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International Journal of Project Management 33 (2015) 1851 – 1862
www.elsevier.com/locate/ijproman

Does complexity and prior interactions affect project

procurement? Evidence from mining mega-projects
Francisco Brahm ⁎, Jorge Tarziján
School of Management, Pontificia Universidad Católica de Chile, Avda. Vicuña Mackenna 4860, Macul, Santiago, Chile

Received 4 March 2015; accepted 11 August 2015

Available online 9 September 2015

Abstract

We investigated mining mega-projects to analyze the effect of project complexity on (1) the “make vs. ally” choice for the implementation stage
of a project and the “fixed-price vs. cost-plus” contractual choice when an “ally” was chosen; and (2) the extent to which prior interactions with a
contractor at earlier stages of the same project impact the “fixed-price vs. cost-plus” decision. Contrary to expectations, we found that project
complexity promoted allying with external contractors but that, as expected, it promoted the use of cost-plus contracts. In addition, we found that
prior interactions promoted fixed-price contracts and that this effect was more pronounced for less complex projects in which learning and
knowledge acquired during prior stages was more easily transferred into contractual detail. Given that fixed prices are contractually heavier than
cost-plus agreements, this result suggests that complexity strongly moderates the relationship between formal and relational contracting.
© 2015 Elsevier Ltd. APM and IPMA. All rights reserved.

Keywords: Complexity; Project procurement; Contracts; Make or buy; Prior interactions

1. Introduction determinant of their outcomes (Merrow, 2011; Winch, 2010). A

The supply chain and project management literature has
increasingly focused its attention on the management of complex
projects (Svejvig and Andersen, 2015; Ulku and Schmidt, 2011;
Brinkhoff et al., 2014; Lu et al., 2015). A relevant issue in this
literature is the governance of the project procurement (Pitsis et al.,
2014; Olsen et al., 2005; Caniëls et al., 2012). Research in the
strategic management literature has dealt with issues regarding the
optimal governance of project procurement (Bajari and Tadelis,
2001; Bajari et al., 2009; Brahm and Tarziján, 2013; Castañer et
al., 2014; Gil and Marion, 2013). In this paper, we draw from
these two research streams to study the governance of projects
delivering complex capital goods, in particular, mega-projects in
the copper mining industry.
Capital goods projects have economic significance, and the
governance of their design and construction is a fundamental
⁎ Corresponding author.
E-mail addresses: fbrahm@uc.cl (F. Brahm), jtarzija@uc.cl (J. Tarziján).
major feature of project governance is how to address complexity.
Large projects, such as those related to the delivery of buildings,
airplanes, and plants, typically involve many tasks that interact to
create a complex solution landscape (Simon, 1969; Caniëls et al.,
2012; Peng et al., 2014). Moreover, the extended duration of these
projects requires establishing and maintaining good relationships
and trust among project participants to achieve project success
(Winch, 2010; Brinkhoff et al., 2014; Ulku and Schmidt, 2011).
In this setting, an informal contract based on relationships might
complement or substitute for a formal contract (Cao and Lumineau,
accepted for publication; Faems et al., 2008; Jayaraman et al.,
2013; Poppo and Zenger, 2002; Schepker et al., 2013), and project
complexity might serve as a key moderator of this relationship, just
as it moderates project organization and outcome (e.g., Peng et al.,
2014; Choo, 2014).
To further understand the interplay between project gover-
nance, complexity, and relationships, in this paper, we investigate
the governance choices made by mining companies for 86
mega-projects in Latin America. Mining mega-projects include

