Setbacks, Shutdowns, and Overruns

We employ novel methods to investigate optimal project management in a setting plagued by unavoidable setbacks. The contractor can cover up delays from shirking either by making false claims of setbacks or by postponing the reports of real ones. The sponsor induces work and honest reporting via a soft deadline and a reward for completion. Late-stage setbacks trigger randomization between cancellation and extension. Thus the project may run far beyond its initial schedule, generating arbitrarily large overruns, and yet be canceled. Absent commitment to randomize, the sponsor grants the contractor more time to complete the project.

Keywords: Project Management, Dynamic Agency, Soft Deadline, Cost-Plus-Award-Fee Contract, Schedule Slippage

JEL Classification: C72, D21, D86, M11

Suggested Citation: Suggested Citation

Feng, Felix and Taylor, Curtis R. and Westerfield, Mark M. and Zhang, Feifan, Setbacks, Shutdowns, and Overruns (June 28, 2021). Available at SSRN: https://ssrn.com/abstract=3775340 or http://dx.doi.org/10.2139/ssrn.3775340