The effects of varying emphasis on risk premiums on performance-based MRO contracts

As part of the paradigm shift in aerospace service contracts, a principal (e.g., an airline) now deals with only one agent (e.g., an aircraft integrator or MRO service provider) - an agent can service any number of contracts. Due to the sporadic nature of unscheduled MRO, these integrators would stipulate a fee based on a detailed cost structure consisting of the amount of spares and effort required to service these packages. By doing so, the contractual value may be overpriced, thus making the provider less competitive, or underpriced, consequently incurring losses. This work aims to optimally value a service contract employing a multi-task principal-agent model to support resource allocation - such a service contract comprises three terms, i.e., cost-plus, fixed-price and performance-based, each with a varying degree depending on the risk averseness of the parties involved. Risk mitigation is achievable through cost sharing of resources. With this, we discuss the effect varying emphasis of risk premiums associated with performance uncertainty on an MRO contract.