Performance‐Based Maintenance Service Contract With Business Interruption Insurance Considering the Supplier's Heterogeneous Risk Attitudes

In modern industrial systems, the outsourcing of the maintenance service of mission‐critical equipment (MCE) is becoming common practice for increasing the system flexibility and decreasing operating costs. For the MCE operator and the service provider, a performance‐based contract (PBC) is critical to the cooperation between these two parties. In the PBC of maintenance service, equipment availability is often used as the performance indicator. Considering the potential loss due to the MCE downtime, business interruption (BI) insurance is often purchased by the practitioners for mitigating the operating risks. This paper designs a PBC by taking the supplier's risk attitudes and BI insurance into account. Specifically, this paper constructs a PBC design model using principal‐agent analysis and explores the role of BI insurance in contract parameters (the fixed payment and the penalty/reward rate). Results show that greater (smaller) fixed payments and penalties in PBCs are more incentive for suppliers as their risk‐averse (risk‐seeking) degree rises. When BI insurance is purchased, the operator would be more suitable to use a contract with smaller penalties (for risk‐averse, risk‐neutral, risk‐seeking suppliers) compared to a PBC without BI insurance. Finally, a numerical example illustrates our proposed PBC model.