| Abstract: | Public agencies typically acquire construction services through competitive procurement, awarding contracts to the lowest responsive bid read at a 'public bid opening.' This method is seen by policy-makers as the most effective and efficient method of awarding construction contracts. Fierce competition for public monies is intrinsically appealing. However, public agencies are not immune to this ferocity. There are inherent risks in using competitive procurement in public agencies. The principal risk is contracting with the wrong firm. These contracted firms can be wrong for a multitude of reasons, but there were two reasons of special interest in this research, phantom bidders and the owner's dilemma. Phantom bidders are unique in their bidding strategy. They submit unusually low bids with an expectation of recouping any initial sacrifice by generating cost growth on the project. The owner's dilemma is a corollary of the "winner's curse" [Capen (1971)], where the low bidder is cursed because they are the one most likely to have underestimated the project. From the owner's perspective it causes a dilemma because they must routinely make the tenuous decision to contract with this cursed bidder. A statistical methodology was developed which allowed detection of bids which are too low. They are considered to be discordant bids because they are in disagreement with the other bids received on the project. The study data indicates that there is a historical relationship within the data between discordant bids and the magnitude of cost growth experienced on the project. This suggests that for the owner to take the perceived benefit of a lower bid, they also incur the financial risk of having higher project cost growth. |
|---|