Framework Agreements in Procurement: An Auction Model and Design Recommendations
Coauthor(s): Y. Gur, L. Lu, and G. Y. Weintraub
Framework agreements (FAs) are procurement mechanisms commonly used by buying agencies around the world to satisfy demand that arises randomly over a certain time horizon. This paper is one of the first in the literature that provides a formal understanding of FAs, with a particular focus on the cost uncertainty faced by bidders over the FA time horizon. More specifically, we introduce a novel model that generalizes standard auction models to incorporate the complexities that arise in FAs. We analyze the model through a combination of theoretical and numerical results. Based on these results, we provide concrete design recommendations to decrease the buying prices in FAs, highlighting the importance of i) investing in implementing price indexes for the random part of suppliers' costs; and ii) allowing the right form of flexibility in suppliers' pricing over the time horizon. These prescriptions are already being used by the Chilean government procurement agency that buys US$1.9 billion worth of contracts every year using FAs.
Y. Gur, L. Lu, and G. Y. Weintraub "Framework Agreements in Procurement: An Auction Model and Design Recommendations." , Columbia Business School, (2013).