http://dx.doi.org/10.1016/j.ijproman.2015.08.005
0263-7863/00/© 2015 Elsevier Ltd. APM and IPMA. All rights reserved.
1852 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862
both a development and an implementation stage. In the
development stage, the broad design of the project is outlined to
estimate project costs, and major design choices are evaluated
and preliminarily decided upon. In the implementation stage, the
design is fully specified, and the project is executed and
completed. Typical examples of mega-projects in mining are
developing and constructing new mining sites, expanding current
mining sites, and building or renovating related facilities such
as processing plants or power plants. We focused on two
fundamental and related governance choices that must occur
during the implementation stage: (1) whether to “make” by
managing project delivery internally or to “ally” by appointing a
specialized engineering contractor (typically through a partnering
agreement); and (2) whether to choose a fixed price (FP) or
a cost-plus (C+) contract when an “ally” has been selected
(Berends, 2000; Turner and Simister, 2001). We examined how
these choices were influenced by project complexity and by
interactions between the mining company and the engineering
contractor during earlier stages of the project. To our
knowledge, no prior empirical studies have analyzed how
project complexity and prior relationships established during
the same project affect the sequence of governance decisions
identified above.
Following Bajari and Tadelis (2001), Tadelis (2002),
Williamson (1985), and Nickerson and Zenger (2004), we
hypothesized that project complexity, which was operation-
alized as the degree of interdependence between the project
being implemented and current company mining sites, would
be positively related to the choice of “internal governance”
and to the choice of C + contracts if an “ally” was chosen.
Complex projects require more adaptation, coordination, and
knowledge sharing, which would be optimally managed by
an internal hierarchy. Moreover, complexity is expected
to increase the likelihood of choosing a C + contract that
transferred most contractual risks to the mining company.
We also study how prior interactions affect the contractual
choice of C + vs. FP. In contrast to earlier studies, which typically
operationalized prior interactions as interactions during other
projects, we operationalized prior interactions as the presence of
the contractor during an earlier stage of the same project. This
measure more accurately evaluates the extent to which the parties
improved contractibility through learning, which promotes
the use of FP contracts (e.g., Vanneste and Puranam, 2010).
Moreover, by examining the extent to which project complexity
moderates the effect of prior interactions on the choice of FP
and C + contracts, the study also sheds light on the issue of the
extent to which formal and informal contracts are substitutes or
complementary, rather than seeking to find a unique relationship
(Gulati and Nickerson, 2008; Lafontaine and Slade, 2013;
Schepker et al., 2013).
This article is organized as follows: in the next section, we
present the literature review and study hypotheses. We describe
the context of the empirical research in the third section, and
present the study data and variables in the fourth section. We
present the empirical analysis and results in the fifth section,
and finally, we discuss the study results and present our
conclusions.
2. Literature review and hypotheses
A firm executing a project and choosing the governance
structure for managing the implementation phase (i.e., the
project's final design and construction) must decide whether to
manage the implementation phase internally with its own
project management unit or invite an external firm to serve this
role. When an external firm is chosen, the firm must then
decide whether to use a fixed price contract or a cost-plus
contract.
2.1. Complexity and governance choices
Complexity has been considered to be an important driver
of the “make or buy” and “FP or C+” choices. Simon (1969)
defined complexity as the number of components that interact
intensively within a system (pp. 183–184). In complex systems,
the interactions between the different components or subsystems
are typically non-trivial. In the literature on organizational
boundaries, Baldwin (2008) and Zhou (2011) have adopted this
view of complexity. Based on this definition of complexity,
Nickerson and Zenger (2004) developed a theory of comparative
governance and argued that the market does not optimally handle
the search for solutions and the acquisition of problem-solving
knowledge when elements exhibit extensive interdependencies
because learning and knowledge sharing become difficult and
hazardous. Instead, complex problems are more appropriately
solved within a hierarchical organization by using an authority
mechanism for moderately complex problems (Conner and
Prahalad, 1996; Demsetz, 1988), and consensus and extensive
knowledge sharing for highly complex problems (Grant, 1996;
Kogut and Zander, 1996).
Based on transaction cost economics (Williamson, 1985),
Bajari and Tadelis (2001), and Tadelis (2002) developed a theory
of procurement contracts in construction projects, which uses the
number of required project design choices as a measure of
complexity. Although the number of design choices does not
always increase interdependency, the theory proposed by Bajari
and Tadelis (2001) readily incorporates interactions between
design choices, which is consistent with Nickerson and Zenger's
theory.
Tadelis (2002) argues that higher complexity is positively
associated with contract incompleteness and thus with an
increased number of unexpected project changes. Hierarchical
governance is better able to manage unexpected changes
because hierarchies economize on the ex post haggling and
renegotiation costs these changes produce. In contrast, market
governance is preferred when project complexity is low and ex
post changes are infrequent because high-powered incentives
are obtained at the expense of higher and less frequent haggling
costs. Some empirical studies have found a positive relation-
ship between complexity and the “make” choice (e.g., Brahm
and Tarziján, 2012; Macher, 2006; Macher and Boerner, 2012;
Masten, 1984; Levin and Tadelis, 2010; Monteverde and
Teece, 1982; Novak and Eppinger, 2001).
Complexity might affect not only the “make or buy” choice
but also the choice between C + and FP contracts when the firm
 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862
obtains an ally from the market. Bajari and Tadelis (2001) note
that contractual exchanges tend to be structured around these
two types of contracts, particularly in construction. In a C +
contract, the principal pays the supplier the realized costs plus a
fee, which addresses non-contractible ex post changes effec-
tively but at the cost of decreased supplier motivation. In an FP
contract, the principal pays a lump sum to the supplier, which
provides stronger incentives to motivate the supplier but creates
inflexibility in regard to non-contractible ex post changes that
occur. Bajari and Tadelis (2001) found that C + contracts are
chosen rather than FP contracts when complexity is high
because higher complexity is associated with more ex post
disturbances that are better handled by the more flexible C +
contract.
The positive association between complexity and the use of
C + contracts is consistent with arguments from transaction cost
economics. Williamson (1985) posits that “low-powered
incentives have well-known adaptability advantages, and that
is what commends C + contracts. Changes are more easily
agreed upon under C + contracts, whereas FP requires more
contractual details. By definition, more complex projects entail
more contractual incompleteness and thus, if a FP contract is
chosen, ex post renegotiations will more likely arise”. Several
empirical studies have confirmed a positive relationship
between complexity and the choice of C + contracts (e.g.,
Bajari et al., 2009; Corts and Singh, 2004; Joskow, 1985;
Kalnins and Mayer, 2004; Kellogg, 2011; Lo et al., 2012).
Based on the above considerations, we proposed the
following hypotheses regarding the role of complexity in the
sequence of governance choices of mega-projects:
H1. Higher project complexity increases the likelihood of an
internal management (i.e., “to make”) of project implementation.
H2. When a firm decides to outsource the management of
project implementation, higher project complexity increases the
likelihood of choosing a C + contract rather than an FP contract.
2.2. Prior interactions and contract choice
A number of studies have investigated the extent to which
prior interactions between parties affect the choice of FP or C +
contracts. In general, the literature has examined the extent to
which prior interactions, which signal the continuation of the
relationship and create a self-enforcing contract (e.g., Gil and
Marion, 2013), induce contracting parties to reduce opportu-
nistic behavior and promote contractual compliance. However,
agents in both types of contracts might deviate. While agents in
C + contracts deviate by not exerting consummate effort, agents
in FP contracts deviate by opportunistically renegotiating when
unexpected disturbances occur. Consequently, Corts and Singh
(2004) note that it is impossible to determine a unique
relationship between prior interactions and contract choice.
Empirical evidence suggests that earlier interactions increase
the use of C + contracts (e.g., Corts and Singh, 2004; Kalnins
and Mayer, 2004; Kellogg, 2011; see Lafontaine and Slade,
2013 for a review). Because prior interactions change the
incentives to defect, Corts (2012) argues that the principal is
1853
better off “trusting” the agent in a C + contract to work hard rather
than “trusting” the agent in an FP contract to renegotiate fairly
because the C + contract provides the supplier with more frequent
opportunities to renege (effort must often be exerted) but fewer
gains from deviation. In contrast, an FP contract provides the
supplier with fewer opportunities to renege due to disturbances
but greater gains from renegotiating opportunistically.
In a debate that parallels the discussion of the relationship
between prior interaction and the choice of C + or FP contracts,
the strategy and organization literature has focused on the
extent to which the presence of a “formal contract” that
includes details such as contract length, the number and depth
of clauses, and the contingencies included in the contract
interacts with the “informal contract” created over time by prior
interactions. Contractual detail and FP contracts arise endog-
