Competitive Bidding Alone Will Not Fix Pentagon Procurement System, Duke Economist Says

A report this week correctly raises concerns about billions in Pentagon contracts awarded without competitive bidding, but overlooks an even more serious problem in the competitive bidding process, says a Duke University economist.

"Competitive bidding alone will not ensure that the Pentagon gets the best price and quality for the contract," said Patrick Bajari, professor of economics whose recent research includes studies of bidding on procurement contracts. "The current competitive bidding system can lead to excessive dispute costs and a lack of cooperation between the buyer and contractors. In the most complicated contracts, awarding contracts by selecting the low bidder is not always efficient."

Competitive bidding can hold down costs for certain types of contracts and limit opportunities for corruption, but it can also have significant drawbacks, Bajari said. "The competitive bidding system tends to work poorly for things that are very complicated, such as a state-of-the-art defense system."

Also, the most successful contractors in such a system may be those who are best at renegotiating increased payments rather than those who hold down costs, he said. As a result, competitive bidding may actually select the worst contractor.

Bajari said public sector procurement systems must be modernized. "We need to get the agency and the contractor to work as a team," he said. "We also need a smoother process of renegotiating alterations to contracts. Finally, we need to ensure that the process is open and cost-effective."

In two recent working papers, "Auctions versus Negotiations: An Empirical Analysis" and "Bidding for Incomplete Contracts: An Empirical Analysis," Bajari and co-authors Steve Tadelis of Stanford, Robert McMillan of the Federal Trade Commission and Stephanie Houghton of Duke found that considerable resources were squandered on renegotiating competitive bid contracts. Their analysis also suggested that competitive bidding is less desirable for the most complicated projects.

"The adversarial relationship in continual renegotiations prevents the purchasing agency and the contractor from working as a team to solve difficult problems on complex projects," Bajari said.

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