Uncertainty in Procurement Contracting With Time Incentives

Abstract

This article studies cost‐plus‐time (A+B) procurement contracting with time incentives in the highway construction industry. In the presence of construction uncertainty, the contractor's actual completion time may deviate from the bid completion time, and the A+B contract design is not ex post efficient. Using data from highway procurement contracts in California, we show that an ex post efficient lane rental contract would reduce the social cost by $41.39 million (43.11%) on average. Moreover, the average commuter cost would decrease by $62.06 million (78.96%), suggesting a substantial reduction in the construction externality to commuters from lane rental contracts.