enously because the former is related to the latter (Bajari and
Tadelis, 2001; Williamson, 1985). Evidence from the strategy
and organization literature contributes to the discussion of the
relationship between prior interaction and the choice of C + or
FP contracts due to the association between FP contracts and
the level of contract detail.
Early theoretical and case study research claimed that
contract detail undermines the “trust-based” informal contract
created by earlier interactions and has proposed that informal
contracts substitute for detailed contracts (Adler, 2001; Dyer,
1996; Dyer and Singh, 1998; Gulati, 1995). These researchers
support the sociological perspective in which social contacts
create unique benefits for parties that are independent of and
eventually undermined by economic calculations (Granovetter,
1985; Uzzi, 1996). Although subsequent evidence suggests that
prior interaction may be positively related to contractual detail
(Ariño et al., 2014; Argyres and Mayer, 2004; Argyres et al.,
2007; Cao and Lumineau, accepted for publication; Caniëls et
al., 2012; Duan, 2012; Jayaraman et al., 2013; Li et al., 2010;
Lumineau et al., 2011; Poppo and Zenger, 2002; Ryall and
Sampson, 2009; Vanneste and Puranam, 2010), other research
indicates that prior interaction may serve as a substitute for
contractual detail (Gulati and Nickerson, 2008; Reuer and
Ariño, 2007) or that the relationship between prior experience
and contract detail is complementary for some domains but
substitute for others (Abdi and Aulakh, 2014; Bercovitz and
Tyler, 2014; Carson et al., 2006; Faems et al., 2008; Lui and
Ngo, 2004; Poppo and Zhou, 2014; Rhee et al., 2014).
Researchers who have found a complementary relationship
note that prior interactions facilitate learning, enhance knowledge
creation and improve routines between contracting parties, which
increases contractibility and thus the use of FP contracts (e.g.,
Argyres and Mayer, 2004; Lumineau et al., 2011; Vanneste and
Puranam, 2010). Because the economics literature typically
focuses on incentives and behavior, treating contractibility as
exogenous, it has not deeply investigated the role of prior
interactions on learning (Argyres et al., 2007). Not surprisingly,
researchers in the organization and economic literatures have
tended to report different results.
In summary, research on the influence of prior interaction on
the choice of an FP or C + contract has produced conflicting
results. On the one hand, the economics literature suggests that
1854 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862
prior interaction promotes the choice of a C + contract; on
the other hand, the organization literature suggests that prior
interaction promotes the choice of an FP contract. Because
more evidence is required to resolve this issue, we proposed the
following “competing” hypotheses:
H3a. More extensive prior interactions between a firm and the
supplier selected to manage project implementation increase the
likelihood of a C + contract between the firm and the supplier.
H3b. More extensive prior interactions between a firm and the
supplier selected to manage project implementation increase the
likelihood of an FP contract between the firm and the supplier.
3. The context of the empirical study
The context for the present study is based on mega-projects in
the South American mining industry, in which two-thirds of the
projects were located in Chile. Mega-projects are large mining
company projects that maintain and improve current mining sites
or develop and exploit new mining sites. The types of projects
vary from multibillion dollar projects in which new mining sites
are built from scratch to less costly projects involving hundreds of
millions of dollars such as renovating processing plants or
constructing power or water treatment plants (Merrow, 2011).
The mining industry distinguishes between “greenfield” and
“brownfield” projects. Greenfield projects are typically new
projects in undeveloped land in which the new project does
not directly interact with the company's current mining sites. In
contrast, brownfield projects expand or add new facilities and
equipment to an ongoing mining site, and these projects are
usually located in the same sites as the company's main projects.
Brownfield projects are regarded as more complex and uncertain
than greenfield projects due to the intricate web of interdepen-
dencies and conflicting relationships between operations at the
current site and development of the new projects. For example,
the “Andina Phase II” brownfield project currently under
development by the Chilean Copper Corporation Codelco, one
of the world's largest copper producers, is expected to double the
production volume of the current mine. This project requires
precise coordination between the progressive increase in volume
due to the expansion and the ongoing capacity investment and
production plans of the current mine exploitation. Disturbances in
one of these activities generates important externalities in the
other and potentially compromise the capacity of the mine to
deliver the volume committed to the parent company Codelco.
Another example is provided by Codelco's “Chuquicamata
Underground” brownfield project to transform Chuquicamata,
currently the largest open pit mine site in the world, into an
underground operation. As a result, current exploitation of the
mine and project development are interrelated in multiple
complex ways. Building the underground mine periodically
compromises the current operation of the mine due to inevitable
interruptions between exploitation of the open pit and develop-
ment of the underground tunnels, which result from situations
such as the need to share road capacity and the use of explosives
at the open pit that affect the safety of underground development.
In addition to the interdependencies between the project and the
current operations, brownfield projects may increase complexity
by changes in technology. Typically, these projects entail
revamping a facility or changing a method of extraction (e.g.,
from open pit to underground). These technological changes tend
to generate new unexpected interactions with the rest of the mine.
Mega-projects in mining involve a “development stage” and
an “implementation stage”. In the development or “conceptual
and basic design” stage, the broad design of the project is
articulated in enough detail to adequately estimate the project
cost, evaluate major design choices, and make preliminary
decisions such as open pit vs. underground, type of mine
exploitation techniques, and type of ore transportation technol-
ogy. During the initial stage, the project is analyzed into
“modules” that typically capture the different professions or
trades with the expertise required for the development and
construction of the project, such as the geological profession,
underground tunneling trades, road and transportation trades,
and electrical trades. In the second “detailed design and
construction” stage, the design is fully specified and the project
is executed and completed.
During both stages, mining companies confront different
organizational choices. In the development stage, the mining
company typically contracts with one or more specialized
engineering firms to develop the conceptual and basic design.
During the implementation stage, the mining company faces
several choices to manage execution of the detailed design and
construction. The first choice is to internally manage the project
by creating an internal project management team that directly
contracts with the engineering firms of different trades who
execute the detailed design and with the contractors who build
the project. This choice maintains the entire responsibility
for coordinating and successfully executing the implementation
phase within the company. Following the terminology employed
in the firm boundaries literature, a mining company that decides
to internally manage a project chooses the “make” option. In
contrast, a mining company that invites a specialized firm to
participate in the implementation phase chooses the “ally” option.
These specialized firms are typically global engineering firms
with highly developed skills in engineering, design, and project
management, such as Hatch, Fluor, and Amec. We use the
term “ally” instead of “buy” because the relationship between the
mining company and the engineering firm that is invited to
participate in the implementation stage exhibits characteristics
that are more similar to an alliance than to an arms-length
transaction, such as long term commitments of 2 to 3 years,
extensive knowledge sharing and communication, and co-location
of the mining company and the engineering firm's implementation
teams.
The mining company might contract with a specialized firm
either through an “Engineering, Procurement and Construction
Contract” (EPC) or an “Engineering, Procurement and Con-
struction Management Contract” (EPCM). The choice between
these two types of project contract is strategic (Merrow, 2011).
In an EPC contract, the contractor is responsible for the
delivery of a detailed design and project construction, with the
contractor directly subcontracting with trade contractors and
building contractors paying the contractor a fixed price. In the
 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862
EPC contract, the mining company facilitates project execution
but is much less involved in coordinating the design and
construction details with the contractor. The EPC contract thus
corresponds to an FP contract. In contrast, the contractor in an
EPCM contract provides services to the mining company and
develops and manages the project on behalf of the company
using its trade and project management expertise; however, it is
not responsible for project costs or for subcontracting directly
with trade and building contractors. Instead, the mining company
directly subcontracts with trade and building contractors based on
the subcontractor recommendations and terms negotiated by the
EPCM firm. The EPCM firm is reimbursed on a cost-plus basis,
which typically involves reimbursement for the hours worked
plus a fee. Thus, in contrast to the EPC contract, the mining
company bears the risk of cost overruns or project delays. The
EPCM contract thus corresponds to a C + type of contract.
Financial risks apportionment in the EPCM and EPC choice
is important, particularly in mega-projects where liabilities can
be very large. Thus, the financial health of the engineering firm
is an important factor to consider when choosing EPC. The use
of project finance -that is, the financing of the project by the
project´s cash flow without considering the owner´s financial
statements (Esty, 2004)- allows to limit to some extent the
