Financing infrastructure: fixed price vs. price index contracts
| Date | 01 March 2008 |
| DOI | https://doi.org/10.1108/JOPP-08-03-2008-B002 |
| Pages | 289-301 |
| Published date | 01 March 2008 |
| Author | Robert J. Eger III,Hai (David) Guo |
| Subject Matter | Public policy & environmental management,Politics,Public adminstration & management,Government,Economics,Public Finance/economics,Texation/public revenue |
JOURNAL OF PUBLIC PROCUREMENT, VOLUME 8, ISSUE 3, 289-301 2008
FINANCING INFRASTRUCTURE:
FIXED PRICE VS. PRICE INDEX CONTRACTS
Robert J. Eger III and Hai (David) Guo*
ABSTRACT. 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.
INTRODUCTION
State governments usually ask for bids among interested and
qualified firms for long-term infrastructure construction. The lowest
bidder is then chosen to fulfill the project requirements and is
monitored by the state agency requesting the project until the
completion of the infrastructure project. In the process of bidding,
how to control the production costs and quality is the focal concern of
the government. The contractor’s concern is how to secure their
profit. However, in this process, asymmetric information between the
two parties, the government and the contractor, provides tension
-----------------------------
* Robert J. Eger III, Ph.D., is an Associate Professor, Reubin O’D. Askew
School of Public Administration and Policy, Florida State University. His
research and teaching interests are in governmental accounting, public
financial management, tax/revenue compliance issues, and infrastructure
finance. Hai (David) Guo is a Ph.D. Candidate in the joint Public Policy
Program at Georgia State University and Georgia Institute of Technology.
His research and teaching interests are in public budgeting, public finance,
and infrastructure finance.
Copyright © 2008 by PrAcademics Press
To continue reading
Request your trial