Sous-traitance et avenants dans les marchés publics: une illustration

François Maréchal and Pierre-Henri Morand ()

Revue d'économie politique, 2002, vol. 112, issue 1, 103-120

Abstract: Subcontracting is a widespread use in procurement contracting. However, subcontracting regulation differs between countries. In the USA e.g., each bidder is required to submit the potential subcontracting plan before the award of contracts when they exceed $500,000 ($1,000,000 for construction). On the contrary, in Canada and in the EU, contracting authorities may ask the tenderer to precise in his bid, the share of subcontracting but also may allow him to choose the subcontracting plan after the award of the contract. Therefore, the purpose of this paper is to compare these two legal frameworks and derive subcontracting regulatory rules in public procurement. Government contracts awarded by fixed price sealed bid auctions are often renegotiated by change orders, which occur after the contract is signed. These are due to exogenous uncertainty characterizing the contract and might either rise or decrease the initial amount. In our paper, the potential amount of change orders depends on the subcontracting level. If the firm undertakes the whole contract, it faces all the exogenous uncertainty. By subcontracting part of the contract, the firm reduces its potential change orders. However, it may extract specific rents from subcontractors (e.g. because of sunk or learning costs, subcontracting generates rents, but due to agency relation, too much subcontracting may become unprofitable for the firm). This trade-off determines the optimal choice of subcontracting. On the one hand, raising the share of subcontracting reduces the potential amount of change orders. On the other hand, the firm may obtain more rents. Bidders choose their optimal bid taking into account rents and expected change orders. Nevertheless, the value of these change orders may differ from the one, which was first expected and may lead to ex post negative profits. We consider that the aim of the public buyer is to choose the rule that yields the lowest expected cost. Comparing pre and post-award subcontracting plan, we derive a subcontracting regulatory rule. Especially when change orders with mean 0 are expected, the model confirms actual rules that impose pre-award subcontracting plans. However, the availability of post-award contracting may be justified with significant expected change orders. Then, for each subcontracting regulatory rule, we determine the probability that the winning bid yields negative profits. Counter intuitively, we show that the rule, which minimizes expected costs, does not necessarily co-occur with the highest probability for the winning bidder to get ex post negative profits. Classification JEL : D44, L51

Keywords: procurement bidding; subcontracting; change orders; ex post regret (search for similar items in EconPapers)
JEL-codes: D44 L51 (search for similar items in EconPapers)
Date: 2002
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Working Paper: Sous-traitance et avenants dans les marchés publics: une illustration (2002)
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