Effects of Price-Adjustment Clauses on Number of Bidders and Dispersion of Bid Prices in Highway Construction

Price adjustment clauses (PACs) offered in highway construction projects are among the most common risk-management strategies for controlling the consequences of uncertainty in the price of asphalt cement. Owners of organizations can benefit from a PAC in two different ways. First, PACs encourage contractors to exclude extra risk premiums from their bid prices and, as a consequence, submit lower bid prices. Second, PACs can boost competition among bidders and result in more bidders and less dispersion of bid prices for a project. Although several previous studies analyzed the effects of offering PACs on reduction of submitted bid prices, the actual effects of PACs on the level of competition is unclear. The objective of this paper is to analyze empirically the effects of offering PACs on the number of bidders and dispersions of submitted bid prices. System-monitoring control charts were used to track variations in the average number of bidders per project and to analyze the dispersion of submitted bid prices for four major asphalt line items to determine whether their variations changed after PACs were offered. The results reveal no evidence indicating that offering PACs leads to more bidders or less dispersion of submitted bid prices. These results can help capital planners of transportation agencies and owners of major capital projects to evaluate their financial risk-management strategies systemically through the use of PACs.

Language

  • English

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Filing Info

  • Accession Number: 01634215
  • Record Type: Publication
  • Files: TRIS, ASCE
  • Created Date: Apr 20 2017 3:05PM