Determining reasonable bid ratios under two-sided power distribution assumption for public procurement under capped lowest-cost bidding system

Abstract

This paper proposes a new definition of reasonable bid ratios - a ratio of bid price to published owner cost estimate - under the capped lowest-cost bidding system and provides a closed-form solution to determine the ratios for a given number of bidders. Bid ratios are assumed to be random, obeying two-sided power distribution (TSP). A reasonable bid ratio is found to decrease with increased number of bidders. The Monte Carlo simulations demonstrate that the computed reasonable bid ratios under the assumption of TSP distribution are proven to be very close to those under beta distribution and those from empirical data and are more accurate than those estimated from triangular distribution. Using Indonesian public procurement as a case study, this paper shows that reasonable bid ratios with uncertain numbers of bidders are lower than the traditional cut-off point. To make the proposed model operational, this paper also presents a simple protocol including the determination of minimum sample size required for TSP approximation. This paper concludes with model limitations and directions for future research.