Quantity Choice in Unit Price Contract Procurements

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. © 2013 LSE and the University of Bath