Keywords: principal-agent theory, agency theory, contract, large-scale engineering projects, turnkey, EPC
Innovative contractual structures for inter-organisational systems
This paper tests the principal-agent theory in the context of contracting practices for the development of large-scale engineering projects. Five hypotheses are derived from the principal-agent theory regarding the propensity to use behaviour-based contracts versus outcome-based contracts function of the project owner's risk aversion and monitoring competencies, of the goal congruence between principal and agent, of the agent's risk aversion, and of the technological innovation required by the project. A sixth hypothesis states that more successful projects are more in line with the predictions of the first five hypotheses. All hypotheses are translated into testable propositions specific to large-scale engineering projects. For instance, outcome-based contracts are assimilated to fixed-price contracts such as turnkey and EPC. Results based on a sample of 60 power plant projects confirm that participants tend to select contracts as the principal agent theory predicts. Moreover, contracts used in successful projects follow more accurately the theoretical predictions.