Concentration of Bid Prices Just Above the Standard Minimum Price in Public Construction Works

In Japan, contract offices are mandated to set threshold prices for public works. A threshold price is the upper limit of the bid price, and a contractor who exceeds this threshold is disqualified. Furthermore, based on the threshold price, a minimum price is set as a price requiring investigation before acceptance. In recent years, bids and contracts for public works have generally had bid prices concentrated slightly above the standard minimum for investigation. It has been pointed out that this tendency is detrimental in terms of the motivation of engineers and social costs. In this study, we confirm that this tendency was alleviated and that the level of the winning bidder's technical evaluation score was feasible at the same time. In addition, we obtained quantitative findings on variables that affect both above. Furthermore, although it is impossible to achieve a perfect balance between alleviating the tendency of prices to concentrate slightly above the standard minimum for investigation and sufficient technical evaluation scores, elements necessary to improve the overall situation were quantitatively identified

Procurement Contracting with Time Incentives: Theory and Evidence

In public sector procurement, social welfare often depends on the time taken to complete the contract. A leading example is highway construction, where slow completion times inflict a negative externality on commuters. Recently, highway departments have introduced innovative contracting methods based on scoring auctions that give contractors explicit time incentives. We characterize equilibrium bidding and efficient design of these contracts. We then gather an extensive data set of highway repair projects awarded by the California Department of Transportation between 2003 and 2008 that includes both innovative and standard contracts. Comparing similar con- tracts in which the innovative design was and was not used, we show that the welfare gains to commuters from quicker completion substantially exceeded the increase in the winning bid. Having argued that the current policy is effective, we then develop a structural econometric model that endogenizes participation and bidding to examine counterfactual policies. Our estimates suggest that while the current policy raised com- muter surplus relative to the contractor's costs by $359M (6.8$1.52B (29%).

Agent-based simulation of electricity markets: a literature review

Liberalisation, climate policy and promotion of renewable energy are challenges to players of the electricity sector in many countries. Policy makers have to consider issues like market power, bounded rationality of players and the appearance of fluctuating energy sources in order to provide adequate legislation. Furthermore the interactions between markets and environmental policy instruments become an issue of increasing importance. A promising approach for the scientific analysis of these developments is the field of agent-based simulation. The goal of this article is to provide an overview of the current work applying this methodology to the analysis of electricity markets. --

Valuation of flexibility and investment timing in airport infrastructure projects: Cases in airport expansions and alternate design alternate bid bidding

Many large infrastructure projects are subject to considerable uncertainty over their revenue streams which makes their valuations particularly challenging. When project scalability can be altered as new information is revealed over the course of a project’s lifecycle, the presence of uncertainty can, in fact, provide option values that are ignored with static Net Present Value (NPV) analyses. To achieve these benefits, however, a better understanding of volatility is of the essence. This dissertation seeks to demonstrate how a better understanding of the business risks could facilitate the valuation of flexibility options in investment timing and engineering design. It also details how the need to acquire such options may vary across different contexts (i.e., among airports of different sizes and different pavement types). The dissertation first demonstrates the mechanics of this complex concept by applying it to the simpler problem of volatility in airport pavement materials using the alternate design/alternative bid (ADAB) process common in highway construction. The research then proceeds to fully develop the approach for application to airport expansion projects. The results contribute to a better understanding of volatility of airport activity in US airports by relating option values to airports’ concentration risk in their connecting traffic volumes. Finally, the presence of any stationarity behavior in airport capacity utilization levels is examined to test the existence of a constant mean and variance in the long run, which may assist the forecasting efforts associated with airport expansion projects. The major contribution of the dissertation is the explicit formulation of an equation for airport activity levels, which relates changes (hereafter termed “jumps”) in passenger enplanements to the valuation of airport expansions

Small Business Set-asides in Procurement Auctions: An Empirical Analysis

As part of public procurement, many governments adopt small business programs to pro- vide contract opportunities for businesses often with preferences for firms operated by mem- bers of groups designated as disadvantaged. The redistribution arising from such programs, however, can introduce significant added costs to government procurement budgets. In this paper, the extent to which small business set-asides increase government procurement costs is examined. The estimates employ data on Japanese public construction projects, where approximately half of the procurement budget is set aside for small and medium enterprises (SMEs). Applying a positive relationship between profitability and firm size obtained by the non-parametric estimation of asymmetric first-price auctions with affiliated private values, a counterfactual simulation is undertaken to demonstrate that approximately 40 percent of SMEs would exit the procurement market if set-asides were to be removed. Surprisingly, the resulting lack of competition would increase government procurement costs more than it would offset the production cost inefficiency.

Incentive Contracts for Road Construction to Reduce Greenhouse Gas Emissions

Road constructions play a significant role in greenhouse gas (GHG) release into the atmosphere due to a large amount of materials consumption. To reduce emission has an effect on project costs. This research proposes an incentive measure named the Construction-Emission-Punishment (CEP) bidding method which offers emission reduction options and incentives for participating bidders. An equivalent bid price and a financial penalty will be specified in the construction contract as a part of this method. This penalty is applied when there is a failure to comply with binding obligations. The results show that the rates of the emission deduction from the six reduction options account for 0.115%-2.768% of the project cost. The case study also shows that a bidder who receives some emission deductions can be the winner. The effectiveness of the CEP method depends on the bid price gaps among the bidders and the emission deduction from the selected options

Efficient and effective solution procedures for order acceptance and capacity planning.

This paper investigates dynamic order acceptance and capacity planning under limited regular and non-regular resources. Our goal is to maximize the profits of the accepted projects within a finite planning horizon. The way in which the projects are planned affects their payout time and, as a consequence, there investment revenues as well as the available capacity for future arriving projects. In general, project proposals arise dynamically to the organization, and their actual characteristics are only revealed upon arrival. Dynamic solution approaches are therefore most likely to obtain good results. Although the problem can theoretically be solved to optimality as a stochastic dynamic program, real-life problem instances are too difficult to be solved exactly within areas on able amount of time. Efficient and effective heuristics are thus required that supply a response without delay.For this reason, this paper considers both 'single-pass' algorithms as well as approximate dynamic-programming algorithms and investigates their suitability to solve the problem. Simulation experiments compare the performance of our procedures to a firrst-come, first-served policy that is commonly used in practice.Approximate dynamic programming; Capacity planning; multi-project; Order acceptance; Simulation;

RISK MANAGEMENT IN PROJECT BUSINESS –A CASE STUDY ON THE ACQUISITION OFCONSTRUCTION PROJECTS AT BILFINGER BERGER CIVIL

This paper deals with risk management in project business. In particular, it examines the specific risks during the acquisition of construction projects. First of all the characteristics of the construction industry and the risks occurring during bid preparation and negotiation of construction projects are described. Then a case study explores which strategies the subject company pursues to manage these risks. In focus of the case study is the company Bilfinger Berger Civil, a large, international construction company, which is an active player in the project business and has already carried out a variety of construction projects successfully. The author deals with various aspects of practical risk management: optimization of the project portfolio, risk analysis and determination of the offer price with the help of a simulation model and the work of the company´s Project Controlling Department that monitors the high-risk projects. The risk management of Bilfinger Berger Civil is finally assessed in form of a summary. The reader gains information about theories on risk management and numerous impressions on their practical application in a real construction company