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This article analyzes an important dimension in which the organization of the projects performed by the same firm can differ: the insourcing or outsourcing of an activity that needs to be undertaken in each of the different projects. Analyzing the variability of a firm's insourcing or outsourcing decision across its projects gives us a better understanding of the firm's decision-making process in terms of the stability of its choices across projects and the main determinants of that variability. This analysis is valuable because a firm that manages multiple projects can benefit from the careful analysis and consideration of the interactions among and the specificities of its projects. Using a comprehensive database of construction firms and projects, we conclude that firms demonstrate variability in their insource or outsource choices across projects and that this variability is explained by factors such as the number of projects simultaneously undertaken, the variability in a project's complexity, and their market power in local markets. These results suggest that the theories explaining firm boundaries in project-based firms should be expanded to include interrelationships between projects and the individual project characteristics that drive differences in insource or outsource choices.

The increasing significance of project-based firms has stimulated considerable interest in them as distinctive types of economic actors (Whitley, 2006). Project-based firms may choose different organizational arrangements for the different projects that they manage (Collyer and Warren, 2009, Killen and Kjaer, 2012 and Petit, 2012). This article analyzes an important dimension in which the organization of the projects performed by the same firm can differ, i.e., insourcing or outsourcing an activity that needs to be undertaken in the different projects executed by the firm. An analysis of the variability of a firm's insourcing or outsourcing decision across its projects gives us a better understanding of the firm's decision-making process in terms of the stability of its choices across projects and of the main determinants of that variability. Numerous studies exist on firms' insourcing and outsourcing decisions. Two of the most well known approaches are those based on transaction cost economics (TCE) and on the capabilities theory (CT). TCE (e.g., Williamson, 1975, Williamson, 1985, Williamson, 1991 and Williamson, 2000) prescribes that the firm should insource an activity when the transaction costs of using the market to attain that activity (i.e., outsourcing) are greater than the costs of internally producing that activity (i.e., insourcing). The costs of using the market are higher when the specificity of the assets involved in the transaction, the frequency of the transaction, and the uncertainty of the transaction are higher, whereas the costs of internal production are higher when the activity demands more information and communication costs (Mookherjee, 2006 and Gifford, 1992) and presents higher levels of complexity (Gulati et al., 2005 and Claussen et al., 2014). In contrast, the CT (e.g., Nelson and Winter, 1982, Barney, 1986, Mahoney and Pandian, 1992, Peteraf, 1993, Conner and Prahalad, 1996, Argyres, 1996, Jacobides and Hitt., 2005., Mayer and Nickerson, 2005 and Mayer and Salomon, 2006) argues that the insourcing or outsourcing decision is primarily determined by the heterogeneous distribution of productive capabilities between contractors and subcontractors. Thus, the activity will be outsourced if a subcontractor has better capabilities than contractors and insourced if a contractor has better capabilities than do subcontractors in the performance of that activity. This discussion leads us to conclude that according to the “conventional” approaches that are used to analyze insourcing and outsourcing decisions, the firm should tend to select the same decision for the same activity in each of its different projects at each moment in time, i.e., either that activity will imply higher or lower transaction costs or the firm or subcontractor will have greater capabilities in that activity. The main reason behind the previous conclusion is that TCE and the CT take the specific transaction to be the main unit of analysis and do not consider (at least explicitly) the interdependencies among projects and transactions. By allowing us to analyze the variability of their insourcing or outsourcing decision for each activity and project at a specific time, project-based firms provide an ideal setting to assess whether some of the implicit prescriptions of the well-established theories of the firm are confirmed and to understand some aspects that are not observed using a standard mean-choice approach. Thus, one of the novel empirical contributions of this article is the assessment of whether the main prescriptions of the previously mentioned theories can be applied to project-based firms. A related novel contribution is the determination of the causality of the variability in the choice to insource or outsource at the project-based firm level. Our analysis should be interesting for managers because it enables observing how organizational decisions are made across project-based firms and whether they consider each project to be a separate entity with a possible different organizational structure or whether the firms tend to make the same insource or outsource choice across different projects. To undertake our study, we use extensive data from construction projects. The level of detail and the extent of the data permit us to perform an in-depth exploration of the backward integration decisions made by building contractors for each of the eight main specialty trade activities for each project (e.g., the construction of metallic structures, electric works, and heating). The data indicate whether a contractor handled each of the activities for a given project internally or externally through subcontractors and allow us to distinguish the number, size, complexity, timing, and types of the projects (e.g., residential and commercial) that each building contractor managed. Our results show that project-based firms exhibit variability in their insourcing or outsourcing choices, i.e., the same firm may make different choices for the same activity across its different projects; as such, our analysis confirms that a project-based firm faces dilemmas regarding the insource or outsource choice that are not quite the same as the dilemmas faced by non-project-based firms. Variables such as the number of projects simultaneously undertaken by a firm and project type and complexity are important to explain the variability of the insourcing decision. These results show that the prescriptions of the leading theories of firms' boundaries have to be complemented when analyzing project-based firms. Our results also enable a better understanding of project-based firms and their modes of organizing and controlling work, which is important because the proliferation of this type of firm has been heralded as the development of a new “logic of organizing” in market economies (DeFillippi and Arthur, 1998, Ekstedt et al., 1999 and Whitley, 2006). Although we focus on the construction industry, project-based firms are also commonly found in industries such as professional services, entertainment, feature film production, and sports, as well as in highly dynamic sectors such as computer software development and industries that produce other complex products and systems (Grabher, 2002, Lundin and Norbäck, 2009 and Sydow et al., 2004). Following Archibald (1993) and Turner and Keegan (2000), we conceptualize project-based firms as those whose work is primarily oriented as projects. For a possible variation of the insource or outsource decision, we consider project-based firms that develop at least two projects during our sample period, and each of the projects has to be independently labeled. Project-based businesses differ from other types of business primarily through their specific relational context, time-limitedness, value creation properties, levels of complexity, and limited potential for standardization (Hellström and Wikström, 2005). Following this introduction, the second section discusses the study's theoretical background and presents the hypotheses. The third section introduces the empirical setting, the sample, and the data and presents the econometric methods. The fourth section presents and discusses the main results. Finally, the conclusions are presented in the fifth section.

