Theories Of Procurement

5.4 Towards Development of a Comprehensive Procurement Practices for the Establishment of an International Standard: A Review of Theories on Procurement.

This is a review of some of the models of theories on procurement, with the view of creating awareness of their existence and the possibility of supporting the development of a state of the art procurement practices. The Theories examined include: 1) Incentives versus transaction costs: a theory of procurement contracts (Bajari, P.; Tadelis, S.; 2001). 2) Procurement Contracting with Time Incentives: Theory and Evidence (Lewis, G.; Bajari, P.; 2011) .3) Supply Chain Relationships for Customer Satisfaction in China: Interdependence and Cooperative Goals (Wong,A.; Tjosvold, D.; 2013). 4) Theory

By Patrick Bajari and Steven Tadelis.

Bajari and Tadelis (2001) made arguments in their theory of procurement contracts - Incentives versus transaction costs- that brought awareness to an aspect that dwells on provision of incentives and reduction of transaction cost in the public sector. In their model a buyer incurs a cost of providing a design and is faced with a trade-off between providing incentives and reducing ex post transaction costs due to costly renegotiation. They showed that cost-plus contracts are preferred to fixed-price contracts complex projects.

They explained in their literature thus, “In fixed-price contracts, the buyer offers the seller a prespecified price for completing the project. A cost-plus contract does not specify a price, but rather reimburses the contractor for costs plus a stipulated fee”. After having examined the literature and speaking to the industry participants they found evidence depicting that either the contractor or the buyer had private information at the onset of a procurement project, and both shared uncertainty about many important design changes that may occur after signing the contract and beginning production. These uncertainties include design failures; unanticipated site and environmental conditions; and changes in regulatory

They suggested that, an important aspect of contractual arrangements is the ability to accommodate adaptation, thus creating a trade-off between transaction costs that are due to change and incentives to reduce costs. They indicated that in some situations, fixed price contracts provide the strong incentives for cost reduction. In other situations, where the design is left incomplete, then the cost of renegotiating fixed price contracts is high. They also suggested that when cost plus contracts are used, the cost-reducing incentives disappear; but the process of adaptation is far smoother because the reimbursement process is simple, well defined, and leaves little room for haggling. They supported their argument with evidence from procurement contracts in private construction, defence, and software acquisition; which they argued, are consistent with the results of their