Resource Dependence, Alternative Supply Sources and the Design of Formal Contracts

Employing a resource-dependence theoretical framework, we analyze a set of recently awarded contracts between the Environmental Protection Agency and various suppliers to determine how joint dependence, supplier dependence, and government dependence affect contract design, and specifically the decision to use a cost-plus (flexible) contract. Findings provide evidence that organizations choose contract designs that will reduce uncertainty related to securing critical resources. However, different dimensions of dependence have different effects: (1) higher levels of joint dependence lead to more flexible governance forms; (2) the lack of alternative suppliers is a more important factor than high levels of financial dependence; and (3) the parties involved in government procurement are likely to perceive government as a unique type of organization, which in turn has implications for contract design choices. We conclude with managerial strategies for restructuring power-dependence relationships to achieve the contract design most likely to yield a surplus in the exchange