Maintenance service contract model for heavy equipment in mining industry using principal agent theory

Mining industry is characterized by a high operational revenue, and hence high availability of heavy equipment used in mining industry is a critical factor to ensure the revenue target. To maintain high avaliability of the heavy equipment, the equipment’s owner hires an agent to perform maintenance action. Contract is then used to control the relationship between the two parties involved. The traditional contracts such as fixed price, cost plus or penalty based contract studied is unable to push agent’s performance to exceed target, and this in turn would lead to a sub-optimal result (revenue). This research deals with designing maintenance contract compensation schemes. The scheme should induce agent to select the highest possible maintenance effort level, thereby pushing agent’s performance and achieve maximum utility for both parties involved. Principal agent theory is used as a modeling approach due to its ability to simultaneously modeled owner and agent decision making process. Compensation schemes considered in this research includes fixed price, cost sharing and revenue sharing. The optimal decision is obtained using a numerical method. The results show that if both parties are risk neutral, then there are infinite combination of fixed price, cost sharing and revenue sharing produced the same optimal solution. The combination of fixed price and cost sharing contract results in the optimal solution when the agent is risk averse, while the optimal combination of fixed price and revenue sharing contract is obtained when agent is risk averse. When both parties are risk averse, the optimal compensation scheme is a combination of fixed price, cost sharing and revenue sharing.