Contractor Selection in Project Outsourcing via Request-for-Quote

Request-for-quote (RFQ) is the most common way for contractor selection, which is of vital importance to the success of project outsourcing. Project clients need to choose from various available RFQ procedures to properly select and incentivize contractors. We study the RFQ design problem for project outsourcing by capturing the fundamental time--cost trade-off in project management. We consider two contract forms (cost-sharing and time-incentive) that are the most widely used in practice, combined with both simple (fixed-term) and more complex (upfront-fee) RFQ procedures. The resulting problem features both adverse selection and moral hazard. The practical requirement of positive time-incentives further complicates the problem by disallowing rewards for longer completion time. By studying the RFQ design problem under various widely used RFQ procedures and contractual forms, we quantify the benefit of including different procedures and contract terms and provide guidelines on choosing an RFQ procedure that balances optimality, system efficiency, and execution simplicity.We find that the proper choice between cost-sharing and time-incentive contracts depends on the availability of differentiated cost auditing. Contracts based on direct cost sharing can induce higher effort levels, shorter project completion time, and higher client payoffs. However, when only total cost is observable, cost-sharing contracts may be inferior to time-incentive contracts if the client's relative urgency for the project is high. Imposing the positive time-incentive constraint can induce faster completion with relatively low cost increase and improve system efficiency under mild conditions. To justify the use of relatively simple RFQ procedures, we develop a closed-form bound on the relative increase in the client's expenses by offering a fixed-term RFQ instead of its more complex counterpart with upfront fees. Under comprehensive numerical settings, this relative decrease is less than 0.2\%, supporting the use of simple fixed-term RFQs. Finally, we develop simple RFQs that achieve system coordination and eliminate rents under a higher informational requirement