Scandinavian Working Papers in Economics

Working Papers,
Swedish National Road & Transport Research Institute (VTI)

No 2011:4: Quantity Choice in Unit Price Contract Procurements

Svante Mandell () and Fredrik Brunes ()
Additional contact information
Svante Mandell: vti - Swedish National Road & Transport Research Institute, Postal: Dept. of Transport Economics, P.O. Box 55685, SE-102 15 Stockholm, Sweden
Fredrik Brunes: KTH, Postal: Department of Real Estate and Construction Management, KTH, Brinellvägen 1, 100 44 STOCKHOLM, Sweden

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

JEL-codes: D44; H54; H57

17 pages, February 15, 2011

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Quantity_in_UPC_(Mandell_Brunes).pdf PDF-file 

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