Don’t trust me. I asked Claude – Is there any research that shows that the final cost of a construction project, hard cost and soft costs, that is competitively bid is lower than one that is negotiated.
Short answer: I’m not aware of any rigorous research showing that competitively bid projects come out cheaper in total, and the best-known empirical work points the other way for complex projects. The evidence is also thinner than people usually assume.
What the research does show
- The most cited study is Bajari, McMillan and Tadelis (2009), which looked at private-sector building contracts in Northern California from 1995 to 2000. They found auctions may perform poorly when projects are complex, contract design is incomplete, and few bidders are available. They also found auctions can stifle communication between buyer and contractor, so the buyer can’t use the contractor’s expertise in design. Almost half of the private nonresidential projects in their data were procured by negotiation. This study is about when each method performs better, not a clean “negotiated is cheaper” result. stanforduni-muenchen
- An earlier version of the paper also noted that auctions involve increased administrative expenses and delay, which are the kinds of soft-cost effects you’re asking about. repec
- Later theory work by Tadelis and coauthors argues that negotiations give sellers stronger incentives to investigate design improvements, which is why handbooks often recommend negotiation for complex work. uni-muenchen
Where the evidence is weak
- Most comparisons I know of, such as the school-construction delivery-method studies from the Pacific Northwest and the Konchar and Sanvido work on design-build, compare delivery methods (design-bid-build vs. CM at risk vs. design-build). That isn’t the same as bid vs. negotiated, because the two get conflated. I’m recalling those from memory, so check them before citing.
- Projects aren’t randomly assigned to each method. Owners tend to negotiate the complex, uncertain jobs, so raw cost comparisons are biased.
- Few studies capture all soft costs, such as design redo, owner staff time, delay and claims, on both sides.
- Much of what you’ll find online is advocacy. For example, the AGC white paper arguing for negotiation is a trade-group position, not peer-reviewed research.
What the evidence suggests
- Well-defined scope, complete drawings, many bidders: competitive bidding tends to win on initial price. Change orders on the low-bid job can erode that, and most study-level data on change orders comes from public school projects.
- Complex or uncertain scope: negotiation, with early contractor input, tends to do as well or better on total cost.