Bids for silvicultural services: estimating reasonable costs and identifying bidding errors

Abstract

Econometric procedures were developed for (i) estimating the reasonable cost of a contract before advertising for bids and (ii) identifying abnormally low bids immediately after the bids tendered are opened. Two-order statistics were used in this initial study of low bidding in forestry. The ratio G (low bid minus mean of all bids divided by the standard deviation of all bids) follows Gumbel's type I extreme value distribution. The natural logarithm of the ratio M (the margin between the two lowest bids divided by the range in bids) has the same form. The "reasonable cost" of a contract not yet awarded can be estimated as a function of the distributions of G and M and the mean low bid and range of bids from prior contracts for the same service. Statistical tests for outliers from exponential distributions of order statistics can help identify abnormally low bids that may contain bidding errors. The moments of the G and M distributions reveal that half the silvicultural contractors are foregoing profits greater than 15% of the total contract cost, more than $6.79 per acre. The principal reasons are incomplete market information for preparing bids, heterogeneous cost structures among bidders, and cost advantages arising from work site location compared with the base of operations.