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Procurement and contract design in the construction industry: … not one size fits all

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Abstract

This paper considers the choice between different approaches to contract for the construction and maintenance of infrastructure projects. The need to control for user and third party costs over the life cycle of an asset is demonstrated to be a core aspect of welfare maximising contract design. The more likely it is that a certain problem in the current infrastructure could be solved by constructing assets in alternative ways, the more strongly should the tendering agency consider innovative design alternatives such as performance contracts of Public Private Partnerships. It is also demonstrated that contracts which cover both construction and subsequent maintenance must be accompanied by bonuses and penalties for remunerating or punishing the entrepreneur for delivering (or not) appropriate infrastructure quality.

Suggested Citation

  • Nilsson, Jan-Eric, 2012. "Procurement and contract design in the construction industry: … not one size fits all," Working papers in Transport Economics 2012:26, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
  • Handle: RePEc:hhs:ctswps:2012_026
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    File URL: http://www.transportportal.se/SWoPEc/CTS-2012-26.pdf
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    References listed on IDEAS

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    1. Bajari, Patrick & Tadelis, Steven, 2001. "Incentives versus Transaction Costs: A Theory of Procurement Contracts," RAND Journal of Economics, The RAND Corporation, vol. 32(3), pages 387-407, Autumn.
    2. Milgrom,Paul, 2004. "Putting Auction Theory to Work," Cambridge Books, Cambridge University Press, number 9780521536721.
    3. Paul Klemperer, 2002. "What Really Matters in Auction Design," Journal of Economic Perspectives, American Economic Association, vol. 16(1), pages 169-189, Winter.
    4. Tadelis, Steven, 2012. "Public procurement design: Lessons from the private sector," International Journal of Industrial Organization, Elsevier, vol. 30(3), pages 297-302.
    5. Nilsson Jan-Eric & Hultkrantz Lars & Karlström Urban, 2008. "The Arlanda Airport Rail Link: Lessons Learned from a Swedish Construction Project," Review of Network Economics, De Gruyter, vol. 7(1), pages 1-18, March.
    6. Mandell, Svante & Nilsson, Jan-Eric, 2010. "A Comparison of Unit Price and Fixed Price Contracts for Infrastructure Construction Projects," Working Papers 2010:13, Swedish National Road & Transport Research Institute (VTI).
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Infrastructure investment and maintenance; Bundling; Welfare maximisation vs. minimisation of financial costs; Risk allocation;

    JEL classification:

    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
    • R42 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - Transportation Economics - - - Government and Private Investment Analysis; Road Maintenance; Transportation Planning

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