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Quantity Choice in Unit Price Contract Procurements
, Swedish National Road and Transport Research Institute.ORCID iD: 0000-0002-1819-0805
KTH, School of Architecture and the Built Environment (ABE), Real Estate and Construction Management, Building and Real Estate Economics.
2014 (English)In: Journal of Transport Economics and Policy, ISSN 0022-5258, Vol. 48, no 3, 483-497 p.Article in journal (Refereed) Published
Abstract [en]

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.

Place, publisher, year, edition, pages
2014. Vol. 48, no 3, 483-497 p.
Keyword [en]
Cost Overruns, Projects, Competition, Auctions
National Category
Economics Transport Systems and Logistics
URN: urn:nbn:se:kth:diva-143351ISI: 000340698000008OAI: diva2:706358

QC 20140325

Available from: 2014-03-20 Created: 2014-03-20 Last updated: 2014-09-18Bibliographically approved

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