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ABSTRACT
Changes in the contracting market, such as a drop or increase in the level of construetion activity, the introduction of new technology, or changing legislation, must be understood by the successful contractor and compensated for in the bid process. Statistical methods for strategic bidding can be powerful tools for contractors. This article illustrates several statistical models that can be of use to a contractor that is willing to incorporate scientific methods into what is often a random process.
Key Words: bidding, construction, expected value model, "gut" feelings, contractor
The subject of bidding models for the construction industry has been covered by many authors [4, 2, 3, 6, 10]. The models created to-date vary to some degree, but they all attempt to capture the essence of industrial bidding.
Bidding in the construction industry is a very tricky process in which bidders must accurately estimate their actual costs, assign appropriate risk costs and contingencies, and understand the market and competition. Bidders also need to understand any legislation that affects the scope of the project. Contractors must then decide on the amount of profit they feel is appropriate, weighing the profit against the fact that a contract normally is awarded to the lowest bidder.
Many contractors rely on "gut" feelings when preparing a bid, and often submit the bid based on the probability of success rather than on a carefully prepared bidding strategy. Statistical methods can be helpful to a contractor that is willing to look at the long-term trends and statistical history of the bidding process, and at the competition.
This article illustrates several statistical models that can be of use to a contractor that is willing to incorporate scientific methods into what is often a random process.
BIDDING MODELS EXPECTED VALUE
The basis for most bidding strategies is for the bidder to optimize his or her bid by balancing the profit included in the bid against the probability that the bid will be the lowest received by the bid evaluators [8]. This article makes the following assumptions about the traditional bidding process:
all bidding contractors have the same level of information about the project; all contractors will use similar construction methods if awarded the contract;
the actual cost to complete the construction is similar...