Abstract
Purpose: Performance-based contracting (PBC) has been gaining popularity over the years. However, empirical studies investigating the impact of PBC features have been limited. The main purpose of this study is to investigate the effect of PBC features leading to quality investment that fosters financial benefits. Design/methodology/approach: After examining the validity and reliability of scale items through confirmatory factor analysis, this study tested hypotheses using covariance-based structural equation modeling of survey data from 381 supply, logistics and operations managers. Findings: The findings reveal the impact of PBC features (joint knowledge generation, goal congruence and incentive alignment) on financial benefits and the mediation impact of quality investment between these features and financial benefits. The upfront investment for quality enhancement was found facilitator of PBC features to achieve financial benefits. The findings also reveal the importance of collaborative communication and information sharing for knowledge generation that leads financial benefits through quality investment. This study shows that PBC governance strengthens the theory of relational view by empowering collaborative efforts and aligning goals and incentives within downstream suppliers for knowledge generation and quality enhancement. Research limitations/implicationsAn analysis of PBC features by industry would be very beneficial in differentiating between and more thoroughly understanding the commonalities and differences across various sectors. Investigating how these change across industries would also help identify any bias in PBC implementation. Practical implicationsThis study illustrates that it will be practical and beneficial for suppliers to understand the major drivers of quality investment and the relationship between quality investment and the financial benefits of selecting PBC. Originality/valueUnlike most previous studies, this research contributes to the literature in that it is one of the relatively few examples of empirical research on PBC features. Overall, the findings of this study will improve our understanding of how PBC features enhance upfront investment in quality and improve financial benefits.