importance of the financial health of the mining company when
choosing an EPC contract.
An engineering firm under contract during the implementa-
tion stage might also have been under contract during the
development stage. Thus, the mining company might have
awarded an FP or C + contract to a contractor who had previously
interacted with the mining company on the same project. This
aspect of the empirical context of the present study is distinct
from previous research analyzing the effect of prior interactions
because these studies primarily measure prior interaction in other,
distinct projects. For example, Corts and Singh (2004) and
Kellogg (2011) analyzed off-shore and on-shore oil well drilling
projects, and the measure of prior interactions was based on prior
wells. Because the research analyzing prior interactions and
contracting typically employs the project as the analytical unit
(e.g., industry–university research projects in Bercovitz and Tyler
(2014), and software projects in Kalnins and Mayer (2004)), and
projects are very different from each other, the empirical literature
has been biased against a mechanism of knowledge development
in which prior interactions lead to knowledge that promotes
increased contractual detail and an FP type of contract in favor
of alternative mechanisms such as the “reneging temptation”
mechanism identified by Corts (2012). Knowledge improves
contractibility and using an FP contract requires not only knowing
the details of “generic activity” based on previous projects
but learning the specific features of the project faced by the
contracting parties. Thus, a key advantage of the empirical context
of the present study was the ability to observe prior interaction
during an earlier stage of the same project. Thus, our analysis
better captured the effect of prior experience on participants'
capacity to acquire knowledge and learn about the actual project
involved in the contract. Although previous research based on
case studies between two contracting parties has investigated an
ongoing relationship (Argyres and Mayer, 2004; Faems et al.,
1855
2008; Lumineau et al., 2011), the results of these studies were
limited due to their restricted samples.
Another characteristic of mega-projects in mining that is
worth noting is the environmental issues they create (Merrow,
2011). Mega-mining projects might severely affect the surround-
ing environment and community and worker safety. A global
trend has produced increased awareness of these issues by local
communities, government, and other stakeholders, which has
been associated with increasing and often unpredictable demands
upon projects that increase uncertainty and potential disturbances
to project development and construction. For example, the
“ANDINA Phase II” expansion project during late 2013 and early
2014 was subject to intensive environmental pressure by the
media, politicians, and local communities, which created serious
delays and a non-negligible risk that the project would be
abandoned altogether. Increased uncertainty due to environ-
mental risks might influence a mining company's contractual
choice, particularly because engineering firms managing the
implementation of the project using an EPC contract are
usually responsible for project sustainability (e.g., obtaining
environmental permits from authorities), which creates higher
financial risks.
4. Study data and variables
4.1. Data
The study employed a unique database provided by “New
Process”, a firm that collects data on mega-projects in different
industrial sectors. As of 2013, the database included 103 mining
projects with a total investment of US$121.8 billion. We restricted
the database to projects that, as of the above date, have selected the
governance choice of the implementation stage. This restricted
the database to 86 projects with a total investment of US$99.5
billion. Most projects involved copper mines, but also included a
small number of mines of gold, silver, and other metals. For
each project, we obtained information about the investment (in
USD), project location, whether the project was a brownfield or
greenfield project, the number and types of work to be performed
during construction, the contractors employed during each stage,
the type of governance chosen during the implementation
stage, and the types of environmental permits required by the
government.
4.2. Measurement of variables
4.2.1. “Make or ally” decision
The first dependent variable was a dummy assigned the
value of 1 if the mining company governance choice in the
implementation stage was “to ally” with a third party and 0 if
the choice was “to make” with the mining company internally
executing project management.
4.2.2. “FP or C+” decision
The second dependent variable was a dummy assigned the
value of 1 if the mining company governance choice in the
implementation stage was to contract with a third party using an
1856 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862
FP contract, and 0 if a C + contract was used. This variable was
left blank if the company did not contract with a third party.
4.2.3. Project complexity (brownfield vs. greenfield)
We conceptualized project complexity as the extent to which
the project involved interactions with mines currently under
exploitation. This conceptualization was captured by a dummy
variable assigned a value of 1 if the project was a “brownfield
project” and 0 if it was a “greenfield project”. This definition is
consistent with Simon's (1969) definition of complexity, which
has been adopted by Nickerson and Zenger (2004), Macher
(2006), and Macher and Boerner (2012). Because the extent to
which the project involved interaction with current mines
was expected to be positively associated with unexpected
disturbances in project implementation, this definition also
satisfied the criteria for complexity proposed by Bajari and
Tadelis (2001).
4.2.4. Prior presence of the contractor
This variable was assigned a value of 1 if the firm under
contract during the implementation stage was also under contract
during the development stage, and 0 otherwise. This variable was
left blank if the company chose “to make” rather than “to ally”
with a third party during the implementation stage.
4.2.5. Control variables
We included four control variables. The first was the “natural
logarithm of the project budget” (expressed in millions of USD)
because a large-scale project might influence the motives
underlying governance choices, such as impaired monitoring
ability of the mining company, managerial diseconomies of scale,
and financial risks. The second control variable was the “number
of project components”. Based on detailed written descriptions of
the project, we identified the number of components in each
project: exploration drilling, earth movement, installation of
worker facilities, major roads and project access, foundries, civil
construction such as office buildings and catering facilities,
plants (e.g., water treatment or concentrator plants), electrical
substations, equipment for grinding or crushing material, belts
for transporting ore/metals, trains for transporting ore/metals,
seaports for distributing metals, underground tunnels, and stockpile
sites and equipment. The third control variable was a dummy
variable assigned the value of 1 if the project was located in Chile
and 0 otherwise. In all, 67 percent of the projects were executed in
Chile, 17 percent in Peru, and 7 percent in Argentina, with the
rest equally distributed across other Latin American countries.
According to the Worldwide Governance Indicators of the World
Bank, Chile consistently exhibits higher rankings for all indicators
and possesses a special advantage with respect to the rule of law,
which affects project governance choices. The fourth control
variable was the “environmental risk” of the project. Environmen-
tal regulations require projects to submit either a “Declaration of
Environmental Impact” (DEI) or an “Evaluation of Environmental
Impact” (EEI), which are formal statements that are subject to
revision or approval by the government's environmental agency.
The EEI, which is a much more comprehensive document, is
required for projects with potentially much more severe effects on
the environment or communities near the project. We computed a
dummy variable that was assigned the value of 1 if the project
submitted an EEI and 0 otherwise.
Table 1 presents descriptive statistics and the correlation
matrix for the study variables.
5. Empirical analysis
5.1. Descriptive analysis
Of the 86 final projects in the study sample, 51 involved the
project governance choice of “make” and 35 involved the
choice of “ally” in the implementation stage. For the 35 projects
involving the “ally” choice, 23 projects chose a C + contract,
and 12 projects chose an FP contract. Table 2 presents the
relationship between the distribution of governance choices
(make, ally with C +, ally with FP) and project complexity, and
Table 3 presents the effect of prior interactions on the type of
contract choice. Table 3 includes only the 35 projects in which
the company allied with an external contractor for project
management.
5.2. Econometric analysis
We performed a cross-sectional regression analysis to assess
models of the mining company governance choices of “make or
ally” and whether the company chose “FP or C+” when choosing
to “ally”. The following econometric model was used to analyze
the “make or ally” decision in project "i" and thus test hypothesis
1:
Allyi ¼ β0 þ β1  Brownfieldi þ Controls þ μi ð1Þ
The following model was used to test hypotheses 2, 3a, and
3b:
ð2Þ
FPi ¼ β0 þ α1  Brownfieldi þ α2  Prior Presence Contractori
þControls þ μi
For hypotheses 1 and 2, we expected that β1 b 0 and α1 b 0,
whereas for hypotheses 3a and 3b, we expected α2 b 0 and
α2 N 0.
Because our dependent variables were discrete choices, we
employed LOGIT models. Table 4 presents the results of the
analysis. Models 1 and 2 analyzed the make or ally decision.
OLS was used as the baseline in model 1, and the LOGIT
specification was used in model 2. Both models exhibited a
good fit; r-square was 30% in model 1, and 79.1% of the
observations were correctly classified in model 2. The results
for model 1 indicate that the likelihood of allying increased by
15.1 percentage points (e.g., from 0.3 to 0.451) in brownfield
projects, with a 10% significance level. The LOGIT model
coefficient was positive but was significant only at the 15%
level. In contrast to OLS models, the coefficient in LOGIT
models was not equal to the marginal effect of the brownfield
variable. Instead, the nonlinear specification of the LOGIT
function produced a derivative of ally on the brownfield, which
 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862 1857

