General Bidding Model

Abstract

The general model of competitive bidding is not limited by the assumptions on which Friedman's and Gates' models depend. It is applicable to competition for which a contractor's cost distribution and opponents' bid distributions can be estimated. Historical data of contractor's cost and competitors' bids on different projects produce a distribution for the ratio between them, the bid/cost ratio. Standardized distributions for contractors' cost and competitors' bids, estimated to have respective means of one and the mean bid/cost ratio and to have equal variance, are inserted into the general model. Results are compared with Friedman's and Gates' models for competition against average competitors. Because markup adjustments are counterbalanced by shifts in probability of winning, contractor expected value is not very sensitive to markup, or its method of selection. However, the models vary considerably in their estimates of expected value. Gates' model is always more accurate than Friedman's model where variance of bids is due to variance of costs.