Penalizing Lateness or Sharing Cost: Project Outsourcing via Request-for-Quote
Chengfan Hou, Mengshi Lu, Tianhu Deng, Zuo-Jun Max Shen
Manufacturing & Service Operations Management · 2026 · Volume 28 · Issue 3
Abstract
Request-for-quote (RFQ) is the most commonly used mechanism for contractor selection in project outsourcing. Problem definition : We study how RFQ design interacts with the time-cost trade-off in project execution and compare two common contract forms: time-incentive contracts (penalizing lateness) and cost-sharing contracts (reimbursing direct costs). Methodology/results : Using a game-theoretic model, we characterize optimal RFQ designs under incomplete information about contractors’ direct cost efficiency. Time-incentive contracts weaken competition, whereas cost-sharing contracts strengthen it, increasing work rates and shortening completion times. Clients prefer cost-sharing contracts, with this preference being stronger when time urgency is high, contractor heterogeneity is substantial, or the contractor pool is small; time-incentive contracts yield higher overall system efficiency in low-urgency settings, consistent with their prevalence in public projects. We derive a closed-form bound on the relative decrease in the client’s payoff when using a fixed-term RFQ instead of a more complex upfront-fee RFQ and numerically show that fixed-term RFQs lose less than 0.28% of client payoff. Audit noise has no effect when correction costs are negligible or very high, but it introduces bidding frictions and lowers the optimal cost-sharing ratio when correction costs are moderate. Managerial implications : These insights guide contract selection by time urgency and market conditions and support the use of simple fixed-term RFQs with minimal profit loss. Funding: This work was partially supported by the National Natural Science Foundation of China [Grants 72501203, 72525012, 72188101, and 72242107]. Supplemental Material: The online appendix is available at https://doi.org/10.1287/msom.2024.0894 .
Keywords
project outsourcing, request-for-quote, incentive contracts
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