Quantity choice in unit price contract procurements Mandell, Svante ; Brunes, Fredrik
Series: Working papers in transport economics ; 2011:4Publication details: Stockholm Centre for Transport Studies Stockholm, 2011; Swedish National Road & Transport Research Institute [VTI], ; KTH Royal Institute of Technology, ; S-WoPEc, Scandinavian Working Papers in Economics, Description: 17 sSubject(s): Online resources: Notes: Tidigare utg. som: Swedish National Road & Transport Research Institute (VTI), Working Paper 2011:4, S-WoPEc, Scandinavian Working Papers in Economics. 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 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. Older version: http://swopec.hhs.se/vtiwps/abs/vtiwps2011_004.htmTidigare utg. som: Swedish National Road & Transport Research Institute (VTI), Working Paper 2011:4, S-WoPEc, Scandinavian Working Papers in Economics.
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. Older version: http://swopec.hhs.se/vtiwps/abs/vtiwps2011_004.htm