Uncertainty in Procurement Contracting with Time Incentives

This paper studies A+B (cost-plus-time) procurement contracting with time incentives in the highway construction industry. In the presence of construction uncertainty, the contractor's actual completion time may deviate from the bid completion time, and the A+B contract design is not ex post efficient. Using data from highway procurement contracts in California, we show through a counterfactual analysis that an ex post efficient lane rental contract would reduce the social cost by $41.39 million (43.11\%) on average. In particular, the average commuter cost would decrease by $62.06 million (78.96\%), suggesting a substantial reduction in the construction externality to commuters from lane rental contracts