Stochastic Programming Model for Bidding Price Decision in Construction Projects
Publication: Journal of Construction Engineering and Management
Volume 147, Issue 4
Abstract
In competitive bidding, the success and/or failure of the contractors strongly depends on their submitted bid price. Hence, the bidding price decision is a strategic subject for contractors of construction projects. This paper develops a stochastic programming model for determining the optimum bidding price in construction projects. Some model parameters, such as the number of competitors and the project’s cost, are estimated by analyzing historical data. Then, a mathematical model for the bidding price decision that maximizes the expected profit is proposed. To reduce the risk of suffering from a large loss, a maximum acceptable risk constraint is employed. To evaluate the model’s performance, some numerical problems are examined. Moreover, sensitivity analysis of the key parameters and a robustness evaluation of the model against uncertain parameters are conducted. To evaluate the model’s effectiveness in real-world situations, a case study is analyzed using the proposed approach. The numerical results indicate that the proposed approach reduces the cost estimation errors and increases the average expected profit, which validates the applicability of the model. This research contributes to the community of contractors of construction projects by providing a new approach for determining the optimum bidding price that is in greater accordance with real-world constraints.
Get full access to this article
View all available purchase options and get full access to this article.
Data Availability Statement
The data, models, and code generated or used during the study are available from the corresponding author by request.
Acknowledgments
We express our sincere thanks for all of the assistance rendered to us by the National Iranian South Oil Company (NISOC) during this study.
References
Abdoli, G., and A. Khirandish. 2010. “A game theory model of economic opportunistic bidding and claim with a case study in Iran.” [In Persian.]Econ. Res. 14 (43): 111–140.
Ballesteros-Pérez, P., and M. Skitmore. 2017. “On the distribution of bids for construction contract auctions.” Constr. Manage. Econ. 35 (3): 106–121. https://doi.org/10.1080/01446193.2016.1247972.
Bigdeli, N., K. Afshar, and M. Fotuhi-Firuzabad. 2010. “Bidding strategy in pay-as-bid markets based on supplier-market interaction analysis.” Energy Convers. Manage. 51 (12): 2419–2430. https://doi.org/10.1016/j.enconman.2010.05.006.
Burkardt, J. 2014. “The truncated normal distribution.” Discussion paper. Dept. of Scientific Computing, Florida State Univ.
Carr, P. G. 2005. “Investigation of bid price competition measured through prebid project estimates, actual bid prices, and number of bidders.” J. Constr. Eng. Manage. 131 (11): 1165–1172. https://doi.org/10.1061/(ASCE)0733-9364(2005)131:11(1165).
Chen, Y. Q., S. J. Zhang, L. S. Liu, and J. Hu. 2015. “Risk perception and propensity in bid/no-bid decision-making of construction projects.” Eng. Constr. Archit. Manage 22 (1): 2–20. https://doi.org/10.1108/ECAM-01-2013-0011.
Chisala, M. L. 2017. “Quantitative bid or no-bid decision-support model for contractors.” J. Constr. Eng. Manage. 143 (12): 04017088. https://doi.org/10.1061/(ASCE)CO.1943-7862.0001407.
Chou, J. S., A. D. Pham, and H. Wang. 2013. “Bidding strategy to support decision-making by integrating fuzzy AHP and regression-based simulation.” Autom. Constr. 35 (Nov): 517–527. https://doi.org/10.1016/j.autcon.2013.06.007.
Christodoulou, S. 2010. “Bid mark-up selection using artificial neural networks and an entropy metric.” Eng. Constr. Archit. Manage. 17 (4): 424–439. https://doi.org/10.1108/09699981011056600.
Chua, D. K. H., D. Z. Li, and W. T. Chan. 2001. “Case-based reasoning approach in bid decision making.” J. Constr. Eng. Manage. 127 (1): 35–45. https://doi.org/10.1061/(ASCE)0733-9364(2001)127:1(35).
Davatgaran, V., M. Saniei, and S. S. Mortazavi. 2018. “Optimal bidding strategy for an energy hub in energy market.” Energy 148 (Apr): 482–493. https://doi.org/10.1016/j.energy.2018.01.174.