Table 1
Summary statistics and correlation matrix.
1 2 3 4 5 6 7 8
1 Ally 1
2 Fixed price contract n/a 1
3 Prior contractor presence n/a 0.39 1
4 Brownfield project 0.02 − 0.13 − 0.10 1
5 Ln(project budget) 0.51 0.23 0.26 − 0.29 1
6 Number of components 0.20 0.12 − 0.06 − 0.17 0.41 1
7 Executed in Chile − 0.13 − 0.14 − 0.22 0.44 − 0.48 0.00 1
8 Environmental risk 0.24 − 0.03 − 0.10 − 0.19 0.45 0.30 − 0.18 1
Number of observations 86 35 35 86 86 86 86 86
Mean 0.41 0.34 0.66 0.50 5.61 4.20 0.67 0.37
Standard deviation 0.49 0.48 0.48 0.50 1.99 2.37 0.60 0.49
Minimum 0 0 0 0 1.7918 0 1 0
Maximum 1 1 1 1 8.9872 10 3 1

included the other covariates and thus created a different
marginal effect for each observation (Wiersema and Bowen,
2009). We computed the individual marginal effect and
corresponding standard error for each observation and averaged
the observations to obtain the “average marginal effect”.
The results, which are displayed in the “average marginal
effect” column in model 2, parallel the OLS estimation. For
brownfield projects, the likelihood of allying with a contractor
during management of the implementation phase increased by
15.5 percentage points. This result does not support H1 or the
extant research, which found a positive relationship between
project complexity and internal management (Macher, 2006;
Nickerson and Zenger, 2004; Tadelis, 2002).
Models 3 and 4 analyzed the FP vs. C + choice for the OLS
and LOGIT estimations, respectively. The model fit was
adequate; r-square was 35%, and the percentage of correctly
classified observations was 80%. However, due to the small
sample size, the model fit must be viewed with caution
because, even though statistical relationships within our
sample aren't affected, the external validity may be dimin-
ished. The results for model 3 indicate that when the project
was a brownfield project, the likelihood of an FP contract
decreased by 24 percent with a 15% significance level. Model
4 and the computation of the average marginal effect and
associated standard error indicates that for brownfield
projects, the likelihood of an FP contract decreased by 23.6
percentage points with a statistical significance level of 10%.
This result is consistent with H2 and with the theoretical
arguments presented by Bajari and Tadelis (2001). It should
be noted that the project complexity associated with the
greenfield/brownfield variable confirms the Bajari and
Tadelis model only for the FP vs. C + choice and does not
Table 2
Number of projects for each type of delivery strategy and type of project.
Type of project
Delivery strategy Greenfield Brownfield
Make 26 25
Ally with C + (EPCM) 9 14
Ally with FP (EPC) 8 4
support the model with respect to the make vs. ally choice. In
the final section of the paper, we address this issue and
propose theoretical extensions that reconcile these conflicting
findings.
With respect to the effect of prior interactions, we obtained
more reliable statistical results. The variable “prior contractor
presence” increased the likelihood of an FP contract by 41.4
percentage points in model 3 and by 38.4 percentage points in
model 4, both results with a 99% significance level. These results
strongly supported H3b and enabled us to reject H3a, indicating
that for the South American mining mega-projects studied, prior
interactions were related to the use of high-powered FP contracts
rather than C + contracts, supporting the claim that formal and
relational contracts are complementary.
For the control variables, we found that project budgets were
positively related to the ally choice, with strong statistical
significance and economic effect. Because project budgets were
strongly related to project size, and project size has previously
been used as a surrogate of project complexity (Bajari et al.,
2009), this finding is consistent with a positive relationship
between brownfield projects and the ally governance choice.
We also found that the likelihood of using a FP contract
decreased by 29.9 percentage points for projects with higher
environmental risks with a 95% significance level. This result is
consistent with the Bajari and Tadelis (2001) model because
environmental risk increases the likelihood of unexpected ex
post disturbances such as changes in project design required by
government environmental agencies, which are better handled
by a C + contract. However, we found no relationship between
environmental risk and the likelihood of choosing an ally to
Table 3
Number of ally projects for each contract choice and for contractor presence
during the previous stage of the project (with percentage of brownfield projects
in parentheses).
Prior interaction
Contract choice Not present during Present during
the 1st stage the 1st stage
Ally with C + (EPCM) 11 (54%) 12 (66%)
Ally with FP (EPC) 1 (100%) 11 (27%)
1858 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862

