Efficiency measurement in the tendering of road surface renewal contracts

Abstract

The problem of slow productivity growth in the road construction (and wider construction) industry is well known. The present paper suggests a means for efficiency analysis in one part of this industry, namely road surface renewal in Sweden, built upon the application of Stochastic Frontier Analysis (SFA) techniques. The paper is novel in that it focuses on project level rather than firm or contractor level performance and takes the perspective of the inefficiency that may result from the way the contracts are specified by the highway agency’s pavement engineers (client side). We compare 233 renewal contracts tendered over a four-year period via the estimation of a cost frontier, with controls for heterogeneity between projects. Our results produce first estimates that expose substantive differences in the relative efficiency performance of different engineers within the Swedish highways procurement organisation (Trafikverket); with indicative savings of around €40 m out of a total road renewals budget in Sweden of €200 m. We also find substantial economies of scale that could, in principle, point to further cost savings if road renewal projects can be packaged up as larger projects. These client-side savings represent potentially important sources of savings in addition to those that can be achieved through the pressure of competitive tendering on the supplier side. The paper therefore illustrates how disaggregate analysis of project level information can readily be used for revealing important information about how best to frame the procurement process and thus deliver productivity and unit cost improvements over time.