Skip to main content Accessibility help

We use cookies to distinguish you from other users and to provide you with a better experience on our websites. Close this message to accept cookies or find out how to manage your cookie settings.

Close cookie message
×
Hostname: page-component-78c5997874-4rdpn Total loading time: 0 Render date: 2024-11-09T14:06:29.090Z Has data issue: false hasContentIssue false

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
Get access

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

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Anderlini, L. and L. Felli (2005). Should Courts Always Enforce What Contracting Parties Write? mimeo.
Anton, J. J. and Yao, D. A. (1987). Second Sourcing and the Experience Curve: Price Competition in Defense Procurement, RAND Journal of Economics, 57–76.CrossRefGoogle Scholar
Banfield, E. C. (1975). Corruption as a Feature of Governmental Organization. Journal of Law and Economics, 58, 587–605.CrossRefGoogle Scholar
Baumol, W. J., Panzer, J. and Willig, R. D. (1986). Contestable Markets and the Theory of Industrial Structure, Harcourt Brace and Jovanovitch.Google Scholar
Bolton, P. and Dewatripoint, M. (2004). Contract Theory, The MIT Press, Cambridge, MA.Google Scholar
Calzolari, G. and G. Spagnolo (2005). Reputational Commitments and Collusion in Procurement, mimeo, University of Bologna and Consip.
Dalen, D. M. Moen, E. R. and Riis, C. (2004). Contract Renewal and Incentive in Public Procurement, CEPR Discussion Paper No. 4540.
Doni, N. (2005). L'affidamento mediante gara di contratti pubblici: l'importanza della reputazione (with English summary), Politica Economica, 21 (2), 307–335.Google Scholar
EC (2004). On the coordination of procedures for the award of public works contracts, public supply contracts and public service contracts, Directive 2004/18/EC of the European Parliament and of the Council, 31 March 2004.
Ellman, M. (2005). The Optimal Length of Contracts with Application to Outsourcing, manuscript, Universdad Pompeu Fabra.
Ewerhart, C. and Fieseler, K. (2003). Procurement Auctions and Unit-price Contracts, RAND Journal of Economics, 34 (3), 568–580.CrossRefGoogle Scholar
General Service Administration, Department of Defense and National Aeronautics and Space Administration (2005). Federal Acquisition Regulation, vol. I.
Fehr, E.Brown, M. and Falk, A. (2004). Relational Contracts and the Nature of Market Interactions, Econometrica 72 (3), 747–780.Google Scholar
Guerrero, J. C., Kirkpatrick, C. J. (2001). Evaluating Contractor Past Performance in the United States, Public Procurement Law Review, 10, 243–259.Google Scholar
Guriev, S. M. and Kvasov, D., (2005). Contracting on time, American Economic Review, 95, (5), 1369–1385.CrossRefGoogle Scholar
Holmostrom, B. (1979). Managerial Incentive Problems: A Dynamic Perspective, Review of Economic Studies, 66 (1), 169–182.Google Scholar
Iossa, E. and Legros, P. (2004). Auditing and Property Rights, The Rand Journal of Economics, 35, 356–372.CrossRefGoogle Scholar
Kim, I. G. (1998). A Model of Selective Tendering: Does Bidding Competition Deter Opportunism by Contractor?, The Quarterly Review of Economics and Finance, 38, 907–925.CrossRefGoogle Scholar
Kelman, S. (1990). Procurement and Public Management: The Fear of Discretion and the Quality of Government Performance, Washington, DC: American Enterprise Institute Press.Google Scholar
Kelman, S. (2002). Remaking Federal Procurement, Working Paper No. 3, Visions of Governance in the 21st Century Program, Kennedy School of Goverment. Published as Remaking Federal Procurement, Public Contracts Law Journal (Summer 2002).
Laffont, J. and Tirole, J. (1987). Auctioning Incentives Contracts, Journal of Political Economy, 95 (5), 921–937.CrossRefGoogle Scholar
Laffont, J. and Tirole, J. (1993). A Theory of Incentives in Regulation and Procurement, Cambridge, MA:MIT Press.Google Scholar
Lyon T. (2006). Does Dual Sourcing Lower Procurement Costs?, The Journal of Industrial Economics, Vol. 54 (2), 223–252.
Lyon T. P. (2000). Does Dual Sourcing Lower Procurement Costs?, mimeo Kelley School of Business, Indiana University.
Manelli, A. and Vincent, D. R. (1995). Optimal Procurement Mechanisms. Econometrica, 63, (3), 591–620.CrossRefGoogle Scholar
McAfee, R. P. and McMillan, J. (1986). Bidding for Contracts: A Principal–Agent Analysis, The Rand Journal of Economics, 17 (3), 326–388.CrossRefGoogle Scholar
McAfee, R. P. and McMillan, J. (1987). Competition for Agency Contracts, The RAND Journal of Economics, 18 (2), 296–307.CrossRefGoogle Scholar
McMillan, J. (1992). Games, Strategies and Managers, New York, NJ:Oxford University Press.Google Scholar
National Audit Office. (2005). Improving Public Services through Better Construction. National Audit Office, HC 209.
Neeman, A. and Orosel, G. (2004). Contestable Licensing, Contributions to Economic Analysis & Policy, 3 (2004), 3, (1), Article1, http://www.bepress.com/bejeap/contributions/vol3/iss1/art1.Google Scholar
Office of Federal Procurement Policy (Office of Management and Budget Executive Office of the President) (2000). Best Practices for Collecting and Using Past Performance Information. www.acqnet.gov/Library/OFPP/BestPractices/ pbsc/library/OFPPbp-collecting.pdf.
Richardson, J. (1993). Parallel Sourcing and Supplier Performance in the Japaneese Automotive Industry, Strategic Management Journal, 14 (5), 339–350.CrossRefGoogle Scholar
Riordan, M. H. and Sappington, D. E. M. (1987). Awarding Monopoly Franchises, American Economic Review, 77 (3) 375–387.Google Scholar
Rob, R. (1986). The Design of Procurement Contracts, American Economic Review, 76 (3), 378–389.Google Scholar
Rogerson, W. P. (1992). Overhead Allocation and Incentives for Cost Minimization in Defence Procurement, The Accounting Review, 67 (4), 671–690.Google Scholar
Weitzman, M. L. (1980). Efficient Incentive Contracts, The Quarterly Journal of Economics, 94 (4), 719–730.CrossRefGoogle Scholar

Save book to Kindle

To save this book to your Kindle, first ensure [email protected] is added to your Approved Personal Document E-mail List under your Personal Document Settings on the Manage Your Content and Devices page of your Amazon account. Then enter the ‘name’ part of your Kindle email address below. Find out more about saving to your Kindle.

Note you can select to save to either the @free.kindle.com or @kindle.com variations. ‘@free.kindle.com’ emails are free but can only be saved to your device when it is connected to wi-fi. ‘@kindle.com’ emails can be delivered even when you are not connected to wi-fi, but note that service fees apply.

Find out more about the Kindle Personal Document Service.

Available formats
×

Save book to Dropbox

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Dropbox.

Available formats
×

Save book to Google Drive

To save content items to your account, please confirm that you agree to abide by our usage policies. If this is the first time you use this feature, you will be asked to authorise Cambridge Core to connect with your account. Find out more about saving content to Google Drive.

Available formats
×