Table 4
OLS and LOGIT regressions for ally choice (vs. make) and FP contract choice (vs. C +).
Dependent variable: Ally Dependent variable: FP contract
Model 1 Model 2 Model 3 Model 4 Model 5 Model 6
OLS LOGIT OLS LOGIT OLS OLS
Coefficient Coefficient Average marginal Coefficient Coefficient Average marginal Coefficient Coefficient
effect effect
Brownfield project 0.151* 0.935‡ 0.155* − 0.240‡ − 1.689 − 0.236* 0.017 − 0.236‡
(0.092) (0.597) (0.094) (0.153) (1.229) (0.143) (0.166) (0.159)
Prior contractor presence 0.414*** 2.743*** 0.384*** 0.632***† 0.448*
(0.149) (1.101) (0.128) (0.163) (0.249)
Ln(project budget) 0.149*** 0.854*** 0.142*** − 0.087 − 0.478 − 0.067 − 0.050 − 0.090
(0.028) (0.241) (0.026) (0.074) (0.497) (0.064) (0.079) (0.079)
Number of packages − 0.005 − 0.053 − 0.008 0.049 0.306 0.043 0.037 0.050
(0.020) (0.113) (0.018) (0.038) (0206) (0.031) (0.038) (0.040)
Executed in Chile 0.025 0.597 0.099 − 0.102 − 0.377 − 0.052 − 0.002 − 0.108
(0.107) (0.627) (0.101) (0.184) (1.315) (0.181) (0.186) (0.195)
Environmental risk 0.103 0.151 0.025 − 0.283* − 2.140* − 0.299** − 0.289* − 0.242
(0.119) (0.551) (0.091) (0.152) (1.284) (0.129) (0.152) (0.200)
Prior contractor presence × Brownfield − 0.434‡†
project (0.275)
Prior contractor presence × Environmental − 0.058
risk (0.304)
Constant − 0.565** − 0.764‡ 1.122 .368 0.755
6.027***
(0.172) (1.579) (0.507) (3.350) (0.566) (0.520)

