Financing infrastructure: fixed price vs. price index contracts

This paper looks at a common type of price adjustment, price indexing, which provides contractors with compensation for increases in price volatile commodities. We address the effect of Firm Fixed Price (FFP) versus indexed price systems for a price volatile commodity. The impact of these two types...

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Bibliographic Details
Published in:Journal of public procurement 2008-09, Vol.8 (3), p.289-301
Main Authors: Eger III, Robert J., (David) Guo, Hai
Format: Article
Language:English
Subjects:
Adverse selection
Asphalt
Asymmetry
Bids
Cement
Contractors
Cost control
Design
Fixed price contracts
Infrastructure
Moral hazard
Price indexes
Production costs
State government
Studies
Volatility
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Summary:This paper looks at a common type of price adjustment, price indexing, which provides contractors with compensation for increases in price volatile commodities. We address the effect of Firm Fixed Price (FFP) versus indexed price systems for a price volatile commodity. The impact of these two types of bid systems is analyzed through a combined qualitative and quantitative analysis. Results indicate that an indexed price system does not provide a reduction in costs compared to a Firm Fixed Price system. This study is important to state financial managers as they address the efficient use of resources invested in state infrastructure.
ISSN:1535-0118
2150-6930
DOI:10.1108/JOPP-08-03-2008-B002