Project Modifications and Bidding in Highway Procurement Auctions

Dakshina G. De Silva, Timothy Dunne, Georgia Kosmopoulou, and Carlos Lamarche

Working Paper 2015-14
December 2015

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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.

JEL classification: D4, L1, L2

Key words: procurement auctions, incomplete contracts

The views expressed here are the authors' and not necessarily those of the Federal Reserve Bank of Atlanta, the Federal Reserve System or the National Science Foundation. Any remaining errors are the authors' responsibility.
Please address questions regarding content to Dakshina G. De Silva, Department of Economics, Lancaster University,; Timothy Dunne, Research Department, Federal Reserve Bank of Atlanta,; Georgia Kosmopoulou, University of Oklahoma and National Science Foundation,; or Carlos Lamarche, Department of Economics, University of Kentucky,
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