Observations 86 86 35 35 35 35
Percent correctly classified 79.1% 80%
r-square {pseudo r-square} 30% {25.5%} 34.5% {32.53%} 38.20%
⁎10% significance; ⁎⁎5% significance; ⁎⁎⁎1% significance; †1% significance in joint test; ‡15% significance. Robust standard errors in parentheses. Delta method
standard errors in AME.

manage the project. This dichotomy, in addition to the
dichotomies found for project budget and for project complex-
ity, strongly suggest that the governance choices of “make”,
“ally with C+”, and “ally with FP” are not affected in the
same direction by the same underlying covariates, suggesting
that they may not be thought as of lying in a “continuum” of
governance choices.
5.3. Potential mechanisms underlying the influence of prior
interactions
As discussed, the extant research claims that two types
of mechanisms produce a positive relationship between prior
interactions and the use of FP contracts. First, ex post opportunistic
renegotiation is discouraged by a relational contract based on prior
interactions that promote trust and modify behavior. Second, prior
interactions result in learning, which increases contractibility and
the feasibility of an FP contract because parties learn to include
contingencies in contracts.
Although not conclusive, our data shed light on the extent to
which the mechanism underlying the positive relationship
between prior experience and the choice of an FP contract
involves increased contractibility or the desire to prevent
opportunistic renegotiation. The variable “prior contractor
presence” interacted with “brownfield project” in model 5,
while the variable “prior contractor presence” interacted with
“environmental risk” in model 6 (see Table 4). As noted above,
brownfield projects and environmental risk present challenges
to contractibility and promote a C + contract. However, due
to the nature of these two hazards, they interact with prior
experience in different ways. Knowledge acquired through
prior experience is valuable for predicting the likelihood of
future disturbances and incorporating potential disturbances into
a more comprehensive FP contract for less complex projects such
as greenfield projects. However, the complex interdependencies
of brownfield projects reduce the extent to which the knowledge
acquired during earlier stages of the project can increase the
comprehensiveness of a contract. Thus, consistent with the
increased contractibility argument, prior interactions were expect-
ed to be related to the greater use of FP contracts in greenfield
projects and produce a negative interaction in the model.
In contrast, mining projects might severely affect the
surrounding environment as well as community and worker
safety, and some projects might be completely abandoned due to
these concerns. Because external contractors are responsible for a
project's environmental risks and for the process of obtaining
environmental permits, they might fear liability for uncontrolla-
ble events or might not trust the principal to act fairly if these
events occur. Consequently, the main challenge environmental
risk creates for contracts is the pressure on the principal to fairly
determine the contractor's liability if an adverse event occurs
(e.g., an environmental authority revokes permits or politicians
terminate the project for nontechnical reasons). Thus, if prior
experience increases the use of FP by limiting opportunistic
 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862 1859

renegotiations, this relationship should be stronger when the 0

temptation to renege is lower, leading to a positive interaction -.5
term.
These scenarios were explored by models 5 and 6 (see Table 4). -1
The interaction between the prior experience and brownfield

project variables was negative and significant with 85% confidence
level for the interaction term, and with 99% confidence level in a
joint statistical test for the individual and the interaction term.
Interaction terms are subject to multicollinearity, which increases
the standard deviations of the coefficients. In this case, the variance
of the interaction term was increased by a factor of 4.9. Due to this
variance inflation, we observed a large economic effect of the
interaction effect, lower statistical significance for the interaction
term alone, and higher statistical significance for the joint test.
In contrast, the interaction between prior experience and
environmental risk was modest and nonsignificant. We assessed
the extent to which the results of the OLS estimations were robust
to the LOGIT model. Following Ai and Norton (2003), we used
the INTEFF procedure in STATA to evaluate interactions. Fig. 1
illustrates the interaction effects for the 35 projects. The average
marginal effect was − 0.52, which is consistent with the
coefficient of − 0.43 obtained in the OLS regression. Fig. 2
displays the z-score for each of the interactions presented in
Fig. 1. Of the 35 interaction terms, 27 were significant at the 90%
level, and 15 of the 27 significant interactions were significant
at the 95% level. The average z-score was − 1.91. We performed
similar procedures to evaluate the interaction between environ-
mental risk and prior interaction but the results remained
non-significant. Fig. 3 illustrates how the type of project influences
the effect of prior interactions on the likelihood of an FP contract
and reveals that the effect of prior interactions on the use of an FP
contract is stronger for greenfield projects in which knowledge
acquired through prior experience contributes to more compre-
hensive formal contracts.
6. Discussion and conclusions
We analyzed mining company governance choices for
managing the implementation phase of mega-projects. In
0
Interaction Effect (Percentage points)
z-statistic
-1.5
-2
-2.5
-3
-3.5
0 .2 .4 .6 .8 1
Predicted probability of using a FP contract
Fig. 2. Statistical significance of the interactions between the prior contractor
presence and brownfield project factors.
particular, we studied how governance choices were affected by
project complexity, prior interactions with contractors, and by the
interaction of complexity with prior interactions. We believe that
the strategic management and the supply chain and operations
literatures should interact more closely to find answers and offer
prescriptions to the management of mega-projects. In this paper,
we offer additional evidence about the rather scantly empirical
literature on the governance of procurement in mega projects. In
what follows, we discuss the implications of the study findings.
First, we found that project complexity was associated
with the increased use of C + contracts. This finding, which is
consistent with Bajari and Tadelis (2001) as well as with prior
empirical evidence (e.g., Corts and Singh, 2004), suggests
that mining companies prefer to address the higher expected
disturbances of more complex projects by using more flexible C +
contracts because project complexity impairs contractibility.
However, we also found that project complexity was associated
with the increased use of internal teams to manage project
implementation. This finding is in stark contrast with the
theoretical predictions made by Tadelis (2002), which share the
underlying rationale of Bajari and Tadelis (2001), Nickerson and
Zenger (2004), and earlier empirical research (e.g., Macher,
2006).

