Optimal Cost Overruns: Procurement Auctions and Renegotiation

Herweg, Fabian; Schwarz, Marco A.

doi:10.2139/ssrn.2770417

Cited by 5 publications

(6 citation statements)

References 18 publications

(25 reference statements)

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“…Considering federal purchases only, procurers obligated $5.6 trillion in government spending between 2005 and 2015 and 59% of contracts between 2005 and 2015 were completed behind schedule, incurred additional costs, or both 1. The massive volume of goods and services procured compels contracting officers to minimize both delays and cost overruns, which are the most critical post‐award metrics in both project management (Herweg & Schwarz, 2018) and empirical economics (Decarolis, 2014). Performance bonding is considered by practitioners as a powerful supply chain practice to alleviate such concerns because it brings in the benefits of the outsourcing.…”

Section: Introductionmentioning

confidence: 99%

Supplier selection and contract enforcement: Evidence from performance bonding

Giuffrida

Rovigatti

2022

Economics Manag Strategy

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We analyze an important but little‐studied institution for balancing supply risk in the management of procurement operations: performance bonding. By adding the surety as a third party that guarantees contract fulfillment between supplier and buyer, performance bonding aims to streamline the purchasing process by influencing both contractor selection in the bidding phase and contract enforcement during project execution. Using the data on US government procurement from 2005 to 2015 and exploiting an exogenous variation in the threshold for its application to construction contracts, we find that performance bonding improves contract outcomes by 10.5% and 3.7% in terms of delays and extra costs, respectively. Net of bond premia, which by law are included in the award amounts, this effect translates into savings of about 4% in the budget for federal construction projects and 16% for mid‐size projects. We provide suggestive evidence on the effectiveness of selection and monitoring by sureties as driving channels.

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Section: Introductionmentioning

confidence: 99%

Supplier selection and contract enforcement: Evidence from performance bonding

Giuffrida

Rovigatti

2022

Economics Manag Strategy

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“…As Bandiera, Prat and Valletti [5] showed for the procurement of standardized goods, the presence of bureaucratic inefficiency might lead to overestimating corruption. Furthermore, for the procurement of public work, as renegotiation might be an optimal strategy for complex contracts (Herweg and Schwarz [35]).…”

Section: Indicators' Validationmentioning

confidence: 99%

“…34 To minimize the arbitrariness of our choices and ensure replicability, we implement all three algorithms through commonly used statistical packages. 35 Our data structure shows both shared and different features from the typical ML exercise. As typical in ML, we have a large number of potential predictors, while observing a relatively small set of contracts.…”

Section: Empirical Strategymentioning

confidence: 99%

Corruption red flags in public procurement: new evidence from Italian calls for tenders

Decarolis

Giorgiantonio

2022

EPJ Data Sci.

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This paper contributes to the analysis of quantitative indicators (i.e., red flags or screens) to detect corruption in public procurement. It presents an approach to evaluate corruption risk in public tenders through standardized ML tools applied to detailed data on the content of calls for tenders. The method is applied to roadwork contracts in Italy and three main contributions are reported. First, the study expands the set of commonly discussed indicators in the literature to new ones derived from operative practices of police forces and the judiciary. Second, using novel and unique data on firm-level corruption risk, this study validates the effectiveness of the indicators. Third, it quantifies the increased corruption-prediction ability when indicators that are known to be unavailable to the corruption-monitoring authority are included in the prediction exercise. Regarding the specific red flags, we find a systematic association between high corruption risk and the use of multi-parameter awarding criteria. Furthermore, predictability of the red flag makes them ineffective as prediction tools: the most obvious and scrutinized red flags are either uncorrelated with corruption or, even, negatively associated with it, as it is the case for invoking special procedures due to “urgency,” or the extent of publicity of the call for tender.

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“…However, the latter need to be considered together with ex-post contract renegotiation, which may impose additional costs. As the main post-award contract outcome, we focus on Extra Cost and Delay, which are the most common post-award metrics in both project management (Herweg and Schwarz, 2018) and empirical economics (Decarolis, 2014). Extra Cost is the sum of all cost renegotiations related to a project that exceed the expected budget.…”

Section: Sample Selectionmentioning

confidence: 99%

“…Regardless of which competition channels dominate, the implications for the execution stage of the contract are ambiguous due to supplier selection and bidding behavior response. We follow the related literature (e.g., Decarolis, 2014;Hart and Moore, 1988;Herweg and Schwarz, 2018) and study the effect of set-asides on delays and extra costs-relative to the contract amount and expected duration, respectively-as the main metrics for assessing the final contract outcomes.…”

Section: Introductionmentioning

confidence: 99%