Development of risk management strategies for state DOTs to effectively deal with volatile prices of transportation construction materials.
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2014-06-01
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Abstract:Volatility in price of critical materials used in transportation projects, such as asphalt cement, leads to
considerable uncertainty about project cost. This uncertainty may lead to price speculation and inflated
bid prices submitted by highway contractors to protect themselves against possible price increases. One
of the most common risk sharing strategies widely used by transportation agencies is price adjustment
clauses (PAC) that divide potential upside and downside risk of material prices between contractors
and owners. However, it is not clear whether offering PAC reduces risk premium of bids submitted by
highway contractors. The research objective of this study is to explore whether offering PAC for asphalt
cement can explain the variation of submitted bids for asphalt line items by highway contractors. Data
on 3,749 highway projects bid out in the State of Georgia from January 1998 to July 2013 were
collected to analyze the impacts of PAC on bid prices. Multivariate regression analysis was conducted
to evaluate the effect of several factors, such as project size, number of bidders, asphalt cement price,
and availability of PAC on unit price bids submitted by highway contractors for major asphalt line
items. The results show that a linear combination of several explanatory variables such as quantity of
the item, total bid price, and asphalt cement price index can explain the variations of the submitted bid
prices appropriately. Eligibility for the PAC program is not a statistically significant explanatory
variable in most of the models. In addition, several time series models were created to forecast the
short-term variation of the asphalt cement price in Georgia.
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