Tendering theory revisited

Abstract

This paper discusses the content, origin and development of tendering theory as a theory of price determination. It demonstrates how tendering theory determines prices and how it is different from game and decision theories, and that in the tendering process, with non-cooperative, simultaneous, single sealed bids with individual private valuations, extensive public information, a large number of bidders and a long sequence of tendering occasions, there develops a competitive equilibrium. The development of a competitive equilibrium means that the concept of the tender as the sum of a valuation and a strategy, which is at the core of tendering theory, cannot be supported, and that there are serious empirical, theoretical and methodological inconsistencies in the theory.Tendering Theory, Tendering, Price Determination, Bidding,

Winning the Bid – A Step-Wise Approach Using BIMto Reduce Uncertainty in Construction Bidding

“…It seems that a profitmaximising bidding strategy as a prescribed practice is ill-founded, which may also explain why there is little evidence of its adoption in practice (Runeson and Skitmore 1999). However, if not driven by utility maximisation, then what?…”

“…In an article by Runeson and Skitmore (1999) the competitive bidding theory is criticized for being inappropriate to describe the construction bidding situation. This is done on two grounds; first, that to maximize the expected value of every single bid may work well for a game of poker or when betting on horses, but the problem in construction tendering is to maximize the return to a given productive capacity.…”

“…One of the early, notable contributions to the field is by Friedman (1956) on competitive bidding strategy. It involves maximising the expected profit from a single tender where each competitor submits a closed bid by selecting a mark-up on cost that maximises expected value of the profit -which is the product of the mark-up and the probability of winning the contract (Runeson and Skitmore 1999). The problem, according to Friedman, lies in determining the probability of winning as a function of the mark-up (op.cit).…”

“…Friedman's competitive bidding strategy has later been reinterpreted by Gates (1967) from a single bid strategy into a general, profit maximising pricing model. An essential characteristic of the model presented by Gates (1967) is a mark-up that is constant, over time and in practice, from tender to tender (Runeson and Skitmore 1999). It excludes the possibilities of systematic changes in the mark-up to calculate the probabilities of success at different mark-ups (op.cit.…”

The Effect of Information Feedback in Construction Bidding

“…de Neufville et al 1977, Flanagan and Norman 1985, Chan et al 1996. Runeson and Skitmore (1999) argued that variations in bids over time can be explained by changes in demand, firm capacity level and competitor behaviour. Highly correlated with changes in demand is the bidders' need for work, which tends to be high in recession time as demand decreases.…”