Optimal Contract Mechanism Design For Performance Based Contracts
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Optimal Contract Mechanism Design for Performance-based Contracts
Author | : Diwakar Gupta |
Publisher | : |
Total Pages | : 53 |
Release | : 2011 |
Genre | : Road construction contracts |
ISBN | : |
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This report explores the possibility of implementing a performance-based contract (PBC) in highway construction and maintenance. PBC allows a state transportation agency (STA) to use an incentive structure to induce the contractor to take a long-term interest in the functionality of the highway without excessive cost to the STA. First, an overview of contract mechanisms and existing PBCs in industry is provided. Then, a summary of performance-based specifications illustrates that contractors can adopt construction and maintenance policies to significantly improve pavement performance. Finally, a framework for choosing PBCs to achieve STAs' goals is provided, with a discussion of some of the difficulties associated with implementation. It can be seen that, in a competitive bidding process, the additional cost of incentives is not larger than the additional value gained by higher-quality work.