Performance Based Lease Contract Involving Discrete Preventive Maintenance

Numerous studies have considered penalty as part of lease contract stipulation, which incurs whenever equipment downtime exceed a predetermined level. Under this stipulation, lessor would then choose maintenance effort level just enough to hinder them from penalty. Since it is used for business purpose, lower equipment downtime would always preferable for the lessee but necessarily for the lessor. Lower downtime requires higher maintenance effort, thus higher cost. To make sure that lessor is putting their best effort to achieve the lowest downtime possible a proper incentive needs to be determined. This paper considers not only penalty but also incentive as part of contract stipulation. We adopt the perspective of lessee and build decision making model for determining lease contract price and performance based payment scheme to be offered to the lessor. Principal agent theory is used as modeling approach due to its ability to simultaneously consider the interest of both parties involved.