Cost-Benefit Analysis of Bid Protests: A Representative Bidder Model

Abstract

The goal of any procurement process is to obtain ‘value for money.’ Bid protest systems are intended to help. The U.S. Department of Defense, NATO, the EU, UN, OECD, and WTO, all authorize losing bidders to protest public procurements. The threat of a protest is meant to increase government accountability, and encourage vendor participation. An extensive legal and regulatory literature discusses intended benefits of protests, but is surprisingly silent about the costs. The goal of this study is to examine both costs and benefits. Military acquisition offers an illustration. The dual objective is to minimize corruption, and maximize competition. Sadly, protest systems can inadvertently discourage both. Moreover, past protests by defense companies have generated signifi- cant costs, and triggered dangerous delays of critical defense equipment, materiel, services, and supplies required for national security. The static, probabilistic, micro-economic, partial equilibrium, representative bidder model presented in this paper offers a cautionary tale for defense organizations, government agencies, countries, and international institu- tions that authorize bid protests. The model reveals multiple potential deficiencies of protest systems, and recommends analysis of portfolios of alternatives to eliminate fraud and favoritism, and increase competition, to improve procurement outcomes.