Subcontracting and the incidence of change orders in procurement contracts

In public procurement, most contracts are renegotiated ex post and involve subcontractors. We examine whether there is a causal link between subcontractor use and the incidence of change orders to amend the original scope of a project. Since subcontracting is likely related to unobserved project complexity, we use a novel IV, the predicted level of subcontracting from a method modeled after Christakis et al. (2010), to estimate the likelihood of renegotiation. The results establish that subcontractors are associated with an increased likelihood of change orders as well as a higher dollar amount renegotiated.