COMPETITION AND COST OVERRUNS IN PROCUREMENT^*

Abstract

Most cases of cost overruns in public procurement are related to important changes in the initial project design. This paper deals with the problem of design speci¯cation in public procurement and provides a rationale for design misspeci¯cation. We propose a model in which the sponsor decides how much to invest in design speci¯cation and awards competitively the project to a contractor. After the project has been awarded the sponsor engages in bilateral renegotiation with the contractor, in order to accommodate changes in the initial project's design that new information makes desirable. When procurement takes place in the presence of horizontally di®erentiated contractors, the design's speci¯cation level is seen to a®ect the resulting degree of competition. The paper highlights this interaction between market competition and design speci¯cation and shows that the sponsor's optimal strategy, when facing an imperfectly competitive market supply, is to underinvest in design speci¯cation so as to make signi¯cant cost overruns likely. Since no such misspeci¯cation occurs in a perfectly competitive market, cost overruns are seen to arise as a consequence of lack of competition in the procurement market.

Factors influencing cost over-run in Indian construction projects

“…The reference point for estimating the cost overrun should be derived at the detailed planning stage where design, scope, specification and final cost are developed [15]. An alternative point of reference for determining cost overrun is the award of contract, which is the final negotiated and agreed price at the construction commencement [16,17]. The relationship between project size and cost overruns is notable as the larger the construction project is greater in the percentage cost overrun.…”

Analysis of the Development of the Public Procurement in the Czech Republic in the Years 2008-2015

“…Implicitně tak přispívá k zajištění vyšší konkurence (přímé, ve formě nárůstu podaných nabídek, i potenciální), která umožňuje zadavateli vysoutěžit nižší cenu s nejmodernější dostupnou technologií. Což opětovně zpětně zvyšuje transparentnost (Ganuza, 2007).…”

Optimal Cost Overruns: Procurement Auctions With Renegotiation

“…In other words, cost overruns are the outcome of a strategic decision in our model. Moreover, Ganuza () analyzes solely price‐only auctions, whereas we also investigate multidimensional auctions . A similar model where the procurer's preferences are initially unknown and suppliers are horizontally differentiated is analyzed by De Chiara ().…”

“…Ganuza () uses the same approach to model transaction costs of contract renegotiation. In his interpretation, there are transaction costs associated with renegotiation and these costs are stochastic.…”