Price Adjustment Clauses and Submitted Bid Prices for Major Asphalt Line Items in Highway Projects

Abstract

Unprecedented uncertainty in the price of asphalt cement over the last decade has been a source of major concern for state departments of transportation (state DOTs) and highway contractors. This uncertainty may lead to price speculation and inflated bid prices by highway contractors, in order to secure their financial positions against possible rising prices. One of the most common risk-sharing strategies widely used by transportation agencies is price adjustment clauses (PACs) that shift potential upside and downside risk of material prices from contractors to owners. PACs are aimed at eliminating extra risk premiums and therefore reducing contractors’ submitted bid prices. However, the actual effect of offering PACs on submitted bid prices for major asphalt line items has not been empirically studied. The research objective of this paper is to examine the effect of PACs offered by state DOTs on the variations of contractors’ submitted bid prices for major asphalt line items. Data on 841 transportation projects were collected and several potential explanatory variables, such as duration of the project, asphalt cement price index, number of bidders, and eligibility for the PAC program were identified. Multivariate regression analysis was used to create appropriate statistical models that can explain the variations of contractors’ submitted bid prices for five major asphalt line items. The results indicate that eligibility for the PAC program was not a statistically significant variable in most of the models. Thus, no evidence was found to support the statement that offering PACs would reduce the submitted bid prices. It is expected that this work will help capital planners of transportation agencies enhance their understandings about important variables affecting submitted bid prices for highway projects.