Project Management with Delayed Payments

37 Pages Posted: 8 Mar 2010

See all articles by H. Dharma Kwon

H. Dharma Kwon

affiliation not provided to SSRN

Kevin F. McCardle

University of California, Los Angeles (UCLA) - Anderson School of Management

Steven A. Lippman

University of California, Los Angeles (UCLA) - Policy Area

Christopher S. Tang

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: March 5, 2010

Abstract

When managing projectswith considerable uncertainty such as those arising in construction, defense, and new product development, it is customary for a manufacturer (project manager) to offer contracts under which each supplier (contractor) receives a pre-specified payment when she completes her task. However, there are recent cases in which the manufacturer imposes “delayed payment” contracts under which each supplier is paid only when all suppliers have completed their tasks. By considering a model of one manufacturer and n ≥ 2 identical and independent suppliers with exponential completion times, we analyze the impact of both a delayed payment regime and a no delayed payment regime on each supplier’s effort level and on the manufacturer’s net profit in equilibrium. When the suppliers work rates are unadjustable, we conjecture that the manufacturer is actually worse off under the delayed payment regime. However, when the suppliers work rates are adjustable, we obtain a different result: the delayed payment regime is more profitable for the manufacturer either when the project revenue is sufficiently small or when the number of suppliers is sufficiently large.

Keywords: project management, contracts, payment schemes, games

Suggested Citation

Kwon, H. Dharma and McCardle, Kevin F. and Lippman, Steven A. and Tang, Christopher S., Project Management with Delayed Payments (March 5, 2010). Available at SSRN: https://ssrn.com/abstract=1567071 or http://dx.doi.org/10.2139/ssrn.1567071

H. Dharma Kwon

affiliation not provided to SSRN ( email )

Kevin F. McCardle

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

Steven A. Lippman

University of California, Los Angeles (UCLA) - Policy Area ( email )

110 Westwood Plaza
Los Angeles, CA 90095
United States

HOME PAGE: http://www.anderson.ucla.edu/acad_unit/policy/

Christopher S. Tang (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States

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