Game-Theoretic Design of International Construction Contracts: Integrating Liquidated Damages, Consortium Structures, and Performance Guarantees

Abstract

Abstract Delays and cost overruns remain endemic in international infrastructure projects. This study develops a unified game-theoretic for contractor schedule incentives under liquidated damages (LDs), extensions of time (EOTs), and multicontractor or consortium structures. We model the owner, multiple contractors, and a guarantor as strategic agents choosing effort, bidding price, and guarantee levels under probabilistic detection of delay or noncompliance. Numerical experiments calibrated to typical highway and rail projects show that moving from parallel single-responsibility contracts to a joint-and-several consortium with shared LD and a 10% performance bond reduces expected completion delay from 5.4 to 3.1 months ( <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML" alttext="negative 43 percent sign" overflow="scroll"> <mml:mo rspace="-0.1em">−</mml:mo> <mml:mn>43</mml:mn> <mml:mtext>%</mml:mtext> </mml:math> ) and lowers the owner’s expected cost overrun from 18% to 11% ( <mml:math xmlns:mml="http://www.w3.org/1998/Math/MathML" alttext="negative 39 percent sign" display="inline" overflow="scroll"> <mml:mo rspace="-0.1em">−</mml:mo> <mml:mn>39</mml:mn> <mml:mtext>%</mml:mtext> </mml:math> ) while preserving nonnegative expected contractor profit. Introducing appropriately priced guarantees cuts the probability of race-to-the-bottom opportunistic underbidding by 62% and improves the probability of on-time, in-specification completion from 0.54 to 0.81. The framework provides owners and contractors with quantitative guidance on how to coordinate LD levels, monitoring intensity, consortium internal allocation rules, and guarantee requirements to simultaneously enhance time, cost, and service performance in complex international construction projects.