Optimal Contract Mechanism Design for Performance-Based Contracts

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https://hdl.handle.net/11299/150077

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Title

Optimal Contract Mechanism Design for Performance-Based Contracts

Authors

Gupta, Diwakar

Vedantam, Aditya

Azadivar, Justin

Published Date

2011-08

Publisher

Minnesota Department of Transportation Research Services Section

Type

Report

Abstract

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 performancebased 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.

Keywords

Performance-based contracting

Contracting

Highway construction

Road construction

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Research Reports

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MN/RC
2011-18

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Minnesota Department of Transportation Research Services Section

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Gupta, Diwakar; Vedantam, Aditya; Azadivar, Justin. (2011). Optimal Contract Mechanism Design for Performance-Based Contracts. Retrieved from the University Digital Conservancy, https://hdl.handle.net/11299/150077.

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