Determinants of Contract Terms for Professional Services
Posted: 18 Oct 2008 Last revised: 17 Nov 2008
Date Written: October 8, 2008
This study provides evidence on the determinants of contract terms between professional services firms and their clients. Because professional services are typically characterized by a high degree of transactional uncertainty and a double moral hazard risk, contracts can be essential for the creation of incentives to control the behavior of those involved in the service encounter. Based on both agency and organizational theory, hypotheses on the determinants of implementing a specific type of cost contract are developed and tested empirically with respect to management consulting firms. Our results indicate that (1) service characteristics exert a significant impact on the chosen contract type, (2) performance-based contracts may not be optimal, even if service output is measurable and verifiable, and (3) experience-based trust and reputation impact on the choice of controls used in short-term contracts. These results contribute to the field of management accounting by providing insights into the design of management control systems in service organizations.
Keywords: cost contracts, customer integration, double moral hazard, incentives, professional services
JEL Classification: M49, M40, M46, D82, G34
Suggested Citation: Suggested Citation