Incomplete

The city’s public streets are an uncongested, nonrivalrous (in consumption), nonexcludable pure public good. The debate of who benefits from the provision of this good is not relevant when discussing contracting; the debate starts at who benefits from how the good is maintained. It should be expected that cities will provide maintenance of public goods, but will use a diverse array of service arrangements. This includes direct provision, joint contracting and complete contracting with external suppliers to provide services. In questioning market failures (equilibrium market behavior fails to provide maximum social surplus) related to maintaining the good (local public streets) there must be an understanding of the true qualities of the services purchased (direct provision, contract). The contracting of city services, which is part of a broader process of market liberalization, has implications for the efficiency of markets and the political process as well as for the efficiency of the city organization. How do you evaluate the efficiency, equity, administrative and political feasibility of direct provision or contracting all services of the city?
The procurement of goods and services is commonly performed using a bidding process of one type or another, the benefits of which are well known and vigorously advocated. Namely, competitive bidding will result in low prices and sets rules that limit the influence of favoritism and political ties. For standard goods, such as pencils, photocopy machines, and simple book-keeping software, it is rather straightforward to describe the item and proceed with a competitive bidding process.
Unique goods (street construction) and services (audit) that need to be custom made to fit the city’s needs are different. It is generally quite costly for the city to translate its operational needs into well defined and communicable specifications that become the product’s definition. Also, as is often the case with custom ordered goods and services, during the production and delivery phase there will likely be unforeseen variables that requires some adaptations and changes. These problems are often due to inadequate designs and specifications, due to changes in the external environment, or more commonly, to the incompleteness of the initial contract. In these events, the buyer and supplier will have to agree on the ways in which to adapt the original contract, both in terms of production specifications, and in terms of compensation. This may result in considerable discrepancies between the lowest winning bid and the actual costs that are incurred by the buyer. Changing the contract after it is awarded generates substantial extra costs for both parties for two reasons: First, there may be costs due to ex post bargaining, haggling and lawsuits over the payments made from changing the project specifications after the contract is awarded. Second, changing the contract disrupts the project work flow.