90%
Greenfield Project
80%
-.25 Brownfield Project
70%
60%
Likelihood 50%
of EPC
-.5 40%
Contract
30%
20%
10%
-.75 0%
0 .2 .4 .6 .8 1 No Prior Contractor Prior Contractor
Predicted probability of using a FP contract Presence Presence

Fig. 1. Marginal effects of the interactions between the prior contractor presence Fig. 3. Effects of the interaction between the “prior contractor presence” and
and brownfield project factors. “brownfield” factors on the likelihood of an FP contract.
1860 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862
These results have important implications. First, extant research
suggests that the choices of make, ally, or buy with C +, and ally or
buy with FP lie on a continuum, and that the common determinants
of these choices exert a monotonic effect along this continuum.
However, our results indicate that complexity is nonmonotonic
over this continuum, pulling more towards “market” but pulling
towards a more “hierarchical” C + type of contract within the
market. We believe that these nonmonotonic relationships should
be further investigated to determine their prevalence, importance,
and antecedents.
The second implication reflects the impact of our results on the
extant theory that analyzes the relationship between complexity
and the make or buy choice. We believe that the theory of
Nickerson and Zenger (2004) is able to incorporate a positive
relationship between complexity and the use of the market at high
levels of complexity. In the Nickerson and Zenger (2004) theory,
problems with moderate levels of complexity are better resolved
by an authority-based hierarchy that substitutes direction for
education and knowledge transfer. However, problems with high
levels of complexity require a consensus-based hierarchy in which
firm managers foster extensive knowledge sharing, communica-
tion, and consensus building. A consensus-based hierarchy is
required because complex problems demand extensive knowledge
acquisition and the creation of many disparate disciplines and
knowledge sets, which cannot be achieved by a single central
manager. Instead, many units must first acquire and create
specialized knowledge and then meet to coordinate the solution of
the problem under the auspices of a consensus-building and
communication savvy common manager. However, this scenario
does not necessarily require the manager role. Instead, the image
of two units with specialized knowledge coming together to solve
a complex problem resembles an alliance (e.g., Gulati, 1998).
Because an alliance is able to solve the common direction
problem through different mechanisms such as contracts and
rules of exchange, relational contracting, spin-offs, and team
co-location, the units might not be owned by a single firm. Thus,
higher complexity might decrease the use of firm governance and
increase the use of market governance. This alternative view, in
which there is a nonlinear relationship between complexity and
firm governance in which high complexity is governed by the use
of an alliance, receives theoretical and empirical support from
Gulati et al. (2005), and is related to the recent work of Claussen
et al. (2014), who claim that the relationship between firm
governance and complexity exhibits an inverted U shape.
Third, we found that prior contractor presence during earlier
stages of the project increased the use of an FP contract in the
implementation stage, and that this relationship was stronger
when the project was less complex but unaffected by
envoronmental risks. These findings suggest that prior interac-
tions do not reduce the incentive to renege on promises through
relational contracting but increase contractibility for simpler
projects in which prior knowledge can effectively be translated
into increased contractual detail. These findings thus contribute to
the ongoing debate regarding the relationship between informal
contracting, which involves prior interactions and trust, and
formal contracting, which involves more detailed contracts that
foster the use of FP. In the context we investigated, we found
evidence for a complementary relationship that involves learning
as an underlying mechanism, which is consistent with much of the
recent research in the strategy and organization literature (e.g.,
Ariño et al., 2014; Argyres et al., 2007). More importantly, the
results of the present study also indicate that because prior
interactions produce knowledge and learning, a complementary
relationship is more likely to occur for less complex projects in
which prior knowledge is more effectively translated into more
comprehensive contracts. This result adds to recent research
seeking to unpack the circumstances in which formal and informal
contracts are substitutes or complementary (Abdi and Aulakh,
2014; Bercovitz and Tyler, 2014; Carson et al., 2006; Faems et al.,
2008; Gil, 2013; Lui and Ngo, 2004; Poppo and Zhou, 2014; Rhee
et al., 2014). Future research should synthesize the results of this
avenue of research.
Fourth, the findings of our study have implications for the
issue of the appropriate measure of prior interactions, and
the extent to which this measure affects the identification of
the different types of mechanisms underlying influence. In
general, interactions in prior projects are used to measure prior
interaction (e.g., Corts and Singh, 2004; Kalnins and Mayer,
2004). However, because new projects typically differ from
earlier projects, measuring interactions using prior projects
does not fully capture the mechanism based on the learning and
knowledge produced by prior interactions but is biased towards
mechanisms that involve reducing opportunism and trust. The
choice of research context in the present study allowed us to
circumvent this limitation by measuring prior interactions
within the same project.
Our study exhibits a number of limitations. First, it was
restricted to a single industry and geographical area, which limits
the generalizability of the conclusions. Second, the relatively
small size of our sample limits the statistical power of the analysis
and reduces its external validity. In the present study, the focus on
mega-projects in a specific industry resulted in a relatively
small sample size, similar to Ryall and Sampson (2009), who
performed an in-depth analysis of 52 joint technological
development contracts. Finally, the results for prior interactions
may be threatened by endogeneity: it is likely that the choice of
repeating the contractor in the first and second stage of the project
is executed endogenously with the choice of contract. For
example, mining companies might systematically self-select a
prior interaction strategy by considering the extent to which their
firm's characteristics influence the performance of a C + or a FP
contract. To control for possible endogeneity, we performed a
supplementary regression analysis in which we computed the
inverse Mills ratio using the project budget as the exclusion
restriction (see Hamilton and Nickerson, 2003). Although the
relatively small sample size affects this regression, we obtained
results that were largely consistent with those presented in the
Results section. This supplementary regression analysis is
available from the authors upon request.
Conflict of interest statement
The authors declare that they have no conflict of interest.
 F. Brahm, J. Tarziján / International Journal of Project Management 33 (2015) 1851–1862
Funding
Research support for this study was provided by the
National Comission for Cientific and Techonological Research
of Chile (FONDECYT-1141101).
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