Tuesday, June 15, 2010

When should you negotiate; and when should you use an auction?

Pat Bajari (paper, paper) and various co-authors conclude that
Auctions may perform poorly when projects are complex, contractual design is incomplete, and there are few available bidders. Furthermore, auctions may stifle communication between buyers and sellers, preventing the buyer from utilizing the contractor's expertise when designing the project.

Bottom line: use negotiation when flexibility (like change orders) is important, as is likely for large complex projects; and if you negotiate, use a reputable firm because you are subject to hold up when unforeseen contingencies arise. Contracting with a reputable firm can reduce the risk of hold-up.

1 comment:

  1. In some industries (construction) it is still possible to have an auction with incomplete design but owner's must be sure their goals and that of the project team align. The integrated project delivery method is a relatively new way of better accomplishing this in construction.