Understanding supplier motivation to engage in multiparty performance-based contracts: The lens of Expectancy theory

Abstract

Research on performance-based contracts (PBCs) has emphasized outcome uncertainty (lack of outcome attributability) as an obstacle to applying such contracts effectively and has investigated possible ways to mitigate this uncertainty. Most studies primarily address dyadic buyer-supplier contracts and the uncertainty that originates in the environment or in buyer behaviour. However, suppliers often also depend on other suppliers and sub-suppliers in the process of outcome creation. Such reciprocal interdependencies between more than two parties cannot easily be addressed through dyadic contracts. This paper examines how effective multiparty PBCs can be designed to align the interests of multiple suppliers. To develop our a priori conceptualisation, we first review the literature and identify the factors that affect suppliers' willingness to engage in PBCs, drawing on Expectancy theory to unravel the motivational effects of rewards. We then use case studies from the construction sector to investigate how these factors apply to multiparty PBCs and identify specific variables that influence supplier motivation in such settings. Based on our findings, we propose that expectancy (the relationship between effort and performance) is enhanced by parties’ joint participation in the planning and control of project activities, their reputation, and specific contractual elements such as the codification of collaboration or reward design in hybrid PBCs. Instrumentality (the link between performance and reward) is primarily affected by the perceived fairness of the reward sharing and codified collaboration, and valence (the relationship between reward and supplier objectives) is mainly influenced by the monetary amounts at stake.