Hence if you go the other way and include severe penalties you’ll only get significantly padded estimates because the contractor now has to bear significantly more risk.
The buyer has an advantage in that they can negotiate the vendor down through competitive bidding techniques, and by doing so transfer the fault for insufficient delivery entirely on to the bidder instead sharing the fault themselves. If I work two contractors against one another to drive one into the position where they are now no longer safely comfortable they can deliver the product they promise for the agreed upon price, (however I am now safely in my own comfort zone knowing that I've got the lowest possible price extracted from them), well if they fail to deliver what is requested it's now their fault for promising they can do it, not mine for pressuring them into a risky position.
If its just an estimate, you underbid everyone else, win the contract, start building, run out of money past the point of no return, then get more funding.
a) What it says about lowest unique bid auctions [1] and reverse auctions [2] with multiple bidders and multiple auctioneers. That the auctioneers will often (?) take the lowest bid, even if it represents "unrealistic" based on the criteria of the auction (this seems especially relevant in contract procurement).
Especially though, that even in a market, with relatively "transparent" information (concrete costs this much, lumber costs this much, ect...) there's still not much consumer transparency on what "reasonable" prices for construction represent. And consumers or "auctioneers" are likely to just take the lowest number, like a lowest unique bid auction. Whether its lack of information, strong preference for lowest price, can't be bothered to check reasonableness, purposeful cost obfuscation, or some other issue.
b) That people often fall for sunk cost issues. Especially on big purchases. Gov't might drop $100k contract without much notice. Except a $10B contract? Just keep throwing good money after bad. Consumer might switch soap brands on a tiny price fluctuation. Except a $1M house? Just keep throwing good money after bad.
Australia's had a rash of collapses lately, and it's felt this way.[3] 2000 companies in two years, and reading along, lots of companies that basically said "Give us another $200k as a payment right now." ("Even though we know we won't be able to finish your house, because our financials are horrible.") Except buyers felt like they had to, because they already committed to an expensive project.
[1] https://en.wikipedia.org/wiki/Unique_bid_auction [2] https://en.wikipedia.org/wiki/Reverse_auction [3] https://www.9news.com.au/national/building-construction-comp...
In this case, it's not necessarily sunk cost. There are switching costs associated with bringing in a new contractor, so it is likely cheapest to continue with the current one, even if they didn't bid it right initially.