DESIGNING CONTRACTS FOR COMPLEX SERVICES

In this article, we employ transaction cost economics and the contingency stream of organization theory to answer two related questions. First, when contracting for complex services, do governments design contracts for flexibility? Second, is the contingency perspective relevant to understanding contract design? Examining 130 professional service contracts awarded by state government agencies in the USA, we find that task complexity and task unpredictability, two dimensions of task uncertainty, increase the probability of flexible governance. This research highlights for managers the important fact that the potential for opportunism and task complexity are different sources of uncertainty that pose different challenges and call for different governance solutions. The study enriches our understanding of transaction costs by probing the conditions under which task uncertainty matters most (and least), and further shows the utility of integrating transaction cost economics with contingency theory to better understand contract governance.