Research on the Material Procurement of Construction Projects Based on Option Contract

Increasing global competition and cost pressure force construction enterprises to discover undetected cost-saving potentials. We develop an option model to quantify a flexible supply contract, by which the contractors, in addition to a committed order quantity, can purchase option contracts and decide whether or not to exercise them after demand and price are realized when both the product demand and the spot price are random in construction material procurement. We focus on deriving the optimal order decision of the contractors, in terms of both the committed order quantity and the number of option contracts. We find out that option contracts could effectively reduce the cost of materials procurement.