Could anyone comment on whether or not awarding contacts to the second-lowest bidder (whose bid meets technical merit) has ever been practiced by governments? Or other alternative auction strategies.
One of the contentions of Alon Levy [author of the blog in question] is that the primary reason for inexcusably high costs in the US is the hollowing out of agencies to the point that they can't do this sort of evaluation anymore.
My dad worked for the government doing management and oversight. It takes a lot of work to evaluate and reject bad low ball bids. Even more work to create bids that you can hold contractors to and to weed out shysters.
This reminds me of when I used to own homes. It was generally easier to just do some home-repair job myself than deal with the hassles of finding a good contractor, and then having to deal with more hassles if the contractor didn't do it right.
The kinds of work that you describe fall more under maintenance and basic repair, which most public agencies have full time employees that perform that roles. For instance the NYC subway has signaling workers for a constant stream of signal work, track workers to maintain track and sign workers for endless lifecycle replacement of signs. New construction work, like tunnels and stations is done by contractors.
I suspect that there isn't a magic set of incentives that replaces appropriate levels of funding, good faith and sufficient oversight.
Dismissing a very low bid must be dismissed, giving good arguments that the bid is not realistic is something completely else.