Holonic manufacturing systems (HMS) is based on the notion of holon, an autonomous, cooperative and intelligent entity to provide a econfigurable, flexible and decentralized manufacturing environment to respond to changing needs and opportunities. A set of holons that cooperate to achieve a goal forms a holarchy. How to design a mechanism to form a holarchy to achieve a goal while minimizing the overall cost is a challenge. The objectives of this paper are to propose models and develop collaborative algorithms to guide the holons to form a holarchy to coherently move toward the desired goal state ultimately. We adopt contract net protocol (CNP) to model mutual selection of holons in forming a holarchy. We formulate a holarchy optimization problem to minimize the cost subject to the feasibility constraints. To analyze the feasibility of a holarchy, a Petri net (PN) model is proposed. As classical PN models do not take into account the cost involved in firing transitions, we augment the RN model with cost functions in the problem formulation. Due to the distributed architecture of HMS, the internal structure of each potential holarchy that acts as bidder in CNP is not available to the manager. A key issue is to determine the feasibility of a holarchy without constructing the whole PN model of the given hierarchy. We study the feasible conditions for a holarchy and propose a collaborative algorithm to analyze the feasibility and award contracts to holons without constructing the whole model of a holarchy. (c) 2007 Elsevier Ltd. All rights reserved.