Project modifications and bidding in highway procurement auctions

Dakshina De Silva, Timothy Dunne, Georgia Kosmopoulou and Carlos Lamarche

No 2015-14, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: This paper examines bidding behavior in a setting where post-bid-letting project modifications occur. These modifications change both the costs and payouts to the winning contractor, making the contract incomplete. Recent empirical research shows that bidders incorporate the likelihood of such changes in contracts into their bidding strategies. In particular, contractors may adjust bids to compensate for renegotiation, resequencing of tasks, and other costs associated with project modifications. This paper extends this literature by examining bidding behavior and project modifications in Texas, where there has been a significant shift in change order policy. Specifically, Texas sharply reduced its spending on change orders starting in the mid-2000s. In the period before the change in policy, we estimate that project modifications raised bidder costs by 4 percent to 6 percent. In the period after the change in policy, the impact of project modifications on bidder costs is estimated to be closer to 1 percent.

Keywords: procurement auctions; incomplete contracts (search for similar items in EconPapers)
JEL-codes: D4 L1 L2 (search for similar items in EconPapers)
Pages: 52 pages
Date: 2015-12-01
New Economics Papers: this item is included in nep-com, nep-cta and nep-ppm
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Citations: View citations in EconPapers (2)

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