Bidding for Incomplete Contracts: An Empirical Analysis of Adaptation Costs

Abstract

Procurement contracts are often renegotiated because of changes that are required after their execution. Using highway paving contracts we show that renegotiation imposes significant adaptation costs. Reduced form regressions suggest that bidders respond strategically to contractual incompleteness and that adaptation costs are an important determinant of their bids. A structural empirical model compares adaptation costs to bidder markups and shows that adaptation costs account for 7.5–14 percent of the winning bid. Markups from private information and market power, the focus of much of the auctions literature, are much smaller by comparison. Implications for government procurement are discussed. (JEL D44, D82, D86, H57, L13, L74, R42)

The Fiscal Implications of Public-Private Partnerships in Honduras: Current Developments and the Road Ahead

“…One fundamental issue with regards to the current Honduran legal framework is the multiplicity of input specifications (for example, specifying construction materials to be used for a project). The evidence illustrates that using this kind of approach significantly increases the cost of the project (Bajari et al, 2014). PPPs can be more efficient than traditional public procurement specifically because the contract focuses on what is to be delivered, not how it is delivered.…”

A festschrift for Graham Ive

“…In recent years, we have seen an imposing body of work on construction-related issues in mainstream economics journals, including contract forms (Bajari and Tadelis, 2001;Ewerhart and Fieseler, 2003), award procedure Ganuza, 2007;Bajari et al, 2014), risk sharing (Olsen and Osmundsen, 2005), subcontracting (Tadelis, 2002), bidding behaviour , procurement efficiency (Jensen and Stonecash, 2005;Bajari et al, 2014), corruption in procurement (Auriol, 2006), and public-private partnerships (Hart, 2003;Maskin and Tirole, 2008;De Bettignies and Ross, 2009). While modelled elegantly, these works may not be pieced together coherently enough to form an integrated understanding of construction economic activity.…”

“…Actually, in recent years, construction issues have received increasing attention from mainstream economists. The most remarkable stream of research is owing to the works of Steven Tadelis and Patricia Bajari (Bajari et al, 2009;Levin and Tadelis, 2010;Bajari and Lewis, 2011;Bajari et al, 2014). These papers are concerned with some of the core issues in construction economics, including construction contracts or public procurement (see a summary in Table 2).…”

Understanding Construction Delay Analysis and the Role of Preconstruction Programming

“…First, there is the issue of contractual related problems in the form of incomplete or ambiguous contract documents (Thomas, et al, 1994;Al-Najjar, 1995, Yates andHardcastle, 2003) and unfair risk allocation in contracts (Jannadia et al 2000;Pickavance, 2005, p.16). These issues have however continued to remain quite challenging to resolve effectively (Al-Najjar, 1995;Bajari et al, 2007), partly due to employers' inability to fully and adequately address all possible uncertainties within their contract documents (Ibbs and Ashley, 1987;Thomas, et al, 1994;Walker and Pryke, 2010). The second issue relates to inadequate or lack of necessary information to support the entitlement and quantification of claims made (Jergeas and Hartman, 1994;Kangari, 1995;Vidogah and Ndekugri, 1998).…”