Price Adjustment Clauses
Unprecedented uncertainty in the price of asphalt cement over the last decade has caused significant financial hardships for state Departments of Transportation (state DOTs) and contractors in transportation projects. This uncertainty may lead to price speculation and inflated bid prices submitted by highway contractors to secure themselves against possible price increases.
One of the most common risk sharing strategies widely used by transportation agencies is price adjustment clauses (PAC) that shifts potential upside and downside risk of material prices from the contractors to the owners. PACs are aimed at eliminating extra risk premiums and therefor, reducing contractors’ submitted bid prices. However, the financial implications of offering PAC for asphalt cement line items in transportation projects are not clear.
In this project with collaboration with Dr. Mohammad Ilbaigi and Dr. Baabak Ashuri from Georgia Institute of Technology, we examine the impacts of offering PACs by state DOTs on the variations of contractors’ submitted bid prices for major asphalt line items in transportation projects. Multivariate linear regression analysis was used to create appropriate statistical models that can explain the variations of contractors’ submitted bid prices for seven major asphalt line items. Data on 3,749 transportation projects were collected. Several explanatory variables such as duration of the project, quantity of the item, asphalt cement price index at the bid date, competition, and eligibility for the PAC program were considered in creating the regression models.
1. Ilbeigi M., Shayegh S., Mostaan K., Ashuri B., “A Quantitative Approach for Analyzing Material Price Effects on Bid Prices of Highway Projects”, 51st ASC Annual International Conference Proceedings, 2015
Significant volatility in average prices of asphalt cement (AC) in the state of Georgia.