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

Abstract

AbstractUnprecedented 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 transpo...