Fuzzy Logic Model for Determining Minimum Bid Markup

Abstract

Abstract: Many construction markets exhibit severe price competition where contractors have to cut their bids to compete, giving priority to winning enough contracts to sustain normal operation, and it is common to see a winning bid close to the expected project cost. While cutting bids not only gives up profits but also undoubtedly increases the risk of making a loss, the behavior of contractors in intense competition is difficult to explain by existing models. A fuzzy‐logic‐based model is proposed for determining the minimum bid markup with assessments of chance of winning and loss risk. The model incorporates the position of a decision maker in the fuzzy rules according to his/her attitude toward risk and degree of need for the job. Two illustrative examples, one hypothetical and one real, are provided, in which differences in priorities are simulated by four sets of fuzzy rules for a comparison of the effects. The results show that the model is sensitive enough to differentiate a decision maker's position on bidding and suggest bid‐cutting limits consistently, thereby remedying some shortcomings of existing models.