Contract splitting in public procurement

Public procurement bridges public funds to private activity and is therefore strictly regulated. Competition requirements depend on contract prices: contracts above pre-determined thresholds must use competitive auctions, while smaller contracts can be directly awarded at discretion. The study first provides evidence that, in Portugal, buyers often manipulate procurement contracts to evade these rules and exercise discretion. The paper studies contract splitting—dividing contracts into multiple smaller ones—as a mechanism of manipulation in public procurement. Previous research mainly studied contract shifting, where buyers slightly reduce prices or quantities of contracts close to the threshold to comply with discretion requirements. In comparison, contract splitting enables manipulation across broader price ranges. Leveraging detailed data from Portugal’s public procurement registry, the paper analyzes a reform that significantly lowered discretion thresholds (€75,000 to €20,000 in goods and services and €150,000 to €30,000 in construction).

Results show that contract splitting is the main mechanism of manipulation. The reform induces a sharp increase in contracts priced just below the new thresholds. The empirical strategy isolates the buyers’ product-level purchases and examines their response to the reform. The paper finds that buyers maintained total spending per product but significantly increased the number of contracts, providing strong evidence of contract splitting.

The paper highlights the consequences of contract splitting. It shows that splitting can bias existing statistical methods used to quantify manipulation, leading to an underestimation of its true extent. The results suggest favoritism as the main driver of discretion-seeking manipulation; manipulation tends to favor politically connected and local companies, and municipalities with lower transparency manipulate more. These contracts usually have longer durations without generating cost savings. The paper finds no evidence supporting efficiency-promoting motivations. The results emphasize the importance of oversight and transparency over complex regulatory frameworks to ensure fair and effective use of public resources.

Click here to go to the paper by Filipe B. Caires, Susana Peralta, and Diogo Mendes