Risk and Need‐for‐Work Premiums in Contractor Bidding
Publication: Journal of Construction Engineering and Management
Volume 117, Issue 4
Abstract
Contractors add significant premiums, on the order of 3%, to their bids when they have a low need for work or projects have high risk. An empirical study of the effect of need‐for‐work and project risk on contractor bid markups was conducted by assessing and analyzing utility functions obtained from construction contractors in a bid‐simulation exercise. Thirty New England contractors participated in the study. The statistical analysis of utility data indicates, with a high level of confidence, that need for work and risk significantly affect contractor bid markups. A revised model of bidding is presented. The paper also discusses the implications of these need‐for‐work and risk premiums for owners, contractors, and the insurance industry. Specifically, project managers should seriously consider investing at least 1% of the project cost in studies that reduce the risk perceived by contractors.
Get full access to this article
View all available purchase options and get full access to this article.
References
1.
Ahmad, I., and Minkarah, I. (1988). “Questionnaire survey on bidding in construction.” J. Mgmt. in Engrg., ASCE, 4(3), 229–243.
2.
Baumgarten, R. M. (1970). “Discussion of by John Smith.” J. Constr. Div., ASCE, 93(1), 88–91.
3.
Benjamin, N. B. H. (1972). “Competitive bidding: the probability of winning.” J. Constr. Div., ASCE, 98(2), 313–329.
4.
Benjamin, N. B. H., and Meador, R. C. (1979). “Comparison of Friedman and Gates competitive bidding models.” J. Constr. Div., ASCE, 105(1), 25–40.
5.
Carr, R. I. (1982). “General bidding model.” J. Constr. Div., 108(4), 639–650.
6.
Carr, R. I. (1983). “Impact of the number of bidders on competition.” J. Constr. Engrg. and Mgmt., 109(1), 61–73.
7.
Delquie, P. (1986). “Statistical exploration of ‘certainty effects’ on utility assessments,” thesis presented to Massachusetts Institute of Technology, at Cambridge, Mass., in partial fulfillment of the requirements of the degree of Master of Science.
8.
Delquie, P. (1989). Contingent weighting of the response dimension in preference matching, thesis presented to Massachusetts Institute of Technology, at Cambridge, Mass., in partial fulfillment of the requirements for the degree of Doctor of Philosophy.
9.
de Neufville, R. (1990). Applied systems analysis: engineering planning and technology management. McGraw‐Hill, New York, N. Y.
10.
de Neufville, R., Hani, E. H., and Lesage, Y. (1977). “Bidding models: effect of bidders' risk aversion,” J. Constr. Div., ASCE, 103(1), 57–70.
11.
Dixie, J. M. (1974). “Bidding models—the final resolution of a controversy.” J. Constr. Div., ASCE, 100(3), 265–271.
12.
Friedman, L. (1956). “A competitive bidding strategy.” Oper. Res., 4, 104–112.
13.
Fuerst, M. (1976). “Bidding models: truth and comments.” J. Constr. Div., ASCE, 102(1), 169–177.
14.
Fuerst, M. (1977). “Theory for competitive bidding.” J. Constr. Div., ASCE, 103(1), 139–152.
15.
Gates, M. (1967). “Bidding strategies and probabilities.” J. Constr. Div., ASCE, 93(1), 75–107.
16.
Gates, M. (1976). “Gates' bidding model—a Monte Carlo experiment.” J. Constr. Div., ASCE, 102(4), 669–679.
17.
Ibbs, C. W., and Crandall, K. C. (1982). “Construction risk: multiattribute approach.” J. Constr. Div., ASCE, 108(2), 187–200.
18.
Ioannou, P. G. (1988). “Bidding models: symmetry and state of information.” J. Mgmt. Engrg., ASCE, 114(2), 214–232.
19.
King. D. (1990). “Project cost increases due to risk and need‐for‐work premiums: an empirical study of bidding in the construction industry,” thesis presented to the Massachusetts Institute of Technology, at Cambridge, Mass., in partial fulfillment of the requirements for the degree of Master of Science.
20.
Levitt, R., Ashley, D. B., and Logcher, R. D. (1980). “Allocating risk and incentive in construction.” J. Constr. Div., 106(3), 297–305.
21.
Macomber, J. D. (1989). “You can manage construction risks.” Harvard Business Review, 67(2), 155–165.
22.
McCord, M., and de Neufville, R. (1986). “Lottery equivalents: reduction of the certainty effect in utility assessment.” Manage. Sci., 32(1), 56–60.
23.
Morin, T. L., and Clough, R. H. (1969). “OPBID: competitive bidding strategy model.” J. Constr. Div., ASCE, 95(1), 85–106.
24.
Park, W. R. (1966). The strategy of contracting for profit. Prentice‐Hall, Englewood Cliffs, N. J.
25.
Peitrzyk, V. (1985). “Effectiveness of an interactive computer program for utility assessment using certainty and lottery equivalents: an application to medical decision‐making,” thesis presented to the Massachusetts Institute of Technology, at Cambridge, Mass., in partial fullfillment of the requirements for the degree of Master of Science.
26.
Raiffa, H. (1968). Decision analysis: introductory lectures on choices under uncertainty. Addison‐Wesley, Reading, Mass.
27.
Rosenshine, M. (1972). “Bidding models: resolution of a controversy.” J. Constr. Div., ASCE, 98(1), 143–148.
28.
Sugrue, P. (1980). “An optimum bid approximation model.” J. Constr. Div., ASCE, 106(4), 499–505.
29.
Wade, R. L., and Harris, R. B. (1976). “LOMARK: a bidding strategy.” J. Constr. Div., ASCE, 102(1), 197–211.
30.
Willenbrock, J. (1973). “Utility function determination for bidding models.” J. Constr. Div., ASCE, 99(1), 133–153.
Information & Authors
Information
Published In
Journal of Construction Engineering and Management
Volume 117 • Issue 4 • December 1991
Pages: 659 - 673
Copyright
Copyright © 1991 ASCE.
History
Published online: Dec 1, 1991
Published in print: Dec 1991
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.