Project Management Contracts with Delayed Payments

In project management, most manufacturers (project managers) offer no delayed payment contracts under which each supplier (contractor) will receive a pre-specified payment when she completes her task. However, some manufacturers impose delayed payment contracts under which each supplier is paid only after all suppliers have completed their tasks. In this paper, we investigate whether or not the manufacturer ought to demand such a delayed payment contract. In our model with one manufacturer and n ≥ 2 suppliers, we compare 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’ completion times are exponentially distributed, we show that the delayed payment regime is more (less) profitable than the no delayed payment regime if the manufacturer’s revenue is below (above) a certain threshold. Also, we show the delayed payment regime is dominated by the no delayed payment regime when the number of suppliers exceeds a certain threshold. By considering a different setting in which each supplier has information about the progress of all other suppliers’ tasks, we obtain similar structural results except that the delayed payment regime is more profitable than the no delayed payment regime when the number of suppliers exceeds a certain threshold.