Abstract: The cost-based procurement contracts can usually be classified into the cost-sharing contract, and the fixed-priced contract, and the cost-reimbursement contract. A fixed-price contract provides the strong incentives for the cost-reducing effort, but leaves all risk with the supplier. A cost-reimbursement contract removes all risk from the suppliers, but yields few incentives to decrease cost. The cost-sharing contract is in the middle.
The cost-based procurement can be formulated as a principal-agent problem. The buyer is the principal and the supplier is agent. The buyer's objectives are to ensure cost within budget and minimize the cost under delivering high quality finished projects on time in order to obtain the maximization profit, which are affected not only by the future uncertainties, but also by the action of the supplier. Although the buyer can monitor the supplier's behavior, the buyer can't entirely observe the action of the supplier. This asymmetric information always leads to some loss in efficiency due to moral hazard and adverse selection.
In consideration of this fact, a simple linear formulation of cost-sharing procurement contract is developed,that the reciprocal behavior is embedded into, in which the buyer firstly formulates some kind, and then the supplier is willing to reciprocate the buyer's kind by reciprocal cost-reducing effort. After modeling this reciprocal behavior, it is found that the efficiency on the procurement contract inserted the reciprocal behavior, under the very modest restrictions, can also reach the level or social surplus secured by a fully optimal contract even if the purchaser cannot observe the supplier's effort on the cost reduction.
The reciprocal model has the double significant in theory and practice. The model, relative to the traditional cost-based procurement contracts, is a Pareto improvement because the buyer and the supplier both can get more benefits from their reciprocal behavior. In practice, the buyer can adjust his kind level based on the project's risk and the supplier's management ability and technical level to promote the project's success.

Key words: procurement contract, risk-sharing, incentive, reciprocal behavior