The Next Level in Contract Design: Incorporating Non-Contractual Mechanisms when Negotiating and Drafting Complex Contracts

Abstract

Defense acquisition programs are examples of complex contracts plagued by surging delays and cost overruns. In particular, contract management of defense acquisition programs has been identified as “high risk” - threatening project performance and leading to the Department of Defense (DoD) overpaying for projects. Empirical findings suggest that parties’ contractual behavior - especially the ability to work together cooperatively - is an important success factor. Empirical research also indicates that, in complex projects, such as defense projects, contracts are often experienced as a cause of disruption of cooperation. In addressing this problem, contract literature has mainly focused on how to improve contracts by making them better enforcement mechanisms. This article takes a different approach. It specifically focuses on how and why the contract, as a legal mechanism, may obstruct cooperation between the DoD and contractors. It proposes a new normative framework that includes other variables that influence parties’ contractual behavior, such as social norms and economic rationality, which are frequently ignored in contract design. The main observation this article makes is that tensions can arise between the norms set forth in contracts and other non-legal norms that are particularly problematic in complex contracts such as defense contracts. It explains why these tensions may undermine cooperative behavior between contractors and the DoD and become a source of disappointing acquisition program results. Finally, a framework is provided for identifying these tensions, and design principles are proposed to enhance cooperation by foreseeing and eliminating these tensions when drafting contracts for defense acquisition programs.