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Quantity Choice in Unit Price Contract Procurements

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  • Svante Mandell
  • Fredrik Brunes

Abstract

A procurement approach commonly used for construction projects involves paying a fixed price per unit conducted - that is, 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 behaviour 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 minimises the expected total cost. © 2013 LSE and the University of Bath

Suggested Citation

  • Svante Mandell & Fredrik Brunes, 2014. "Quantity Choice in Unit Price Contract Procurements," Journal of Transport Economics and Policy, University of Bath, vol. 48(3), pages 483-497, September.
    • Handle: RePEc:tpe:jtecpo:v:48:y:2014:i:3:p:483-497
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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

    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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