This interesting article presents a model on Framework Agreements, in which rather than centering itself on the uncertainties faced by suppliers’ demand, it highlights the uncertainties endured by the costs presented in short term agreements.

The author develops a model that generalizes Framework Agreements, incorporating the complexities derived under the mechanism of allocation, and analyzes them through a combination of theoretical and numerical results. The first result unraveled during this study is the verification that donors in fact “charge” for price uncertainties that are faced, formalizing the intuition of the practitioners of ChileCompra.

Based on the results obtained, in order to diminish procurement prices in Framework Agreement the authors recommend to implement price indexes as representative of the random prices that are faced by suppliers, and to allow a certain degree of price flexibility during the validity of the contract.

Additionally the document proposes a future line of investigation that further complicates the analysis, such as considering risk averse suppliers instead of neutral suppliers. The study also realizes to later consider how suppliers face uncertainty in the demand within the time settled during the Framework Agreement.

Document Link:

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2257073