Contract Design, Supply Chain Complexity, and Accountability in Federal Contracts

Abstract

In this manuscript, we argue that supply chain management choices are affected by both the extent to which there is a risk of disruption within the supply chain and external to the supply chain, as well. We suggest that the formal governance mechanisms that are favored under different conditions of endogenous and exogenous supply chain risk reflect the risk management preferences of the supply chain partners. In this preliminary study of public sector supply chains, we found evidence suggesting that, as expected, when endogenous risk is low, suppliers tend to bear most of the disruption risk by agreeing to fixed price contracts. Conversely, when endogenous risk is high but exogenous risk is low, buyers (governments) are willing to bear most of the risk by agreeing to cost reimbursement or time and materials contracts. When both endogenous and exogenous risk is high, we found partial support of the proposition that buyers and suppliers are more likely to share risk by agreeing to incentive contracts.