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4 - Procurement contracting strategies

Published online by Cambridge University Press:  04 November 2009

By
Gian Luigi Albano ,
Giacomo Calzolari ,
Federico Dini ,
Elisabetta Iossa  and
Giancarlo Spagnolo
Edited by
Nicola Dimitri ,
Gustavo Piga  and
Giancarlo Spagnolo
Gian Luigi Albano
Affiliation:
Senior Economist Consip Research Unit, Italy
Giacomo Calzolari
Affiliation:
Associate Professor of Economics University of Bologna, Italy
Federico Dini
Affiliation:
Junior Economist Consip Research Unit, Italy
Elisabetta Iossa
Affiliation:
Professor of Economics Brunel University, UK
Giancarlo Spagnolo
Affiliation:
Head of the Research Unit at Consip, Italy: Visiting Associate Professor of Economics at the Stockholm School of Economics, Sweden
Nicola Dimitri
Affiliation:
Università degli Studi, Siena
Gustavo Piga
Affiliation:
Università degli Studi di Roma 'Tor Vergata'
Giancarlo Spagnolo
Affiliation:
Stockholm School of Economics
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Summary

Introduction

Well-designed supply contracts are essential to effective procurement. By fixing obligations and promises, contracts protect each party in a procurement transaction against the risk of unexpected changes in the future behaviour of business partners, thereby allowing safe and efficient planning, investing, and production in decentralized supply chains. Contract obligations ensure, for example, that a buyer will receive the right service or good when and as needed, as promised by her supplier, and that the supplier's investment specific to a particular procurement will not be ‘wasted,’ in the sense that the buyer will indeed buy what she ordered at the agreed terms.

There are several types of contracts and very many dimensions along which apparently similar contracts differ, so that choosing the right contracting strategy is not always easy for a buyer. And a bad choice of contract can have very negative consequences for a buyer in terms of cost and quality of supply. However, economists and practitioners would agree on considering contract flexibility, the incentives for quality and cost reduction, and the allocation of procurement risk as the most important dimensions influencing the buyer's choice of the procurement contract.

In this chapter we offer simple and practical indications on how to choose among different types of procurement contracts. We focus on situations where the needs of the buyers are unlikely to change during the execution of the contract, so that renegotiation of the initial contract specifications, which is generally costly for the buyer, is unlikely to occur.

Type
Chapter
Information
Handbook of Procurement , pp. 82 - 120
Publisher: Cambridge University Press
Print publication year: 2006

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