Contract Design, Complexity, and Incentives: Evidence From U.S. Federal Agencies

Abstract

Financial incentives are used throughout the public and private sectors to control costs, expedite projects, maximize quality, and encourage performance. Although federal agencies in the United States utilize incentive contracts, there is little research on the scope of their use or effectiveness. This study analyzes nearly 390,000 federal contracts across service acquisitions of varying complexity to determine whether incentive contracts differ in contract duration, cost, or technical performance when compared with other types of contracts. The results indicate that contracts appear to execute differently on these three dimensions based on the complexity of the acquired service. The findings provide a heightened understanding of the accountability dynamics in third-party implementation, particularly when financial incentives are used to motivate contractor performance.