Incentive Structure in Public Design- Bid-build Tendering and Its Effects on Projects

Organizational theory argues that the more dynamic and uncertain the environment, the stricter are regulations and organizational structures. Germany’s public sector is restricted by tendering regulations resulting in a strict design-bid-build tendering. These legal regulations, as well as contractual penalties, create an incentive structure which often leads to uncooperative behavior of the project partners. This paper identifies the negative incentives of strict design-bid-build tendering and explains their effects on projects. Data was collected from one public authority, and data shows that contractors are selected based on lowest bid. Thus, we argue that this tendering procedure leads to speculative behavior of the contractors, which results in unrealistic cost estimation and an intensified focus on claim management to compensate for below-cost bids. Furthermore, the design-bid-build tendering procedure strictly separates planning and execution phases, resulting in communication barriers between architects and construction companies. With regard to the non-collaborative up to hostile behavior three current public mega projects in Germany will be reviewed in brief, and of these the project Elbphilharmonie Hamburg will be discussed in more depth based on the tendering procedure and the contractual situation. We conclude that due to increasing uncertainty and complexity in projects, as well as the way of interaction between the project parties, that the current tendering procedure and the form of contracts impede collaboration. Therefore, incentives are needed which foster the collaboration in public projects.