Multi-period resource allocation for estimating project costs in competitive bidding

Abstract

In competitive bidding for project contracts, contractors estimate the cost of completing a project and then determine the bid price. Accordingly, the bid price is markedly affected by the inaccuracies in the estimated cost. To establish a profit-making strategy in competitive bidding, it is crucial for contractors to estimate project costs accurately. Although allocating a large amount of resources to cost estimates allows contractors to prepare more accurate estimates, there is usually a limit to available resources in practice. To the best of our knowledge, however, none of the existing studies have addressed the resource allocation problem for estimating project costs in competitive bidding. To maximize a contractor’s expected profit, this paper develops a multi-period resource allocation method for estimating project costs in a sequential competitive bidding situation. Our resource allocation model is posed as a mixed integer linear programming problem by making piecewise linear approximations of the expected profit functions. Numerical experiments examine the characteristics of the optimal resource allocation and demonstrate the effectiveness of our resource allocation method.