Working Papers, Swedish National Road & Transport Research Institute (VTI)
No 2011:4:
Quantity Choice in Unit Price Contract Procurements
Svante Mandell ()
and Fredrik Brunes ()
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.
Keywords: Unit price contracts; procurement; construction; (follow links to similar papers)
JEL-Codes: D44; H54; H57; (follow links to similar papers)
17 pages, February 15, 2011
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