The influence of contract design on contractor performance: A multivariate analysis

This study identifies contract design factors influential in determining the cost and quality of public services delivered by private contractors. Knowing more about how contract design relates to contractor performance will help local level administrators select contracting methods that have the best potential for reducing the cost, and improving the quality, of public services.;A questionnaire was sent to local government officials to collect data on contract design and contractor performance for residential refuse collection, bus transit, outpatient mental health care and emergency ambulance transport. The data obtained in the survey was combined with secondary data to form data sets for statistical analysis. The framework for analysis postulates contractor performance to be a function of contract design factors (type of specification, solicitation method, contract type, length of contract, type of firm, number of contracts awarded, oversight, and contract rewards and sanctions) and factors which control for other influences on contractor performance.;The results show that for refuse collection and bus transit three contract design variables have a statistically significant association with the cost of each service. One contract design variable has a statistically significant association with the cost of outpatient mental health care, while none of the contract design variables have a statistically significant influence on the cost of emergency ambulance transport. For refuse collection and bus transit two contract design variables have a statistically significant association with quality for each service.;The findings indicate that for refuse collection and bus transit contract design has a bearing on contractor performance. In particular, local governments contracting for these services may be incurring higher production cost by not using the most competitive solicitation method available. In addition, less competitive contract solicitation methods tend to be more complex and thus require higher transaction cost to be incurred by the local government. The combination of higher production cost and higher transaction cost indicates that local governments may be able to reduce the total cost of contracting by using more competitive solicitation methods. The results also provide evidence on the effect of sanctions on contractor performance. Contractors providing bids for refuse collection and bus transit solicitations with a penalty provision appear to be including the cost of additional flexibility in the bid so penalties will not be incurred.;The findings are particularly relevant in the context of business attitudes toward government as a buyer of goods and services. When firms doing business with government were asked whether government purchasing policies and procedures result in purchase of quality goods at lowest cost, almost two thirds (60%) responded negatively (MacManus, 1993, p.93). In terms of residential refuse collection and bus transit, this study tends to support the view of the private firms. Using the most competitive contracting procedures, given the nature of the service involved, may indeed help move local governments in the direction of purchasing quality services at the lowest cost.