Dikmen, I., M. T. Birgonul, and A. K. Gur. 2007. “A case-based decision support tool for bid mark-up estimation of international construction projects.” Autom. Constr. 17 (1): 30–44. https://doi.org/10.1016/j.autcon.2007.02.009.
Dong-Hong, C., and Z. Xi-Yan. 2009a. “Application of game theory on bidding price decision.” In Proc., 16th Int. Conf. on Industrial Engineering and Engineering Management, 2009: IE&EM’09, 58–61. New York: IEEE.
Dong-Hong, C., and Z. Xi-Yan. 2009b. “Bidding price game model.” In Proc., Int. Conf. on Information and Multimedia Technology, 2009, ICIMT’09, 86–89. New York: IEEE.
El-Mashaleh, M. S. 2010. “Decision to bid or not to bid: A data envelopment analysis approach.” Can. J. Civ. Eng. 37 (1): 37–44. https://doi.org/10.1139/L09-119.
Engelbrecht-Wiggans, R. 1978. A model for the distribution of the number of bidders in an auction (No. Discussion). New Haven, CT: Yale University New Haven Conn Cowles Foundation.
Friedman, L. 1956. “A competitive-bidding strategy.” Oper. Res. 4 (1): 104–112. https://doi.org/10.1287/opre.4.1.104.
Gates, M. 1967. “Bidding strategies and probabilities.” J. Constr. Div. 93 (1): 75–110.
Hickman, B. R., T. P. Hubbard, and H. J. Paarsch. 2017. “Identification and estimation of a bidding model for electronic auctions.” Quant. Econ. 8 (2): 505–551. https://doi.org/10.3982/QE233.
Hosny, O., and A. Elhakeem. 2012. “Simulating the winning bid: A generalized approach for optimum markup estimation.” Autom. Constr. 22 (Mar): 357–367. https://doi.org/10.1016/j.autcon.2011.09.014.
Huang, Z. X. 2016. “Modeling bidding decision in engineering field with incomplete information: A static game–based approach.” Adv. Mech. Eng. 8 (1): 1687814015624830. https://doi.org10.1177/1687814015624830.
Jarkas, A. M., S. A. Mubarak, and C. Y. Kadri. 2013. “Critical factors determining bid/no bid decisions of contractors in Qatar.” J. Manage. Eng. 30 (4): 05014007. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000223.
Keller, A. Z., and R. H. Bor. 1978. “Strategic aspects of bidding against an unknown number of bidders.” In Proc., TIMS/ORSA Meeting. Catonsville, MD: Institute for Operations Research and the Management Sciences.
Kim, S., and J. H. Shim. 2013. “Combining case-based reasoning with genetic algorithm optimization for preliminary cost estimation in construction industry.” Can. J. Civ. Eng. 41 (1): 65–73. https://doi.org/10.1139/cjce-2013-0223.
King, M., and A. Mercer. 1988. “Recurrent competitive bidding.” Eur. J. Oper. Res. 33 (1): 2–16. https://doi.org/10.1016/0377-2217(88)90249-4.
Kumar, J. V., D. V. Kumar, and K. Edukondalu. 2013. “Strategic bidding using fuzzy adaptive gravitational search algorithm in a pool based electricity market.” Appl. Soft Comput. 13 (5): 2445–2455. https://doi.org/10.1016/j.asoc.2012.12.003.
Li, H. 1996. “Neural network models for intelligent support of mark-up estimation.” Eng. Constr. Archit. Manage. 3 (1/2): 69–81. https://doi.org/10.1108/eb021023.
Liang, R., Z. Sheng, F. Xu, and C. Wu. 2016. “Bidding strategy to support decision-making based on comprehensive information in construction projects.” Discrete Dyn. Nat. Soc. 2016: 1–15.
Liu, J., Z. Cui, X. Yang, and M. Skitmore. 2018. “Experimental investigation of the impact of risk preference on construction bid markups.” J. Manage. Eng. 34 (3): 04018003. https://doi.org/10.1061/(ASCE)ME.1943-5479.0000596.
Liu, M., and Y. Y. Ling. 2003. “Using fuzzy neural network approach to estimate contractors’ markup.” Build. Environ. 38 (11): 1303–1308. https://doi.org/10.1016/S0360-1323(03)00135-5.
