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Quantity Choice in Unit Price Contract Procurements

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 minimize 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 renegotiations. 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.

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File URL: http://www.transportportal.se/SWoPEc/Quantity_in_UPC_(Mandell_Brunes).pdf
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Paper provided by Swedish National Road & Transport Research Institute (VTI) in its series Working Papers with number 2011:4.

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Length: 17 pages
Date of creation: 15 Feb 2011
Date of revision:
Handle: RePEc:hhs:vtiwps:2011_004
Contact details of provider: Postal: VTI, Transport Economics, P.O. Box 6056, SE-171 06 Solna, Sweden
Phone: +46-13-20 40 00
Fax: +46-13-14 14 36
Web page: http://www.vti.se/tek
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