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Quantity choice in unit price contract procurements

Author

Listed:
  • Mandell, Svante

    (VTI)

  • Brunes, Fredrik

    (KTH)

Abstract

A common approach for procuring large construction projects is through Unit Price Contracts. By the means of a simple model, we study the optimal quantity to procure under uncertainty regarding the actual required quantity given that the procurer strives to minomize expected total costs. The model shows that the quantity to procure in optimum follows from a trade-off between the risk of having to pay for more units than actually necessary and of having to conduct costly renogotiations. The optimal quantity increases in costs associated with possible renegotiations, decreases in expected per unit price, and, if a renegotiation does not increase per unit price too much, decreases in the uncertainty surrounding the actual quantity required.

Suggested Citation

  • 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).
  • Handle: RePEc:hhs:ctswps:2011_004
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    File URL: http://www.transportportal.se/SWoPEc/CTS2011-4.pdf
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    Cited by:

    1. Milan Mirkovic, 2018. "The Impact of Failure Types in Construction Production Systems on Economic Risk Assessments in the Bidding Phase," Complexity, Hindawi, vol. 2018, pages 1-13, November.
    2. Odeck, James, 2014. "Do reforms reduce the magnitudes of cost overruns in road projects? Statistical evidence from Norway," Transportation Research Part A: Policy and Practice, Elsevier, vol. 65(C), pages 68-79.

    More about this item

    Keywords

    Unit price contracts; procurement; construction;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - 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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