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Quantity Choice in Unit Price Contract Procurements

Author

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  • 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.

Suggested Citation

  • Mandell, Svante & Brunes, Fredrik, 2013. "Quantity Choice in Unit Price Contract Procurements," Working Paper Series 13/2, Royal Institute of Technology, Department of Real Estate and Construction Management & Centre for Banking and Finance (cefin).
  • Handle: RePEc:hhs:kthrec:2013_002
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    Cited by:

    1. 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; cost overruns;

    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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