Analysis of the Effects of Uncertainty, Risk-Pooling, and Subcontracting Mechanisms on Project Performance

Abstract

The problem of designing a contract mechanism to allocate the component subprojects of a large project to a pool of contractors has important implications for project success. Our research analytically addresses issues involved in diversifying risk for the project owner by partitioning the project and assigning the subprojects to multiple contractors whose performance characteristics are imperfectly known. We begin by giving a precise analytical treatment of the effect of activity variance on expected project duration, characterizing the cases when an increase in activity variance pushes up the expected project duration. In the case of a homogeneous project consisting of serial subprojects, we show that disaggregating the project and assigning the subprojects to the contractors on a piecemeal basis reduces variance of project duration while leaving the mean unchanged. On the other hand, in the case of a homogeneous project consisting of parallel subprojects, aggregating the subprojects and assigning the aggregated project to one of the contractors reduces mean project duration.