Project Modifications and Bidding in Highway Procurement Auctions

52 Pages Posted: 10 Dec 2015 Last revised: 30 Aug 2017

See all articles by Dakshina G. De Silva

Dakshina G. De Silva

Department of Economics, Lancaster University Management School

Timothy Dunne

Federal Reserve Bank of Cleveland

Georgia Kosmopoulou

University of Oklahoma - Department of Economics

Carlos Lamarche

University of Kentucky

Date Written: 2015-12-01

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

JEL Classification: D4, L1, L2

Suggested Citation

De Silva, Dakshina G. and Dunne, Timothy and Kosmopoulou, Georgia and Lamarche, Carlos, Project Modifications and Bidding in Highway Procurement Auctions (2015-12-01). FRB Atlanta Working Paper No. 2015-14. Available at SSRN: https://ssrn.com/abstract=2701187

Dakshina G. De Silva (Contact Author)

Department of Economics, Lancaster University Management School ( email )

Lancaster LA1 4YX
United Kingdom

Timothy Dunne

Federal Reserve Bank of Cleveland ( email )

PO Box 6387
Cleveland, OH 44101-1387
United States

Georgia Kosmopoulou

University of Oklahoma - Department of Economics ( email )

633 Elm Avenue
306 Ellison Hall
Norman, OK 73019
United States
405-325-3083 (Phone)
405-325-5842 (Fax)

HOME PAGE: http://georgiakosmopoulou.oucreate.com/

Carlos Lamarche

University of Kentucky ( email )

Lexington, KY 40506
United States

HOME PAGE: http://gattonweb.uky.edu/Faculty/lamarche/

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