Procurement, contract design and innovations

Public sector procurement annually adds up to large sums of money, in total perhaps up towards 20 percent of GDP. The present report focuses procurement of complex products such as new roads. More specifically, the projects have three characteristics in common: They are costly to build; they have a long expected service life; and the quality of the resulting road has consequences for the costs for future users as well as society at large. A datum for the report is the problems of the construction industry with respect to cost overdraws, late delivery and poor productivity growth. The hypothesis under discussion in the report is that this at least partly may be explained by the standard way of contracting in the industry, often referred to as Design-Bid-Build (DBB). It is argued that this contract format is excessively rigid, giving entrepreneurs little leeway for cost savings. This traditional way to contract is contrasted against the current development in the industry to test more flexible contracting formats. While the public sector principal uses a consultant for the detailed planning under the traditional DBB format, Design-Build (DB) contracts give the contractor control of both planning and construction. This is a first step to hand over control to the entrepreneur. Performance contracts enhance DB by extending the contract period to include a number of years where the builder also is made responsible for the facility's maintenance. This bundling of construction and maintenance generates further scope for considering alternative tradeoffs between the costs expended on investment and maintenance, respectively. This would be welfare enhancing if the procurer is able to specify quality to be delivered in a way which captures consequences for users and society at large in an appropriate way. Finally, Public Private Partnerships are here defined to be a performance contract where the contractor is also made responsible for funding the construction. Costs can be repaid in different ways, for instance by way of down payments from the public sector principal during the contract period. It is argued that this first and foremost is a way to increase the builder's commitment to the long-term contract which is being signed