Contract amendments: for better or for worse?

Abstract

PurposePublic management researchers have successfully leveraged theory to advance the understanding of contracts and the different governance structures that underpin contract relationships. Yet there is still much to learn about the implications for different governance structures. Applying insights from property rights, the purpose of this paper is to examine the substance of initial government contracts and their subsequent amendments in order to determine whether allocation of decision rights leads to better or worse contract amendments.Design/methodology/approachThe authors evaluate the text of initial contracts and their subsequent amendments in 258 government–business relationships and focus on the implications of assigning key decision rights to the party with most relevant knowledge expertise.FindingsTwo primary findings are presented. First, initial contracts where knowledge expertise and the associated decision rights are co-located (i.e. integrated) are likely to be associated with ex post adjustments that benefit both parties to the contract. Second, the authors find that this initial finding is likely a result of government integration as opposed to supplier integration.Originality/valueGiven that we know most professional service contracts require some form of contract amendment over time, this research helps us understand why some amendments will reinforce the collaborative (Pareto enhancing) nature of the relationship, while others may be more one sided (rent seeking). Unlike other theoretical approaches (e.g. transaction cost theory), property rights theory provides guidance for such decision making.