Project-based firms face challenges and dilemmas regarding the insource or outsource choice of different activities at the project level that are not quite the same as those for non-project-based firms. These additional challenges primarily originate from the simultaneous undertaking of more than one project and from the interdependencies among decisions arising in this setting. Two important queries in this type of situation are whether the firm selects the same insource or outsource choice at the activity level in each of the projects it performs and some of the factors that may explain the variability of the insource or outsource choice for the same activity at the firm level. We argue that the literature has not addressed these last two questions and hope that this article represented a first step in this direction. The two previously mentioned questions have important implications for the management of project-based firms. One implication is to show the stability of the insource or outsource choices at the activity level. The insource or outsource choice of an activity not displaying any significant variation across the different projects undertaken by the firm implies that managers focus on the insource or outsource decision at the activity level without considering the number and features of the projects being undertaken by the firm, i.e., the firm selects an insource or outsource choice for each activity and basically replicates that choice across all of its projects that require that activity. In contrast, the insource or outsource choice of the same activity displaying variability across projects indicates that managers think about that choice in each of their projects and account for the interdependencies that may arise between them. Finally, our article also sheds some light on testing some of the variables that may affect the variability of the insource or outsource choice. From our analysis, we conclude that variables such as the number of projects and the type and complexity of projects are important for determining the variability of the insource or outsource choice. An important management implication arising from the results presented in this article is that the different projects undertaken by a firm can be observed as neither completely independent islands nor completely dependent on each other. The existence of interdependence promotes the emergence of additional challenges; therefore, managers must know that the insource or outsource choices have to be determined more dynamically when they undertake multiple projects that display, for example, different types and levels of complexity. The results suggest that the theories and models explaining firm boundaries in project-based firms should be expanded to include issues related to interrelationships between projects, as well as individual project characteristics that drive differences in boundary choices. The results also suggest that the insource or outsource choices in project-based firms cannot have a “one size fits all” policy. The nested and interdependent nature of the governance choices for the different projects within a firm, as well as the different project settings and characteristics, calls for different choices across firms and projects. Our analysis is also related to the business model literature. According to Amit and Zott (2001), a business model can be defined as “the structure, content, and governance of transactions between a focal firm and its exchange partners”, whereas Casadesus-Masanell and Ricart ( 2010) posited that a business model implies choices of assets and policies, and the governance of those assets and policies, and concluded that seemingly innocuous differences exist in the governance of assets and policies. Because the governance choice is equivalent to the insource or outsource choice and is part of the business model decision, knowing how firms tackle similar governance choices in different projects and understanding the drivers of these results is valuable. Understanding how business models are designed and executed at the project level seems to be a critical issue to better address the value generated from individual projects in project-based firms (Wikström et al., 2010). A small number of exploratory studies sought to analyze business models in project-based industries. Mutka et al. (2010) analyzed a sample of eight different projects and concluded that business models of delivery projects vary, whereas Kujala et al. (2010) identified considerable differences in the business models of five projects delivered by a multinational power company. Additionally, Wikström et al. (2010), working on an exploratory study of six project-based firms operating in diverse industries such as telecom, shipbuilding, and power systems, found that all firms reported that they have several business models for similar industrial segments to address different client needs. We add to this literature by performing an econometric analysis—based on a large set of projects—of insourcing or outsourcing choices in project-based firms that tends to confirm that the same firm may use different business models for different projects. We think that our article contributes several ideas for further research. First, to add robustness to our main results, conducting similar studies using large databases from other industries will be informative. It would also be interesting to analyze the possible interactions among the explanatory variables. We also think that the analysis of the relationship between the insource or outsource choice and the choice of business model at the project level needs to be much more detailed. Moreover, we think that much more work needs to be performed to understand how the interactions between the projects being handled by the same firm affect the projects' boundary choices and their interdependencies. Our paper has two main limitations. First, by focusing on one industry and one country, we lose generalizability. Second, endogeneity concerns were analyzed and tackled but were not ruled out. We suggest further research to address these limitations.