Optimal procurement contract between contractor and supplier in large-scale projects

Procurement management is an important process in large-scale projects because large-scale projects heavily depend on building materials from suppliers. This paper develops a model of material procurement in large-scale projects using the quality of material as decision-making variable. The optimal contract specifying quality and price between the contractor and the supplier is given. In addition, we present analytical and computational results related to the equilibrium solution. We find that the lower the cost of the supplier, the higher the efficiency, thus the supplier will provide higher quality materials; the higher the risk parameter of the contractor, the higher the quality of material will be; the higher the supplier´s cost, the higher the risk sensitivity of the contractor.