Time is Money: Optimal Investment Delay in Procurement (and Concession) Contracts
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Procurement (and concession) contracts are agreements granting the right to construct public works, operate and provide a service/good. The
main advantage of a procurement contract is that it passes full responsibility for investment and operations to the private sector and consequently
provides incentives for efficiency. Although most contracts include penalty/premium clauses to avoid
construction risks (i.e. delays), evidence from ongoing procurement contracts shows that there are many delays in making investments. Actually
these clauses introduce the flexibility to decide when it is optimal to invest and consequently increase the contract’s value for the contractor. Therefore if the contracting authority underestimates penalty/premium fees, these may be totally ineffective in avoiding construction risks.
In this paper we specifically investigate the effects that penalty/premium
clauses have on both contract value and reduction of delay. We also focus on the design of optimal penalty/premium rules.