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Quantity Choice in Unit Price Contract Procurements

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Author Info

  • Mandell, Svante

    ()
    (vti – Swedish National Road and Transport Research Institute)

  • Brunes, Fredrik

    (Department of Real Estate and Construction Management, Royal Institute of Technology)

Abstract

A procurement approach commonly used for construction projects involves paying a fixed price per unit conducted, i.e., unit price contracts. We develop an analytical model to study the optimal procurement quantity and monitoring intensity when the required quantities are uncertain. The optimum involves a trade-off between a risk of paying for more units than necessary, conducting costly renegotiations and/or investing in monitoring. The paper adds to the understanding of both optimal behavior in procurements and the presence of cost overruns. In particular, deliberately procuring low quantities, and thereby facing a high risk of cost overruns, is sometimes optimal as it minimizes the expected total cost.

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Bibliographic Info

Paper provided by Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin), Royal Institute of Technology in its series Working Paper Series with number 13/2.

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Length: 29 pages
Date of creation: 15 Mar 2013
Date of revision:
Handle: RePEc:hhs:kthrec:2013_002

Contact details of provider:
Postal: Department of Real Estate and Construction Management, Royal Institute of Technology, Brinellvägen 1, 100 44 Stockholm, Sweden
Web page: http://www.kth.se/en/abe/inst/fob
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Keywords: Unit price contracts; procurement; construction; cost overruns;

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