Incentive contract design and selection for inhibiting unethical collusion in construction projects

Abstract

Purpose The construction industry has long been criticized for unethical conduct. The owner usually manages the contractor's opportunistic behaviors by employing a professional supervisor, but there is a risk of covert collusion between the supervisor and contractor. Based on the principal–agent theory and collusion theory, this paper aims to investigate optimal collusion-proof incentive contracts.Design/methodology/approachThis paper presents a game-theoretic framework comprising an owner, supervisor and contractor, who interact and pursue maximized self-profits. Built upon the fixed-price incentive contract, cost-reimbursement contract, and revenue-sharing contract, different collusion-proof incentive contracts are investigated. A real project case is used to validate the developed model and derived results.FindingsThis paper shows that the presence of unethical collusion undermines the owner's interests. Especially, the possibility of agent collusion may induce the owner to abandon extracting quality information from the supervisor. Furthermore, information asymmetry significantly affects the construction contract selection, and the application conditions for different incentive contracts are provided.Research limitations/implicationsThis study still has some limitations that deserve further exploration. First, this study explores contractor–supervisor collusion but ignores the possibility of the supervisor abusing authority to extort the contractor. Second, to focus on collusion, this paper ignores the supervision costs. What's the optimal supervision effort that the owner should induce the supervisor to exert? Finally, this paper assumes that the colluders involved always keep their promises. However, what if the colluders may break their promises?Practical implicationsSeveral collusion-proof incentive contracts are explored in a project management setting. The proposed incentive contracts can provide the project owner with effective and practical tools to inhibit covert collusion in construction management and thus safeguard construction project quality.Originality/valueThis study expands the organization collusion theory to the field of construction management and investigates the optimal collusion-proof incentive contracts. In addition, this study is the first to investigate the effects of information asymmetry on contract selection.