Quantity Choice in Unit Price Contract Procurements
AbstractA 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 InfoPaper 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.
Length: 29 pages
Date of creation: 15 Mar 2013
Date of revision:
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
More information through EDIRC
Unit price contracts; procurement; construction; cost overruns;
Other versions of this item:
- Mandell, Svante & Brunes, Fredrik, 2011. "Quantity choice in unit price contract procurements," Working papers in Transport Economics 2011:4, CTS - Centre for Transport Studies Stockholm (KTH and VTI).
- Mandell, Svante & Brunes, Fredrik, 2011. "Quantity Choice in Unit Price Contract Procurements," Working Papers 2011:4, Swedish National Road & Transport Research Institute (VTI).
- D44 - Microeconomics - - Market Structure and Pricing - - - Auctions
- H54 - Public Economics - - National Government Expenditures and Related Policies - - - Infrastructures
- H57 - Public Economics - - National Government Expenditures and Related Policies - - - Procurement
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