FEEM working papers "Note di lavoro" series
2017 .002

Cost Uncertainty and Time Overruns in Public Procurement: a Scoring Auction for a Contract with Delay Penalties


Authors: Cesare Dosi, Michele Moretto
Series: Economic Theory
Editor: Carlo Carraro
Keywords: Public Procurement, Fixed-price Contracts,  Real Options, Time Overruns, Scoring Auctions, Liquidated Damages
JEL n.: C61, D44, D86, K12

Abstract

Drawing on the real-options theory we analyse bidding behaviour in a sealed-bid-first-score procurement auction where suppliers, facing variable production costs, must simultaneously report the contract price and the cost level at which they intend to perform the project. We show that this award mechanism is potentially able to maximize total welfare. Next we look at the time incentives required to ensure compliance with the promised optimal trigger value. We show that ex-post efficiency may call for delay penalties higher than the anticipated harm caused by time overruns, in so doing questioning the efficiency rationale of existing liquidated damages rules.

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Suggested citation: Dosi, C., M.  Moretto, (2017), 'Cost Uncertainty and Time Overruns in Public Procurement: a Scoring Auction for a Contract with Delay Penalties', Nota di Lavoro 2.2017, Milan, Italy: Fondazione Eni Enrico Mattei

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