Time Overruns in Public Procurement and Concession Contracts: Penalty Fee and Option Value to Delay
6 Pages Posted: 15 Mar 2014
Date Written: March 13, 2014
Evidence from ongoing procurement and concession contracts shows that time overruns are widespread. Two key elements, among others, can affect the delays in the execution of the contracts: a) uncertainty over production costs; b) inefficiency in the judicial system. In this article we summarize a couple of works (D'Alpaos et al., 2013 and D'Alpaos and Moretto, 2013), in which the authors theoretically and empirically investigate some causes of time overruns in public procurement and concession contracts and determine the trade-off between the supplier’s option value to delay and the penalty fee to be paid in the event of delay. The main results are tested on Italian public procurement data and show that the supplier's incentive to delay is greater the higher the volatility of production costs and the lower the "efficiency" of the judicial system.
Keywords: Procurement and Concession Contracts, Option Value to Delay, Strategic time overruns
JEL Classification: D81, H54, H57, L51
Suggested Citation: Suggested Citation