Scandinavian Working Papers in Economics

Working papers in Transport Economics,
CTS - Centre for Transport Studies Stockholm (KTH and VTI)

No 2012:26: Procurement and contract design in the construction industry: … not one size fits all

Jan-Eric Nilsson ()
Additional contact information
Jan-Eric Nilsson: VTI, Postal: Centrum för Transportstudier (CTS), Teknikringen 10, 100 44 Stockholm, Sweden

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.

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

JEL-codes: D61; D82; D86; R42

25 pages, November 22, 2012

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CTS-2012-26.pdf PDF-file 

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