Quantity Choice in Unit Price Contract Procurements

Svante Mandell and Fredrik Brunes
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Fredrik Brunes: Department of Real Estate and Construction Management, Royal Institute of Technology, Postal: Department of Real Estate and Construction Management , Royal Institute of Technology, Brinellvägen 1, 100 44 Stockholm, Sweden

No 13/2, Working Paper Series from Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance

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.

Keywords: Unit price contracts; procurement; construction; cost overruns (search for similar items in EconPapers)
JEL-codes: D44 H54 H57 (search for similar items in EconPapers)
Pages: 29 pages
Date: 2013-03-15
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Related works:
Journal Article: Quantity Choice in Unit Price Contract Procurements (2014)
Working Paper: Quantity choice in unit price contract procurements (2011)
Working Paper: Quantity Choice in Unit Price Contract Procurements (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:hhs:kthrec:2013_002

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