Managing Time-Based Contracts with Delayed Payments

Some manufacturers impose a time-based contract on their suppliers under which each supplier is paid only when all of the suppliers have completed their tasks. We investigate whether or not the manufacturer ought to demand such a delayed payment contract. In our model with one manufacturer and two suppliers, we compare the impact of both a delayed payment regime and a no delayed payment regime on each supplier’s effort level and on the manufacturer’s net profit in equilibrium. With deterministic supplier completion times, behavior and profits are the same for both regimes. However, with uncertainty in the suppliers’ completion times, the delayed payment regime is more profitable than the no delayed payment regime if the manufacturer’s project is sufficiently small; the delayed payment regime is less profitable if the project is very large.