Bidding the project vs. bidding the envelope in public sector infrastructure procurements

Abstract

We study the relative efficiency of two mechanisms actually employed in large-scale public procurements, often for transportation projects such as roads, bridges and rapid transit systems. In the more common “bidding the project” mechanism, the government specifies the size of the project (a quantity) and firms bid prices (the lowest bid winning). In the “bidding the envelope” mechanism the government specifies what it is willing to spend and firms bid quantities (the highest winning). With uncertainty about project costs and benefits, the much less frequently applied “bidding the envelope” mechanism can lead to higher value for money. Its advantage lies in its ability to allow quantity to adjust to high or low costs.