Monday, May 31, 2010

Winner's Curse or Delaying Recalculation?

When I first, saw this article about the local highway construction, my first thought was "winner's curse":
The Indiana Department of Transportation has awarded Milestone Contractors -- whose bid was $3 million less than the second nearest bidder -- the contract for the 45/46 bypass expansion project in Bloomington. But some area contractors are wondering just how Milestone’s bid could be so low.
However, the article has several interviews that suggest that many contractors are intentionally going below cost in an effort to retain good employees until the recession passes:
“We surveyed our members in late December, early January and 10 percent of them told us that they were actually bidding projects below cost,” Turmail said. “In other words we call that buying work where they’re willing to take a loss on the work simply to keep their teams together and busy.”


“If you have good construction workers that you can rely on you absolutely want to do everything you can to keep them on staff because ultimately the success of the contractors is based on being able to get the job done right the first time.”
If you stick around to the end of the story, however, the winning company thinks that they believe the state engineer systematically overestimates the true cost of projects by 25-30 percent, so that they expect to turn a profit on their bid-price. A couple of remaining thoughts:
  1. For students, when does it make sense to undertake a project despite an expected loss? i.e. What are the relevant costs to this decision?
  2. I know there is a literature on the state revenue forecaster rationality/bias, but is there one on state engineer cost estimates? This would be a much more difficult question to address, but one that might make an interesting dissertation for some enterprising doctoral student with interests in public choice and industrial organization.

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