Contractor’s bid pricing strategy: a model with correlation among competitors’ prices

Abstract

The approach used by construction companies to determine bid prices is an element of their strategy used to win jobs in competitive tenders. Such strategies build upon an analysis of the contactor’s potential and capabilities (am I able to deliver? am I eligible to participate in the tender?), and the analysis of the economic environment, including the expected behavior of competitors. The tender strategy sets out both the guidelines and the procedure in deciding whether or not to bid as well as the rules for determining the price. The price, on the one hand, should be high enough to cover expected direct and indirect costs as well as risk-adjusted profit. On the other hand, it needs to be low enough to be considered most attractive (typically: the lowest) among the prices offered by the competitors. The paper focuses on the price definition component of the bidding strategy. It provides a brief overview of the existing methods that support bidding decisions by comparing their demand for input and limitations in practical applications and presents a simulation-based method supporting the determination of the profit ratio. This probabilistic method assumes the existence of a positive correlation between the prices offered by the competitors. Its application is illustrated by means of a numerical example. The outcomes of the simulation prompt the amount of the profit margin that maximizes the expected value of the contractor’s profit.

A Case Study of a Negotiated Tender within a Small-to-Medium Construction Contractor: Modelling Project Cost Variance

“…Consequently, the project requirements are largely defined and delineated by the contractors' interpretations [6], thus increasing the difficulty of levelling bids, especially due to the inclusion of qualifications that form the basis of the tender return [7,8]. In addition, this approach reduces the clarity of procuring a contractor who has fully understood and allowed for the full extent of the scope of the works [9]. This lack of clarity in terms of scope, and the inherently competitive element of this procurement route, compel contractors to strategically plan their approach to each tender in order to increase the appeal of their tender return [10] and participate in the infamous "race to the bottom" [11].…”

Extreme Gradient Boosting-Based Machine Learning Approach for Green Building Cost Prediction

“…Compared to the traditional approach, such as the low-bid approach to choosing a winner, DB seems to have significant advantages for sustainable green building objectives [40,41]. Many approaches have been improved since the 1990s to find a rating approach to handle green buildings properly [42]. To achieve a comprehensive vision of all aspects of the bid details and to meet the required conditions written in the contract to satisfy all parties, when determining the bid winner, it is vital to consider the quality, environment, technical aspects, reputation, and price.…”

“…To achieve a comprehensive vision of all aspects of the bid details and to meet the required conditions written in the contract to satisfy all parties, when determining the bid winner, it is vital to consider the quality, environment, technical aspects, reputation, and price. This approach ensures that more work and effort is put into enforcing adequate and acceptable criteria for choosing the winner to attain the optimal advantage [16,41,42]. Many factors must be considered for the conceptual phase in the design and planning stages of the green building to acquire practical work [43].…”

Métodos e Critérios para Decisão sobre Participação em Licitações: Uma Revisão Sistemática da Literatura

“…Jaśkowski e Czarnigowska ( 2019); Li et al (2019); Skitmore e Pemberton, (1993); Hwang e Kim (2015); Polat e Bingol (2017); SU et al (2019); Tian et al (2019).…”