Unbalanced tendering forms In ConstructioN

Unbalanced tendering forms In Construction

Unbalanced Bidding Models In Construction

Introduction

Procurement of goods and services is commonly performed using auctions of one type or another, the benefits of which are well known and vigorously advocated. Namely, competitive bidding will result in low prices and sets rules that limit the influence of favoritism and political ties. When the good being procured is complex and hard to specify, it is often the case that alterations to the original design are needed after the contract is awarded and production begins. This may result in considerable discrepancies between the lowest winning bid and the actual costs that are incurred by the parties. A leading example is the “Big Dig” in Boston where 12,000 changes to more than 150 design and construction contracts have led to $1.6 billion in cost overruns, much of which can be traced back to unsatisfactory design and site conditions that differed from expectations. These changes not only have an impact on the direct costs of production, but they can also impose significant transaction costs due to adaptation and renegotiation. Changing the contract disrupts the normal flow of work and increases the effort needed to coordinate workers, subcontractors and material suppliers. Also, renegotiating the contract generates transaction costs in the form of haggling, dispute resolution and opportunistic behavior. In this paper we develop a model of bidding in the face of incomplete contract design, and present evidence that transaction costs are significant in a unique data set of highway improvement contracts awarded by the California Department of Transportation (Caltrans). We also estimate a structural econometric model of how bidders strategically respond to contractual incompleteness.

Competitive tendering for main road Contracts

As described in Hinze (1993) and Clough and Sears (1994), procurements for highway construction, as well as many other procurements in the public sector, are often done through competitive bidding on unitprice contracts. For such contracts, civil engineers first prepare a list of items that describe the tasks and materials required for the job. For example, in the contracts we investigate, items include laying asphalt, installing new sidewalks and striping the highway. For each work item, the engineers provide an estimate of the quantity that they anticipate contractors will need in order to complete the job. For example, they might estimate 25,000 tons of asphalt, 10,000 square yards of sidewalk and 50 rumble strips. The itemized list is publicly advertised along with a detailed set of plans and specifications that describe exactly how the project is to be completed.

A contractor that wishes to bid on the project will propose per unit prices for each of the work items on the engineer's list. A contractor's bid is therefore a vector of unit prices that specifies his price for each contract item. Table 1 shows the basic structure of a completed bid, which must be sealed and submitted prior to a set bid date. When the bids are opened, the contract is awarded to the contractor with the lowest estimated ...