s hidden effort, which influences the duration and cost of project activities. We formulate the owner’s problem of determining the optimal parameters of a linear incentive contract as a bi-level program, where the lower level is a multi-mode project scheduling problem with time/cost trade-offs, representing the contractor’s problem. Two benchmarks for the optimal contract are formulated, providing bounds on the expected total cost to the owner, and performance measures are defined accordingly. A stylized model of the owner’s problem is presented and solved in closed form for the simple case where an aggregate effort can be exerted at the project level, with restrictive assumptions on the variance of noise and the cost of effort. However, when effort is exerted at the activity level, solving the owner’s problem involves the solution of the multi-mode project scheduling problem. A numerical study for such situation is presented, which illustrates the trade-off between incentives and risk, and the effect of this trade-off on different project related costs. The findings from the stylized model and those from the numerical results of the presented example are compared in a computational experiment on 15 randomly generated projects.