An Agent-based Model to Study Competitive Construction Bidding and the Winner’s Curse

Abstract

Abstract Reverse auction theory is the basis for competitive construction bidding process. The lowest bid method is utilized for selecting contractors in public projects. The winning contractor having the lowest bid value could be cursed when the submitted bid value results in negative profits. This is caused by many factors such as the contractor’s estimation accuracy and markup. This is addressed in this paper by providing a model simulating the construction competitive bidding and the occurrence of the winner’s curse. To this end, the authors show the extent to which the winner’s curse affects the status of contracting companies. The objectives are to understand the characteristics of the competitive bidding phase in construction and to study the behavior of contractors subject to competitive bidding and the occurrence of the winner’s curse. As such, the authors implemented a two-step methodology that incorporates (1) developing a general simulation model involving a population of contractors and projects using agent-based modeling for the competitive bidding process and (2) analyzing the results of the simulation model. This model should provide a better understanding to the construction profession as in contractors, project owners and Departments of Transportation of how decisions are made in this bidding environment.