Scandinavian Working Papers in Economics
Working Paper Series,
Royal Institute of Technology, Department of Real Estate and Construction Management & Banking and Finance
No 13/2: Quantity Choice in Unit Price Contract Procurements
Svante Mandell () and Fredrik Brunes
Additional contact information
Svante Mandell: vti – Swedish National Road and Transport Research Institute, Postal: Box 55685, , SE-102 15 Stockholm, , Sweden,
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
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
29 pages, March 15, 2013
Full text files
WP201302.pdf
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