Liu, M., and Y. Y. Ling. 2005. “Modeling a contractor’s markup estimation.” J. Constr. Eng. Manage. 131 (4): 391–399. https://doi.org/10.1061/(ASCE)0733-9364(2005)131:4(391).
Lorentziadis, P. L. 2016. “Optimal bidding in auctions from a game theory perspective.” Eur. J. Oper. Res. 248 (2): 347–371. https://doi.org/10.1016/j.ejor.2015.08.012.
Love, P. E., P. R. Davis, J. M. Ellis, and S. O. Cheung. 2010. “A systemic view of dispute causation.” Int. J. Managing Projects Bus 3 (4): 661–680. https://doi.org/10.1108/17538371011076109.
Moselhi, O., T. Hegazy, and P. Fazio. 1993. “DBID: Analogy-based DSS for bidding in construction.” J. Constr. Eng. Manage. 119 (3): 466–479. https://doi.org/10.1061/(ASCE)0733-9364(1993)119:3(466).
Mousavi, S. H., A. Nazemi, and A. Hafezalkotob. 2015. “Using and comparing metaheuristic algorithms for optimizing bidding strategy viewpoint of profit maximization of generators.” J. Indus. Eng. Int. 11 (1): 59–72.
Park, C. S. 2001. Contemporary engineering economics: A Canadian perspective. Don Mills, ON: Addison Wesley Longman.
Ravanshadnia, M., H. Rajaie, and H. R. Abbasian. 2011. A comprehensive bid/no-bid decision making framework for construction companies. Berlin: Springer.
Rohatgi, V. K., and A. M. E. Saleh. 2015. An introduction to probability and statistics. New York: Wiley.
Skitmore, M., and J. Pemberton. 1994. “A multivariate approach to construction contract bidding mark-up strategies.” J. Oper. Res. Soc. 45 (11): 1263–1272. https://doi.org/10.1057/jors.1994.199.
Skitmore, R., and J. Pemberton. 2006. “A multivariate approach to optimal bidding.” Manage. Qual. Econ. Build. 248 (3): 274–281.
Skitmore, R. M., A. N. Pettitt, and R. McVinish. 2007. “Gates’ bidding model.” J. Constr. Eng. Manage. 133 (11): 855–863. https://doi.org/10.1061/(ASCE)0733-9364(2007)133:11(855).
Soleymani, S. 2011. “Bidding strategy of generation companies using PSO combined with SA method in the pay as bid markets.” Int. J. Electr. Power Energy Syst. 33 (7): 1272–1278. https://doi.org/10.1016/j.ijepes.2011.05.003.
Takano, Y., N. Ishii, and M. Muraki. 2014. “A sequential competitive bidding strategy considering inaccurate cost estimates.” Omega 42 (1): 132–140. https://doi.org/10.1016/j.omega.2013.04.004.
Takano, Y., N. Ishii, and M. Muraki. 2018. “Determining bid markup and resources allocated to cost estimation in competitive bidding.” Autom. Constr. 85 (Jan): 358–368. https://doi.org/10.1016/j.autcon.2017.06.007.
Wang, W. C., R. J. Dzeng, and Y. H. Lu. 2007. “Integration of simulation-based cost model and multi-criteria evaluation model for bid price decisions.” Comput.-Aided Civ. Infrastruct. Eng. 22 (3): 223–235. https://doi.org/10.1111/j.1467-8667.2007.00480.x.
Weverbergh, M. 1982. Competitive bidding: Estimating the joint distribution of bids. West Lafayette, Indiana: Institute for Research in the Behavioral, Economic, and Management Sciences, Krannert Graduate School of Management, Purdue Univ.
Information & Authors
Information
Published In
Copyright
© 2021 American Society of Civil Engineers.
History
Received: Jun 3, 2020
Accepted: Oct 16, 2020
Published online: Feb 15, 2021
Published in print: Apr 1, 2021
Discussion open until: Jul 15, 2021
Authors
Metrics & Citations
Metrics
Citations
Download citation
If you have the appropriate software installed, you can download article citation data to the citation manager of your choice. Simply select your manager software from the list below and click Download.