Scaling Auctions as Insurance: A Case Study of the Massachusetts Department of Transportation

Infrastructure investment underlies nearly every part of the American economy and constitutes hundreds of billions of dollars in public spending each year. However, infrastructure projects are often complex and subject to unexpected changes. This uncertainty can be challenging for government estimates of project needs and costly for the fi rms that bid and ultimately implement the projects.

In the paper this brief is based on, we study the mechanism by which contracts for construction work are allocated by the Highway and Bridge Division in the Massachusetts Department of Transportation (MassDOT or “the DOT”). Along with DOTs in 40 other states, MassDOT uses a scaling auction, whereby bidders submit unit price bids for each item in a comprehensive list of tasks and materials required to complete a project. The winning bidder is determined by the lowest sum of unit bids multiplied by item quantity estimates produced by DOT project designers. The winner, however, is paid based on the actual quantities ultimately used in completing the project, not the estimates.