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There's an interesting game theory problem here. If you stick the bidder with the cost of overruns, they will bid high -- and be overpaid if the risks don't eventuate.

So, the consensus seems to be Governments would rather get low bids that don't price in unknowns. If unknowns happen, they can dicker over the increase. But if you award a contract that's too fat, it's difficult to claw back.

If the work goes exactly to plan, the contract will come in on budget. But if problems occur, the price usually goes up. Our current system seems to be optimized for lower overall project cost at completion, with the side effect of making it less useful as a budgeting tool.

The bids aren't in bad faith. They are just over-rationalized and under-justified until the number is small enough to be in the winnable range. Middle Management talks out of both sides of their mouth, demanding lower estimates, while demanding integrity of results (wink wink).

They don't really want integrity, they want to get a number that won't get them yelled at by their boss. The integrity bit is a pass the buck clause.

So the estimator is in the position of trying as hard as they can to lower the estimate. "Well, if we assume xyz unreasonable assumption, then we can lower the amount by this amount."

And then there are "risk" shenanigans. You itemize all the risk items, declare an arbitrary probability of happening. Then management rolls those up, and declares that they are not going to fully fund the risk and instead "carry" it forward.

Fully funding basically would mean multiplying the likelihood of occurring by the cost, and adding all the items up. Which is already iffy as the probabilities aren't based on much except a w.a.g.

So you win the bid, the risks are realized, and weren't funded. blow out.

Standard practice. And because everyone does it, the honest bidder is the loser. Losers go out of business. So the whole bidding practice is self selecting for cheats.

If you say, "this is unethical, I'm going to do my best to give a realistic bid", you lose.

Should be easy to fix, if the contract for work includes a "penalty for being wrong for circumstances completely within the bidders control that they should have seen".

Austin government did this for its MoPac toll express lanes and got them for way cheaper than what they should have paid: https://www.bizjournals.com/austin/news/2017/09/27/big-settl...

However, the project ran over for two years longer than it should have (it was supposed to be completed in September 2015, and they are only just now wrapping it up). So I guess no one really won there aside from the Austin transportation budget guys, except the populace hates them now for traffic jamming the place up for two years longer than they said they would.

Isn't completion something that is at least in part in the bidders control. Did they employ all available personnel and work 24 hours?

Sort of, when they could. In this case there were penalties for going longer on the project. Main problems ended up being weather (heavy rains) and lack of knowledge of the soil - many changes were made to the project because the contractor (C2HM) did not do a proper soil survey where they were going to be digging.

It is definitely a system issue. Our contractual/financial system just doesn't work well when confronted with large complex projects that have enough variance and unknown unknowns. Since they really push to have everything committed to up front, with really basic rules around how to handle change and variance.

Let alone that we basically award this work one estimated number and the ability to get through a paper work hurdle.

If you start making those rules complex it becomes hard to compare bids to each other, since your bids are likely to become non-transitive based on the scenarios.

Cost plus is the normal way this is side stepped, but unless you have a system that is mostly ethical actors that can break down. And if you have all ethical actors pretty much any system will work...

Cost plus percentage gives a very clear incentive to raise costs; that's the only way you can get more profit. If it's so widespread that might be one reason why all our infrastructure is so much more expensive.

Why not just have major contractors required to post a bond when they place a bid, and if they have cost overruns they pull those from the bond (ie, their own money)?

> Cost plus percentage gives a very clear incentive to raise costs; that's the only way you can get more profit

Case in point: SpaceX challenging the launch industry's cost-plus culture with publicly-posted fixed prices [1].

[1] http://www.spacex.com/about/capabilities

Case in point #2: the new Bay Bridge.

Case in point #0: the Space Shuttle (STS).

Sorry, you're citing the Space Shuttle [1] as a successful public procurement process?

[1] https://www.nasa.gov/pdf/382045main_19%20-%2020090730.11.STS...

No, my cites relate to the parent comment:

  Cost plus percentage gives a very clear incentive to raise costs

Compare the original winning bid for the STS with the actual costs; I think they rose more than tenfold (and the per-flight cost rose more than that), IIRC.

And had the competing team won, the Challenger disaster never would have happened, because the solid-rocket boosters would have been manufactured as units and transported to the Cape by barge rather than having to be broken into small enough components to fit on rail cars.

Oh for sure, I should probably add a non-profit driven caveat to the actors in the system.

I am not sure if you can implement a system that would work well when your actors are profit driven work that needs to be done can only be done exclusively by one entity at a time, and as a bonus that extra profit gives you more feedback into how the system operates. There aren't a lot of natural negative feedback to keep things under control in that system.

Especially if your goals are to reduce overhead.

> if only we could punish these few bad apples - punish those scheming, underbidding contractors, then the problem would disappear

I'm criticizing a system that incentives optimistic initial bids that are later revised up. A bad system doesn't need bad actors to produce bad outcomes. A $275 million bid ballooning to $500 million without any competitive pressure is a bad outcome.

American infrastructure costs are higher than production factors, e.g. land, material and labour cost differentials, explain [1]. Our auction mechanics are called out by experts as a big part of the problem.

[1] http://marroninstitute.nyu.edu/content/blog/is-u.s.-infrastr...

How do you specify the contract so the unknown unknowns can be priced into the bid and compared to each other. Given that resolving those unknowns costs about as much as the just doing the actual work.

You temporarily re-open bidding when big price changes are requested. See my other comment [1].

[1] https://news.ycombinator.com/item?id=15524807

That sounds like a recipe for delays and finger pointing along with massive overruns on the later parts "to fix what those other guys didn't do our way."

If you want separate bidding for separate phases, bid it out that way.

I suspect this would just make all projects much more expensive - bidding for a large project costs a lot of money and can require large teams of people working for extended periods of time. All of that gets paid for out of the projects that are won.

If you now introduce scenarios where projects can have an unknown number of bidding processes all costs will go up to cover the work necessary for multiple companies to prepare bids.

It would just make things much much worse.

Even better: the more rules and processes you put in place to try to avoid/punish this, the harder it is to get the contract in the first place. Eventually, most companies decide it's not worth jumping through all the hoops you've put in place to avoid corruption, and you end up with a handful of entities which get every contract and face no meaningful competition to try to keep the bids down.

This is already a problem. A company I worked for submitted a bid for an IT infrastructure project several years ago. We were rejected for not having completed a similar project for a government agency before.

Our bid was 1/3rd of the "winning" bid.

Thank you for saying this. I think there is a deeply distrustful aspect to how the public views these contracts, probably because a few bad actors (as you noted) have in fact screwed the people from time to time. Also people tend to associate these bid contracts with politicians in power who they may dislike for one reason or another therefore further tainting their opinion of the bid system.

The distrust of government and corporations in our society is one of the biggest problems facing us as we go forward in the 21st century. We need to figure out how to restore trust.

Problem is easy to identify - We are using waterfall for massive scale urban projects, and getting the known associated problems. Add to that massive corruption and cronyism.

The fix is not clear. Can't just drop in agile, every attempt to legislate away corruption fails.