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

21 Pages Posted: 29 Aug 2014 Last revised: 15 Nov 2014

Peter Kamminga

VU University Amsterdam - Faculty of Law; Harvard Law School (Program on Negotiation); University of California Hastings College of the Law

Date Written: August 27, 2014

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.

Keywords: complex contracts, contract design, non-contractual mechanisms, defense projects

JEL Classification: K12

Suggested Citation

Kamminga, Peter, The Next Level in Contract Design: Incorporating Non-Contractual Mechanisms when Negotiating and Drafting Complex Contracts (August 27, 2014). UC Hastings Research Paper No. 115. Available at SSRN: https://ssrn.com/abstract=2488080 or http://dx.doi.org/10.2139/ssrn.2488080

Peter Kamminga (Contact Author)

VU University Amsterdam - Faculty of Law ( email )

De Boelelaan 1105
Amsterdam, 1081 HV
Netherlands

Harvard Law School (Program on Negotiation) ( email )

1575 Massachusetts
Hauser 406
Cambridge, MA 02138
United States

University of California Hastings College of the Law ( email )

200 McAllister Street
San Francisco, CA 94102
United States

HOME PAGE: http://www.uchastings.edu/faculty-administration/faculty/kamminga/index.html

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